25 Nov 2021

Long-running Grafil saga flags potential changes for resource recovery in NSW

By Claire Smith, Alice Brennan

Consumers must be sophisticated and cognisant of the risks of using recovered materials, which may include prosecution for the presence of asbestos of which the consumer is unaware.

Consumers of recovered aggregate material seeking to rely on the resource recovery regime to protect them from future investigation and prosecution by the EPA should be on notice: there are currently significant legal and financial risks in doing so. That is the cheery message for the NSW construction and demolition waste recycling and resource recovery industry coming from the latest decision in the long-running Grafil saga, the sentencing decision in EPA v Grafil Pty Ltd; EPA v Mackenzie (No 4) [2021] NSWLEC 123.

The EPA is now in the process of a comprehensive review of its resource recovery regime and it is hoped that new consumer protection measures will be implemented to allow construction and demolition waste to continue to be widely processed and re-used in infrastructure and building projects in line with circular economy principles.

Grafil buys some waste and builds some stockpiles

This long-running court battle, described as a "test case" by Justice Pain, examined the interplay between section 144(1) of the Protection of the Environment Operations Act (POEO Act) (a strict liability offence) and the State's resource recovery exemption regime. Under section 144(1):

"(1) A person who is the owner or occupier of any place and who uses the place, or causes or permits the place to be used, as a waste facility without lawful authority is guilty of an offence."

If an offence is committed by a corporation, then there is also special executive liability for a director or other person involved in the management of the corporation.

Grafil had stockpiles of woodchips, chicken manure, bricks and demolition waste on its site. These stockpiles, it said, were temporary and the site was being used for resource recovery, specifically road construction on the site, rather than waste dumping. An EPA resource recovery exemption allows recovered fines to be used as road base, and Grafil argued it had obtained the recovered fines from reputable waste companies who were required to comply with the corresponding resource recovery order for recovered fines.

In the initial case, EPA v Grafil Pty Ltd; EPA v Mackenzie [2018] NSWLEC 99 (Grafil No 1), Justice Pain found that the EPA needed to prove beyond reasonable doubt that the site in question was being used as a waste facility without lawful authority. Grafil was a consumer under the recovered fines and excavated natural materials exemptions; the EPA had not proved beyond reasonable doubt that the material in the stockpiles breached the chemical parameters and contaminant standards in the recovered fines exemption.

In 2019, the NSW Court of Criminal Appeal (CCA) held that a single fragment of asbestos (regardless of its type or size) in a waste stockpile (of any size) will mean that the whole stockpile is subsequently classified as "asbestos waste" having regard to the interpretation of the definition in the POEO Act. Grafil sought leave to appeal the decision in EPA v Grafil Pty Ltd; EPA v Mackenzie (Grafil No 2) to the High Court but was refused leave to appeal. Ultimately the defendants Grafil and MacKenzie were found guilty of the offences in Environment Protection Authority v Grafil Pty Ltd; Environment Protection Authority v Mackenzie (No 3) [2020] NSWLEC 90 (Grafil No 3).

State resource recovery exemption regime exposes consumers to significant risk

In the sentencing hearing, Justice Pain was critical of the EPA for its approach to litigating the case, given that it was not until the fifth day of the sentencing hearing that it accepted a proposal that material be capped and left on site (at a minimum cost of $250,000) when it was originally seeking off-site disposal which would cost between $15 - $20 million.

Justice Pain identified a number of significant legal and practical challenges for consumers seeking to rely on the recovered fines exemption in the sentencing hearing following the proceedings in Grafil No 1 and the findings in Grafil No 2 and Grafil No 3, including:

