Australia: Environmental Offences, Management Systems And The Due Diligence Defence

Last Updated: 9 March 2006
Article by Liz Wild and Mark Beaufoy

The assistance of Camilla Brindley, James Smith, Ben Swain and Zoe Lyon in the preparation of this article is gratefully acknowledged.

Important amendments to the New South Wales Protection of the Environment Operations Act 1997 and ISO 14001


The Protection of the Environment Operations Amendment Act 2005 (Amendment Act) recently passed through the NSW Parliament and will enter into force on a date to be proclaimed. This was originally anticipated to be March 2006 but is now scheduled for 1 May 2006.

The Amendment Act makes a number of significant changes which increase the exposure of companies, directors and managers to liability for environmental offences in New South Wales, including:

  • Introduction of new offences;
  • Removal of defences available to directors and managers;
  • Significant increases in penalties (to a maximum of $5M for the most serious environmental offences); and
  • Extension of the Department of Environment & Conservation's (DEC) licensing and enforcement powers.

Two new sets of Regulations have also been made under the Protection of the Environment Operations Act 1997 (POEO Act) in relation to waste and clean air:

  • The Protection of the Environment (Waste) Regulation 2005 (Waste Regulation):
    introduces new controls on waste and requirements relating to waste tracking, the waste levy and waste storage and transport are to be streamlined.
  • The Protection of the Environment (Clean Air) Amendment (Industrial and Commercial Activities and Plant) Regulation 2005 (Clean Air Regulation):
    introduces more stringent air pollution controls which will further restrict industrial emission limits for both scheduled and non-scheduled premises.

A draft Regulation on Underground Petroleum Storage Systems has also recently been released for public comment.

Companies, directors and managers seeking to limit their exposure to liability for environmental offences by exercising due diligence (for example, by implementing an environmental management system (EMS) in line with ISO 14001), should also take note of important changes to ISO 14001 – Environmental Management Systems. ISO 14001 requires that an organisation implementing an EMS must determine how legal and other requirements apply to the environmental aspects of its business. Before this change, the standard only required an organisation to identify applicable legal requirements.

How will the amendments to the POEO Act affect you?

The Amendment Act comes after a lengthy review of the POEO Act that commenced in December 2002. The review addressed the following key areas:

  • Defences available to companies and their directors;
  • Land pollution;
  • Waste regulatory framework;
  • Penalties and enforcement; and
  • Environment protection licence conditions.

Defences available to directors and managers

Where a corporation contravenes a provision of the POEO Act, its directors and managers are presumed to have contravened the same provision unless they can establish a defence under section 169(1) of the POEO Act.

Prior to the Amendment Act, a defence was established if a director or manager satisfied the Court that:

  1. the corporation contravened the provision without the knowledge actual, imputed or constructive of the person, or
  2. the person was not in a position to influence the conduct of the corporation in relation to its contravention of the provision, or
  3. the person, if in such a position, used all due diligence to prevent the contravention by the corporation. [Emphasis added]

The review of the POEO Act concluded that the ‘no knowledge’ defence, previously provided in section 169(1)(a) of the POEO Act, was too broad and was not consistent with modern principles of corporate responsibility which require an awareness by directors and managers of the environmental impact of their business.

The Amendment Act has now removed the ‘no knowledge’ defence and increased the onus on directors and managers to establish either that they were not in a position of influence, or that they used all due diligence, to prevent the contravention by the corporation. Evidence of a regularly updated and implemented EMS, certified in accordance with ISO 14001, may assist in establishing the defence of due diligence. This defence and important changes to ISO 14001 are discussed below.

New offence of ‘land pollution’

The Amendment Act introduces a new ‘land pollution’ offence. Land pollution is broadly defined to mean:

placing in or on, or otherwise introducing into or onto, the land (whether through an act or omission) any matter, whether solid, liquid or gaseous:

  1. that causes or is likely to cause degradation of land, resulting in actual or potential harm to the health or safety of human beings, animals or other terrestrial life or ecosystems, or actual potential loss or property damage, that is not trivial, or
  2. that is of a prescribed nature, description or class or that does not comply with any standard prescribed in respect of that matter,
    but does not include placing in or on, or otherwise introducing into or onto, land any substance excluded from this definition by the regulations.

The maximum penalty for a corporation found in breach of the offence is $1,000,000 and, in the case of a continuing offence, a further penalty of $120,000 for each day the offence continues. In the case of individuals, penalties of up to $250,000 apply and, in the case of a continuing offence, a further penalty of $60,000 for each day the offence continues.

