Environmental Liabilities Update - International Law Office

Restoration Costs
Environmental Investigations
Restoration Liability of Contaminated Soil and Groundwater
Sale and Purchase Agreements

Restoration Costs

According to the latest figures, the environmental authorities have identified approximately 20,000 sites in Finland that are potentially contaminated to the extent that they need to be cleaned up so as not to cause any harm or danger to health or the environment. Approximately 2,500 administrative decisions on the restoration of contaminated soil and groundwater have been issued. The annual restoration costs are in the region of €50 million to €70 million. The overall restoration costs for all the sites are estimated to be between €1 billion and €1.2 billion over the next 20 years, of which €300 to €400 million will be financed from public funds. The private sector will be responsible for the remaining amount - expected to be close to €1 billion.

Environmental Investigations

The restoration costs for a single property may be significant (several hundred thousand euros per site) and liability costs are being imposed more often due to the increasing awareness of the authorities and better data on contamination. Therefore, soil and groundwater conditions have become important factors in a number of merger and acquisition transactions. Thus, many transactions include environmental due diligence investigations and extensive environmental liability clauses in sale and purchase agreements, in particular where the operations of the target (eg, a limited liability company, a business branch or solitary real estate) include polluting activities.

However, investigating the history of the target may also be productive, even where land use of the property is not associated with polluting activities. In some cases, the parties of transaction have been unpleasantly surprised to discover that the limited liability company, which is the target of the transaction, has assumed environmental liabilities through a previous merger. Similarly, in real estate transactions (or business transactions including real estate) previous polluting industrial activities or underground storage tanks (often used for heating due to Finnish weather conditions) may have caused soil or groundwater contamination of which the parties are unaware.

Therefore, parties should always evaluate the risk and agree on liability sharing, even when the target is apparently of low environmental risk. It is particularly important to agree on liabilities, since the allocation of statutory restoration liability is not a well-established procedure.

Restoration Liability of Contaminated Soil and Groundwater

With regard to restoration liability, the applicable law depends on the time of contamination. If contamination occurred after 1994 the applicable law is the Environmental Protection Act (86/2000). Under the act, the polluter is primarily liable for 'new' contamination.

If contamination occurred prior to 1994 the applicable law is the Waste Management Act (673/1978). In practice, most contamination originates from a time prior to 1994 and thus the Waste Management Act is the more frequently applied. The rules for restoration liability with regard to 'old' contamination are not entirely unclear, since the Waste Management Act was originally directed at general waste management, not soil and groundwater contamination issues.

The Supreme Administrative Court has often imposed the restoration liability for old contamination on the present property holder (see Decisions KHO1986 A II 943, KHO October 12 1992 t 3600). This is the particularly the case where there are many potential polluters and it cannot be determined which has actually caused the pollution or the polluter no longer exists. The liability has also been extended to cover very old contamination which occurred prior to the Waste Management Act (ie, before April 1 1979) (see Decision KHO May 23 1994 t 2304). The Waste Management Act does not include provisions on the consideration of equity and thus extensive restoration costs for old contamination may be imposed on a property holder which did not contribute to the contamination.

However, the environmental authorities are now moving towards a 'polluter pays' principle, even in cases of old contamination (ie, more effort is put into identifying and allocating the restoration liability of the actual polluter). On the other hand, the Supreme Administrative Court has limited polluter liability (see Decision KHO:2001:1414) and ruled that the polluter cannot be held liable for restoration if the polluting activity ceased prior the Waste Management Act coming into force. Under this decision, liability for very old contamination is likely to be imposed on the present real estate holder and not on the polluter.

Although the Supreme Administrative Court has issued some guidelines with regard to liability allocation, every case is unique. Therefore, it is important to agree on liability sharing in sale and purchase agreements. When agreeing on liability sharing it is possible that the contractual liability according to the sale and purchase agreement (buyer v seller) is different from the statutory liability (polluter/property holder v environmental authority), and thus the liability may be allocated in a different way. In practice, the authorities may first allocate the administrative restoration liability to the property holder, which will then have right of recourse towards the seller of the property according to the sale and purchase agreement. This means two parallel processes for the same issue.

Furthermore, in a recent Supreme Administrative Court decision (KHO: 2005:52) the liability allocation in the sale and purchase agreement of a lease right was taken into account when the authorities allocated restoration liability. The restoration liability allocated by the environmental authorities was equal to the liability allocation in the sale and purchase agreement. Once again, the case was unique. The property in question was owned by a bankruptcy estate, and the clause on liability sharing was elaborate and addressed a specific problem known to the seller and buyer. Nevertheless, the decision may indicate that the Supreme Administrative Court is increasingly taking into account private undertakings between parties in allocating restoration liability. In practice, this would reduce unnecessary claims for recourse between the seller and purchaser.

Sale and Purchase Agreements

According to Section 104 of the Environmental Protection Act (86/2000), the party which transfers or leases a property is obliged to provide the new owner or leaseholder with information on the operations carried out on-site, and all waste and substances, which may have caused soil and groundwater contamination. This obligation also applies to old contamination. It is advisable to report relevant information in all sale and purchase agreements related to the transfer of property, even where not currently related to polluting activities, as the risk of (historical) contamination will be systematically evaluated by the parties and so the risk of hidden environmental liabilities and additional disputes is decreased.

In recent decisions the Supreme Administrative Court has usually ruled that the party which possesses the property when the authorities detect contamination is liable for restoration. In particular, this is the case if the actual polluter cannot be clearly identified, the polluter is insolvent or the contamination is very old. In practice, this means that the liability is 'attached' to the property. This is relevant in cases where a business or part of business is acquired, as it contradicts the general rule that liability remains with the seller. Therefore, it should be clearly agreed whether the seller or purchaser (present property holder) bears the risk for contamination.

In cases where company share capital is acquired, the tendency to emphasize the polluter's liability increases the need to investigate the company's history. From the buyer's side it is important to investigate whether the company has carried out polluting activities in the past and whether polluting companies have been merged with the target company. In some cases investigations have revealed that an apparently clean company has a heavy environmental liability load due to its past activities.

According to the Real Estate Act (540/1995), all claims based on real estate transactions must be made within five years of the transaction. Similarly, sale and purchase agreements regarding the acquisition of share capital in a company or business (or business division) usually include a specific date after which no claims can be made. For environmental claims the time limit is often between five and 10 years. In practice, five years is not a very long time and it may be that contamination is identified after the set period. If the time limit for claims has expired, the parties' original agreement on liability sharing is not effective and liability is allocated according to statutory rules and court praxis. If the parties want to rely on their agreement on liability sharing, the condition of the property should be investigated soon after signing, if not before in a form of an environmental due diligence investigation.

Finally, sale and purchase agreements usually include clauses on confidentiality so that the parties are not allowed to disclose the contents of the sale and purchase agreement to any third party. A confidentiality clause prevents parties from relying on any environmental liability-sharing clauses with third parties, including the environmental authorities. Although the environmental authorities would accept environmental liability sharing in sale and purchase agreements as a basis for the allocation of administrative restoration liability (as proposed by Decision KHO:2005:52), the confidentiality clause would prevent the effective use of the purchase agreement's provisions. Therefore, it should be considered whether to revise standard confidentiality clauses in order to ensure that parties are able to refer to the agreement's provisions in relation to environmental authorities. This means it would be possible to allocate the restoration liability to the right party from the very beginning, and the seller and purchaser would avoid unnecessary claims for recourse and potential sources of disputes.

For further information on this topic please contact Jari Tuomala at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 21) or by fax (+358 9 474 2222) or by email (jari.tuomala@hpplaw.fi).