Negotiating Transactional Environmental Risks


When you are about to strike a business deal you often face environmental unknowns because of unfamiliarity with the venture, party or property involved. At the same time, new and revised environmental regulations which may be applicable are being processed at rates that challenge the best copiers and computers. Though regulations are in flux and sometimes seemingly impenetrable, at least the stream of environmental laws provides a set of rules governing business transactions. Fraud is illegal, of course, and a few states have environmental disclosure statutes, but besides these constraints, parties are limited by only their imaginations and bargaining positions.

Given both the freedom of contract and risk of environmental harm, each party at the outset of a transaction usually proposes a relatively straight-forward document provision: "The other guy shall be responsible for all environmental problems in connection with this agreement from the beginning of Time to the end of the World." Such a proposal has the virtue of simplicity, but usually is unacceptable to the recipient. Thus, the parties usually must decide what should be the breadth and depth of environmental terms.

Their tools for negotiating a mutually-acceptable contract are closing conditions, representations and warranties, covenants and indemnities. Closing conditions simply are conditions precedent, or specified requirements which must be satisfied before a party will perform under a contract. Representations and warranties are factual statements about events or conditions which the maker essentially guarantees to be true. Covenants are promises to take or refrain from specified actions. Indemnitees are a special form of covenant; one party promises to compensate or reimburse another if certain financial or other contingencies occur.

Using these tools to structure environmental risks appropriately depends on the type of deal contemplated.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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