The Amendment Act provides for certain defences to the new land pollution offence. For example, if authority to pollute land is conferred by regulation or an environment protection licence; where the substance used is a pesticide or fertiliser; or where a substance is placed into an unlicensed landfill that is notified to the DEC and operated in accordance with any requirements of the regulations. The scope of this new offence and its enforcement by the DEC are likely to have significant implications for the regulation of, and the liabilities of owners and occupiers of, sites affected by pollution and contamination. The amendments may also provide greater flexibility for the DEC in regulating sites affected by pollution and contamination under the provisions of the POEO Act (including greater use of clean-up notices), instead of the more restrictive requirements of the Contaminated Land Management Act 1997 (NSW).

Waste regulatory framework

‘Smarter regulation of waste transport and disposal is necessary to keep ahead of those fly-by-night waste operators who choose to flout the law’ (Mr Bob Debus, Minister for the Environment, Second Reading Speech, 13 September 2005).

The review of the POEO Act considered the need to clarify the definition of ‘waste’. The Minister’s speech on the first draft Bill stated that the amendments to the definition of waste were required to prevent inappropriate re-use or recycling of waste that may be harmful to the environment, in particular, the use of hazardous industrial waste like fertilizer, landfill or fuel. The Minister also reported instances of contaminated soils being supplied to innocent landholders as clean fill.

To address this issue, the Amendment Act extends the definition of ‘waste’ to include any processed, recycled, re-used or recovered substance, produced wholly or partly from waste that is applied to land or used as fuel in circumstances prescribed in the regulations. The definition also provides that a substance is not precluded from being waste for the purposes of the POEO Act merely because it is or may be processed, recycled, re-use or recovered.

Part 5 of the Waste Regulation, which is scheduled to commence on 1 March 2006, prohibits the application of ‘residue waste’ to land that is used for the purpose of growing vegetation, including but not limited to land that is used for agricultural, horticultural, silvicultural, pastoral or environmental rehabilitation purposes.

‘Residue waste’ is defined to mean:

any of the following substances (and includes any substance incorporating, mixed with or made from any of the following substances):

  1. fly ash or bottom ash from any furnace,
  2. lime or gypsum residues from any industrial or manufacturing process,
  3. residues from any industrial or manufacturing process that involves the processing of mineral sand,
  4. substances that have been uses as catalysts in any oil refining or other chemical process,
  5. foundry sands and foundry filter bag residues,
  6. residues from any industrial or manufacturing process that involves the refining or processing of metals or metallic products,
  7. any substance that is hazardous waste, industrial waste or Group A waste.

The implications of this expanded definition of waste and the Regulation is that the disposal or application to land of any processed, recycled, re-used or recovered substance, produced wholly or partly from waste, will be subject to:

  • the licensing requirements in sections 47-49 and Schedule 1 of the POEO Act (which sets the requirements for a licence for scheduled premises including 'waste activities' and 'waste facilities'), and
  • the waste tracking requirements of Part 3 of the Waste Regulation.

The expanded definition also means that a person disposing of or applying to land any processed, recycled, re-used or recovered substance, produced wholly or partly from waste, will be subject to the offence provisions relating to unlawful transportation of waste, permitting land to be used unlawfully as a waste facility and the new land pollution offence.

Clause 46 of the Waste Regulation allows the DEC to grant an exemption from the licensing and waste tracking requirements for an activity or a class of activities relating to residue waste or a class of residue waste. An exemption may be subject to conditions imposed by the DEC.

The Amendment Act also introduces a new offence of causing or permitting information to be supplied about waste which is false or misleading in a material respect. The offence applies to activities relating to the sale or disposal of waste or the storage, transport, handling, deposit, transfer, processing, recycling, recovery, re-use or use of waste. The maximum penalty in the case of a corporation is $250,000 and in the case of an individual, $120,000.

Penalties increased to $5M for most serious environmental offences

The levels of fines payable by both companies and individuals will also increase. The maximum penalty payable for a Tier 2 strict liability offence, including water, air, land and noise pollution, increases from $250,000 to $1,000,000 for a corporation, and for an individual from $120,000 to $250,000.

The maximum penalty payable in respect of a Tier 1 offence depends on the state of mind of the offender. If the offence has been committed wilfully, the maximum penalty for a corporation is $5,000,000 and for an individual $1,000,000 and/or seven years imprisonment. If the offence is committed negligently, a corporation can face a penalty of up to $2,000,000 and an individual is liable for up to $500,000 and/or four years imprisonment.

