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RISK MANAGEMENT ADVISORY |
OCTOBER 1995 |
An organization cannot long survive without an understanding of the risks it faces. Where losses can be catastrophic, the risks must be evaluated with care. This paper addresses legal and non-legal factors which affect the risk calculus for environmental projects. This information will assist managers and principals in their evaluation of the risks facing their firms and will guide them in their attempt to manage these risks.
A word of caution. Most analyses of environmental claims focus on what can happen—rather than what will happen—an approach dictated by a lack of long term statistics. Risk, however, is the weighted product of exposure (i.e., potential liability), probability and magnitude of loss. Dwelling on legal principles which define liability can lead to a distorted view of the actual risks undertaken. For example, design/build project delivery systems significantly increase the liability exposure, but the increased control over project variables may reduce the actual risk.
Liability analyses also overlook critical risks. The risk of overshooting a fixed budget may be far more likely to occur than the potential liabilities undertaken. Analysis of an environmental project should incorporate the information contained in this and other papers into an intelligently weighted, real world analysis.
Environmental claims present a series of potential liabilities. Before examining these risks in detail, it is worth considering some of the factors which make environmental claims qualitatively different from traditional construction disputes.
Different Clients and Different Interests
Environmental clients often differ significantly from the clients engineering firms are accustomed to serving. In other instances, the clients are similar to others the engineer has served, but the environmental project excites different interests and responses. A comparison of two projects will illustrate the differences.
In a traditional developmental project, such as a structure or infrastructure improvement, the client is interested in the details of quality. The client wants a project it can be proud of or which is perceived as having superior value. The client is willing to pay some premium for this quality—especially when the project is being financed with another party's funds. The client probably intends to construct other projects and is interested in long term relationships. Finally, the client believes that it has sufficient understanding of the design and construction to be positively involved in the process. The overall theme is positive.
Many of these attributes are absent from an environmental project. Clients are rarely proud of an environmental problem. Unless it saves them money, they are not interested in the elegance of the technology employed. In most instances, the client will be paying for the remediation with its own dollars. Insurance proceeds are rapidly drying up and one can hardly borrow against an environmental liability. This places extraordinary cost pressures on the environmental job. Long term relationships are less common and less desired. The client hopes not to have further remediation projects. Keeping costs down, even at the expense of long term relationships, may be seen as a rational option. Finally, all but the most sophisticated clients do not believe they are capable of managing a remediation project. Their lack of involvement can lead to unrealistic expectations and serious conflict.
Environmental projects frequently have a peculiar client, the Potentially Responsible Party ("PRP") steering committee. The PRP steering committee is often composed of lawyers who have an ethical obligation to achieve the best result possible for their individual clients. They are compelled to drive a hard bargain, even when it is not the "right" thing to do. The PRP group may also be driven by issues, such as allocation of responsibility or insurance coverage, which interfere with the smooth implementation of the project. The PRP steering committee must also coordinate the competing interests of the PRP principals. This can impede, or even paralyze, the decision making process. Finally, the PRP steering committee is an ad hoc organization interested solely in the specific project. Long term relationships are not their concern. These factors make PRP steering committees very difficult clients.
Factors That Aggravate Liability Risks
Environmental claims have attributes that aggravate liability risks. In addition, experience indicates that environmental claims are more costly to defend. Since defense costs erode most professional liability policy limits, the cost of defense can be a significant risk issue even when liability is unlikely. Key liability enhancers are discussed below.
Leveraged Liability
Environmental projects can have characteristics which multiply liability. This is especially true where the project is tied into a financial transaction, such as a sales, financing or investment in real property. The measure of damages in a site assessment will depend upon the eventual use of the information. A relying purchaser may seek damages exceeding the cost of the property itself; investors may seek recoupment of their expected profit; and shareholders may seek damages based on the effect of errant information on the market value of their stock.
This "leveraged liability" phenomenon arises because the damages in an environmental claim are not correlated with the level of services or fees. In a conventional construction project, the risk bears a positive correlation with project value which is similarly correlated with fees. Contrast this with an environmental project where the less services are performed the higher the potential for failure and risk. This inverse correlation is most dramatic in site assessments. The more thorough the site assessment, the less likelihood of error and liability. Worse yet, since risk increases with reduced fee, the profit/risk ratio on small investigative projects is often unacceptable.
