Stepping into a quagmire – environmental liability in cross-border contracts
Businesses engaged in cross-border transactions and investments are often exposed to unanticipated liability under the laws and regulations of foreign countries. Businesses that have an incomplete understanding of the laws and regulations of the jurisdictions where they operate can be subject to unnecessary legal, reputational and financial risks that often have damaging consequences. In many circumstances these risks and liabilities extend to company directors and other officers.
Crucially, in most countries there are local laws and regulations that apply to businesses and individuals even if they are indemnified under a contract or agreement with a local business partner. That is, there are often laws and regulations that cannot be contracted out, and regulators in the foreign country will have no hesitation in pursuing a foreign business to recover damages, fines and penalties.
These challenges are especially relevant to the application and enforcement of local environmental regulations. Environmental laws and regulations in foreign countries are often complicated, and regulators usually have extensive investigation and enforcement powers.
In this article, Moulis Legal partner Christopher Hewitt and lawyer Alexandra Geelan examine the effect local environmental laws can have on cross-border businesses, and what tools businesses can use in their cross-border contracts to limit risks and liabilities.
What you don’t know may kill you: understanding, identifying, and protecting against environmental risks
Most businesses involve some level of, or exposure to, environmental risk. From low risk activities – such as offering customer services out of an office building – to high risk activities – such as mining or chemical manufacture – there are likely to be environmental and planning regulations that require consideration.
As with other areas of legal risk, the level of awareness required will differ depending on the level of risk. Low risk activities may only require a basic awareness and understanding of the applicable laws, to allow the business to monitor and comply with applicable environmental laws and regulations at certain stages of the business process, such as building a new facility or marketing certain products as being environmentally friendly. High risk activities require extensive risk management policies and active ongoing monitoring and reporting of environment incidences and management.
Generally, there are two key areas where businesses may be exposed to risk and liability under local environmental laws and regulations:
- liability and responsibility for compliance with local environmental regulations; and
- liability for environmental harm and damage.
These areas are explained below:
Liability for compliance with local environmental laws and regulations
In most countries, there are strict planning and environmental management regulations that govern the activities of businesses in that jurisdiction. Regulations are often spread across multiple areas of law from planning and development; to transport; to advertising and marketing. For example, planning and development laws often contain additional environmental criteria and requirements that businesses are required to comply with on top of any specific environmental legislation. Penalties for failing to comply with building and planning laws may include fines and/or rectification orders. Generally, these requirements only apply when the development is taking place and do not involve any ongoing obligations.
For businesses that involve ongoing conduct which has the potential to cause environment harm or damage if not properly monitored and managed, there are additional environmental protection laws which may govern their business activities. Examples of high environmental risk businesses includes service stations, fuel depots and refineries, dry cleaners, intensive animal agriculture, mines, some manufacturing businesses and any other business which regularly uses toxic chemicals. For these businesses and industries, there are ongoing monitoring, management and reporting requirements and strict penalties.
These laws are often complex and compliance can be costly for local, domestic businesses. For international businesses that are operating in a foreign jurisdiction, it can be even harder to ensure that the business is operating in accordance with these requirements, particularly when the business owner is not responsible for the day-to-day management of the business.
In such cases, it is important that foreign business owners or joint venture partners ensure that the contract governing their relationship is clear on who is responsible for compliance with local environmental regulations. This can be done in many ways but the most common are to have the local business partner responsible for compliance with all local laws, or if they are a minor partner, include an obligation that they inform the foreign company of the applicable local laws and requirements. Critically, requiring a local partner or contractor to ensure compliance with environmental obligations is not sufficient by itself. The foreign company should also ensure it has the contractual right to receive all details on relevant requirements and actions, and a fully insured indemnity from the local partner or contractor for any environmental damages, fines or penalties. An indemnity will not prevent a local regulator from taking action against the foreign business, but it will allow for the foreign business to recover any penalties and associated costs; especially if the indemnity is insured.
Liability for environmental harm or damage
The second key area where businesses are commonly at risk is liability for environmental harm or damage. This liability arises where a business, is responsible for the costs associated with harm or damage they caused to the environment, such as through land or water contamination. Costs can include environmental assessments, remediation, containment and ongoing monitoring and management. There can also be secondary costs including a reduction in the value of land owned by the business once it has been contaminated.
While land and water contamination is a significant issue for operators of high-risk businesses such as petrol stations and dry cleaners, it should also be considered by any business that are purchasing land. Contamination is frequently a result of historical uses of the land and it can sometimes be difficult to establish what, when and how environmental damage occurred. Potential new land owners should obtain a base-line environmental assessment before they acquire potentially contaminated land so that they are aware of – and can manage – existing contamination, or negotiate financial compensation to protect against any future regulatory action against any existing contamination.
For businesses that are operating high-risk business activities, the strict allocation of liability under a contract is an important protection but it is not a guarantee that they will not be prosecuted for the costs of environmental harm or damage. By way of example, environmental protection legislation in most Australian States and Territories is based on the polluter pays principle, which means that whoever causes environmental harm is responsible for any costs associated with management or remediation of the contaminated land. In most States and Territories, the legislation also prohibits parties from contracting out of their responsibilities under the legislation. This means that the regulators and relevant authorities will seek to recover any costs, or will take enforcement action against any party that they consider or believe to be responsible for the pollution or harm, despite how liability for contamination is allocated under the contract between the parties.
Notwithstanding this limitation, foreign business should ensure that they have the best possible contractual protection against environmental risks through the apportionment of liability under contract and regulations. In some instances this will mean that a local contracting party may be appointed as the designated person for all environmental actions and government reporting obligations, so that liability for non-compliance (at least initially) falls on the local contracting party. However, where a local contracting party is designated to a particular role, the contract should strictly require regular and complete reporting on compliance and non-compliance with environmental regulations.
Considering and understanding the level of risk and liability your business is exposed to as a result of any applicable legislation and the terms of your cross-border contracts is the key to ensuring that your business is protected when engaging in cross-border transactions. Effectively using indemnity, liability limitation and insurance provisions of contracts is essential to minimising the risks associated with environmental laws and regulations when doing business across borders.
Moulis Legal’s dispute resolution team guides businesses across Australia and Asia in the management and resolution of cross-border and domestic commercial disputes in a way that is commercially focused and business-centric. We represent Australian and international organisations in various domestic and international jurisdictions on matters including contractual disputes, cross-border intellectual property disputes, competition law issues and managing and responding to regulatory investigations.
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.