Broader powers for the Court to impose alternative sentences

Orders which may be made by the Land and Environment Court in respect of an offence have also been extended by the Amendment Act. The Court has traditionally had powers to order an offender to undertake restoration and prevention work; pay costs, expenses and compensation associated with an offence; and repay any monetary benefits flowing from an offence.

The Court has also had the power to impose ‘additional orders’ or ‘alternative sentences’ (in addition to a fine), for example, to publicise the offence in relevant media, to notify a class of persons (eg shareholders in the company’s annual report), to carry out a specified environmental project for the public benefit, or to undertake an environmental audit.

Following the Amendment Act, the Court may now order an offender to pay a further penalty representing the amount of any monetary benefit to the offender resulting from the offence. New ‘additional orders’ that may be made include requirements to make a financial contribution to the Environmental Trust, to provide environmental compliance training to employees regarding environmental compliance and to provide financial assurances with respect to ongoing compliance with environment protection licences and/or legislation.

Changes to licensing

A significant amendment, relating to the DEC’s power to impose licence conditions, concerns the potential inconsistency of a condition with the requirements of applicable regulations. Previously, conditions that were inconsistent with the provisions of regulations had no force or effect. Following the Amendment Act, conditions which impose more stringent requirements than a regulation may now be included in a licence.

A breach of a licence condition is an offence for which penalties will also increase to $1,000,000 for a corporation and $250,000 for an individual. The increase in these penalties is significant, as it is often the DEC’s practice to include a requirement to undertake a pollution study or reduction program as a licence condition, the breach of which may now lead to a substantial penalty.

Therefore, when such a licence condition is imposed on application for a licence or as a consequence of an application to transfer or surrender a licence, the licence holder should consider appealing to the Land and Environment Court in relation to the imposition of unreasonable or unachievable conditions or requirements of a pollution study or pollution reduction program.

Additional POEO Act amendments

  • Licence holders may now provide or participate in schemes for the provision of green offsets to mitigate the effect of licensed activities. Works may either offset or make good any environmental damage caused by the licensed activity.
  • The period within which the regulatory authority must review a licence is extended from three to five years.
  • Additional factors are to be taken into consideration by the regulatory authority in determining whether a person is ´fit and proper’ to hold a licence under section 83 of the POEO Act (including a person’s record of compliance, whether the licensed activities will be in the ‘hands of a technically competent person’, and the financial capacity of the licence holder). The ‘fit and proper person’ test is relevant and may be taken into account by the DEC when approving an application for the extension, revocation, transfer or surrender of a licence. The suspension, revocation, transfer or surrender of a licence may also be subject to conditions imposed by the DEC (for example, a condition requiring the carrying out of remedial work, an environmental audit, a pollution study/reduction program).
  • A scheme has also been put in place for offenders to provide voluntary undertakings to the DEC, to remedy or restrain a breach of the POEO Act, thereby avoiding the need for court proceedings. Such undertakings are enforceable in the Land and Environment Court.
  • A licence may be revoked if the holder is convicted of a 'major pollution offence' - an offence likely to cause harm to the environment and subject to a penalty of $1,000,000 (for a corporation) or $250,000 (for an individual).
  • The DEC can refuse an application for the surrender of a licence in circumstances where there is an ongoing environmental impact caused by the former activities.

Environmental Management Systems and the due diligence defence

Due diligence is recognised in most jurisdictions of Australia as a defence to director prosecutions following a breach by a company of environmental law. With directors and managers in NSW no longer able to rely on the ‘no-knowledge’ defence, increasing emphasis will be placed on demonstrating due diligence.

What constitutes due diligence?

The statutory defence of due diligence is available, both to corporations and individuals prosecuted in respect of Tier 1 offences, and to directors and managers prosecuted in respect of offences committed by their corporations.

There has been little judicial guidance as to what is necessary to constitute a due diligence defence. In State Pollution Control Commission v Kelly (1991) 5 ACSR 607, the Court considered the defence as it applied under section 10(1)(c) of the Environmental Offences and Penalties Act 1989 (now section 169(1)(c) of the POEO Act). A company had polluted a creek and its director, Kelly, was taken under the legislation to have committed the same offence. Kelly sought to rely on the defence of due diligence, available under that section, but failed to satisfy the requisite standard.

One of the reasons given by Hemmings J was that, despite being aware of the likelihood of pollution, Kelly had taken no steps to prevent the occurrence by the company of a foreseeable environmental incident. His Honour stated that:

‘Due diligence … depends on the circumstances of the case, but contemplates a mind concentrated on the likely risks. The requirements are not satisfied by precautions merely as a general matter in the business of the corporation, unless also designed to ‘prevent the contravention’.