Long Tailed Liability
Environmental liabilities, especially those related to contamination, can develop slowly. The contamination may not occur for many years or may only become apparent after long periods of exposure. This has several adverse consequences. First, the delay between the action and the result makes it difficult to assess potential liability. During intervening time new technical standards are developed, legal structures change, societal values evolve and insurance and financial markets fluctuate. At any point in time it is difficult to predict future liabilities. Experience in the asbestos and pharmaceutical industries attest to the uncertainties caused by long tailed liabilities. Further, time can deteriorate the ability to transfer risks. The claims made insurance that is the current norm provides no protection against loss in future years. Although insurance is currently available, there is no guarantee that insurance will be available when the claim occurs. Similarly, indemnity provisions are valuable only if the indemnitor is solvent at the time indemnity is demanded. The passage of time can lead to the indemnitor's insolvency, reorganization, and the nullification of indemnity obligations.
Deep Pocket Liability
Environmental claims often follow the Willy Sutton rule. When asked why he robbed banks, Willy Sutton is reputed to have replied, "Because that's where the money is." In environmental claims, entities are targeted because of their ability to satisfy eventual judgments. There are four common reasons for this occurrence.
First, remedial costs often outstrip the financial abilities of the owner or operator of a facility. Liberal contribution rules allow these parties to seek recoupment of all or part of their expenditures. This leads firms to widely cast the liability net to minimize losses. This tactic succeeds because the potential losses can be enormous and the cost of defense extremely high. Engineers are being victimized by this tactic.
Second, the insurance industry has revised their policy forms to effectively reduce environmental claims against property and general liability insurance. This removes a significant source for funding in remediation. In contrast, errors and omissions insurance maintained by environmental professionals will respond to these claims. Plaintiffs may view insurance proceeds as "easy money" and aim their claims against parties, such as engineers, with available coverage.
Third, recent bankruptcy decisions1 have permitted discharge of contingent environmental liabilities, indirectly increasing the engineer's risk. Not only is the most culpable party insulated from further liability, the failing organization likely ignored, or even willfully circumvented, proper hazardous waste management practices. These risks pass to the parties which remain.
Fourth, the type of plaintiff in an environmental claim may exacerbate the potential loss. As examples, bankruptcy trustees and financial institutions are generally interested in recovering any available asset. If the potential recovery exceeds the probable cost, a claim will be made. Adding an engineer to a long list of defendants will generally have an insignificant effect on prosecution costs, but may result in a significant recovery.
The Effects of Novel Technologies, an Evolving Standard of Care, and a Changing Regulatory Framework
Evolving Technologies
In theory, where technologies are rapidly evolving it should be difficult to determine the standard of care in the past. During periods of change, there are often competing, alternative technologies which are acceptable. This should create difficulties in defining the standard of care and greater difficulties in showing that it was breached.
In practice, however, evolving technologies work to plaintiffs' benefit. Since no specific standard prevailed, experts are free to testify based upon their particular experiences. Plaintiffs can find experts who view the evolution of technology as a vindication of their earlier preference. Since the alternative chosen by the engineer presumably failed, the jury will tend to conclude that the testifying expert is correct. Further, since there will be competing expert opinions, the matter cannot be resolved by summary judgment, but must be decided by the trier of fact, whether that is judge or jury. In summary, evolving technologies make it easier for plaintiffs to get their case to the jury.
Novel Technologies
Novel technologies present a different problem. In these instances, the issues will focus on the acceptability of other alternatives, the potential advantages of the technology chosen, and the level of the client's understanding and participation in the decision to utilize the novel technology. In retrospect, reasonable decisions may appear suspect. Risk/benefit discussions with the client are absolutely mandatory and should be memorialized in writing.
Regulatory Changes
Environmental engineering, more than most engineering disciplines, is faced with a changing regulatory environment. Decisions which were reasonable under an existing scheme, may be insufficient when measured by later laws and regulations.
