Environmental Liabilities Increasing in China under New Torts Law
On Dec. 26, 2009, China's National People's Congress approved a new torts law that will increase the liabilities for environmental pollution. We see this as another step forward in China’s environmental protection movement, and American companies should understand the potential liabilities when they conduct business in or with China.
Pollution and ecological deterioration, by-products of China’s rapid economic growth, present the country with a growing number of significant environmental challenges.
In November 2005, a toxic spill into the Songhua River put an international spotlight on China’s environmental problems. The same year, a trial court in Baotou, Inner Mongolia, awarded a local state-owned water supply company ¥2.88 million ($421,644) for its losses due to pollution in the Yellow River caused by the operations of a few local paper-making companies.
In 2007 and 2008, Chinese courts heard as many as 1,200 and 1,400 torts claims, respectively, against businesses causing environmental pollution. In 2009, a manganese processing plant in Hunan province was closed and two factory officials were detained after 1,300 children in the area were found to have excessive levels of lead in their blood.
In response to these accidents and to demonstrate its determination in fighting pollution, China’s environmental protection authority has begun imposing more stringent environmental requirements. After four reviews since 2002, on Dec. 26, 2009, the Standing Committee of the National People’s Congress approved the Torts Law, which sets forth the general principle for environmental liability that a polluter will be held liable for pollution it causes. Implementation of the Torts Law will be vital to resolving environmental claims, punishing polluters, protecting the environment and ensuring social stability.
This advisory summarizes the environmental torts liabilities introduced by the Torts Law and the major environmental laws and regulations that may affect the establishment and daily operation of businesses in China.
Environmental torts liabilities under the Torts Law
The Torts Law, which will take effect this July, is the result of years of drafting and revisions following a string of controversial torts cases, including the collapse of a 13-floor building at the Lotus Riverside residential complex in Shanghai on June 27, 2009, and the tainted infant formula powder scandals in 2008.
The 92-article law covers liabilities for a range of events, including damage caused by defective products, traffic accidents, medical accidents, work-related injuries and pollution, and even damage caused by pets. One Torts Law chapter is devoted to establishing general guidelines for environmental torts liabilities:
Article 65 of the Torts Law provides that a polluter will be held liable for damages it causes. If a company’s discharges or emissions are proven to cause environmental pollution, and if other companies or individuals consequently incur losses and damages, regardless of whether the polluter is at fault or whether the pollution discharges are within allowed volumes, the company will be liable for the damages.
No liability or reduced liabilities
The polluter bears no liability if the pollution is caused by a force majeure event, and if the polluter took reasonable measures to avoid such pollution.
The polluter’s liabilities may be mitigated if the victim is at fault. If the pollution is caused by the victim’s willful conduct, the polluter bears no liability.
If the pollution is caused by a third party, the entity or individual damaged by the pollution may claim damages against either the polluter or the third party, and if the polluter pays for the damages, it can seek indemnifications from the third party.
Burden of proof
The Torts Law supports victims in torts lawsuits by shifting the burden of proof to polluters. According to the Torts Law, the polluter must prove that its emissions or discharges did not cause damage or show conditions under which it bears no liability or lessened liability.
Major civil liabilities the polluter may incur in each event include elimination of the hazard and compensation for damages.
If more than two polluters cause the pollution, all the polluters, other than those who can prove the damage is not caused by their emissions or discharges, are liable for the pollution. Each polluter’s liability is determined in accordance with the type, quantity and other characteristics of the pollutants it discharged.
Civil compensation for mental distress
In addition to compensation for property losses and damages, and for life or health damages, compensation for mental distress is also covered; but only those whose life or health were seriously damaged would be entitled to compensation. This includes cases in which victims eventually die, or are disabled and experience serious psychological effects. Given the complexity of mental distress cases, the Torts Law stipulates no uniform compensation standard. Amounts would be left to the discretion of judges based on legal precedents.
Priority of civil liability
In addition to torts liabilities, a polluter may be subject to administrative or criminal liabilities as discussed below. However, if a polluter must simultaneously pay civil compensations, administrative penalties and criminal fines for one violation, but does not have sufficient resources to pay the full amount, it must pay civil compensations first.
China’s major environmental laws and regulations
The Torts Law includes only a short chapter addressing civil liabilities for pollution. Most of the liabilities are based on existing environmental laws and regulations. Therefore, investors doing business in China must understand the major current environmental laws and regulations that may affect the establishment and daily operations of their businesses.
