Environmental due diligence loose ends: buyers … and sellers … beware

The NSW Land and Environment Court has fined both the new operator and the previous operator of an abattoir for water pollution, and the previous operator for contravening the conditions of the abattoir's Environment Protection Licence (EPL), in relation to a single pollution incident.

The Court's decision in EPA v P&M Quality Smallgoods Pty Ltd; EPA v JBS Australia Pty Ltd [2017] NSWLEC 89 (21 July 2017) highlights the risk that both the operator of licensed premises and the licensee can be prosecuted for the same offence if the operator doesn't hold the EPL.

The sale of the abattoir and the pollution incident

P&M Quality Smallgoods Pty Ltd operated the Scone Abattoir.  P&M was sold in March 2015 to the JBS Group, which includes JBS Australia Pty Limited.  JBS began operating the abattoir in June 2015, but P&M remained the EPL holder.

The abattoir disposed of treated effluent by using it to irrigate specified cropping areas on a farm which was part of the abattoir operation, via a system of pipes.  In August 2015 - just a few months after JBS assumed control of operations - the farm manager directed that between 70,000 and 140,000 litres of effluent be pumped via a discharge pipe to an unauthorised area, from where some of it then flowed into the nearby Two Mile Gully Creek.  The discharge was contrary to the abattoir's environmental management plan.

During the P&M sale process, JBS carried out a desktop and on site review of the abattoir's environmental management systems and controls.  According to the Court, the discharge pipe leading to the unauthorised area was partially obscured by earth and grass for much of its length, and neither the discharge pipe nor the unauthorised discharge location was identified or referred to in any company documents.

The EPA prosecution

The NSW Environment Protection Authority charged JBS for polluting waters, as the current operator of the abattoir and the person who physically caused the water pollution.  It also charged P&M as the holder of the EPL, because, although P&M did not have any physical involvement in the incident, it was taken to be the occupier pursuant to section 258(2) of the Protection of the Environment Operations Act 1997 (POEO Act) since it was the EPL holder at the time of the incident.^[1]

In addition, the EPA charged P&M with contravention of its EPL condition which required that all plant and equipment installed at the premises or used in connection with the licensed activity must be operated in a proper and efficient manner.  This is a standard EPL condition, but its use here is to prosecute P&M was unusual, since, although P&M installed the unauthorised pipe, the Court found that P&M had not operational role on site at the time of the incident and that JBS should have removed or isolated the pipe once it took on the abattoir operations.

P&M was liable for contravention of its EPL condition because section 64 of the POEO Act states that, if any person contravenes an EPL condition, the EPL holder is guilty of an offence.

Given the strict liability nature of the offences, both P&M and JBS pleaded guilty.

Sentencing P&M and JBS

The Court noted the EPA's submission that strict compliance with EPL conditions is required.

The Court also took the view that the fact that P&M is only deemed to be the site occupier and had no physical involvement in the incident, that was not a significant mitigating factor, and P&M still had a duty, as EPL holder, to take steps to prevent the incident.

The evidence indicated that JBS had taken steps to improve effluent treatment and irrigation systems at a cost of about $2.2 million, had made other improvements to the plan, its operations and safety at a cost of about $5.2 million, and was proposing further works at the abattoir with an estimated cost of about $430,000.

The Court fined JBS $60,000 for water pollution.  It fined P&M $42,000 for water pollution and $48,000 for contravention of the EPL condition (the maximum penalty for each offence is $1 million).  Relevant factors which helped reduce the fines included the likely limited environmental harm, JBS' post transaction investment in relevant aspects of the abattoir, both defendants' early guilty pleas and co-operation with the EPA.

In addition, JBS and P&M were ordered to pay the EPA' legal costs and some EPA investigation costs, and to publicise the convictions.

What this means for you

This case highlights the importance of careful environmental due diligence in a transaction, to get a good understanding of a business' systems, capabilities and operational risks.

It also highlights the importance of adopting a legal structure in the operation of a business which is based on an understanding of the legal risks and benefits.

In particular, the consequences of holding - or not holding - the EPL for an operation should be considered carefully.