Engineers must also be aware of impending regulatory changes. Clients can, and have, asserted that an engineer should have known that a proposal would not in the future be sufficient because of proposed regulatory changes
Fragility of Insurance Coverage
Claims Made Coverage
Coverage for environmental engineering is only available on a claims made basis. Under this policy form, claims are covered only if made within the policy period. This does not create significant problems if the coverage is continuously available. If insurance markets tighten, as is likely if environmental claims significantly increase, insurance may not be available, or may only be available at unacceptable rates. Engineers run the risk of being bare when claims become frequent—the time when coverage is needed most.2
Erosion of Policy Limits
Environmental insurance is also provided on an expense within limits basis. Costs of defense erode the available limits for settlement or satisfaction of judgments. This policy attribute creates a tension between aggressively minimizing liability and protecting against excess exposure. If it is possible that a claim will approach or exceed policy limits, defense counsel, insurer and the defendant engineering firm must carefully consider whether to aggressively defend a claim and risk a judgment exceeding policy limits, or to passively preserve policy proceeds and seek a settlement within policy terms. This dilemma undermines the engineer's negotiation position and often results in substantially higher settlements than would otherwise occur.
Strict Statutory Liability
As will be discussed below in "Strict Liability for Abnormally Dangerous Activity" and in "Statutory Liability," environmental liability is not necessarily based on fault. This sharply increases the breadth of claims for which an engineer can be liable. As important, it means that the engineer has no control over some liabilities. Scrupulous adherence to professional standards will reduce the potential of construction claims by eliminating the negligence element. In an environmental claim, however, best efforts may not be a defense.
Criminal and Personal Liability
An engineer involved in a construction project can become personally or criminally liable. However, this outcome is rarely seen. In contrast, several leading environmental decisions involve government prosecution of individuals. Environmental statutes commonly contain criminal sanctions in addition to damages or administrative fines.3 Personal and criminal liability complicate defense of an environmental claim. The different interests of the corporation and its employees may mandate separate counsel and may interfere with cooperation in defense of a claim. Employees may choose to work with the prosecution in exchange for immunity. Loss of a criminal matter may also result in loss of licensing and possible disbarment from future government work. The full ramifications of criminal liability are beyond the scope of this paper. It suffices to note that allegations of criminal or personal liability complicate and increase the cost of claims resolution.
Defense Costs
Several factors combine to increase the costs of defending environmental claims. First, the size of the potential loss justifies extensive defense efforts.4 Second, environmental claims may be based on activities which occurred in the distant past. Establishing accurate factual histories may require substantial investigation and reconstruction. Key witnesses are often absent, or are now working for other firms. Even if they can be found, they will often demand payment to assist in the defense of the action. 5 Third, environmental claims often require some field investigation either to establish causation or the type or cost of repair. This investigation is usually expensive. Fourth, most environmental claims require analysis from several different technical specialties. Higher consultant fees are typical. Fifth, the technical complexity of the information being present, and the technical naiveté of the judge or jury, often dictates the use of sophisticated graphical presentation techniques, adding another layer of cost. Finally, large environmental claims seem to have a life of their own. Even if the engineering firm is involved in a discrete portion of the larger claim, it can be adversely affected by the discovery and motion wars of the other parties. Where stakes are high, such battles are likely.
All of these factors tend to increase the cost of defending environmental claims. In some instances, these costs may be as significant as the potential liability, itself. In other instances, especially where insurance proceeds are limited, the magnitude of defense costs may dictate the strategy followed to resolve the claim.
Breach of Contract
Any failure to comply with a material provision of an agreement will support a breach of contract action. As regards environmental claims, however, two aspects are significant. First, the engineer can fail to achieve a result promised in the agreement, generally timely completion or quality. Although engineers providing services are careful to avoid contractual promises, these promises often are incorporated into design/build agreements. Second, the engineer can fail to execute the services in accordance with good engineering practices. This is often referred to as a negligent breach of contract. Proof of a negligent breach of contract is very similar to proof of professional negligence.
