Opening shots in the liability debate

The European Commission's consultative document on how, and by whom, environmental damage should be paid for has added to the momentum behind the environmental liability debate. The UK Government and industry have responded by voicing strong opposition to any liability measures at EC level, and industry wants minimal changes in the law to protect itself against retrospective claims for compensation. The Government, though, has warned both manufacturers and bankers for the first time that they should not expect to be protected from changes in the current liability regime.

Ministers often have to think quickly during oral questions in the House of Commons. Junior Environment Minister Tony Baldry did just that during October when he invented a new principle of policy-making in response to a question about the contaminated land registers which the Government aborted in March: not legislating can be just as effective as legislating in achieving a desired policy goal. "Our work on the register of contaminated land has made sure," he said, "that every solicitor and every developer is conscious of his need and responsibility to discover the history of any land that he wishes to develop."

Provoking uncertainty
Frivolity aside, it is beyond dispute that the two-year saga of the contaminated land registers had a galvanising effect on those with interests in land. Bankers, insurers, landowners, developers, purchasers of property and others were alerted to the possibility that what was an asset at one moment might turn out to be a liability the next.

Into this bubbling pot were thrown at the turn of last year two further catalysts. One was the European Commission's Green Paper on liability and compensation for environmental damage (ENDS Report 218, p 38 ); the second was the Appeal Court's judgement in the celebrated case of Eastern Counties Leather v Cambridge Water Company (ENDS Report 214, pp 41-42 ).

The Green Paper created what every business dislikes: uncertainty. The uncertainty in this case is whether the Commission will propose an EC liability regime, and if so whether this will be strict, retrospective, and a few other worrying matters besides. And the Appeal Court's verdict opened up the prospect of strict and retrospective liability being applicable in common law at least to some cases of groundwater pollution.

Business has responded in the way that it customarily responds to uncertainty: by demanding a restoration of the stable climate which previously existed. That is a major development in its own right, for until now it would have been hard to find any in the business community who welcomed the idea of a change in the law to clarify the principles of civil liability.

The Government has also acknowledged that the Green Paper in particular has created a powerful momentum for change. This is, in fact, another application of the Baldry Principle: that the mere prospect of EC legislation has been and remains the single most important factor driving the UK's environmental policy forward. As the then Environment Minister David Maclean commented in May: "we do not have the luxury of a do-nothing approach" to the issue of contaminated land, which is now intimately tied up with that of environmental liability.

Government's response
The Government's thinking on liability has now been set out in a response to the Green Paper and a speech by Mr Maclean's successor, Tim Yeo, to the British Bankers' Association (BBA) in mid-October. Both probably reflect the progress made in the inter-departmental review of contaminated land and liability policy established following the abandonment of the contaminated land registers (ENDS Report 218, pp 25-28 ).

With one or two exceptions, decisions have not been made by the Government on the many issues at stake in the liability debate. Yet an important point should not be overlooked: October 1993 was the month in which a UK Government made its first stab at a statement of its position on civil liability since environmental policy emerged as a distinct policy area at the end of the 1960s. How far and how fast it proceeds in the future is likely to depend largely on the European Commission.

The Government's nine-page response to the Green Paper is in three sections. One sets out its views on the need for EC action on liability; the second summarises the current UK approach to remedying environmental damage; and the third contains some broad reflections on liability systems and alternative ways of funding compensation and clean-up.

Subsidiarity doctrine
The Government's exchange of views with the Commission on the need for action on liability at EC level has been conducted mainly in the form of assertions. The Commission suggested that an EC regime might be appropriate to eliminate possible distortions of competition arising from differences between the liability regimes of Member States.

In reply, the Government rightly points out that the Green Paper made no case that such distortions exist or, if they do, that they must be eliminated, and while itself putting forward no evidence to the contrary concludes that action at EC level would not be justified in the light of the subsidiarity doctrine. Whether that view prevails elsewhere in the Community may begin to emerge from a European Parliament hearing on the Green Paper on 3-4 November.

