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Company can't invoke noncontractual indemnity for breach of warranty

Recent environmental case in the 7th Circuit underscores need to carefully word contracts.

In some way or another, we’ve all gotten stuck taking the blame for someone else’s mistake. One company found out the hard way that being in that position can cost hundreds of thousands of dollars.

Wilder Corp. maintained a cattle operation on 6,600 acres of land in Fulton County, Ill. In 2000, the company sold the property to the Nature Conservancy, an environmental organization, for $16.35 million. The Nature Conservancy planned on transforming the land into a nature preserve.

The purchase agreement between Wilder and the Nature Conservancy required Wilder to remove any trash and toxic or chemical substances from the property prior to closing the deal. Wilder guaranteed in its sales contract that the land wasn’t contaminated.

But in 2006, the Nature Conservancy discovered the land was contaminated with petroleum and sued Wilder for breach of warranty. A district court ruled in favor of the Nature Conservancy and ordered Wilder to pay $800,000 in damages. Wilder, which claimed it didn’t cause the contamination and wasn’t aware of it, appealed the decision and lost.

Wilder then sued a local drainage district that stored petroleum in tanks near its former property. The company argued that the drainage district was solely responsible for the contamination and should indemnify it for the damages it had to pay the Nature Conservancy.

A district court granted summary judgment to the drainage district, and on Sept. 27 in Wilder Corporation of Delaware v. Thompson Drainage and Levee District, the 7th Circuit affirmed the decision. The court said that a “blameless contract breaker … cannot invoke non-contractual indemnity to shift the risk that he assumed in the contract.”

“The court felt comfortable in its ruling because the district really was a stranger to that contract [between Wilder and the Nature Conservancy,] and didn’t have the benefit of being able to negotiate to limit its liability to the Nature Conservancy,” says Dan Dunn, a partne rin Hogan Lovells’ Environment practice.

The case is noteworthy for two reasons: It reminds in-house counsel to carefully word all contracts, and it underscores the importance of companies doing their environmental due diligence when selling or buying property.

Wrong Wording

Environmental law experts say Wilder may have limited the damages it had to pay to the Nature Conservancy if it had worded its sales contract differently.

Wilder included a warranty in its contract that broadly stated the land it was selling was not contaminated. According to Dunn, Wilder could have limited the scope of the warranty. 

“If I were advising on the deal, when Wilder sold [the land] to the Nature Conservancy, I would have had a clause that said, ‘We warrant there is no contamination caused by us,’” Dunn says.

Wilder could have further narrowed the scope of its warranty by stating that the land was free of contamination on the date the contract was drafted or closed.

In his opinion, 7th Circuit Judge Richard Posner noted a third way Wilder could have limited its liability.

“Wilder could have insisted on the inclusion in its contract with The Nature Conservancy of a subrogation clause whereby, if forced to make good on its warranty, Wilder would step into the Conservancy’s shoes as plaintiff in a nuisance suit against the district,” Judge Posner wrote.

Dunn explains that if Wilder had included a subrogation clause in its contract, it still would have had to pay damages to the Nature Conservancy, but it then could have acted on the environmental organization’s behalf and pursed a lawsuit with the local drainage district to recover its losses.

Due Diligence

Another takeaway from the Wilder case is that companies should take their environmental responsibilities seriously. Ensuring compliance can help companies avoid litigation down the road.

Experts recommend that companies execute a thorough investigation of any property they are buying or selling.

“Before giving broad express warranties against environmental contamination, the seller of the property ought to have conducted a diligent investigation of its own property so it could see what kind of risk it was creating for itself,” Dunn says. “And in this case, it didn’t appear that Wilder did that.”

Companies can hire environmental site assessment experts to investigate and evaluate properties. If a company is faced with a property that is contaminated, it’s wise to seek advice from outside counsel who specialize in environmental law to determine how to proceed with compliance efforts or litigation.

Contributing Author

Danielle Feinstein

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Contributing Author

Ashley Post

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