China’s Constitution provides the general principle that the government is to protect and improve the environment. It is to prevent and control pollution and other public hazards. However, this principle is too general to apply to companies or individuals directly. The regulatory system that directly affects a company or facility operating in China consists of laws, regulations, ministerial rules, local regulations and rules, and national and local standards. China has also ratified some international environmental conventions and treaties that have been or will be implemented through Chinese laws or regulations and enforced by government agencies.
The Environmental Protection Law
First issued in 1979 and amended in 1989, the Environmental Protection Law is the foundation of all of China’s other environmental laws and regulations. The Environmental Protection Law is more than 30 years old and is enforceable today primarily as implemented by other major environmental laws covering water, air, solid waste, noise, etc. The Standing Committee of National People’s Congress (SCNPC), China’s top legislature, is studying how to modernize the Environmental Protection Law.
The Water Pollution Prevention and Treatment Law
The Water Pollution Prevention and Treatment Law (the “Water Pollution Law”) was issued by the SCNPC in 1984 and amended in 1996 and 2008. Under the Water Pollution Law, a discharge permit must be obtained for each site that discharges wastewater either to surface water or to a wastewater treatment plant. Companies are required to ensure that their pollutant discharges comply with the limits set forth in state or local discharge standards, and with cap amounts for total pollutants. Each year, facilities that discharge pollutants directly or indirectly into water must report to and register with the local Environmental Protection Bureau (EPB) on the categories, quantities and concentrations of pollutants discharged and provide the technical information concerning prevention and control of water pollution.
Air Pollution Prevention and Treatment Law
The Air Pollution Prevention and Treatment Law (the “Air Pollution Law”) was first adopted in 1984 and amended in 1995 and 2000. Similar to the Water Pollution Law, the Air Pollution Law also requires any company that discharges pollutants into air to report to and register with the local EPB on the categories, quantities and concentrations of pollutants discharged and provide the technical information concerning prevention and control of air pollution. Air pollutant emissions may not exceed the state or local standards. A company located in the region where the relevant people’s government has set a total amount control for air pollutant emission may need to obtain an air pollutants emission permit.
Law on the Prevention and Control of Environmental Pollution by Solid Wastes
The Law on the Prevention and Control of Environmental Pollution by Solid Wastes (the “Solid Waste Law”) was adopted in 1996 and amended in 2004. The Solid Waste Law requires a site generating a hazardous waste that is listed in the Hazardous Waste Catalogue to use licensed vendors to transport and dispose of the waste. It makes it clear that polluters are responsible for the pollution they cause. Further, it provides that if an enterprise is acquired or merges with another, the acquirer is responsible for disposal of untreated solid waste unless a previous agreement provides otherwise.
Ministerial rules on land contamination
Currently, no Chinese law exists regarding land contamination or soil pollution prevention and treatment. However, general principles relating to prevention and control of land contamination are prescribed in various laws, regulations and standards, including the Environment Protection Law and the Land Administration Law. China’s top environmental watchdog, the Ministry of Environmental Protection (MEP), together with the Environmental and Resource Committee of the National People’s Congress, have initiated a drafting process for China’s Soil Contamination Protection and Treatment Law.
In June 2004, SEPA (State Environmental Protection Administration, the predecessor of MEP) published a notice (the “Notice”) to address the issue of land contaminated by industrial companies. According to the Notice, polluters will be held liable for the treatment of land pollution and the restoration of contaminated land. More specifically, entities that generate hazardous wastes must have their land tested and analyzed by environmental monitoring authorities before they terminate operations and change the land use purpose.
Further, in 2008, MEP issued an Opinion on Enhancing the Protection and Treatment of Soil Pollution Protection and Treatment (the “Opinion”). According to the Opinion, the local EPB is to ensure that the responsible party conducts a soil risk assessment for the site left by a polluter after its relocation or other land that may be polluted. The original manufacturer or operator is responsible for the treatment and restoration of contaminated land and polluted groundwater.
The principle that the party that causes pollution is responsible for treatment is emphasized in the Opinion. If the responsible polluter cannot be identified, the people’s government will be responsible for the treatment and restoration of the contaminated land or polluted groundwater. It is worth noting that if a company legally acquires the polluted land from the original polluter, the acquiring company must carry out the treatment and restoration work unless otherwise agreed by the polluter and the acquiring company.
There is no detailed definition or guidance regarding how to identify original responsible parties. In practice, it has been difficult to enforce the restoration lacking any baseline or pre-occupancy assessment.
