Environmental Risk in Commercial Deals: How to Avoid Costly Liability

Effective risk management is a key aspect of any commercial transaction. Along with managing risks related to privacy, infringement and other commercial issues, in many cases this includes managing environmental risk as well.

7 Keys to Environmental Risk Management in Commercial Transactions

Environmental risk in commercial deals can take various forms, and addressing environmental risk will often require a multi-faceted approach. With this in mind, here are seven non-exclusive keys to effective environmental risk management in commercial transactions:

1. Environmental Due Diligence

As with all types of risks, when it comes to effectively managing environmental risk, due diligence is key. While the specific due diligence required in any particular case will depend on the specific nature of the transaction and the specific risks involved, environmental due diligence generally involves:

Identifying Pertinent Sources of Environmental Authority

Environmental laws and regulations exist at the federal and state levels and in some cases at the local level. Along with the Environmental Protection Agency (EPA), regulators in many states have established extensive environmental standards governing everything from product manufacturing and industrial emissions to wetlands contamination and site remediation. When approaching a deal, it is critical to have insight into all of the federal, state and local laws and regulations that apply.

Identifying Potential Sources of Environmental Liability Exposure

Once you have a comprehensive understanding of all pertinent sources of environmental authority, then you can shift your focus to identifying all potential sources of environmental liability exposure. Environmental liability risks can exist in essentially all areas of a company’s operations—including not only risks related to federal,  state and local enforcement actions, but risks related to civil and commercial litigation as well.

Assessing Potential Environmental Risks Through Site Assessments and Other Means

Since many types of environmental liability risks are unavoidable, making informed decisions when approaching commercial deals often involves assessing whether the environmental risks involved are manageable. Depending on the circumstances, this may involve conducting site assessments and assessing environmental risks through various other means, as well as ensuring that your company has adequate contractual protections in place (as discussed in greater detail below).

2. CERCLA Assessments and Compliance

For transactions involving commercial real estate, CERCLA assessments and compliance can be critical for avoiding the potential for enormous liability exposure related to environmental contamination. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is a federal law that regulates the cleanup of contaminated sites; and, under CERCLA, purchasers of contaminated properties can face strict, joint and several liability for remediation costs even if they were not aware of the need for remediation when they purchased the properties at issue.

However, purchasers can protect themselves from CERCLA liability through various means, including establishing their status as a bona fide prospective purchaser (BFPP). Under CERCLA’s BFPP provisions, purchasers can insulate themselves from remediation liability even if they are aware of a site’s contamination by conducting environmental site assessments (ESAs) and taking other statutorily mandated steps.

3. Representations and Warranties

When commercial transactions present environmental liability risks, negotiating appropriate representations and warranties is critical for both parties. Parties that are providing representations and warranties must be extremely careful to ensure that these provisions go no further than strictly necessary, while parties that are seeking these protections will want as much protection as possible.

The specific nature of the representations and warranties that are suitable in a commercial transaction will depend on the nature of the transaction itself, among other factors. For example, in commercial real estate transactions, representations and warranties related to site contamination will be critical. In a supplier relationship, representations and warranties may need to focus on the supplier’s compliance with the environmental laws and regulations that govern the supplier’s products—and the customer’s use of those products..

4. Insurance Coverage and Indemnification

As with all types of commercial liability risks, parties can shift liability related to potential environmental risks through mandatory insurance coverage and indemnification provisions. Representations, warranties, insurance coverage requirements and indemnification obligations often go hand-in-hand; and, when drafting contracts for commercial transactions, it is critical to ensure that these provisions all work together as intended. Oversight (including the use of standardized “boilerplate” provisions) can create inconsistencies and leave key questions unanswered—and they can ultimately lead to the specific types of disputes that these provisions are intended to prevent.

5. Other Key Contract Terms

Along with representations, warranties, insurance coverage requirements and indemnification obligations, various other key contract terms may need to be tailored to the specific environmental risks involved in a commercial transaction as well. As with all aspects of commercial contract drafting and negotiation, a custom-tailored approach is key, and both parties will want to work with experienced environmental counsel who can help ensure that they are not overlooking any liability exposure concerns.

6. Addressing Developing Environmental Risks

While environmental risk management is backward-looking in many respects, companies that are approaching commercial deals must do their best to anticipate future environmental risks as well. This includes not only risks related to their future use of real estate, products and services, but also risks related to developing environmental compliance concerns. The environmental regulatory landscape is continuously evolving, and companies that have not anticipated future compliance risks could find themselves facing costs or liability exposure that they could—and perhaps should—have avoided.

7. Proactively Managing Environmental Compliance

Finally, once a commercial deal closes, both parties must keep in mind that managing environmental compliance is an ongoing process. Crucially, even with contractual protections in place, reliance on a third party generally is not a defense to environmental liability. Proactive environmental compliance management is key, and all companies need to ensure that they are relying on policies, procedures and protocols that are suitably tailored to their specific risks and needs.

Contact the Environmental Lawyers at McLaughlin & Stern

McLaughlin & Stern is an environmental law firm that represents commercial clients in compliance, transactional and litigation matters. If you need to know more about managing your company’s environmental risk related to a pending commercial deal, we invite you to get in touch. Call 212-448-6247 or contact us online today.