ENVIRONMENTAL CONTAMINATION CLAUSES
IN GERMAN PRIVATIZATION CONTRACTS
By:
Stefan John
New York
Since the unification of Germany in 1990, the German Privatization Agency (the "GPA") has been remarkably successful in privatizing large parts of what was formerly East Germany's industrial sector. Although most of the privatization transactions closed between 1990 and 1994, investors agreed to a number of post-closing obligations, including future investment. These investment obligations have raised a number of legal issues.
Due to a loose environmental policy under the Communist government, the former East Germany's environment was in poor condition when the Berlin wall came down in 1989. In addition to various public programs, the GPA privatization contracts created an important role for private parties in bringing the environmental conditions in Eastern Germany in line with Western standards. As a rule, those contracts were drafted to contain an environmental contamination clause ("ECC") which provided for cost-sharing between the GPA and the investor in case the privatized assets at issue were environmentally contaminated. This cost-sharing mechanism was of particular importance in contracts involving the privatization of real estate, where clean-up expenses have been considerable.
The general structure of an ECC usually features four different elements. The first element describes how the cost-sharing mechanism is triggered. The second element deals with the kind of expenses that are eligible for cost-sharing. The third element describes how cost-sharing will work, and the fourth element provides for the mechanics the parties must comply with, such as notices, deadlines and the use of experts.
In many contracts the language of the ECC is relatively broad, requiring greater participation of the GPA in clean-up costs. The GPA has, as a result, urged courts to define the key terms of the ECC narrowly. For example, the GPA has argued that the term "contamination," usually used to trigger the cost-sharing mechanism, should only cover situations that constitute an imminent danger to the public in general, as opposed to an imminent danger to the economic basis of the privatization in question. Even if such term is defined in the contract, it is still open to interpretation by a court, following a general concept of German contract law. At the GPA's urging, as a result, lower courts have recently applied a narrow interpretation to the term "contamination." The courts' reasoning in these decisions rests on the narrow definition of contamination in some of Germany's environmental laws. However, Germany's highest civil court has not yet ruled on this issue.
From an investor's standpoint, it seems unfair to introduce the definition of a term from a specific public law context, especially when the term is defined in the contract. In addition the understanding of many investors was that the GPA would participate in any potential clean-up costs on a broad basis. GPA's participation was, indeed, used as an incentive designed to stimulate investment in the former East Germany. To withdraw such incentive by narrowly construing the ECC changes the underlying economic basis of many privatizations.
On the other hand, applying the investors' open and unlimited under-standing of contamination to the ECC would introduce the unwelcome effect of socializing their private financial burdens relating to the environment.
Applying a Solomonic approach to this issue, it appears that the use of the term "contamination" should, indeed, be limited to describing the circumstances that trigger the cost-sharing mechanism. Use of the term is not, however, the appropriate means to strike a balance between the GPA's and the investor's position because the term was originally designed to be used as a divider parties than an integrator, i.e., to divide the sector of GPA's participation in clean-up expenses from the sector of non-participation parties to define the intersection of both sector. In order to integrate the GPA's and the investors' position more flexible mechanisms are needed, especially in cases where the extent of contamination is discovered after the closing, to make the necessary adjustments to the contract.
One mechanism could be the term "costs" that is used in most of the ECCs to specify the kind of expenses that are eligible for cost-sharing. Since this term is not a legal term of art in another legal context (as opposed to the term "contamination"), its use would give the parties and, ultimately, the courts more flexibility in fashioning an equitable solution to this problem on a case-by-case basis. For example, a distinction could be made between direct and indirect costs or costs that are exclusively related to the contamination parties than being part of something else, such as an investment. In accordance with such distinction commercially appropriate patterns of how to allocate the costs between the parties could be developed.
A practical problem, however, exists in how to convince the parties to the contract to follow such a cost-driven approach. Here the maxim of the clausula rebus sic stantibus comes into play. In brief, under such a maxim, a contract ceases to have a continuing binding effect upon the parties when the inherent basis of the transaction changes. In theory, it is under such circumstances that a judge is permitted to make the necessary changes to the contract, if possible, or otherwise declare it null and void. In practice, the adoption of such an approach would give the parties to the contract an incentive to find a commercial solution to the problem by themselves.
A problem nonetheless exists with this approach, since the maxim of the clausula rebus sic stantibus is not one that applies directly to private contracts. The maxim is set forth in Section 60 of the German Law of Administrative Procedures and therefore would have to be incorporated by a court into privatization contracts via Section 242 of the Civil Code. However, such incorporation of procedural concepts (as opposed to the incorporation of the specific meaning of a specific term) is not unusual in cases where German public and private laws interface and has been used previously by courts in similar circumstances. Moreover, such incorporation seems to be objectively justified by the fact that the GPA is a branch of the Ministry of Finance and, thus, a public entity and as such subject to the main concepts of public law, even when entering into a private contract.
Even if German courts do not adopt this cost-driven approach, its use, at the very least, might be a way for the parties of the privatization contract to reach a settlement negotiations.
