New EU recovery prospectuses 'to reduce time and costs involved in raising capital'
Out-Law Guide | 19 Apr 2018 | 11:06 am | 18 min. read
This guide was last updated in April 2018
Numerous EU acts were influential in shaping the system of environmental law in Germany. Despite different initiatives, no uniform environmental code (Umweltgesetzbuch) was adopted. Federal and state agencies have different powers with regard to enforcement. The administrations of the states are generally tasked with the enforcement of federal law. Few specialised areas, such as nuclear power for instance, fall under the responsibility of direct federal administration. Enforcement powers reach vertically from state ministries over regions to local communities.
German regulators have been active in policy shaping, as for example evidenced by the early offshore consenting schemes. In general, there is much public awareness of environmental issues.
From a practitioner’s point of view, Germany heavily relies on its permit, licences and audit systems where applicable. Administrative oversight of industries and operations that may impact on the environment is mainly informed by experts’ opinion at the consenting stage.
The effectiveness of environmental enforcement often differs depending on the applicable permit regime, in particular, whether audits of facilities are prescribed. The current practice also takes recourse to the deterring effects of administrative sanctions and prosecution in cases of environmental non-compliance.
The current enforcement approach is completed by the relatively recent possibility of certain NGOs and acknowledged interest groups to initiate judicial review on the grounds of non-compliance with environmental law.
The provision of environment-related information
Environmental information has been systematically gathered and analysed for many years. There is a tradition of public consultations for sensitive facilities or developments, in particular with regard to certain industries and infrastructure.
Information about so-called brownfield sites is available from public cadastres and groundwater quality maps. Administrative evaluation of data relevant to the determination of environmental action has a longstanding tradition.
Environmental information in the broadest meaning of the term must be made accessible to anybody on the basis of the Environmental Information Act (Umweltinformationsgesetz). This legislation was first introduced in 1994 and was substantially revised in 2005 based on the Aarhus Convention. Although the Environmental Information Act only governs access to information held by the federal administration, it has been a blue print for legislation in all states, which adopted equivalent laws. Access to environmental information for members of the public is granted free of cost for oral or simple written disclosures as well as file reviews at government offices. Certain restrictions apply in order to safeguard national security, private property and data protection interests.
There is no concept of an environmental permit as such. As the national enforcement systems rely on administrative oversight, the process of permitting any operation that could adversely impact on the environment includes, to some extent, an assessment of the foreseeable environmental ramifications based on different legislation. The level of involvement and assessment, however, varies depending on the applicable permit regime, which is determined by nature, scale and scope of the individual project. In the case of offshore pipelines, for example, a variety of different permits from different authorities is required, including different impact assessments.
Object-related permits (Sachkonzessionen), which predominate, are freely transferable; typically with ownership or operator position of the asset. A notification to the authority is sometimes required.
Personal permits (Personalkonzessionen), i.e. permits that are granted to an applicant based on individual qualifications, are nontransferable.
The applicant has full recourse to administrative and judicial review. The appeal can be based on a wrongful denial of an application or limited to specific erroneous conditions. Appeals that could not be amicably resolved by consultation with the regulator can be further pursued in the courts for public administration (Verwaltungsgerichte).
It must be noted that the German authorities enjoy a rather wide margin of discretion in relation to environmental permit requirements.
It is necessary to conduct environmental audits or environmental impact assessments for particularly polluting industries or other installations/projects, depending on the nature and scale of the individual facility for new developments. The assessment is typically part of the original permit process as there is no standalone environmental permit.
Projects that fall within the scope of the environmental instruments are typically subject to public notification requirements, public consultations and require the provision of project-related information and environmental assessments. All elements are considered in the final decision of the competent authority whether to grant the permit including any conditions.
The same applies to a number of facilities that already enjoy permitted status. Certain polluting operations are subject to regular environmental audits. Such audits can result in remediation actions or additional operating conditions.
Germany has adopted legislation pertaining to environmental impact assessment (EIA, Gesetz über die Umweltverträglichkeitsprüfung) in line with European requirements. It prescribes a formal assessment process that complements, but does not substitute, the administrative permit requirements for certain industrial and infrastructure developments. EIA will not apply after the permit stage.
