Chapter 5: Domestic Environmental Liability

5.5 Several regimes impose liability for “causing or knowingly permitting” pollution. A useful starting point for the analysis of such liability is section 85(1) of the WRA 1991. 4 This provides that a person may be guilty of an offence if (in the absence of a discharge consent) he “causes or knowingly permits any poisonous, noxious or polluting matter or any solid waste matter to enter any controlled waters”. Before considering the application of this provision to a lender, it is necessary to examine briefly the general scope of the liability imposed.

5.6 It is clear that liability for “causing” is strict in that it does not require mens rea in the sense of intention or negligence: see Alphacell v. Woodward [1972] AC 824 at p. 842 and Environment Agency v. Empress Cars [1999] 2 AC 22 at p. 32.

5.7 In the former case, Lord Wilberforce stated at p. 834:

“‘causing’ … must involve some active operation or chain of operations involving as the result the pollution of the stream; … In my opinion, ‘causing’ here must be given a common sense meaning and I deprecate the introduction of refinements, such as causa causans, effective cause or novus actus.”

One or more persons may cause pollution by carrying out separate and distinct acts each of which contribute to the pollution and without any of which the pollution would not have occurred. 5 The question is whether there is something which the defendant has done, whether immediately or antecedently, which has caused the pollution. 6

5.8 In order to answer the question “Did the defendant cause pollution?”, Lord Hoffmann said in Empress Cars, supra, that:

“one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule. Does the rule impose a duty which requires one to guard against, or makes one responsible for the deliberate acts of third persons?”. 7

5.9 The mere provision of financial assistance should not ordinarily be considered to be an “active operation” in the chain of causation for the purpose of the approach adopted by Lord Wilberforce in Alphacell v. Woodward. 8 Alternatively, adopting the approach of Lord Hoffmann in Empress Cars, it might be argued that the purpose of the Act is not to require lenders to guard against or to be responsible for the acts of the borrower.

5.10 It is extremely unlikely that a lender would find itself liable for “causing” pollution simply by funding the polluting operations of the borrower or by withdrawing a facility in accordance with its terms when the monies might otherwise have been used to fund remedial work. However, a lender is only likely to be at risk where it is involved in the management of the borrower’s business and/or exercises control over its daily operations. 9

5.11 In Alphacell v. Woodward, Lord Wilberforce made clear that “knowingly permitting” involves “a failure to prevent the pollution accompanied by knowledge”. 10 Again, it is useful to consider the scope of these requirements before dealing with their application to lenders.

5.12 The requirement of knowledge raises two important issues. First, to which elements of the offence does the requirement of knowledge relate? The answer depends on the construction of the statute concerned: compare Ashcroft v. Cambro [1981] 1 WLR 1349 at p. 1355 and Shanks McEwan v. Environment Agency [1999] QB 333 at pp. 342–5 with Westminster v. Croyalgrange [1986] 1 WLR 674 at pp. 681–2 and 684. It is therefore impossible to provide an answer which is of uniform application. In relation to section 85 of the WRA 1991, it is arguable that knowledge that the relevant matter is poisonous, noxious or polluting and knowledge that it is entering controlled waters are both required. 11

5.13 However, the approach of the courts to the second issue, constructive knowledge, may reduce the importance of the first. In Westminster v. Croyalgrange, supra, Lord Bridge said at p. 684:

“it is always open to the tribunal of fact, when knowledge on the part of a defendant is required to be proved, to base a finding of knowledge on evidence that the defendant deliberately shut his eyes to the obvious or refrained from inquiry because he suspected the truth but did not want to have his suspicion confirmed.” 12

In the light of this, a lender is unlikely to be acting in its best interests if it seeks to avoid any exploration of potential pollution or environmental liabilities.

5.14 Before being held to have permitted pollution, however, it is suggested that a lender would need to possess the power to prevent the pollution and to have failed to take reasonable steps to exercise that power. 13 In the ordinary course of events, it is unlikely that a lender would be considered to possess the necessary power unless it exercises control over the day-to-day operations of the borrower.

5.15 The authorities on shadow directorship may shed some light on the situations in which a lender might or might not be found liable for causing or knowingly permitting. This is because a person is similarly at risk of being held liable as a shadow director if he exercises control over or interferes with the management of a company.

5.16 In Ex parte Copp [1989] BCLC 13, for example, the bank commissioned a report on the affairs of a corporate customer from its own financial services section. The company then took various steps to implement the recommendations contained in the report. Knox J. held that the argument that the bank had acted as a shadow director was not “obviously unsustainable”. 14 At trial, however, Millett J. acknowledged that the allegation was “rightly abandoned” due to the absence of supporting oral evidence. 15

5.17 In Re Tasbian (No. 3) [1992] BCLC 358, the Court of Appeal held that there was an arguable case 16 that a “company doctor” was a de facto or shadow director. 17 In reaching that conclusion, the court attached particular weight to the monitoring of the company’s trading and the exercise of control of the company’s bank account through the bank mandate. Such control was real not illusory: the “doctor” refused to countersign salary cheques and decided which creditors should be paid and in what order.

5.18 Absent close involvement in the management of the borrower, a lender is unlikely to be liable for knowingly permitting. In particular, it is submitted that it would be unreasonable for the courts to require a lender to exercise control over the borrower by relying upon covenants which were inserted into a loan agreement for a different purpose, namely, to protect the lender’s interests. However, out of an abundance of caution, a lender should avoid inserting any provision into a loan agreement which confers power on the lender to enter the borrower’s property, to execute remedial work and to pass on the cost of such work to the borrower.

5.19 Liability for causing or knowingly permitting pollution is also imposed by the new contaminated land regime. 18 This regime cannot be considered in detail here. 19 In summary, however, it provides for the imposition of liability for the remediation of contaminated land 20 (or the costs of remediation) on the “appropriate person” or persons who are divided into two categories. The first comprises those persons who have caused or knowingly permitted the substances...