Norman Bernstein of N.W.Bernstein & Associates, LLC takes part in Negotiating Effective Contracts & Dealing with Disputes

QUESTION ONE – Which techniques are typically used by international counterparties in your experience to overcome challenges in the negotiation process?

A way to overcome challenges in negotiations is (a) thorough preparation, (b) understanding the other side’s objectives, and (c) an in-person meeting (with translators present if there are language barriers) between principals in order to resolve the toughest issues that are typically left to the end.

QUESTION TWO – Is there anything special or peculiar about commercial contract law in your country that General Counsel should be aware of?

Environmental risks are a special contracting risk in the U.S. This is because of the complexity of the environmental laws, the enforcement mechanisms, and the scope of potential liability.

It is beyond the scope of this article to try to summarise those laws, but a few basic points need to be understood. Governmental enforcement is by U.S. EPA, the U.S. Justice Department, and by analogous state bodies. Penalties can be harsh. For example, a violation of the Clean Air Act subjects the violator to penalties of up to USD37,500 per day per source. (Four laminators out of compliance would cost up to USD150,000 a day.) If a suit is brought by the Justice Department for an ongoing violation that started a year ago, the price would be USD150,000 x 365 = USD54,750,000 for the past violations. You can challenge the alleged violation in court, but (unless you win) the meter continues to run at USD150,000 per day while you litigate. There is also private enforcement by what are referred to as ‘citizens’ suits.’ If there are violations and the government does not prosecute, private environmental groups are all too willing to sue. If they win, they can get attorney’s fees. If you don’t want to litigate with them, they are often willing to settle for a generous contribution to their favourite environmental charity. Willful violations of U.S environmental laws can also lead to criminal penalties.

The scope of environmental liability in the U.S. is not limited to violations of law. In the U.S., the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) creates, in general, strict joint and several liabilities, for anyone who owns the contaminated property, owned or operated the property at the time of disposal, or arranged for the disposal of a hazardous substance. Liability is for all necessary cleanup costs and potential for the loss of use of natural resources. Cleanup costs can run into the millions, tens of millions or more, depending on the severity of the problem. Because there may be many parties responsible for contamination of soil, groundwater, or sediment that may go back a hundred years or more, many CERCLA suits spawn third-party claims against numerous other parties that, over time, may have contributed to the contamination. Defending a CERCLA claim can be very expensive.

There is obviously no single contractual solution, but some basic principles may be helpful. For example, the typical contract in the U.S. defines environmental risk broadly, to cover all of the main federal and applicable state statutes, but a key term is whether future laws, rules or regulations are also incorporated. If you are the seller that wants the buyer to take future risks, you want future laws and regulations included. If you are a buyer, you generally want to limit the term to just existing environmental law, regulations, etc. Representations, warranties and indemnities are normal contractual devices for allocating risk. But those provisions presuppose that they will be enforced. If a party provides an environmental representation or indemnity, what happens if the promisor goes bankrupt and the provision cannot be enforced? You also need to consider unenforced claims that may be lurking in the background. For example, in a recent case, a buyer bought property at what it thought was an attractive price and confirmed that it had been cleaned up to applicable state standards. After the closing, the buyer was sued by the State of Pennsylvania under CERCLA for the costs of a clean up the State had previously conducted at the site for an amount many times the buyer’s purchase price. A U.S. Court of Appeals ruled that when CERCLA says that liability is for ‘all costs’ it means all costs – no matter when they were incurred.

Although environmental studies by environmental engineers are commonly used before contracting, they are generally limited to historic and existing contamination of property and compliance with current permits. They may not pick up unasserted claims and frequently will not pick up the financial implications of new environmental restrictions that are in the regulatory pipeline. Those may require process changes, affect cash flow projections, and alter future capital costs. And, engineering studies will be unlikely to identify legal trends that a contracting party may need to consider.

QUESTION THREE – What recent legislative developments in your jurisdiction affect commonly drawn up contracts such as articles of incorporation, shareholder agreements or executive remuneration? Can you provide any relevant case law to illustrate this?

Differences among the federal courts as to the scope of the Clean Water Act need to be considered. The statute requires a permit for a ‘point source’ discharge of a pollutant such as a pipe or other conveyance into a river or stream. Obtaining such a permit is time-consuming and expensive, but the consequences of a discharge of a pollutant without a permit are serious and can include jail time. An open question is whether the discharge from the point source needs to flow directly into the water body, or whether a discharge by a point source to groundwater that eventually migrates to an ocean or stream also requires such a permit. In February 2019, the United States Supreme Court granted certiorari to answer that question. How it does so, will have an impact on contracts pertaining to business and properties discharging to groundwater.

A reasonable conclusion is that environmental engineering reviews are necessary but not sufficient. consulting a legal professional knowledgeable in environmental law, environmental litigation, and deal structuring will add cost. But, it may help to assure the environmental risks are understood and contractually mitigated.

TOP TIPS FOR: Successful negotiations

Prepare thoroughly.

Bring in specialised attorneys early (such as tax and environmental) so that the basic structure of the deal is appropriate. As to environmental risks, if you wait to see the results of due diligence, and there are problems, the whole deal may have to be restructured.

Know the other sides’ needs.

Have principals available for an in-person meeting to resolve difficult issues (that are usually saved to the last).

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