ENVIRONMENTAL ISSUES IN CONSTRUCTION CONTRACTS

INTRODUCTION

Unknown or undisclosed hazardous materials or substances can have catastrophic financial and schedule impacts if they are discovered at a construction site.

The financial impacts arise from extremely expensive remedial actions mandated by various regulatory agencies whenever hazardous materials are discovered or spilled.

The schedule impacts arise from the disruption to the planned construction resulting from remediation operations.

A vast array of regulations, statutes, and case law exists discussing procedures for cleaning up contaminated real property.

Even though the contamination may have occurred before the owner purchased the property or the contractor first moved the dirt, all parties under existing regulatory schemes can suffer financial harm in attempting to comply with the alphabet soup of federal, state, and local regulatory requirements.

The potential for enormous financial liability cannot be understated when dealing with hazardous materials.
One of the most significant bodies of law regulating hazardous material is the

Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)

passed by Congress in 1980 and amended in 1986 by the

Superfund Amendment and Reauthorization Act (SARA)

(42 U.S.C. §§ 9601-9675).

CERCLA provides a mechanism whereby the federal government can respond to hazardous waste located on real property.

CERCLA also imposes costs and responsibility on a myriad of parties – deemed “potentially responsible parties” – that may be responsible for the hazardous materials on the property.

This could include previous owners, current owners, lessees, contractors, subcontractors, and material suppliers or transporters.

Obviously, the party actually responsible for any actual contamination is always considered a responsible party, but is not the only “potentially responsible party”.

CERCLA also provides the means for the Environmental Protection Agency (EPA) to search a contaminated property and take direct action to clean up the property.

The EPA also has the power, through CERCLA, to file civil suits against “potentially responsible parties” to recover the costs of any cleanup or force the “potentially responsible parties” to clean up the Superfund sites themselves pursuant to directions imposed by the EPA.

It is an owner’s worst nightmare to have the EPA demand cleanup of a site by an owner who was unaware of any contamination. Likewise for a contractor who works on a contaminated site without knowledge of the contamination.

In either case, an ongoing project may be shut down immediately.

Additionally, an incident such as a hazardous spill during construction may also lead to immediate shutdown of the project and implementation of required cleanup – irrespective of who actually caused the spill.

Depending on the material “spilled” and the extent of the “spill”, various agencies – state and federal – may require that the site be cleaned to their specifications – which are sometimes themselves contradictory.

If hazardous materials are discovered at a job site, the owner, contractor and subcontractor may each have a duty to comply with various reporting requirements pursuant to a litany of governmental regulations, the most notable being CERCLA. This is true irrespective of who “discovered” the hazardous materials.

CERCLA has a very short notice and reporting timeline requirement. Failure to act properly and timely may bring onerous civil, criminal, and other penalties.

The EPA and others may bring suit against the owner, the contractor, and perhaps many other project parties.

To recover damages for cleanup, claimants (usually a governmental agency) must demonstrate the defendant fits within one of four categories of persons defined by CERCLA that are potentially liable for cleanup:

(1) any owner or operator of a site from which the release of contamination emanates;

(2) anyone who arranges for disposal or treatment of contaminants (this can often be an unknowing contractor or owner);

(3) the owner that held title to the property at the time of disposal of the contaminant; or

(4) anyone who accepted hazardous substances for transport (often a contractor).

Because environmental regulations addressing hazardous materials on real property can have potentially devastating financial effects, particularly in the context of construction projects, property owners, contractors, and other “project parties” will do well to carefully review contract provisions that pertain to hazardous materials.

In particular, provisions pertaining to hazardous materials should:

(a) clearly define the actions to be taken by the respective parties upon discovery of hazardous materials, including notice, testing and cleanup, so as to minimize adverse budget and schedule impacts and conform to applicable laws regulating hazardous materials; AND

(b) clearly allocate the risk of loss resulting from the discovery or introduction of hazardous materials onto the real property of a construction project.

HAZARDOUS MATERIALS – DEFINED

Before examining how contract forms handle risk allocation and other responsibilities associated with hazardous materials, we need to better understand the definition of the “hazardous materials” at issue.

Various contract forms take different approaches. Each of the AIA General Conditions, the ConsensusDOCS and the Engineers Joint Contract Documents Committee (EJCDC) General Conditions forms take a different approach to defining “hazardous materials”.

Knowing the differences will aide in determining which of the forms might best suit a particular project.

Unless a project has as an element of its scope the remediation of some known hazardous material, defining the term “hazardous material” in a contract is problematic.

This is because the term is constantly evolving. What may be a good definition of “hazardous materials” in one instance, may be outdated and inadequate six months later.

AIA – A201

Of the three primary contract forms (AIA, ConsensusDOCS and EJCDC), only the AIA documents make specific reference to a particular “hazardous material”.

In AIA A201, Section 10.3.1, the AIA documents make specific reference to “asbestos or polychlorinated biphenyl (PCB)”, but in a non-limiting or exclusive way.

However, each contract form requires, in one way or another, that a contractor comply with “applicable laws, statutes, ordinances, codes, rules, and regulations, and lawful order of public authorities” (e.g. AIA A201 § 3.7 and § 10.3.1). Therefore, it is important that contractors understand what those requirements are – especially in the context of “hazardous materials”.

The AIA A201 defines “hazardous materials” as a “material or substance, including but not limited to asbestos or polychlorinated biphenyl (PCB)”. Thus the scope of the definition is endless – limited only by whether the material can cause “foreseeable bodily injury or death to a person.”

ConsensusDOCS

The ConcensusDOCS uses simple terms to define “hazardous materials” and places responsibility for determining the specific definition upon the contractor. The ConcensusDOCS defines “hazardous material” as “any substance or material identified now or in the future as hazardous under any federal, state, or local law or regulation.” (ConcensusDOCS § 3.13.1.) This definition provides for the evolving nature of the definition.

EJCDC

The EJCDC C-700 is the most specific of all, providing a specific definition of “hazardous environmental condition” and “hazardous waste”.

§ 1.01 Defined Terms

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22. Hazardous Environmental Condition – The presence at the Site of Asbestos, PCBs, Petroleum, Hazardous Waste, or Radioactive Material in such quantities or circumstances that may present a substantial danger to persons or property exposed thereto.

23. Hazardous Waste – The term Hazardous Waste shall have the meaning provided in Section 1004 of the Solid Waste Disposal Act (42 U.S.C. § 6903) as amended from time to time.