Two decisions of the Supreme Court of Victoria provide a reminder of the legal obligations of business owners in relation to the clean-up of environmental contamination arising from their activities and also their liability to compensate people who suffer loss or damage as a result of such contamination.

The cases also demonstrate the often complex, lengthy and expensive nature of litigation in this area and the difficulties that can be encountered by injured parties in seeking to recover compensation. In so doing, they sound a cautionary note to clients involved or thinking about becoming involved in a variety of property-related transactions.

This article begins by providing a brief summary of the regulatory environment in Victoria. It then outlines the facts of each case and the Court’s findings before listing some common business transactions where environmental contamination issues may warrant careful consideration.

Regulatory framework

The Environment Protection Act 1970 (Vic) (Act) establishes a legislative framework for the protection of the environment in Victoria.
The Act, and the State Environment Protection Policies (which set out a range of technical requirements and provide guidance in relation to how the Act’s objectives are to be met for different segments of the environment) made under it, are administered by EPA Victoria.

Key provisions in the Act include:

• Section 62C which creates a statutory presumption that the occupier of a site used for commercial or industrial purposes caused any environmental pollution arising as a result of a discharge, emission or deposit of any substance from or on the land.
  
  
• Section 62A which empowers EPA Victoria to direct the occupier and / or the person who caused or permitted pollution to occur to undertake clean up and ongoing management measures. The section also provides a mechanism for the occupier of land which is the subject of a clean-up notice to apply to the Court for an order that the person who caused or permitted the pollution to occur to compensate the occupier for the reasonable costs incurred by the occupier in good faith in complying with the notice. The section was amended in 2007 to enable EPA Victoria to issue clean-up notices to holding companies of subsidiaries whose activities caused contamination in certain circumstances.
  
  
• Section 59E which sets out the offence of “aggravated pollution”. The offence is committed where, among other things, a person intentionally, recklessly or negligently pollutes the environment. The maximum penalty is $275,000 or 7 years’ imprisonment or both for an individual and a $1.1 million fine for a company.

The Act operates in conjunction with the Planning and Environment Act 1987 (Vic) and the planning schemes made under it. In particular, where it is proposed to change the use of potentially contaminated land to a residential or other sensitive use, planning laws require a statement or certificate of environmental audit to be obtained before the new use commences.

Case studies

Premier Building and Consulting Pty Ltd v Spotless Group Ltd and Others [2007] VSC 377 (5 October 2007)

This case involved a former industrial site in Barkly Street, Brunswick. The site had been used by the Spotless Group for over 20 years for a commercial dry cleaning and laundry business. The case is complex involving many parties and a range of legal claims. What follows is a brief outline of the facts and the Supreme Court’s finding.

The site was acquired by a developer, Premier Building and Consulting (Premier), in 2000. An environmental report obtained by the vendor at the time of the sale to Premier failed to detect the presence of any contamination; Premier had no knowledge that the site was contaminated when it bought the land.

A planning permit was issued by the local council in early 2001 authorising construction of a 49 unit apartment complex. A condition of the permit was that a certificate or statement of environmental audit be issued prior to any residential use of the land.

Premier’s development was substantially complete by late 2002. Most of the apartments were sold off the plan. The auditor appointed to conduct the environmental audit required by the council identified significant soil and groundwater contamination affecting the site which posed a potential risk to human health. The council in turn refused to issue an occupancy permit pending remediation of the site.
Premier sued Spotless and a number of other defendants including town planners, environmental consultants and the local council. Over $10 million compensation was sought from Spotless as well as a further $15 million from the other defendants. The trial ran for 75 days. There were 10 defendants, 1,700 pages of pleadings and a 95 volume court book. The Supreme Court’s decision runs to 155 pages. Sources quoted in the press have estimated that legal costs could be in the vicinity of $40 million to $50 million.