  • The practical issues associated with the assumption that consumers receiving recovered aggregate fines for reuse at their premises can visually check for visible contaminants, including that visually checking for asbestos is impractical given that the fines are crushed to less than 9.5mm and asbestos would not be visible with the naked eye.
  • While the EPA might consider a consumer to be sophisticated enough to be alert to the possibility that there might be asbestos in recovered fines and therefore think to look out for it, the waste strategy documents identify consumers as individuals, households and businesses (i.e. the general public) who may not be aware of the risks of asbestos contamination. The regime needs to be able to be relied on by the public as well as sophisticated corporations.
  • The measures the EPA proposes in addition to a consumer attempting to check each load as it is delivered, presumably as the loads are tipped onto the consumer’s land at which point they become the consumer’s problem, are not identified in the recovered fines exemption namely that material should only be received from one processor. A sophisticated consumer would need to be aware of this operational approach to avoid liability for clean-up costs or in the event of investigation.
  • How talking to a processor will help a consumer work out if recovered fines material is fit for purpose if it is otherwise certified by a processor as compliant with the chemical and other testing requirements in an exemption, over which a consumer has no control, is not apparent.
  • There is no obligation that consumers view test results of processors under the resource recovery exemption and further, as asbestos is not required to be tested for, doing so would not assist in its detection.
  • The certificates of compliance do not provide any assistance in alerting consumers to the presence of asbestos in any recovered fine material they are receiving.
  • The EPA does not explain what a consumer should do once material with asbestos is on their land through no fault of their own (as was the case with Grafil). While the EPA may issue a clean-up notice to the waste processor in respect of the source of the asbestos on the consumer's land, relying on them to do so is risky for a consumer hoping to avoid costly clean up obligations being imposed on them.

In Grafil No 1, it was acknowledged that the defendants had failed to keep records as required under the recovered fines exemption (although they had kept the certificates of compliance). In Grafil No 2, the CCA found that a failure to keep records means a defendant is outside the exemption and therefore needs an environment protection licence (EPL). The declaration of the legal position by the CCA, according to Her Honour, has very significant consequences for the workability of this system

"if you obtain recovered fines from a waste processor that meet every chemical and physical requirement: under the exemption, if you as consumer (and the processor) otherwise comply with every letter of the exemption, but you as a consumer fail to keep the records, you are disqualified from the exemption and, consequently, you require an EPL to use the land as a waste facility."

Another pitfall for consumers, according to the defendants, was the likelihood they will be found to have disposed of waste in contravention of the POEO Act if they temporarily stockpiled it for any period before final use for building a road. Her Honour noted the 

"practical consequence of the findings in Grafil No 2 may not be fully comprehended by the parties, and is not by me, in terms of whether the scheme created by the exemptions permits temporary stockpiling of material at all without an EPL being obtained."

Justice Pain concluded that the proceedings demonstrated that the "management of asbestos in the context of resource recovery exemptions is highly problematic for unwitting consumers who can have no knowledge that they have received asbestos in recovered fines they are otherwise able to receive under the exemptions if that material satisfies the testing regime." Ultimately, the presence of asbestos can have severe legal and financial consequences for consumers. Her Honour warned that the EPA's submissions do not provide any comfort that "consumers seeking to obtain material under the recovered fines exemption scheme will not be subject to investigation" and potential criminal charges for waste offences where there is asbestos present in the recovered fines.

Sentencing Grafil

Justice Pain referred to a number of factors when determining that no additional penalty be imposed on Grafil in the sentencing hearing, including the "low objective seriousness of the offence, the absence of actual environmental harm, the potential for environmental harm from the presence of asbestos not arising from Grafil's actions" as well as its liability for various costs, including 25% of the EPA's legal costs and investigation costs. On this basis, Justice Pain did not impose any additional penalties on Grafil, and also refused an EPA request that the company be required to publicise its offence.

The charge against Grafil's director was dismissed after Justice Pain noted the significant mental toll the case had taken on the Grafil director, particularly after the EPA's 2013 search and seizure operation.

Key takeaways for consumers of recovered materials

Under the current resource recovery exemption regime, consumers need to be sophisticated and cognisant of the risks of using recovered materials, particularly as the risks may include prosecution for the presence of asbestos of which the consumer is unaware.

On the same day Justice Pain delivered her judgment, the NSW Government announced a comprehensive review into its resource recovery framework. The review will examine whether the existing framework is practical, effective and fit for purpose. The review is due to be completed in 2022.

The EPA has also sought public feedback on a new Recovered Soil Order and Exemption which will restrict disposal options for a large portion of processed construction waste due to contamination concerns. The consultation period closed on 29 October 2021 and responses are under review. The waste recycling and resource recovery industry has criticised this proposal, arguing that the contamination concerns can be resolved by strengthening the existing general order. In the event that the existing recovered fines order is revoked, the EPA has said that it may consider "issuing site-specific orders and exemptions to waste facilities that demonstrate they can make high-quality recovered soil".

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.