Recent court cases in Brazil are creating significant concern within the financial community that public prosecutors and courts may impose liability on banks — without regard to fault — merely because they provided financing for activities that later caused pollution. As a result, lenders should carefully evaluate the environmental aspects of projects in Brazil and the current state of the liability regime before disbursement of any loan.
Brazil’s national environmental law (Federal Law No. 6,938/1981) requires the polluter, independently of fault, to indemnify or repair the damages caused to the environment and to third parties affected by its activity. Moreover, “polluter” is defined broadly to include any entity that is directly or indirectly responsible for the activity that caused environmental degradation. Under these provisions, all parties involved in environmental damage are jointly and severally responsible for its remediation.
In December 2009, the Superior Court of Justice, Brazil’s highest federal court of appeals on non-constitutional matters, issued a decision involving damage to a mangrove area allegedly caused by a hardware manufacturer. The decision would not have attracted much attention by lenders had the court not gone on to state that, “for the purpose of evidencing the chain of causation in environmental damage, equivalent liability attaches to those who do, those who don’t do when they were supposed to, those who fail to do, those who don’t care about others doing, those who finance what others do, and those who benefit when others do.” This statement, and in particular its reference to “those who finance what others do,” has created significant concern that banks could find themselves enmeshed in a web of environmental liability based on the action or inaction of their borrowers.
A well-known opinion by one of the judges who ruled in the mangrove case reinforced the notion that an “indirect polluter” could include not only banks, but also the environmental agency, engineer, architect, real estate developer, and broker that are deemed to be facilitating or enabling the environmental harm.
As a result of these interpretations, two class action lawsuits were filed in 2011 by the Federal Prosecutor against Banco da Amazônia S.A. (“BASA”) and Banco do Brasil (“BB”). The main allegation against the banks in those cases is that they failed to comply with Brazilian environmental legislation when they granted credit for cattle raising on lands located in the Amazon Region. The Federal Prosecutor asserted that, without that credit, the allegedly unlawful cattle raising, and the consequent deforestation in the Amazon Region, would not have occurred.
These cases are still in preliminary stages and have not been decided on the merits. Nonetheless, their mere filing has turned into one of the top environmental concerns in Brazil. It is not yet clear whether the court will accept the banks’ contention that they exercised due diligence in granting the credits and that they did not directly or indirectly approve of any unlawful activity by their borrowers.
The uncertainty that now bedevils financial institutions in Brazil may chill responsible lending activity and cause unwarranted disruption until the law is clarified to better define what lenders can do to ensure that they do not attract environmental liability.
For more information about this topic, contact Renata Soares Piazzon at email@example.com.
Renata Soares Piazzon, an attorney in the Sao Paulo office of Lobo & de Rizzo Advogados, completed a two-month exchange program at SPR.