Cleaning Up

Europe's environmental liability regime is getting tougher, explains Jo Bain

The long-awaited European Commission proposal for a directive on environmental liability has been nearly a decade in the making. While it is not expected to become law before 2006, the proposed directive, published in January 2002, and its subsequent amendments are causing much speculation as to the effects on European companies. Once it is finally adopted, member states will have two years to implement it into domestic law.

Why an EU-wide regime?
There have been around 200 pieces of European environmental legislation to control and limit pollution. This legislation has been criticised on the grounds that it is piecemeal in nature and deals with particular environmental issues, rather than using an integrated approach. It is also difficult to implement across all member states. In theory, the new directive will address these problems.

According to the European Environment Agency, there are approximately 1.5 million potentially contaminated sites across Europe. Only some regions have so far made efforts to identify them, so the official number stands at only 300,000. Government policies throughout Europe encourage the re-use of brownfield sites, and the number of transactions involving them is increasing sharply. In the UK alone it is estimated that 3,000 brownfield transactions take place annually. Brownfield land can broadly be defined as land that has previously been developed, which means it could also be contaminated. However, it is worth noting that definitions vary widely through EU member states. Typical sites that could be contaminated include former waste tips and landfill sites, engineering works, iron and steel works, petrol storage, gas works, railway land, dockyards, scrapyards and chemical and pharmaceutical industries.

The proposed directive states that EU action is needed to address environmental damage and the loss of biodiversity. It is generally considered that liability rules are needed to prevent further contamination and damage. These will involve making site polluters liable for the costs of restoring environmental damage, and will also provide an incentive to avoid causing the damage in the first place.

Some member states, such as the UK and Germany, already have legislation in place; others have no specific environmental legislation and no regime establishing liability for contaminated land. Even those countries with a contaminated land regime do not always require the national regulatory authority to clean up the site if the polluter cannot be found or is insolvent. Despite the difficulties it may pose for some countries, this legislation is necessary for a framework at the EU level to address the problem of environmental damage.

Key features
The directive defines environmental damage very widely, and includes land contamination and water pollution which pose a threat to human health, as well as biodiversity damage. However, it is only intended to deal with serious or significant forms of damage. It establishes a framework to ensure that environmental damage is restored or prevented, and member states may adopt more stringent legislation if they wish. This would include for example, the UK Contaminated Land Regime.

The directive is based on the 'polluter pays' principle, ensuring that the person responsible for the damage is liable for the remedy. This means that, in most cases, the site operator would be the responsible person. The definition of operator is likely to be subject to amendment, but currently covers the person who directs the operation of an activity covered by the directive. While it is not proposed that a member state makes it a criminal offence to contaminate or to own contaminated land, there is a duty on member states to ensure that operators have an obligation to prevent significant environmental damage, and to require that operators take restorative measures if damage occurs. If operators fail to do so, member states can take appropriate action and recover the costs. Where contaminated land is concerned, the objective is to ensure that the contamination can no longer lead to serious, or potentially serious, harm to human health.

Environmental damage resulting from those activities specified in Annex 1 will result in strict liability (ie no fault or negligence required) for the operator. Annex 1 activities include operation of installations authorised under the IPPC Directive, water abstraction and waste management activities. Operators of non-Annex 1 activities may be liable for biodiversity damage if negligent.

Exclusions and exceptions
As expected, controversy already surrounds the proposed directive. On the one hand, some industry groups are concerned that it would expose companies to unlimited liability claims. On the other hand, environmental lobbyists have criticised the proposal, especially the exclusions and subsequent amendments, which they claim will water down the effect of the directive.

While the directive has a relatively wide scope of application, it specifically excludes certain activities, in particular those already regulated by, and subject to, a member state's own liability regimes. Thus environmental damage caused by nuclear activities, oil pollution or the carriage of noxious substances at sea is not covered by the proposal. Environmentalists who were keen to see retribution for the recent oil spills off the coasts of France and Spain will be disappointed.

Other key points which have arguably lessened the directive's impact are firstly that it will not apply retrospectively (unlike the contaminated land regime in the UK). Therefore, the main emphasis of the directive is for ongoing operational liability. It will in essence ignore past activities. Secondly, the Commission has left it to individual member states to determine appropriate restoration levels where environmental damage has occurred.

Two defences were added to the proposal at the eleventh hour. These have received wide criticism from environmental groups. The first of these is compliance with a permit. It is argued by critics that this will allow operators to avoid liability all too easily. Secondly, there is a defence for any emissions or activities which were not considered harmful according to technical knowledge at the time they were carried out. This led to accusations that the defences are far too wide and will allow liabilities to be avoided. In March 2003, the European Council's compromise text proposed that these two factors should be treated only as mitigating circumstances in deciding to what extent a company was liable for damage.

Most significantly, in recent weeks the European Council of Ministers postponed the requirement for mandatory insurance of environmental liabilities to give member states and the insurance industry time to develop financial security instruments and markets for dealing with environmental impairment This decision will be reviewed within five years from the directive's date of implementation, and mandatory financial security may then be forthcoming. The European Parliament considered that imposing mandatory insurance would upset the volatile market for environmental liability risks at a time when European businesses already face reduced choice, increased costs, solvency concerns and shortage of capacity for certain lines of business. However in countries such as the UK, this is disappointing news, as the environmental insurance market has been growing year on year.

How it affects you
Environmental risks involving previously developed land are now commonplace. Once the European directive comes into force, environmental liabilities will take on further significance, especially for those countries that currently only have minimal legislation in place. Because the directive will not apply retrospectively, it will have most impact on current operators or companies involved in mergers or acquisitions, where a potentially contaminative operation is ongoing.

If and when such potential hazards actually arise, clean up can be required under the directive. The ensuing costs can be substantial. In addition, the presence of contamination can seriously disrupt revenue generating activity on the site. The potential impact of such business interruption may make obtaining lending more difficult or financially prohibitive. Anyone involved in industrial activities therefore needs to be aware of the potential liabilities they could face.

Potential liabilities
Potential liabilities include the following.