Finland: Groundbreaking Supreme Court Ruling On Compensation Of Environmental Damage

Introduction

A recent ruling of the Finnish Supreme Court changed the interpretation on how tort liability can be used as a means of recourse of remediation costs. The ruling also contained an allocation of liability for environmental damage to an oil company in a situation where a gas station was operated on the basis of a franchise concept. A general conclusion of the case is that industry faces a greater risk of being held liable for environmental remediation costs of historical contamination.

Details of the case

From 1981 to 1996, a limited partnership (Dealer) had operated a gas station which was a part of the national chain of an oil company (Company). The real estate was owned by the Dealer but the gasoline pumps belonged to the Company. The Company was also responsible for the distribution of gasoline, and the whole operation of Dealer's gas station was based on a co-operation agreement between the Company and the Dealer.

In 1996, the Dealer went bankrupt, and the subsequent year a local bank (Bank) bought the gas station property. According to the ruling, the Bank soon detected that the property's soil and groundwater had been polluted during the gas station's operation and had the soil remediated at its own expense.

The Bank claimed compensation from the Company for the remediation costs.

Ruling of the Supreme Court (KKO 2011:62)

The Supreme Court held that the fact that the Company was not in a contractual relationship with the Bank did not mean that the Company could not be held liable on the basis of the Tort Liability Act (412/1974) or the Act on Environmental Damage (737/1994). Further, the Supreme Court deemed that the Company was in such a position that it could be considered as the actual operator of the gas station and could thus be held liable for the environmental damage that had occurred at the gas station property as a part of the Company's business activities.

Conclusions

Based on the judgment, the buyer of a contaminated property now has more legal options for recourse.

Until now, the environmental authority's possibility to oblige the polluter to remediate a contaminated property has been the most useful means for the current holder of the property to avoid remediation costs, as the holders are secondarily liable for remediation. However, there have been no legal options available to claim remediation costs from the polluter if a subsequent owner has already remediated the property at its own expense and if there has been no contractual indemnity available for the subsequent owner.

According to the judgement in question, it is now possible to claim compensation for the remediation costs from the actual polluter even if the polluter had not been the seller of the real estate. This makes the position of a subsequent owner of, for example, an industrial property significantly stronger. The ruling does not, however, answer to the question on whether it is possible to apply the same reasoning in cases where the claim for damages can be targeted to the actual seller of the property.

A specific feature in this case is that the most likely polluter was insolvent. The ruling reflects the polluter pays-principle, but can, due to the set-up of the case, also be argued to illustrate what is referred to as the deep pocket phenomenon.

One focal issue that the Supreme Court did not address at all in its judgment was the actual damage that was caused to the Bank as the buyer of a former gas station property. The Bank did not own the property at the time of contamination but bought the property from the bankruptcy estate. This opens up the question on whether a subsequent buyer of a property actually suffers damage, if the property already at the time of purchase was less valuable due to the contamination. Respectively, if the property increases in value due to brownfield development, no actual damage is necessarily caused as the remediation costs are compensated by an increase in land value.

Due to the judgment, the possibility of tort environmental liability as a means of recourse must be properly addressed in all current and future transactions and lease arrangements where there is a potential risk of environmental liabilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.