A breach of contract has several consequences. First, breach of a material promise excuses the other party from performing the agreement. The client's contractual obligation to pay for services may, thus, be extinguished by the engineer's breach of contract.6 Second, the breach of contract may trigger special damage awards such as liquidated damages or attorneys' fees. Third, the statute of limitations for breach of contracts is often longer than the statute applicable to tort actions. A suit claiming a contractual breach may be viable after a negligence action would be barred. Finally, the measure of damages in contract actions is different than in tort. In general, negligence actions permit recovery of actual damages incurred by the plaintiff. Contract actions permit recovery of the benefit that could have been achieved had the contract been completed.7
Warranties and Certifications
Warranties and certifications create additional problems. In many instances, a public agency, the client or the client's bank requires issuance of a certificate regarding the condition of the site either before or after some corrective effort. Often, these certifications are absolute and unqualified.8
If the conditions are not as certified, liability may attach regardless of negligence. Not only is this liability exposure substantial, it may not be insured. Many errors and omissions policies do not cover liability assumed by contract, and the engineer's insurer may, thus, decline to cover liability arising from errant certifications.
Certifications are especially troublesome where states attempt to transfer their inspection obligations to engineers. The most striking example is the Licensed Site Professional Program in the State of Massachusetts. These separately licensed professionals are required to certify that hazardous waste sites have been successfully remediated. The breadth of the certifications has created significant concern regarding liability and insurance issues.9
Negligence
Duty to Clients
An engineer is responsible for providing services in accordance with the practices of prudent engineers performing similar services under similar circumstances. This standard of care is conventionally proven through expert testimony. Although the legal principles are well established, five factors complicate negligence claims against environmental professionals.
Evolving Technology
In theory, where technologies are rapidly evolving it should be difficult to determine the standard of care in the past. During periods of change, there are often competing, alternative technologies which are acceptable. Plaintiffs should have a difficult time defining the standard of care and a more difficult time showing that it was breached
In practice, however, evolving technologies work to plaintiffs' benefit. Since no specific standard prevailed, experts are free to testify based upon their particular experience. Plaintiff can find an expert who favored a more successful alternative. These experts see the evolution of the technology as a vindication of their earlier preferences. Disagreement with their position is viewed as a breach of the standard of care and not a reasonable choice among competing alternatives. Since there was no prevailing standard, the expert's testimony cannot be disregarded and the action must proceed beyond summary adjudication.
Novel Technology
Novel technologies present a different problem. If a technology is new and untried, how can there be a standard of care?
In these instances, the issues will focus on the acceptability of other alternatives, the potential advantages of the technology chosen, and the level of the client's understanding and participation in the decision to utilize the novel technology. Risk/benefit discussions with the client are absolutely mandatory.
Regulatory Changes
Environmental engineering, more than most engineering disciplines, is faced with a changing regulatory environment. Decisions which were reasonable under an existing scheme, may be insufficient when measured by later laws and regulations.
Engineers must also be aware of impending regulatory changes. Clients can, and have, asserted that an engineer should have known that a proposal would not in the future be sufficient because of proposed regulatory changes.
Public Welfare
The public perceives environmental engineers as fulfilling a public trust to clean the environment. The public wants to see superior services by environmental engineers, not average services. This effectively raises the standard of care.
Multiple Standards
The best example of multiple standards relates to preliminary site assessments. There are several competing written standards in addition to any specific standard required by the client. This leads to confusion and the possibility that an engineer following one standard may be held to have breached another. Where competing standards exist, the scope of work must explicitly indicate which standard is being followed.
Another aspect of the multiple standards problem is the disagreement between the standards perceived by engineers and the standards actually performed by the same engineers. ASFE recently reported that an audit of site assessment reports indicates that the number of tasks commonly included is less than the number of tasks the same engineering firms reported they were routinely performing in site audits.10
Duty to Third Parties
The standard of care is linked to the scope of work. An engineer may limit its undertaking, and its responsibility, by carefully describing the work which will and will not be performed. An informed client which limited the engineer's scope of work cannot successfully argue that the standard of care required more. But what about third parties?
