The New European Union Environmental Liability Directive—Impact on Due Diligence Assessments

Twenty-four years ago in the United States, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or Superfund) established the principle that the “polluter pays” for damage to soil and ground water. Within the European Union (EU), however, member states have had a patchwork of approaches to environmental liability. This changed on April 30 of this year as a new Environmental Liability Directive was published by the European Union. Over 10 years in development, Directive 2004/25/CE on environmental liability (the Directive) takes effect in three years. For the first time, all European Union countries will have a common environmental liability framework, one that is based on the “polluter pays” principle.

While the Directive will be compared to CERCLA, there are some important differences. Three aspects of the Directive create a broader set of requirements for European operators than their U.S. counterparts:

• Environmental damage: Environmental damage under the Directive applies to not only land and waters covered by the 2000 Water Framework Directive, but to endangered species and natural habitats.
• Damage to land as a result of the introduction of organisms: The use, or misuse, of genetically modified organisms (GMOs) is included within the scope of the Directive.
• Prevention: The Directive creates an obligation for an operator to take preventive action where environmental damage has not yet occurred, but there is an imminent threat of damage.

These issues aside, the Directive is generally less onerous to regulated operations in Europe than CERCLA is in the United States. By design, the scope and coverage of liability under the Directive is restricted.

Defense to Liability: While the Directive establishes strict liability for operators, there are several defenses that will significantly limit actual liability. Operators are not liable under three key conditions:

1. Force Majeure—the damage resulted from an incident caused by an act of war or “a natural phenomenon of exceptional, inevitable, and irresistible character.”
2. Permit Defense—the damage was caused as the result of release or event that was authorized by permit.
3. State-of-the-art Defense—the potential for damage could not have been known when the event or release took place.

Temporal Limitations: The period of time over which a release or an event can create liability is limited. Most importantly, liability under the Directive is not retroactive. That is, any damage occurring before the Directive is in force is not covered (operators may be liable for damage retroactively under other state regulations, though).

Biodiversity damage is limited: The Directive limits its scope to damage to sites and species that are already protected under existing European Communities (EC) Directives and their implementing national laws. This significantly restricts the geographic areas within countries that are subject to this aspect of the Directive. In addition, some countries have not designated protected areas or species.

Implications for Purchasing Assets in Europe

While the Directive establishes boundaries around the issue of environmental liability, it is only a framework and must be implemented by each member state. As a result, the challenge of predicting each country’s interpretation of the Directive remains. For companies acquiring European assets, environmental due diligence is more important than ever. Despite the uncertainties in details of the future implementing laws, companies making acquisitions today will be operating under the Directive when it comes time to sell the same assets in the future. The due diligence process must anticipate future regulatory requirements and collect the appropriate information to protect new owners from future liability. Additional considerations include:

1. Identify protected resource areas and species that are located near business operations. If the operation has the potential to affect the protected species in the area, establish an ecological baseline against which to compare future conditions.
2. Pay careful attention to permits, permitted activities, and “state of the art” with regard to operations, and discharges or emissions. These issues will be important in understanding whether an operator has a defense against future liability.
3. Develop a complete and accurate history of plant operations to understand the operating timeframe for potential sources of environmental damage. Although the Directive does not create liability for releases, activities, or events that take place prior to its implementation in 2007, it is important for today’s buyer to document site conditions.
4. For the most significant issues, develop a range of risk scenarios that anticipate potential differences in the local authority’s standards for remediation. Create cost estimates for each scenario to understand the breadth of potential liability.
5. Identify conditions that could be interpreted as an imminent threat under the Directive, since the operator will be liable for implementing preventive measures to mitigate these conditions.

The EU’s Environmental Liability Directive creates a new set of potential environmental liabilities in mergers and acquisitions. Since the implementing laws are not yet in place and there is no experience with their enforcement, there is a great deal of uncertainty about the specific requirements and their impact on operations. Despite the uncertainty, it is important that due diligence assessments immediately begin to anticipate and consider the new risks.

For more information about Battelle’s Due Diligence practice, please contact Mr. Don Salmond at (781) 869-1408, salmondd@battelle.org.