Possible enforcement instruments that are available to the authorities when permits are violated are: a specific compliance action by administrative decision, including remediation of non-compliant situations, which are typically underpinned by enforcement fines (Zwangsgeld); in case of non-compliance within a deadline, execution by substitution at the violator’s expense and even forceful closure of facilities.
This enforcement regime is supplemented by a system of administrative offences that trigger administrative fines (Bußgelder) as well as prosecution (Strafverfolgung). It is particularly noteworthy that the operation of a regulated facility without or materially outside the scope of a permit constitutes a criminal offence.
The statutory definition of waste according to section 3 (1) 1 of the Closed Substance Cycle Act (Kreislaufwirtschaftsgesetz) reads: “Waste is any material or substance the possessor of which disposes, wants to dispose or must dispose of.” This statutory definition is in line with the European understanding of waste as any movable item in or intended for disposal. It follows that either factual disposal, apparent intent to dispose or a legal obligation to dispose of a substance or material renders it waste for the purposes of the law.
Due to the specific nature of the definition, contaminated soil in situ is not regarded as waste. It only becomes waste once mobilised during excavations. Before it is excavated contaminated soil is governed by federal legislation on soil protection (Bundes- Bodenschutzgesetz). Certain industries, such as nuclear and mining, do not fall under the scope of the Closed Substance Cycle Act. Furthermore, waste is categorised as being hazardous and nonhazardous.
Permit requirements and control mechanisms vary depending on the applicable waste category. The law takes a differentiated approach with a view to the substance and the level of involvement that individuals have with it: storage, transportation, collection and disposal. The main instrument of administrative control is the system of waste classification and registration, which seeks to establish accountability of waste streams even across borders.
Waste producers may either be households or commercial operators. The statutory obligation to recycle or dispose of waste in an appropriate manner rests both with the producer and any possessor.
Waste storage in households is not permissible as there is a duty to dispose of such waste through authorised municipal collections. In the commercial sector, waste storage is regulated depending on the nature and quantity of the waste. In general, production permits do not imply the permission to store waste on site. Production facilities typically have approved waste-management plans that contain short-term storage allowances.
Waste disposal on site is not feasible. Onsite use of materials that originate from the facility is only permissible if it can be demonstrated that the remaining waste qualifies as recycling and, indeed, not disposal. An example of this is the use of demolition debris at a construction site as filling material, as long as it is in line with safe water law permit requirements.
Producers of waste retain liability for their waste. Handling, recycling and disposal contracts may be awarded or corporate schemes contracted out with regard to waste. However, strict standards must be applied by the contracting party with regard to the eligible contractor. This becomes the more pertinent the more hazardous the waste is.
Ultimately, the public legal liability to recycle and dispose of waste in a legal manner remains with the producer until such material ceased to qualify as waste. This only happens if the material was either successfully recycled or disposed of in an approved facility such as a landfill. Consequently, if a recycling contractor goes bankrupt and material in its possession traces to the producer, the producer will have to retrieve 'its fraction of waste' for treatment.
Take-back and recovery obligations
The Packaging Ordinance (Verpackungsverordnung) requires manufacturers and distributors to accept defunct packaging of goods for recycling or disposal. A specialised collection system was established, which is mandatory. Beverage containers also fall under the scope of the ordinance with provisions for a monetary refund system at retail level.
The End-of-Life Vehicles Ordinance (Altfahrzeugverordnung) requires manufacturers or importers of vehicles registered within the EU to accept these back and to implement recycling schemes for them.
The Electrical and Electronic Equipment Act as well as the Battery Act provide for the establishment of a freely accessible collection system to consumers for all kinds of electronic waste and rechargeable batteries. The statutes place the manufacturer, importer and, within limits, the re-seller of such goods under a duty to accept their defunct products for recycling or safe disposal. All products concerned must be pre-registered as a condition for lawful marketing or distribution.
All legal instruments mentioned above have in common that the liability for disposal remains with the ultimate originator and that cost-free return options have to be made available to consumers.
The environmental liability concept comprises three categories: public law; civil law; and criminal law. Various intersections between those three exist.