The Environmental Impact Assessment Law
The Environmental Impact Assessment Law was issued by the SCNPC in 2002 and was an escalation of the Regulation on the Environmental Protection of Construction Projects issued by the State Council in 1998. Under the law, the owner of any new, expansion or modification project must, before beginning any construction, submit an environmental impact report, an environmental impact analysis form or an environmental impact assessment registration form (the “EIA Document”) to the local or central government environmental authority for approval, depending on the impact of the project on the environment.
The project owner must follow the requirements contained in the EIA Document and, upon completion of the construction, the relevant environmental authority will inspect the project to ensure compliance with the applicable environmental protection standards and regulations before the project can begin formal operation. An approved EIA Document is essentially a comprehensive environmental permit for the construction and operation of a site or facility.
Local environmental regulations
Similar to the central government, many local governments have environmental regulations and mandatory standards applicable within their jurisdictions. Local environmental regulations may place additional requirements on companies, and local environmental standards may apply more stringent limits on pollutant emission.
If a pollution event occurs during business operation, the business operator should initiate treatment measures immediately, inform the entities or individuals that may be affected, and report the event to the local EPB for investigation. Because the Torts Law and other environmental laws and regulations hold a polluter liable for the pollution it causes, it is essential that the operator collect evidence to help establish whether the polluter is the operator or any other party.
In practice, it would be difficult to identify the original responsible polluter of a hidden pollution existing before a new operator takes possession of a site. It is therefore advisable for the operator to conduct a baseline study or pre-occupancy assessment before occupying of the site. The new operator should also have proper indemnification and warranty provisions in the site acquisition or lease agreement.
If the operator is the polluter, it will be liable for the accident. There are three types of environmental liabilities under Chinese environmental laws: administrative, civil and criminal.
Administrative environmental liability is most commonly imposed by MEP or the local EPB against corporate violators of environmental laws and regulations. By severity from low to high, administrative environmental liability results in warnings, fines, confiscation of illegal gains, orders to stop operation or use, revocations of license or permit, and orders to shut down and terminate operations.
For example, if a company violates the Water Pollution Law, EPB may order the company to take treatment measures to eliminate pollutants within a specified period or designate a qualified company to carry out treatment or remediation work at the polluter’s cost. EPB may also impose fines on the polluter of 20 percent of the direct losses caused by the pollution event.
In the case of a serious water pollution event, subject to the approval by a competent people’s governmental, EPB may order the polluter to shut down, impose fines on the polluter of 30 percent of the direct losses caused by the pollution event, and impose fines on individuals directly responsible for the pollution of up to 50 percent of the income the person received from the polluter for the preceding year.
Adopted on Dec. 30, 2009, by MEP, the new Measures on Environment Administrative Penalties will take effect on March 1, 2010. This new procedural law sets forth the specific procedures the relevant environmental administrative authorities must follow to impose administrative penalties on polluters.
As discussed above, the Torts Law provides that a polluter will be held liable for the pollution it causes. Major civil liabilities the polluter may incur include elimination of the hazard and compensation for damages. For instance, the Water Pollution Law provides that an entity or individual damaged by water pollution is entitled to claim the elimination of the hazard and compensation for the damages against the polluter.
Criminal liability is set forth in China’s Criminal Code as amended in 1997. Nine articles in the Code criminalize pollution acts, such as dumping hazardous waste, that severely damage the environment. Based on the consequence of the crime, a violator could be jailed for up to 15 years and fined. If a company is found guilty of causing serious pollution accidents or damages, the company will be fined, and persons directly responsible for the offense, e.g., a general manager, safety manager, board director, etc., will be punished in accordance with relevant provisions.
Upon the enforcement of the Torts Law, if an environmental pollution event occurs during the operation of a business in China, a business operator may be held liable unless it can be proven that the operator is not the polluter or the damage is not caused by the pollution. If pollution caused by the operator is the fault of a third party, a polluter may seek indemnification against the third party if the operator pays for the damages to the victims.
To identify the original responsible polluter of a hidden pollution existing before a new operator takes possession of an operation site, it would be advisable to conduct a baseline study or pre-occupancy assessment prior to occupancy of the site and to have proper indemnification and warranty provisions in the agreement for the acquisition or occupancy of the operation site.
If a polluter is held liable for a pollution event, it may bear administrative and civil liabilities under China’s environmental protection laws and regulations. If serious pollution accidents or damages occur, the operator or its responsible personnel may face criminal liability.