June 14, 2011

Contract Fails To Protect Seller From CERCLA Liability After Expiration Of Indemnity For Environmental Claims

Posted on June 14, 2011 by Jose R. Allen

Since the passage of CERCLA, practitioners have been keenly aware of the necessity to negotiate contractual provisions allocating responsibility for environmental liabilities in the purchase and sale of industrial facilities. Such agreements typically include provisions aimed at protecting the buyer from liability for pre-purchase environmental claims and limiting the length of time that the seller may be obligated to indemnify the buyer for such claims.

A recent federal district court decision, Stimson Lumber Co. v. Int’l Paper Co., CV 10-79-M-DWM-JCL (D. Mont. 2011), illustrates the importance of not only including provisions in purchase and sale agreements for indemnity as to pre-closing conditions, but ensuring that such provisions unambiguously reflect the parties’ intentions regarding CERCLA statutory liability. On April 22, the court in Stimson Lumber held that the buyer of a lumber mill could sue the seller of the mill for costs incurred under CERCLA even though the period of seller’s contractual indemnity for environmental claims had expired under the terms of the sale contract.

A 1993 asset purchase agreement (the “APA”) pursuant to which Stimson Lumber Company bought a lumber mill from Champion International provided an indemnity for environmental claims relating to pre-closing conditions for a period of ten years. In 2008, after the indemnity had expired, Stimson filed suit against Champion’s successor, International Paper, for costs incurred to clean up contamination at the mill. International Paper argued that the lawsuit was barred under the terms of the APA because the contractual period for indemnity for environmental claims had run. The court disagreed, finding that a provision setting forth the purchase price could have signaled the parties’ intention that statutory CERCLA liability remains with the seller. The court found that the wording of the provision created an ambiguity regarding whether the parties intended for the buyer to assume the seller’s statutory liabilities after the contractual indemnification obligations expired.

The court distinguished Armotek Industries, Inc. v. Freedman, 790 F. Supp. 383 (D. Conn. 1992), in which the purchase agreement had included a proviso that after the expiration of the indemnity period, “no claim for indemnification for losses . . . shall be made against Seller.” The court in Aromtek found that this provision reflected the parties’ unambiguous agreement that the seller’s CERCLA liability had shifted to the buyer after the indemnity period expired. In reviewing the Stimson Lumber agreement, the court found no similar bar to claims after the expiry of the indemnity period, and held that the ambiguity in the terms of the APA precluded summary judgment for the seller.

The Stimson Lumber decision serves as a useful reminder that in drafting environmental provisions, the words must be either very broad and quite absolute in the allocation of future liabilities or very specific and complete in reflecting sometimes subtle distinctions between indemnity for and assumption of liability. Years after the fact, when the participants in the initial transaction are long gone and the cold words on a sheet of paper are the only guide to the parties’ intentions, only truly unambiguous language will protect against the revival of old liabilities thought extinguished long ago.

Tags: Superfund


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