The second part of the paper sets out how the UK's environmental and planning laws address the problems of contaminated land clean-up and the allocation of liability. Their shortcomings, not surprisingly, are not described.

NRA's frustrations
The ineffectiveness of the statutory provisions in this area have been exposed particularly clearly in the past four years in the water pollution field. The Water Act 1989 and its successor, the Water Resources Act 1991, enabled the National Rivers Authority to clean up pollution and seek to recover its costs from the offending party. Yet there is no known case of water pollution from contaminated land in which the NRA has been able to use those powers in its four-year existence.

The difficulty is that the NRA has no budget for clean-up work, the costs of which would run to six or seven figures in any significant project. And even if it did have the cash, uncertainty about the outcome of a cost-recovery case has discouraged it from pursuing the matter. ENDS knows of several instances in which it has decided not to act for these reasons.

The story is recounted with telling effect in the NRA's corporate plans. In its first it put in a bid for £34 million over three years to invest in a contaminated land clean-up programme. The request was turned down by the Government. The NRA's latest corporate plan, published in October, shows that it has now put all further work on its contaminated land policy on hold until the Government clarifies the legal position.

The NRA's inability to act has been frustrating for other reasons. In 1990, a report by the House of Commons Environment Committee recommended that "urgent attention" should be given by the Government to creating a statutory liability regime for damage caused to property and the environment by land contamination (ENDS Report 180, pp 12-15).

The Government declined to act, arguing that the case for statutory change would be considered after the applicability of common law principles had been tested in the courts (ENDS Report 186, pp 29-31). This ducked the problem identified by the Committee, which is that the common law is so uncertain that it acts as a deterrent to any such test. The same has now been seen to apply to the NRA's situation - and so there has been no movement from the position in 1990.

The Government may claim that the Eastern Counties Leather case, which has now gone to the House of Lords, is the test case it had been seeking. But whichever way the Lords' now imminent judgement goes, the point at issue is so relatively narrow that it is unlikely to have widespread applicability.

The Government's response to the Green Paper does, however, make a little clearer its position on specific issues in the liability debate:

  • Acting under authorisations: One of the questions raised by the Green Paper is whether it should be a defence against liability that a polluter was fully in compliance with his authorisations at the time environmental damage was caused.

    According to the Government, the consequence would be to shift liability from the polluter "to the regulator and so on to the public purse. That would not in many cases be consistent with the original purpose of the regulation, which is rarely to remove all danger of pollution regardless of practicability and economic cost."

    Another adverse consequence "might well be to inject a far greater level of caution in future regulatory consents and enforcement so as to remove the possibility of further liabilities being incurred."

  • Joint and several liability: One of the ideas canvassed in the Green Paper was a system under which liability in a case where environmental damage had been caused by several parties might be channelled to a single party who would then have to recover whatever compensation costs the others were liable for independently. However, the Government says that it "does not accept that it is right to extend joint and several liability simply to ensure the availability of money for remediation or compensation."

  • Cleaning-up past pollution: The Government accepts that there can be intractable problems in applying the "polluter pays" principle, "especially where the polluter has gone away or is unable to meet the costs. Nevertheless," it says, "the public purse should not be treated as the easy answer in such circumstances, since that would weaken the responsibilities of operators and owners."

    The Government goes on to argue that since there is a limited amount that can be done to improve the ability of liable parties to pay the costs in such cases, this "counts against imposing a strict liability regime on past pollution and suggests that it may be necessary, instead, to identify a hierarchy of liable persons for past pollution, including owners, occupiers and, in some cases, the state." But precisely what type of liability regime the Government has in mind for such cases is not explained.

  • Insurance: Compulsory environmental insurance was mooted in the Green Paper as one means of ensuring the availability of compensation for environmental damage. This is one issue on which the Government has nailed its colours to the mast. Since insurers might simply refuse to provide cover for high-risk activities, compulsory insurance "could seriously distort economic activity and would not be appropriate."

