Under the Environmental Protection Act 1994, the Environmental Protection Agency may serve a remediation notice on a variety of parties to remedy land contamination. These parties include the party responsible for the contamination (if known and locatable), the relevant local government authority (in certain limited circumstances) and the owner of the land. In some cases the party responsible for the contamination will be unknown or not locatable, and the circumstances in which the relevant local government will be required to remediate the site are limited. For this reason, the private party is likely to resist taking ownership of a site without a warranty or an indemnity from the previous owner in respect of pre-existing site contamination.
There may be a concern that there is insufficient time during the bidding phase for proponents to undertake the detailed and exhaustive studies necessary to sufficiently quantify contamination risk. It may also be considered to be cost-inefficient for each proponent to commission such investigations. As a result of excessive cost and lack of time, most proponents bid in ignorance of the true site condition. Unless provided with an appropriate indemnity, proponents may bid at very high premiums to cover worst-case outcomes.
Contamination risk is also seen as open-ended. The full extent of environmental impact may be difficult to predict, particularly if there are off-site impacts from on-site pollution. In such cases, the occupier of the project site is liable as the polluter of the adjacent site.
Clearly, government should not indemnify the private party against contamination risk for any site that the private party brings to the project.
Identified contamination should also be excluded from any indemnity with respect to a government-owned or designated site, as it should have been priced into the bid. Furthermore, depending on the nature of the project, it may not be necessary for the site to be pristine. In that instance, a broad indemnity may generate wasteful, unnecessary clean-up. It may therefore be appropriate for government to provide a limited indemnity, or subject environmental liabilities to a material adverse effect clause that deals with them only if and when a risk eventuates.
By limiting the scope of such indemnities, and creatively applying a material adverse effect regime to contamination risk, such risk - even at sites previously owned by government - may be shared and incur a lesser premium. Capping government's liability under the indemnities may also assist in ensuring that the private party efficiently complies with its contractual obligation (if any) to clean up a project site.