A limited scope of work creates a conflict between the general duty to avoid injury to those who would be foreseeably harmed by one's negligence and the limited nature of the engineer's assignment. At the extreme it seems clear that an engineer cannot contract to negligently perform services and jeopardize the lives and property of third parties. Certain duties may be irreducible.11 It is also clear that an engineer does not assume all liabilities merely by undertaking work.12 Between these limits, however, it is less clear. Engineers should thus be wary of undertaking limited work where the interests of third parties will be affected.
Negligent Misrepresentation
Duty to Clients
As with negligence, the legal issues involving negligent misrepresentation are relatively straightforward. More troubling is the extent to which third parties can rely upon the engineer's opinions.
Duty to Third Parties
There are relatively few decisions concerning an engineer's liability to third parties who have relied upon the engineer's reports. During the last decade, however, third parties have made repeated attempts to hold accountants liable for misrepresentations or omissions in audited financial reports. Accountant liability is similar to the liability of an engineer performing site assessments. The accounting decisions are a bellwether of the potential liability of engineers issuing site assessment reports. Depending upon jurisdiction, there are four approaches to an accountant's liability to third parties. These may be described as actual privity, privity of relationship, intended beneficiary and foreseeable reliance.
Actual Privity
The common law did not permit third parties to sue for negligent injury to their economic interests. Only those who had contracted with the defendant, who were in privity of contract, could bring suit. Under the actual privity rule, a person cannot rely upon the engineer's report unless the relying party has a contractual relationship with the engineer. This rule is intertwined with the unavailability, in certain jurisdictions, of economic damages in negligence actions.
The actual privity approach sharply limits the potential class of plaintiffs. Third parties, such as lenders, may attempt to circumvent the rule by obtaining the engineer's explicit waiver of the rule.
Privity of Relationship
As the law developed, it was realized some circumstances did warrant allowing third parties to recover. But if parties not in contract could sue, how could limits be maintained on the extent of liability?
The New York courts, in Ultramares Corp. v. Touche13 concluded that an auditor should not be liable to third party claimants unless there was a privity of relationship between the auditor and the claimant. Under this approach, an accountant is liable if he or she was aware that the financial reports were to be used for a particular purpose and knew of the existence of a party or parties who would rely upon the reports. In addition, there must be some conduct on the part of the accountant linking him to that party or parties and which evinces the accountant's understanding of that party's reliance.14 This relationship substitutes for the prior requirement of contractual privity.
The privity of relationship approach has allowed courts to limit the expansion of third party liability, but it has done so in an arbitrary manner. It is difficult to determine what conduct is a sufficient linking between auditor and third party. Hence, it is difficult for the auditor or the third party to determine the extent of liability and the risks assumed.
Foreseeable Reliance
Other courts have adopted a pure foreseeability approach.15 Under this approach, liability attaches if the third party's reliance upon the report was foreseeable. Although satisfyingly simple, this approach leads to extensive liability. As stated by the California Supreme Court, "...[T]here are clear judicial days on which a court can foresee forever."16 In the context of site assessments, it is generally "foreseeable" that a report will be provided to purchasers, lenders or investors regardless of the primary purpose for the report.
The extensive sweep of a foreseeability rule is exacerbated by the practicalities of litigation. Issues of fact, such as foreseeability, are generally reserved for a jury. This greatly reduces the likelihood that a defendant can achieve a summary disposition of the action. Faced with the expensive and uncertain prospect of a jury trial, many professionals must necessarily settle claims of dubious validity.
Intended Beneficiary
In Bily v. Arthur Young & Co.,17 the California Supreme Court abandoned the foreseeability rule18 and adopted the intended beneficiary approach of section 552, Restatement of Torts, Second.19
[W]e hold that an auditor's liability for general negligence in the conduct of an audit of its client's financial statements is confined to the client; i.e., the person who contracts for or engages the audit services. Other persons may not recover on a pure negligence theory.
There is, however, a further narrow class of persons who, although not clients, may reasonably come to receive and rely on an audit report and whose existence constitutes a risk of audit reporting that may fairly be imposed on the auditor. Such persons are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report. While such persons may not recover on a general negligence theory, we hold that, for the reasons stated in part IV(B), post, they may recover on a theory of negligent misrepresentation.20 (emphasis added.)