Ultimately, Spotless was found to be liable to compensate Premier, but only in respect of the clean-up costs it incurred in complying with EPA Victoria’s notice. Notably, Premier’s claims against Spotless for damages for negligence and nuisance failed; the Court found that the Spotless parent company was not legally responsible for the past activities of its deregistered subsidiaries. While deregistration of the subsidiaries was found not to have been part of a scheme to avoid liability, the Court observed that Spotless’ denial of responsibility “reflects on credit on the commercial morality of those whose decision it was that this position should be adopted”. 

Masha Nominees Pty Ltd v Mobil Oil Australia Pty Ltd [2006] VSC 15 (7 February 2006)

This case concerned land in Springvale which had been leased by Mobil for over 20 years and used for a petrol station business.
The lease contained clauses requiring Mobil to:

• cause “an Environmental Site Assessment to be undertaken to establish the level of contamination then existing at the [site]” at or before the end of the lease;
  
  
• clean-up the site “to a level of contamination below the then current maximum allowable concentration set or adopted by the Environment Protection Authority so as to permit any as of right ongoing use of the [the premises] under the zoning existing at the commencement date…”; and
  
  
• pay the owner a licence fee equivalent to the rent it had been paying under the lease until Mobil complied with its clean-up obligations.

In apparent disregard to its obligations under the lease, Mobil’s representatives commissioned an Environmental Site Assessment on the basis that the site would continue to be used as a service station in future; the site was located in a zone that enabled a range of commercial uses to be made of it without a planning permit.

The owner sued Mobil seeking damages for breach of the clean-up obligation as well as recovery of the licence fees it claimed to be entitled to under the lease.

Mobil’s main defence was that the clean-up obligation in the lease was void for uncertainty. The Court summarised the legal authorities on the circumstances in which a contract will be found to be void for uncertainty and concluded that the “commercially sensible” interpretation of the clause was that put forward by the owner – namely, that Mobil was responsible for the costs of remediating the land to a condition that would enable it to be used for “as of right” (meaning, no permit required) uses under the planning scheme.

The Court awarded the owner $950,000 compensation which comprised an amount for unpaid licence fees plus $380,000 for breach of the clean-up obligation in the lease. In doing so, it was very critical of Mobil for the “arrogant and high-handed manner in which [it] treated the plaintiffs” and the way it sought to cut costs by pursuing a minimalist interpretation of its clean-up obligations that was not reasonably open to it. 

Observations

The two decisions summarised above are instructive because they provide a good summary of the law in this area and the way in which it is applied by the courts, and also because they demonstrate the significant negative financial consequences that can follow when things turn nasty.

Different considerations will arise depending on the nature of the particular transaction. For instance:

• prospective buyers / developers of industrial land should, among other things, consider what investigations they require to be undertaken in relation to the land prior to contract or as a condition precedent to settlement. For instance, in addition to usual conditions, consideration should be given to requiring a certificate or statement of environmental audit or at least a satisfactory report from a reputable consultant;
  
  
• prospective sellers should:
  
  

• assess whether they are willing, commercially, to divest a site known or suspected to be contaminated and thereby lose control over its future use which may in turn expose them to expensive remediation or worse;
  
  
• consider what is an appropriate and reasonable level of disclosure to make to a prospective purchaser in the circumstances; and
  
  
• think about what contractual indemnities and releases are to be sought from the buyer;
  
  

• prospective landlords should ensure that their leases contain clauses which set out a clear description of the standard to which the tenant is required, at the end of the lease, to clean-up the site and the consequences of the tenant failing to do that;
  
  
• prospective tenants should endeavour to ensure that their clean-up obligations at the end of the lease are clear and specifically limited to unacceptable contamination caused by them during the term of the lease; and 
  
  
• prospective business buyers should think twice before agreeing to buy the shares in an entity that conducts (or has in the past conducted) an industrial undertaking as any environmental liabilities arising from the company’s past activities (and not just those that relate to its current premises) will in all likelihood be inherited.

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