Landmark ruling on the interpretation of joint liability for pollution

Similar to most jurisdictions, the Swedish Environmental Code recognises the 'polluter pays' principle. According to Chapter 10(2) of the code, a person who pursues or has pursued an activity or taken a measure that has contributed to pollution (ie, the operator) is liable for the pollution and is required to perform remedial action. In case of more than one operator causing pollution, there is a joint liability between the operators involved (Chapter 10(6) of the code).

However, it does not follow clearly from Swedish environmental legislation what it means exactly to have "pursued an activity or taken a measure that has contributed to pollution". In other words, who is regarded as the 'operator' of a polluting activity? In case law, the notion of an operator has been interpreted extensively – although not beyond corporate boundaries. The question of whether parent companies could hold any environmental responsibility for contamination caused by a subsidiary's activities has been discussed frequently in legal doctrine. Should the liability always be limited to the legal entity conducting the polluting operations? Or could the responsibility, under certain circumstances, be extended to a parent company exercising control over its subsidiary (ie, as a matter of lifting the corporate veil)?

Swedish courts have been reluctant to establish the responsibility of a parent company for its subsidiary's activities. Under a National Franchise Board for Environmental Protection ruling (KN B 100/96), which preceded the environmental courts, an injunction to investigate pollution could not be imposed on a parent company where its subsidiary had been the actual operator of the activities causing the pollution, since the parent company was a legal entity other than the actual operator. It was not even considered possible to impose a public law liability on the parent company based on a voluntary agreement between the parent company and its subsidiary, stating that the parent company was obliged to carry the responsibility for pollution caused by its subsidiary.

A recent case from the Environmental Court of Appeal (MÖD 2013:28, June 26 2013) brought the issue of parent company liability to the fore. The decision has provided a different view on the issue of a parent company's liability and the scope of the concept of operator according to Chapter 10(2). The case involves the issue of liability for contamination when a parent company exercises considerable economic influence on a subsidiary company with weak economic resources. The issue raised is whether there could be a question of lifting the corporate veil for pollution liability or whether the liability should always rest with the actual operator.

The ruling concerned Proton Finishing Ekenässjön AB (now liquidated), which was fully owned by Proton Industries AB. Proton Finishing pursued its activities between 2002 and 2007 and during this period the water from the industrial process ended up in a forest area, via a pipe and a pond. The pond was found to hold increased quantities of certain metal substances, including nickel and zinc. In 2011 the supervisory authority (the county administrative board) ordered parent company Proton Industries to decontaminate the pond. Proton Industries appealed to the district environmental court arguing that it could not be considered as the operator of the polluting activities.

The district environmental court found that it was the subsidiary (Proton Finishing) that had been the actual operator of the activities and that Proton Finishing could be held liable for the pollution even though it had entered into liquidation. The environmental court thereafter considered whether any liability could rest with the parent company, but found that the parent company had not acted in a manner that could raise the issue of lifting the corporate veil. Consequently, the court found that the authority was unable to order decontamination measures from Proton Industries and repealed the decision by the supervisory authority. The judgment was thereafter appealed to the Environmental Court of Appeal.

The court discussed the concept of operator liability and stated that in each individual case the person or entity which is the operator of the polluting activities must be considered, according to Chapter 10(2). However, it cannot be excluded that two or more legal or physical persons could be considered operators for the same activity. The court considered the issue of whether parent company Proton Industries could be regarded as the operator, even though the actual polluting activities had been carried out by the subsidiary, Proton Finishing. The fundamental condition for such operator liability would be, according to the court, that the parent company exercised power over the subsidiary to the extent that it could have had an impact on the subsidiary's activities and that the parent company had legal and factual rights and possibilities to interfere with the subsidiary's business. A pre-condition was also that the parent company could interfere in the activities causing the pollution in question, according to Chapter 10(2).

The court stated that Proton Finishing had been continuously loss-making between 2003 and 2007 and that Proton Industries had financially supported and rendered possible the continuous activities of its subsidiary during these years. Due to these financial contributions, which had enabled the activities of Proton Finishing, Proton Industries was found to have had a decisive influence on the activities which caused the contamination. In its strong position as sole shareholder, and by providing group contributions, Proton Industries was also considered to have had a legal influence on its subsidiary's activities, and had thereby contributed to the pollution. Since the legislation provides for joint liability for contaminations, the court found that the parent company could be held responsible for the pollution.

Accordingly, the court did not connect the issues of lifting the corporate veil and the definition of 'operator' under the Environmental Code. Instead, it made an extensive interpretation of the notion of 'operator. The parent company was considered to have been an operator of the polluting activities and thus to have joint responsibility to execute decontamination measures. Whether the extensive definition of 'operator' implies liability for the parent company in the same manner as lifting the corporate veil warrants further discussion. In any event, the decision established that, under certain circumstances, a parent company could be held liable for activities by its subsidiary's which have caused contamination.

For further information on this topic please contact Mikael Wärnsby or Madeleine Edqvist at Advokatfirman Lindahl KB by telephone (+46 40 664 66 50), fax (+46 40 664 66 55) or email (mikael.warnsby@lindahl.se or madeleine.edqvist@lindahl.se).