The Bily court sent a clear message that the intended beneficiary rule would be applied to professionals other than accountants.
The Restatement of Torts Second approach is also the only one that achieves consistence in the law of negligent misrepresentation. Accountants are not unique in their position as suppliers of information and evaluations for the use and benefit of others. Other professionals, including attorneys, architects, engineers, title insurers and abstractors, and others also perform that function. And, like auditors, these professionals may also face suits by third persons claiming reliance on information and opinions generated in a professional capacity.21
Approximately a month after its issuance, the Bily decision was applied to a third party claim against an environmental engineer. In Lincoln Alameda Creek v. Cooper Industries,22 an engineer was retained by a prospective purchaser to evaluate soil and groundwater contamination. Unbeknownst to the engineer, the purchaser provided a copy of the report to the seller. After additional contamination was found, the purchaser instituted suit against the seller. The seller cross-complained against the engineer alleging errors in the preliminary site assessment.
The court noted that Bily acknowledged that engineers and other professionals supply information and evaluations for others to use and held that: "Therefore, for all groups of information-supplying professionals, liability is limited to those persons the information is intended to benefit." The court further held that both parties to a real estate transaction are not automatically intended beneficiaries.
The facts underlying this case are not unique. The preparation of a professional's report, such as a contamination report or an engineer's report, is frequently a condition of sale. Therefore, if both parties to the transaction are ordinarily beneficiaries of such reports, it is quite remarkable that there are no cases on this issue.
Bily and Lincoln Alameda Creek constrict, but do not eliminate, the risk of suit by third parties. However, the third party will need to establish that the engineer intended that the third party be benefited by its opinions.
To avoid the limitations of the Restatement rule, sophisticated third parties take steps to assure that they are intended beneficiaries. For example, lending institutions may require that an opinion or certificate be sent to them directly. Where a report has already been issued, the third party may write to advise the engineer that it will be relying upon the report. This permits an argument that the engineer reissued the report if it permits republication and reliance by the financial institution. The engineer should, therefore, object to any republication or reuse of the report.
Strict Liability for Abnormally Dangerous Activity
Strict liability will be imposed for damages arising from "abnormally dangerous" (sometimes referred to as ultrahazardous) activity. As stated in Restatement of Torts section 519, this liability attaches even if the defendant has exercised "...the utmost care to prevent the harm." The Restatement sets forth six factors that determine whether an activity is abnormally dangerous.
The Restatement factors are fact intensive, requiring assessment of the activity on a case by case basis. Thus, one cannot establish bright lines stating that a given activity is, or is not, abnormally dangerous. This is clearly seen in Daigle v. Shell Corporation,24 where the court refused to follow a state court ruling that disposal of a fifteen gallon container of hazardous materials was not an abnormally dangerous activity.25 The Daigle court distinguished the prior precedent stating:
We do not read this brief paragraph as a foreclosure of the strict liability for the generation, treatment, storage and disposal of every conceivable type of hazardous waste regardless of the circumstances. As is evident from the emphasized language, the Court of Appeals limited its holding to the "activities complained of," and those activities bear resemblance to the allegations in Plaintiffs' complaint only to the extent that both involve the generic term "hazardous wastes."
The court then refused to dismiss the strict liability claim against Shell.
Since there are no bright line rules, it should not be surprising that courts have reached different conclusions concerning strict liability for disposal of hazardous wastes.
Ultrahazardous decisions have also supported imposition of strict liability based on risk distribution theory. Under risk distribution theory, the loss is allocated to the party best able to accept it.26 Other states have relied on the risk distribution theory to impose strict liability for releases of hazardous substances.27
Since the doctrine of abnormally dangerous activities is factual and policy based, one cannot rule out imposition of the theory in specific environmental claims.