  • Joint compensation funds: The Green Paper suggested that as a complement to a civil liability regime, a fund or funds could be established to ensure that compensation was available in cases where the polluter was unable to pay. The money could be raised by a levy on sectors whose operations had caused significant pollution in the past.

    The Government accepts in principle that joint compensation funds could increase the likelihood that environmental damage would be remedied. However, operating these on a voluntary basis could be problematic because of "free riders", while a compulsory scheme might not be efficient. Funds, therefore, cannot provide an "immediate or universal" solution in areas where a liability regime leaves a gap.

    By and large, therefore, the paper shows the Government still to be hedging its bets. But some further light was shed on its thinking by Mr Yeo in his speech to the BBA.

    The Government, he said, wanted to see "orderly progress" in clearing up the backlog of land contamination, but equally it did not want to proceed so fast that the nation's ability to pay would be weakened.

    Lessons of Superfund
    The USA's experience with its "Superfund" legislation - a combination of strict, retrospective and joint and several liability - was not one which the Government wished to see repeated in the UK. But, said Mr Yeo, "we should also recognise that there have been positive benefits. There is evidence that the Superfund system has acted as a deterrent to further contamination - in that respect it has been effective.

    "In the complex modern world, it is not enough to say the polluter must pay - and make that an excuse to leave it to the last person in the chain of decisions. Liability should follow responsibility - possibly even to bankers in some circumstances. Otherwise there is every incentive to make the operator of a polluting process into a 'man of straw' who can leave the public purse to bear the costs of cleaning up his mess."

    After that illuminating passage, the Minister turned to the Government's position on the new Council of Europe Convention on civil liability for environmental damage caused by dangerous activities (ENDS Report 209, pp 33-35 ). The treaty was finalised at the end of last year, and shortly afterwards the Government said it had no plans to ratify it. Its position has since hardened - there will be no ratification by the UK.

    Explaining the Government's reasons, Mr Yeo also expanded indirectly on its position on the EC Green Paper:

  • Damage to the 'unowned' environment: Liability is extended by the Convention to the unowned environment, such as landscape features and the cultural heritage. The Government, however, regards these as matters for regulation and not civil liability.

  • Strict liability: The Convention is based on strict liability principles, but the Government prefers the existing UK mix of strict and fault-based liability provisions which have been "adapted to specific cases and circumstances," said Mr Yeo. "An over-arching, all-purpose liability regime is not appropriate."

  • Standing: Under UK law civil claims can generally be pursued only by those whose persons or property have been damaged, or by regulatory authorities. The Convention would extend these rights to non-governmental organisations in specified circumstances. However, Mr Yeo told the BBA that "we should be very cautious about giving enhanced status" to NGOs - meaning that the idea is a non-starter.

    Concluding his speech, the Minister turned to the responsibilities of the various parties with an interest in contaminated land. The public purse - the "last resort" and "not a soft touch" - again featured prominently. Polluters, landowners and prudent lenders all have responsibilities, he said, and should not turn the issue over to the Government to sort out.

    A specific message for industry was that the Government does not accept that its responsibilities "can be absolved by operating within an authorisation - the concept of 'regulatory compliance' as a reason for avoiding remediation costs or resisting civil liability under the common law."

    Warning for bankers
    As for the BBA's members, Mr Yeo warned that he could not promise that the outcome of the Government's policy review would protect their interests. "You also have responsibilities, for including risk assessment in deciding when to lend and for including cover for the risks in managing your portfolios. Banks have an important role to play in encouraging wider confidence, in encouraging greater environmental awareness among their customers, as well as providing funds. And you have to live up to the rising expectations of the community."

    The Government clearly has some way to go before determining its position on civil liability. A deadline for completion of its inter-departmental review has not been made public, and at the BBA Mr Yeo refused to commit the Government to conducting a formal consultation exercise on the outcome.