Public law liability for environmental non-compliance derives from various statutes and ordinances that aim at environmental protection. In addition, administrative orders can be adopted in cases of imminent danger on the basis of public order legislation. The concept of public law liability is best described as the set of statutory enforcement instruments available to the authorities against permit holders, operators or polluters. Whenever remediation is required, the person legally liable has to take all necessary compliance action and has to bear all costs associated with any remediation action. The Environmental Damage Act (Umweltschadensgesetz) establishes a strict liability of industries for adverse impacts on soil, waterbodies and biodiversity.
Civil law liability encompasses all claims for indemnification and damages in relation to environmental impacts. Potential claims can vary in scope. Most commonly, civil law claims between neighbouring property owners deal with emission control. Damages can be awarded if private property was damaged or expenses for remediation of adverse impacts were incurred. Environmental indemnifications are frequently a stress-point in real estate transactions, especially concerning soil contaminations and hazardous construction materials. Certain public law statutes provide for civil compensation claims against a polluter or other parties. The Environmental Liabilities Act (Umwelthaftungsgesetz) contains a strict liability for certain facilities that can be environmentally harmful and, in turn, harm human beings.
Criminal liability can arise in cases of infringement of penal code provisions, for instance if necessary permits were not obtained or existing ones materially breached.
The potential for effective defences against any of such liability claims is rather limited given that either strict liability or negligence applies.
Liability for environmental damage where the polluting activity is operated within permit limits
The “defence of permitted use” remains a contested one. More recent case law of the federal judiciary tends to state that this defence was only admissible provided that the permit in question directly allowed the adverse environmental impact to occur, such as mining. The defence would not be available if an impact only occurred incidentally during the permitted operations. This defence bears more relevance to older cases in which the adverse impact originated in times when contemporary environmental laws were not in force yet.
It is argued that directors/corporate officers could attract civil legal lability for environmental wrongdoing, but to date no relevant precedent exists. Cases of adverse environmental impacts need to be carefully differentiated from those concerning negligence with regard to operational safety of a facility.
Directors and corporate officers will be the ones prosecuted in any case that involves a private legal entity operating a non-permitted facility. The German penal code does not provide for corporate prosecution, but allocates criminal liability to the individuals in management.
Various insurance policies are available under directors and officers policies and PI schemes to cover environmental liabilities. Infringements by wilful intent are generally excluded.
Environmental liability following share sale or asset purchase
Perpetual liability in every respect is inevitable in any share deal or fully fledged merger. The acquirer will be liable for any incidents or findings prior to and after closing of the acquisition.
The situation can be similar even in an asset deal with regard to soil and groundwater contamination that originated after 1 March 1999 because of the German legislation. The owner of a soil-polluted or water-polluting property will remain liable to decontaminate besides the historical polluter. However, the liability can be limited on a statutory or, to some extent, on a contractual basis. Compensation claims against the polluter are also afforded.
Depending on the type of environmental impact or damage, the liability implications between share and asset deal may not differ significantly. The target assets, therefore, always require careful analysis.
There is no concept of a lender’s liability for environmental wrongdoing nor a similar legal mechanism to this effect in Germany.
Contaminated soil and groundwater pollution caused as a result of it are governed by the Federal Soil Protection Act (Bundes- Bodenschutzgesetz). It stipulates a liability of polluters, including their universal legal successors; current land owners; previous land owners who knew or ought to have known about environmental issues when acquiring title, and possessors including lessees and operators of a contaminated site. Authorities have statutory powers to require information and conduct searches and soil analysis in order to tackle sources of contamination, and they frequently do so.
Authorities enjoy a wide margin of discretion as to which liable party to engage. All liable parties can be approached for a full decontamination provided that they are in a position to reasonably and effectively perform necessary searches and remediation measures.
In turn, the party held liable by the authorities will have a statutory compensation claim against any other liable party in proportion to the extent these others caused the pollution.
Public law agreements on decontamination measures are a common tool. They are legally binding on the parties involved, including the authorities, who cannot make additional demands after entering into such an agreement. This legally binding effect is limited to the pollution concerned. The authority would not be pre-empted if previously unknown contamination was discovered on site.
