News

NSW court holds directors liable for contamination clean-up costs

08.12.2015

The NSW Land and Environment Court has handed down a decision with significant implications for directors and managers of companies that operate environmentally sensitive businesses, such as service stations, petroleum storage facilities and depots.

Clean-up costs for contamination can be prohibitive, particularly when those costs are incurred by a company but imposed on an individual. Company directors and managers need to be aware that courts are willing to look behind the corporate veil and attach liability to individuals. Companies must put in place effective environmental risk management and allocation strategies to protect themselves from unanticipated liability.

In this Litigation Monitor, Moulis Legal senior lawyer Lisa Eldridge and lawyer Alexandra Geelan examine the outcome of Kempsey Shire Council v Slade [2015] NSWLEC 135 (“the Slade case”), and the implications for businesses and their directors and managers.

The facts are not extraordinary, but the outcome is

The facts of the Slade case are not extraordinary. The commercial structure and the actions taken by the directors are frequently used in businesses throughout Australia every day.

Michael and Barry Slade operated a commercial waste transfer station at a site leased from the Kempsey Shire Council (“the Council”). The property was initially leased to Michael Slade and later to Mid Coast Skip Bins and Metal Recycling Pty Ltd (“the Company”). Michael and Barry Slade were the directors of the Company.

The property was found to be polluted with asbestos and after failed attempts to order Michael and Barry Slade to clean up the property, the NSW Environment Protection Agency (“EPA”) ordered the Council to take the necessary clean-up action. The Council complied with the order and then issued Michael and Barry Slade with a “compliance cost notice” requiring Michael and Barry Slade to pay the costs Council had incurred cleaning up the site.

Michael and Barry Slade argued that only the Company could have been reasonably suspected of causing the pollution and that the corporate structure protected them from personal liability.

The Court’s decision

The Court held that given Michael and Barry Slade were in charge of operations and had management responsibility for implementing and overseeing the asbestos management procedures at the property. When these management procedures failed, the Court found that “it was reasonable for Council to suspect that they [Michael and Barry Slade] had caused the pollution”. Michael and Barry Slade were personally ordered to pay the Council’s costs for cleaning up the site.

What does the Slade case mean for directors and managers?

Generally, the EPA will issue clean-up notices to public authorities as a last resort when it cannot get the actual polluter to clean up the site, either because the polluter cannot be found or cannot pay for the clean-up (for example, in the event of insolvency).

The Slade case shows that directors, managers and other individuals with control, responsibility or authority to prevent pollution are at personal risk for the costs of the clean-up if the polluter company cannot bear the costs. In the Slade case, the company had ceased trading and been wound up. As a result of their responsibility and authority for the management of the company, Michael and Barry Slade were held accountable for the conditions that gave rise to the pollution.

The key take-away message for directors from the Slade case is that directors or other managers of the company will not be able to simply wind up the responsible company and walk away from pollution liability. The Court can and will pierce the corporate veil and impose personal liability for clean-up costs on the directors, which can be substantial.

The NSW cost recovery scheme – going after the easiest target

The Protection of the Environment Operations Act 1997 (“POEO Act”), creates a pollution clean-up cost recovery scheme that provides:

  • if the EPA reasonably suspects that a pollution incident has occurred, the EPA may issue a “clean-up notice” which directs a person or public authority (such as the local council) to take the necessary clean-up action;
  • when a clean-up notice is issued to a Council, the Council may issue a “compliance cost notice” to the person the Council reasonably suspects caused the pollution – this notice requires the person to pay Council’s reasonable costs for the clean-up;
  • if the person who is issued with the compliance costs notice did not cause the pollution that person must still pay the costs, but they may try to recover the cost from the person who actually caused the pollution.

The key issue is that the EPA and Council do not need to prove that a person caused pollution, or even that a site is polluted. The EPA and Council only need to have a reasonable suspicion that pollution has occurred and that a particular person is responsible for that pollution to issue the notices. As the Court said in the Slade case: “[T]he law seizes on any person who stands in the spotlight of suspicion even though they may be innocent of causing the pollution incident.”

If this seems unfair and unbalanced, that is because it is.

Almost all states have provisions which allow for directors or executive officers to be held liable for contamination caused by the company they have an interest in if the company has failed to comply with the order or has been wound up.

What the scheme means in practice – don’t be the one without a chair when the music stops

The Slade case shows that the EPA and Council have almost no risk of having to bear the costs of any clean-up action they undertake – they need only to establish that they have reasonable suspicion and they can pass the liability to the next person in the scheme. The Court in the Slade case confirmed that the bar for having reasonable suspicion is low and “undemanding”.

Where a Council reasonably suspects a person of polluting a site, that person has to pay for the clean-up costs. The person can then try to recover the costs from the person who caused the pollution through court action but they take the risk that the polluter will be unable to repay the costs after a lengthy and costly litigation.

It is only at the final cost recovery stage that the factual issues – such as whether there was a pollution incident at all and, if so, who actually caused it – are considered by the Court. The person seeking to recover the costs does not receive the same benefit as the EPA or local council in only having to demonstrate a reasonable suspicion.

In the Slade case the Court held that “the corporate veil is of no avail”, meaning that company directors will not find protection in the corporate structure. A person with “sufficient control over operations” or with the authority to prevent or correct the action that resulted in pollution can be held to have caused pollution and therefore be personally liable for the costs of cleaning up the pollution. This includes directors, officers and/or managers, and it does not matter that these individuals caused the pollution while acting in a particular role for a company. The scheme gives the EPA, and public authorities, greater scope for ensuring a pollution incident is rectified or, alternatively, recovering the costs of doing so.

NSW is the only jurisdiction which structures its cost recovery scheme in this way. In most other Australian jurisdictions, if the EPA or relevant agency is satisfied a pollution incident has occurred and cannot require the polluter or owner of the site to clean-up the contamination, the EPA will undertake the clean-up measures and then recover the reasonable costs from the person responsible through court action. This means that the factual question of who actually caused the contamination must be proved by the authority rather than later in the process. Accordingly, the chances of an innocent person being left holding the bag for pollution clean-up are significantly reduced.

Given the low threshold test a public authority in NSW must satisfy to issue a compliance cost notice, companies that carry out activities that may potentially cause pollution should seek to mitigate their exposure to liability. There are many practical steps that directors and managers can take to minimise their potential liability, including reviewing their company’s pollution control procedures and conducting regular checks to ensure that the procedures are being complied with. Directors should keep their potential personal exposure to liability front and centre when negotiating contracts with service providers and contractors and ensure that the contracts clearly allocate risk in the event of a pollution incident. And if a compliance cost notice is received, do not ignore it or think that the corporate veil will protect you.

Moulis Legal represents Australian and international organisations in the energy, resources, manufacturing sectors, and businesses involved in disputes across a variety of jurisdictions and forums, both in Australia and abroad.  For more information, please contact Lisa Eldridge (+61 2 6163 1000 or lisa.eldridge@moulislegal.com) or Alexandra Geelan (+61 7 3367 6900 or alexandra.geelan@moulislegal.com).

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.