    However, on some issues the Government's position is fairly clear. The CBI and other industry groups which have responded to the Green Paper, the BBA and the insurance industry will be pleased with its opposition to joint and several liability, to the extension of standing in liability cases to environmental groups, and to the idea that compensation should be payable for damage to the unowned environment.

    But they will also have recognised the significance of the Government's comments on the availability of public funds for land remediation work, and the pressure that this implies to develop other sources of funding. Likewise, they will be unhappy that the Government has evidently not ruled out strict liability altogether, and with its firm rejection of the "regulatory compliance" defence.

    CBI's clean-up estimate
    The most considered industry response to the EC Green Paper has come from the CBI. Its paper talks up the extent of the UK's contaminated land problem, coming up with the largest estimates to date not only of the area affected - up to 200,000 hectares, or twice the maximum normally quoted - but also of the potential clean-up costs involved - more than £40 billion.

    The CBI warns that the growing uncertainty about the extent of business liabilities "is already proving damaging. There is increasing reluctance to purchase and develop land which may be contaminated. The financing and insurance of industrial activity are under threat." And companies have already been forced to shoulder extra costs in carrying out environmental audits and having to extend due diligence procedures in order to secure finance or complete deals.

    The CBI argues that "inaction is not an option, because of the damaging consequences of uncertainty caused by the operation of the existing network of law and the potential for liability under it."

    In particular, while it was happy until recently with the operation of the common law, the CBI now wants statutory provisions to ensure that liability cannot be retrospective, regardless of the outcome of Eastern Counties Leather's appeal to the House of Lords. It appears to want no other major changes in the law - and especially no extension of strict liability. If, however, the existing definition of potentially liable parties was modified, a lender exemption should be provided. This is also the main concern of the BBA, which is worried that banks may be exposed to liability claims if they take possession of a borrower's property or exercise any control over his affairs.

    Confusion on defences
    The CBI's position on retrospection by no means benefits from clarity. At one point its paper says that actions which were lawful at the time they were taken should not attract liability in the future. But elsewhere it says that the test should not be just whether the activities were lawful at the time but that they also conformed to then existing standards of best practice.

    Equally, the paper is confusing where it comments on what the position should be where strict liability is incorporated in statute. Here operators should have a state of the art defence, which the CBI interprets to mean "compliance with the accepted technical standards of the day."

    These terms are not interchangeable in the way the paper implies. Establishing that an activity conformed to the state of the art would potentially be far more onerous than showing that it simply complied with "accepted technical standards". And best practice is unlikely to be the same as an accepted technical standard.

    Moreover, the lawfulness or otherwise of an activity at a particular time is unlikely to be the only material consideration in many liability proceedings - unless, that is, it is taken to mean that anything not specifically regulated under statute is by definition lawful.

    Call on public funds
    The CBI sets itself against the European Commission's idea of a compensation fund built up from a levy on industry. Intriguingly, the paper notes that some sectors of industry have considered voluntary agreements to fund clean-up programmes - but then says that "the overwhelming view of CBI members was that, as society as a whole had benefitted from the development brought about by industrial activities, it should also in some circumstances face responsibility for the environmental costs of that economic growth."

    Precisely where the cash for land remediation should come from is not made clear. Options suggested in the paper include extracting some of the proceeds of the National Lottery, tax credits and capital allowances for clean-up projects, and funds from the Urban Regeneration Agency. All appear to be pockets of the public purse about which Mr Yeo was so concerned.

    The CBI's principal recommendation is that the Government must provide authoritative guidance on assessing contamination and the standards to which it should be cleaned up for particular uses. A deadline for preparing this guidance should be set and made public.

    Overall, there is a distinct impression of a buck being passed in the CBI's and other industry responses to the Green Paper. The scale of the business opposition to it in the UK at least is formidable, and the next few months will show whether the Commission can muster sufficient political support or retain the will to press on with its liability initiative.

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