Third parties as stakeholders can and must be a party to such agreements. They can only challenge an agreement if their legitimate concerns or formal position as a stakeholder in the cleanup were unlawfully curtailed. No other challenges by third parties to such an agreement can be made. General challenges of third parties are not admissible in court.
Claims against previous owners
There is a statutory compensation claim afforded to all statutory liable parties in respect of clean-up costs when a previous owner caused contamination. Such claim is dependent on the extent of the pollution, but litigating such claims is difficult because of the applicable burden of proof.
This compensation claim can be contractually excluded, but only with effect between the parties to the agreement. So any subsequent acquirer of the property could claim from a previous owner. A vendor can prevent this by obligating the acquirer to exclude all compensation claims in the future conveyance of title to another party, but residual risks remain, due to the statutory liability regime.
Equally, the vendor and purchaser can agree to indemnify one another for specific contamination. But this would not prevent the authorities from holding them liable contrary to such an agreement.
The government does not have authority to obtain monetary damages from a polluter for aesthetic harms to public assets.
Powers of regulators
The competent authorities have comprehensive investigative powers that derive from various statutes and often correspond with a duty of industrial operators to maintain relevant information. In general, they can request information, conduct site inspections and require or effect samples. Depending on the nature and subject matter of the investigation, which could be conducted pursuant to administrative penal law, they could also interview staff members.
Reporting and disclosure obligations
When it comes to disclosure of pollution to an environmental regulator or potentially affected third parties there is no duty to self-incrimination, especially if the nature of the pollution may imply criminal liability. However, in other situations a duty to notify the authorities could stem from public order or sector-specific legislation, provided that an imminent danger to health and safety existed or hazardous materials were involved.
Many states have adopted legislation that requires land owners, possessors such as lessees and operators, or constructors to report any reasonable suspicion about soil and groundwater contamination on their property to the authorities. Failure not to comply can trigger an administrative fine (Bußgeld).
The Federal Soil Protection Act (Bundes-Bodenschutzgesetz) mandates that proprietors take all reasonable actions to avoid all and any dangers originating from adverse soil impacts (schädliche Bodenveränderungen) on their property. This constitutes an affirmative statutory obligation to investigate land for contamination, which will apply regardless of any administrative action being initiated. However, it does not limit the powers of the authorities to decree specific actions to be undertaken by the liable persons as the case may be.
Disclosing environmental problems
Any adverse environmental impact on any given property constitutes a defect (Sachmangel) pursuant to German statutory law of sale. Full disclosure is required in any transactional situation, especially in order not to render contractual limitations of liability and indemnity of the seller, which can usually be agreed, null and void. The same would apply in joint venture and merger situations because the German courts have recognised that environmental impacts are significant circumstances for any deal type that directly affect property or transaction value. Consequentially, contracting parties can expect reasonable disclosure. It may, however, be difficult to adequately assess what kind of “environmental problem” requires full disclosure.
Use of environmental indemnities
The three categories of environmental liability in German law need to be distinguished in such a situation. In general, contractual indemnities can be agreed and are legally binding on the parties if adequate disclosure is provided. Payments under such indemnification will discharge a party’s contractual liability. Any public legal liability, meaning the exposure to be held liable by an environmental regulator for the indemnified incident, will persist.
Any criminal liability and the possibility of prosecution for environmental non-compliance are unaffected.
Keeping environmental liabilities off balance sheet
A true off-balance sheet structure for environmental liabilities is not feasible in most cases that involve non-movable assets due to the statutory framework in Germany. However, proactive asset holding and corporate structuring can limit exposure to some extent. It is not possible to effectively evade environmental liabilities by a simple asset transfer and subsequent liquidation of the company, especially an inadequately capitalised special purpose vehicle.
In general, shareholders cannot be held liable for environmental noncompliance or pollution caused by a company provided that they did not personally contribute. This applies to all limited liability corporate formations, but not to non-incorporated legal partnerships.
Certain statutes such as the Federal Soil Protection Act provide for a liability of parent companies for their subsidiaries provided that they exercise a dominant influence through a controlling agreement. The federal judiciary developed case law that disregards the corporate shield in situations of manifest abuse, which will usually apply to corporate structures where known contaminated assets were transferred to undercapitalised entities.