Liability of Environmental Professionals under CERCLA
A CERCLA Primer
CERCLA supports cost recovery28 and contribution29 actions. Although the statutory bases for these actions are different, courts have not drawn sharp distinctions between them.30 The essential elements of a CERCLA action are that:
CERCLA liability is based on a joint and several,35 strict liability system.36 CERCLA liability is a radical departure from general tort principles that impose liability on engineers only if their conduct falls below the "standard of care."37 The qualitative difference in CERCLA liability, combined with the expansive nature of environmental damages, results in a quantum increase in potential liability.
CERCLA defines four categories of responsible persons: owners, operators, arrangers and transporters.38 Rarely will an engineer be an owner of a facility. However, engineers can easily be operators, arrangers or transporters. Operators are persons who operated a facility at the time a disposal of hazardous wastes occurred.39 An arranger is a person who by "contract, agreement or otherwise arranged for disposal or treatment, or arranged for transport for disposal or treatment, of hazardous substances …"40 Engineers, particularly engineers engaged in design/build remediations, fall within the broad sweep of CERCLA's arranger language.41
The strict liability provisions of CERCLA are eased for "response action contractors," which are only liable for negligent, grossly negligent or intentional misconduct.42 Response action contractors are defined as persons under contract with:
The narrowness of this definition limits its utility to engineers. Many, if not most, private projects would not qualify for response action contractor status. The mere existence of this exception reinforces the conclusion that, unless within the terms of the exception, remediation engineers are strictly liable.
Application of CERCLA to Environmental Professionals
Two recent decisions, Ganton Technologies, Inc. v. Quadion Corporation44 and City of North Miami, Fla. v. Berger,45 reflect contrasting approaches to the liability of environmental engineers. In addition, the decisions reflect the increased liability inherent in design/build and environmental construction management.
In Ganton Technologies, the court held that a remediation contractor and the remediation engineer could be liable under CERCLA as "operators" of a remediation site. The court noted that both were alleged to have control over the remediation site. Amazingly, the court concluded:
Further, holding clean up contractors liable under CERCLA is consistent with the policies of CERCLA." As stated by Judge Parsons "CERCLA was intended to tax those who profit or benefit from their disposal. Thus, Congress included within the statute generators, transporters, and dumpsite owners or operators as potential responsible parties. Brookfield-North, slip op. at 23-24. Clean-up contractors fall in this category.46 (Emphasis added.)
The Ganton Technologies court shows little sympathy for the realities of consulting practice. The court did not recognize any distinction between those who "profit from disposal" and those who "profit by remediation." Both are liable under CERCLA. Further, the court implied authority to control disposal, an essential element of CERCLA liability, because the engineer's reports indicated that the engineer actively supervised the contractor's work.47 While the court did not discuss the contents of the report, one can infer that the reports reviewed the adequacy of the contractor's work since the engineer argued that it merely observed the contractor's work. Reports of this type, are found on all remediation projects.
A contrasting view appears in City of North Miami. There, an engineering firm which contracted to design a landfill, assist with permits, and provide consultation regarding maintenance and operation was held not liable under CERCLA. The court noted that the engineer provided advice, only, and did not have the authority to control operations on the site.
The court also expressed concern over extending CERCLA's reach to the many engineers providing opinions and advice, stating:
The crucial point is that PBS&J had no authority to make the final operational decisions. It could inspect the site, render advice relating to the placement of wastes and the like, but the ultimate authority whether to implement such advice resided with Hadad and Kaufman. Accordingly, PBS&J's role as an independent engineering contractor for the Munisport site does not render it an operator under CERCLA. Indeed, imposing CERCLA liability on independent contractors such as PBS&J would mean that operator liability could be extended to ensnare virtually all engineers and contractors who provide advice relating to the operation of a waste site.48
The North Miami court did hold that the contractor which constructed the landfill was liable under CERCLA as it had actual control over disposal.
The two decisions reflect opposing currents in CERCLA liability. Ganton Technologies assumes that CERCLA is furthered by holding remediation contractors liable since they profit (or hope to) from remediation. North Miami is cautiously opposed to extending liability. Taken together, the cases lead to three conclusions. First, an engineer's CERCLA liability will depend upon the view of the individual court in which an action is brought. This will vary from district to district and possibly from judge to judge. Second, the characterization of an engineer's services in the proposal, contract and report is critical to liability. Authority to control or manage the remediation process must be avoided if CERCLA liability is to be escaped. Third, design/build engineers and contractors will almost always be subject to CERCLA liability. Design/builders must balance the increased risks against profitability and their ability to control project quality.
