Environmental Due Diligence (EDD) Law - Detailed

Environmental Due Diligence is not one law - it is a process of investigation to avoid becoming liable for someone else's pollution. In US it is called All Appropriate Inquiries (AAI), in India it is called Environmental Clearance + Consent + EDD for M&A.

1. Two Completely Different Regimes - US vs India

A. US Model - CERCLA / Superfund - Buyer Liability

Under Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), buyer of contaminated land is automatically liable for cleanup even if he did not pollute - strict, joint and several, retroactive liability.

To escape, buyer must prove Bona Fide Prospective Purchaser (BFPP) Defense or Innocent Landowner Defense. Both require EDD.

AAI Rule - 40 CFR §312 - EPA All Appropriate Inquiries Rule (70 Fed Reg 66070, Nov 1 2005)

To qualify, before purchase you must:

1. Conduct Phase I Environmental Site Assessment (ESA) per ASTM E1527-13 standard by Environmental Professional
2. Review chain of title, historical aerial photos, fire insurance maps
3. Search government records for contamination
4. Interview past owners, operators
5. Include within 180 days of purchase (valid for 1 year with update)

If you fail, you lose defense and pay millions.

B. Indian Model - Prior Clearance + Absolute Liability

India does NOT have CERCLA buyer liability, but has:

• Environmental Protection Act 1986
• EIA Notification 2006 - Prior Environmental Clearance (EC) mandatory before construction
• Water Act 1974 / Air Act 1981 - Consent to Establish / Consent to Operate from State Pollution Control Board
• National Green Tribunal Act 2010

In M&A, Indian EDD is checking if target has valid EC, CTE, CTO, hazardous waste authorizations.

2. Leading Case Laws

US Cases - The AAI Cases:

1. Ashley II of Charleston, LLC v PCS Nitrogen et al., 2010 U.S. Dist. LEXIS 104772 (D.S.C. Sep 30 2010) - First detailed BFPP defense case

Court laid down BFPP requirements beyond AAI:

• Must conduct AAI before purchase
• Must not be liable or affiliated with liable party
• Must comply with land use restrictions
• Must not impede response actions

Ashley failed because although it did Phase I, it did not comply with continuing obligations after purchase - did not stop ongoing contamination.

Principle: AAI alone is not enough - you must continue due care.

2. Atlantic Richfield Co. v Christian, Supreme Court US, Slip Op No. 17-1498, 20 April 2020

Supreme Court confirmed broad statutory definition of "facility" and importance of EDD.

Held: Landowners near Superfund site are potentially responsible parties themselves and need EPA approval to do their own cleanup. Due diligence including AAI remains critical even after purchase.

Takeaway: Even after you buy, your due diligence records determine if you can sue polluter.

3. Viola Coppola v Gregory Smith, Case No. 11-cv-01257, E.D. Cal., Jan 15 2015 - Latest Innocent Landowner Defense case

Defendant asserted Innocent Landowner Defense under CERCLA Sec 101(35)(A)(B). Defense allows avoiding liability if did not contribute, conducted proper due diligence prior to purchase, exercised due care.

M&M alleged it performed due diligence:

• Reviewed preliminary site assessment prepared 4 years before 1995 purchase
• Court: Assessment not conducted per ASTM, outdated (4 years old), not site-specific

Held: Defense failed. Assessment must be ASTM-compliant and within 1 year.

4. In Re Hemingway Transport, Inc., First Circuit

Purchaser conducted environmental site assessment but persons conducting assessment failed to detect drums of contaminants submerged in snow.

Held: Purchaser liable - assessment must be done by qualified professional and must include visual inspection - seasonal conditions not excuse.

5. Von Duprin LLC v Moran Electric Service Inc., No. 1:16-cv-01942, 2019 WL 535752, S.D. Ind.

Court discussed 40 CFR §312.21 - AAI must include review of historical sources back to 1940 or first development.

INDIAN Cases - The EC Cases:

6. Vanashakti v Union of India - Vanashakti I - Supreme Court 16 May 2025 - Justices Abhay S Oka and Ujjal Bhuyan - Landmark

Two-judge bench struck down 2017 Notification and 2021 Office Memorandum (OM) issued by MoEFCC which permitted ex post facto Environmental Clearances (EC).

Held:

Prior environmental clearance is mandatory, and any attempt to regularize violations retrospectively is illegal, unconstitutional.

Facts: Industries started construction without EC, then applied for EC later, MoEFCC regularized under 2017 notification.

SC: This violates precautionary principle, sustainable development. All ex post facto ECs quashed.

For EDD: If target company in your M&A has EC obtained under 2017 notification after starting construction, that EC is void after Vanashakti I. You inherit violation - project can be demolished.

7. Keystone Realtors Pvt Ltd v Shri Anil V Tharthare & Ors - Supreme Court

Held: Fresh Environmental Clearance must for expansion beyond limits approved by prior EC.

Project proponent obtained clearance for expansion by merely 'amending' prior EC granted by State Environment Impact Assessment Authority.

SC: Amendment not allowed - need fresh EIA, fresh public hearing if expansion beyond threshold.

For EDD: Check if expansion done on amended EC - invalid.

8. Vellore District Environment Monitoring Committee v District Collector - Polluters Remain Liable Until Ecological Damage Fully Reversed

Civil Appeal Nos. arising out of SLP(C) Nos. 23633-23634 of 2010 - Supreme Court invoked Revenue Recovery Act 1890, allowing seizure of assets of defaulting industries until damage reversed.

Principle: Absolute liability in India (M C Mehta cases) - unlike US where BFPP can escape, in India polluter remains liable until restoration, and buyer who continues pollution becomes polluter.

9. U.P. Pollution Control Board v Mohan Meakins Ltd (2000 INSC 153) - Supreme Court 27 March 2000

Pollution of River Gomti by distillery. Question: Can directors be criminally liable?

SC: Yes. Directors in charge of day-to-day affairs liable under Water Act. Company cannot hide behind corporate veil.

For EDD: Check if directors have personal criminal complaints pending under Water/Air Act - this is part of EDD.

10. D.P.C.C. v Lodhi Property Co. Ltd - Supreme Court on Restitutionary Powers

Question: Can State Pollution Control Boards levy immediate monetary demands as environmental damage compensation or bank guarantees under Sec 33A Water Act and Sec 31A Air Act?

SC clarified limits of direction powers - cannot impose fixed compensation without hearing, but can demand bank guarantee for restoration.

11. M/S Electrotherm (India) Ltd v Patel Vipulkumar Ramjibhai (2016 INSC 572) - SC on Public Consultation

EC granted for expansion without mandatory public consultation/hearing under EIA Notification 2006 - illegal.

3. What EDD Looks Like in India for M&A / Finance

Checklist that lawyers use (as per SS Rana & Co, CorpBiz):

Common EDD Failures in India:

• EC obtained after construction (void after Vanashakti)
• CTO expired - operating without consent - daily penalty Rs 10k+
• No public hearing for expansion
• Directors prosecuted under Water Act - not disclosed in Dataroom

US-India Difference Summary:

• US: EDD protects buyer from past owner's pollution - need Phase I ESA per ASTM
• India: EDD protects buyer from target's ongoing non-compliance - need EC validity check + CTO check