This approach is similar to that adopted in a number of trade practices cases where, if there is evidence of negligence or a failure to take due care, the defence will not be successful.

The NSW Environment Protection Authority (DEC) Prosecution Guidelines, which guide the DEC's discretion on when to prosecute an environmental offence, relevantly state:

‘The DEC wishes to encourage the introduction and implementation of comprehensive compliance programs such as environmental audits and environmental management programs, which will militate against non-compliance situations arising. Accordingly, the existence and implementation of such programs will be taken into consideration in deciding whether to prosecute.’

Standard of Environmental Management Systems (EMS) required

Typically, the operation of an effective EMS has been the primary focus for establishing environmental due diligence. The decision of the court in Environment Protection Authority v Great Southern Energy [1999] NSWLEC 192 provides guidance as to the standard of EMS expected by the courts. Great Southern Energy was charged with a water pollution offence under the Clean Waters Act 1970 and claimed in its defence that it had in place a detailed EMS certified under ISO 14001. The cost of obtaining such certification was estimated at over $1,000,000. The Court held that, while the preparation of an EMS is relevant to establishing a due diligence defence and ensuring sound environmental practice, the EMS will not be sufficient in establishing due diligence unless it is regularly updated and implemented effectively.

The frequent amendment of environmental laws and their interpretation by the Courts can quickly render an EMS ineffective in establishing a due diligence defence. Unless an organisation’s environmental compliance system is regularly updated and reviewed, and the recommendations of such reviews acted upon, a due diligence defence is unlikely to be successful.

Relevant changes to ISO 14001

To be certified, an EMS must comply with the requirements contained within ISO 14001:2004. A key focus of those requirements is the need for the EMS to address compliance with applicable laws.

The 1996 version of ISO 14001 clause 4.3.2 reads as follows:

‘The organisation shall establish and maintain a procedure to identify and have access to legal and other requirements to which the organisation subscribes, that are applicable to the environmental aspects of its activities, products or services’.

The 2004 version, in addition, requires the organisation:

‘to determine how these requirements apply to its environmental aspects’ [emphasis added].

Further, under the 2004 version:

‘the organisation shall ensure that these applicable legal requirements and other requirements to which the organisation subscribes are taken into account in establishing, implementing and maintaining its environmental management system’ [emphasis added].

The changes to ISO 14001 clearly require a detailed analysis of the environmental legal requirements affecting an organisation. Generic lists of environmental legislation and subscriptions to legislative update services are not likely to be adequate to obtain or maintain certification under ISO 14001. Clearly, failure to understand a company’s legal obligations and to implement a management system to comply with these obligations will make it very difficult to raise a defence of due diligence.

Many organisations have already put in place procedures to determine legal compliance requirements. For those that have not, there is now an additional incentive to do so. Failure to address legal requirements may affect the accreditation of an EMS and, with it, an organisation’s ability to establish a due diligence defence.

Proposed Protection Environment Operations (Underground Petroleum Storage Systems) Regulation 2005

The proposed Underground Petroleum Storage System (UPSS) Regulation will apply to persons with management and/or control of a UPSS, and the occupier of premises in which a UPSS is located. The proposed Regulation will not replace, but will complement, existing regulations relating to underground fuel tanks under the Occupational Health and Safety Act 2000.

The proposed Regulation prescribes pollution prevention requirements for occupiers of sites containing UPSS in New South Wales. The proposed Regulation will require that:

  • The design and installation of new UPSS meets standards consistent with the best available technology and practice;
  • Leak detections systems and environmental monitoring programs be implemented for all UPSS (new and existing) to prescribe minimum standards which are set out in the Regulation, which are based on those used in the Australian Institute of Petroleum’s Code of Practice (CP4) The Design, Installation and Operation of Underground Petroleum Storage Systems.
  • Leaking UPSS are reported to the appropriate regulatory authority (initially the DEC and later councils) and repaired or replaced in accordance with the required standards, and the extent of any associated contamination is investigated, remediated to the extent required and the investigation and remediation validated;
  • An operational environmental management plan be developed and implemented for all UPSS (new and existing) sites to ensure consistent operational standards across such sites within NSW (based on criteria set out in the Regulation);
  • Appropriate standards of record keeping are set and implemented for all UPSS (new and existing) sites (for instance, records on maintenance, monitoring, auditing and decommissioning of underground fuel tanks);
  • Local councils are notified when a UPSS is removed or decommissioned and of validation confirming that no unacceptable level of contamination remains.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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