9. USE CONTRACT CLAUSES CAUTIOUSLY

Quite often too casually, contracts are commonly employed to condition offers to purchase real estate or business assets, afford access to property and documents to conduct due diligence reviews, deal with ongoing or future response actions on a property before and after a transfer, divide costs, responsibilities and liabilities for monitoring, cleanups or litigation, and in many other ways cover environmental contingencies in all kinds of business, residential and governmental transactions.

While not even close to perfect protection, various types of contracts make sense where the buyer needs to conduct a property examination without which the price cannot be negotiated or deal reached, the seller needs to specify the land is being sold “as is,” where the structure of the deal is not enough to give the parties the relative comfort they need, where one party or both desire important warranties and representations, where both parties are to stay involved in actions relative to contamination after the transaction, or where they otherwise need to be crystal clear what they are or are not transferring and agreeing in the transaction.

Essentially, the considerations are similar for transactions large and small, but the complexity of the contracts will differ depending on the circumstances. The contract needs to be tailored to the situation.

For example, the typical seller hopes to sell the property at high value with no further responsibilities, while the typical buyer expects a low price due to contamination, plus seller indemnification for a long period. The reasonable middle ground will be contractual agreement for the buyer to have reasonable time and access to conduct a due diligence, obtain and review relevant documents, inspect the site and conduct testing, obtain extensions if desired, escape the deal (or renegotiate price) if dissatisfied, and maybe limited indemnification. It is usual to obtain a representation that there are no known violations of environmental regulations, no outstanding enforcement or litigation, no notices of claims or liabilities, no outstanding litigation, and no relevant documents known to the seller but withheld.

Another example is to reach agreement that defines a known contamination condition, refer to designated reports and plans, and allocate buyer or seller or shared responsibility for ongoing as well as future response actions (perhaps with a time limit), costs (perhaps with a dollar limit, or shared on a formula).

Common liabilities can be allocated among parties, although CERCLA does not allow parties to actually transfer potential governmental liability imposed by law. Contracts can allocate costs and risks, but can only share or shift the financial burdens. Superfund itself provides that the fundamental legal liability remains and cannot be shifted. For this reason the basic contractual agreement is for indemnification: one party, usually the seller or a former owner or operator, expressly agrees to reimburse the buyer or present owner or operator for all or part of the expenses arising out of a cleanup.

CERCLA, under § 107(e), recognizes the use of indemnification agreements between parties. The courts have consistently enforced such agreements between parties, but have refused to recognize and enforce indemnification agreements between parties and the government. Private party indemnification agreements do not nullify a party’s liability under CERCLA. Rather, these agreements shift the financial burden of potential cleanup costs among private parties.

We think the well-considered contract, in a complex matter involving large amounts of money, ongoing remediation actions, multiple responsible parties, or a long period of time, ought to include provisions for: such things as escrow deposits, purchase money holdbacks, reimbursement formulas, management of the cleanup, covenants not to sue, representations and warranties, liability releases, circulation of progress reports, cooperation on insurance claims, purchase price adjustments, arrangements against third party claims and government cleanup orders, as well as contingencies about future claims in case the government orders a more thorough cleanup later.

A word of caution on escrow agreements: experience teaches an escrow, intended as a solution to hold a deal together that otherwise would fall apart, can simply push the problem down the road to litigation later. Any escrow arrangement should be clear, concise and precise, with very careful consideration of who will serve as escrow agent with no conflict of interest.

The contract language a party should employ in an indemnification agreement in order to successfully incorporate CERCLA liability will vary among jurisdictions. A majority of jurisdictions will interpret broad, general language as distributing CERCLA response costs. A minority of jurisdictions, in contrast, require either a specific reference to CERCLA or environmental liabilities, or specific proven intent of the parties, to allocate CERCLA response costs.

Parties should utilize written representations and warranties, as to the condition of the parcel, within the purchase and sale agreement. The prospective purchaser of contaminated property, for instance, should seek warranties that the seller has exercised due diligence in their representations. Additionally, the purchaser should clearly define the warranties’ precise scope. Of course, the prospective purchaser would want comprehensive warranties, while the seller would want to limit the representations and warranties to the best of its knowledge. Naturally, the prospective purchaser should require that all representations and warranties survive the closing, and attempt to obtain a long survival period.