View from City Road: Manufacturers face new pollution challenge

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In the seven years since Big Bang, compliance officers have become an established part of the City scene, dedicated to ensuring their firms obey the investor protection legislation. As a result of the Eastern Counties Leather judgment yesterday, any manufacturer without the pollution equivalent - managers whose job is to police environmental standards - could find itself badly exposed.

In the short term, of course, the House of Lords' decision was a victory for companies in potentially polluting industries, as well as for their insurers and bankers, and a defeat for the victims of pollution, including water companies and their customers.

If the case had gone the other way, insurers would have cut or withdrawn liability cover, and banks would have thought twice before lending to potential polluters, be they dry cleaners or chemical works.

The law lords said a company could not be strictly liable for past pollution if it did not foresee the consequences at the time. This seems fair, at least in the ECL case. The company was caught by a tightening of European regulations governing drinking water standards that came in years after the pollution occurred. The water became unfit for use under the new regulations.

Foreseeability is the key, but it has a sting in the tail. This judgment is not a blanket let-out for polluters. Unless companies can demonstrate that they had good environmental management systems in place at the time of a pollution incident, courts are likely to be unsympathetic. This makes sense. Anything else would be an invitation to industry to maintain a deliberate ignorance.

Insurers and bankers will also have to take a much closer interest in their customers' environmental management systems before they underwrite pollution liability risks or lend money.