German courts do not have jurisdiction over claims for pollution caused abroad by a foreign subsidiary.
No uniform legal approach to whistle-blowing exists. Certain areas of law provide for protection of notifying staff depending on the area of non-compliance that is concerned. This applies mostly to occupational health and safety situations, but not to general environmental compliance or pollution issues. Indeed, German labour law does not protect general whistle-blowing.
The concept of penal or exemplary damages does not exist in German law. Neither are group or class actions possible. The procedural concept strongly differs from the Anglo-American legal perspective. Only claimants that can show direct individual rights at stake (subjektive öffentliche Rechte) have standing in the administrative courts. A more recent change in legislation allows certain interest groups or non-governmental organisations to bring environmental action, particularly challenges to permits and planning consents.
Public interest exemptions from environmental litigation costs
There are no exemptions from environmental litigation costs. The usual statutory cost liabilities apply, meaning 'loser pays all'. However, litigation in Germany is far less cost-intensive than in the UK or the US due to statutorily capped court and lawyer fees. So a legal privilege or lack of such in this sector might seem less pertinent.
Emissions Trading and Climate Change
The EU Emissions Trading System (EU ETS) is practised in Germany since the European framework was established. It is one important pillar of the government’s longstanding dedication to climate change policy. The third trading phase is presently in force (2013–2020). It is considered to be more challenging on the EU countries and their industries as an EU-wide emissions’ cap was introduced. The certificate trading is well established at federal level and a familiar tool to national stakeholders.
November 2017 saw the so-called Trilogue-consultations at the level of the European institutions for yet another reform of the trading system. While formal consent of the European Council and the European Parliament is pending, the German regulator believes that reforms will help re-incentivise the national market that has seen substantial oversupply in permits. Starting in 2019, annually 24% (instead of 12%) of surplus will be transferred into the Market Stability Reserve (MSR). The MSR will be capped from 2023 onward by the amount of auctioned permits, so that fewer permits will be in circulation. All other surplus permits will be cancelled.
Greenhouse gas emission monitoring and reporting
Federal emission control legislation imposes different monitoring requirements, and not only in relation to CO2. Monitoring and reporting can be specified in the relevant operating permit. The competent authorities may require information on greenhouse gas emissions as part of their general competencies to operational supervision of regulated industries. However, no general monitoring procedure apart from the EU ETS is in effect.
The German government has planned to decarbonise the energy sector and cut emissions for several years now. The plan has become known as the 'energy transition' (Energiewende). The goal is to cut emissions by 40% by 2020 (compared to 1990 levels) and by at least 80% by 2050. This target excels even the EU’s goal to cut emissions. Substantial investment has been undertaken in shaping a functioning renewables market and in the decommissioning of conventional power plants. An expanded action plan was presented in 2017 by the competent federal ministry that introduces significant caps to emissions from energy production.
In contrast to the US-experience, Germany has not seen significant litigation over asbestos. Illness due to asbestos exposure is recognised as occupational hazard and covered by health insurance plans. Occasional claims by individuals for damages for pain and suffering (Schmerzensgeld) have received sparse media coverage.
Although asbestos has been a banned substance since 1993, no national asbestos register for potentially contaminated sites exists. Asbestos issues are dealt with on a single case assessment basis, predominately during demolition works through the permit process. Decontamination in existing buildings is typically triggered when structural damage to a material known to contain asbestos occurred. The owner is under a duty to dispose of the material in a safe manner under the applicable waste and hazardous substances laws.
Environmental insurance liabilities
A wide range of environmental insurance is available on the German market. These range from standard liability policies to more tailored products for distinct risks arising from specialised business operations. Appropriate insurance cover for industrial operations is increasingly considered as best practice. The situation is more difficult with regard to transactions-related indemnity insurances. Environmental insurance is extremely rare among non-corporate owners.
Surprisingly little litigation has arisen around environmental insurance claims. It cannot be regarded as a virulent legal issue. Most insurance claims that surfaced meriting public coverage were related to personal injury claims, rather than to pollution in general.
The latter litigation has typically arisen over insurance for soil contamination in bankruptcy cases.
A version of this guide was first published by ICLG.
New EU recovery prospectuses 'to reduce time and costs involved in raising capital'