Application of CERCLA to Site Remediation
Another pair of cases demonstrate CERCLA risks from a contractor's view. In Kaiser Aluminum vs. Catellus,49 the Ninth Circuit held that a rough grading contractor could be held jointly and severally liable for the site clean-up costs that are imposed under CERCLA. The Court determined that the grader potentially fell within two of the four classes of parties subject to liability under CERCLA. Specifically, the grader could fall within the following two definitions:
…any person who... accepted any hazardous substances for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance... (42 U.S.C. Sec. 9607(a)(4))
In finding potential liability of the rough grader, the Court interpreted "operator" under Sec. 9607(a)(2) to refer to any party that "had authority to control the cause of the contamination at the time the hazardous substances were released into the environment." In Catellus, the rough grader fell within this "operator" definition because the rough grader had control over the grading and the grading caused the additional contamination at the site.
In Danella Southwest v. Southwestern Bell Telephone,50 a contractor undertook to excavate and remove dirt that it had no reason to believe was uncontaminated. After it had excavated some of the material and transported it to another site, it learned that the soil was contaminated with dioxin. The contractor took appropriate steps to contain the contamination and brought suit to confirm that it had no responsibility to contribute to its client's response costs. The court held that the contractor was a proper party under CERCLA, but under equitable principles concluded that its percentage of responsibility was zero. Although the Danella decision successfully resolved the matter in the contractor's favor, consider what would have occurred if the client had not been solvent. Since the contractor was a proper party, it could have been responsible for the entire costs.
Application of CERCLA to Transport and Disposal Decisions
Until recently, it was generally believed that transporter liability did not affect engineers unless they were engaged in physically transporting hazardous wastes. Two 1994 cases, however, cast doubt on the extent of transporter liability. In Tippins v. USX,51 the court held that a transporter that recommended four alternative waste disposal sites "actively participated" in the selection and was, therefore, liable under CERCLA. Although cast as a transporter case, the reasoning of the decision could be transferred to environmental consulting.
When a transporter with knowledge and understanding of the industry superior to its customer's investigates a number of potential disposal sites and suggests several to the customer from which it may pick, and the customer relies upon the transporter's knowledge and experience by choosing one of the winnowed sites, the transporter has performed a selection. Although the transporter has not made the ultimate decision, it has made the penultimate one; for all intents and purposes, the transporter has selected the facility by presenting it as one of a few disposal alternatives. In such cases of cooperation, the customer and transporter have jointly selected an appropriate disposal facility.
The 'active participation' standard advances the objectives of CERCLA by recognizing the reality that transporters often play an influential role in the decision to dispose waste at a given facility. Generators undoubtedly regularly rely upon a transporter's expertise in hazardous waste management when considering disposal alternatives. A sophisticated transporter specializing in the transportation of hazardous material is accordingly frequently in the best position to ensure safe and proper disposal of the waste. There is no sound reason for such parties to escape CERCLA liability while the generators, owners, and operators are held liable, when they essentially determined the disposal location subject to the remedial actions and incurring the response costs. This approach also comports with the need to interpret a remedial statute such as CERCLA liberally.
In contrast, the court in C.P. Systems v. Recovery Corp.,52 held that a disposal consultant was not liable as an arranger where it recommended a disposal site, found a transporter, and invoiced the owner for the marked up costs of transportation. The court compared the consultant's activity to the tasks undertaken in Emergency Technologies Services Corp. v. Morton International. In Emergency Technologies, the broker:
Although the broker's level of involvement in Emergency Technologies may have been greater than the consultant's involvement in C. P. Systems, the difference is slight. The different outcomes are more likely correlated to the specific court than to the specific facts.
State Statutes
There are a tremendous number of state statutes that concern environmental liabilities. Although many of these statutes do not directly discuss the liability of environmental engineers, expansive interpretations of these statutes could include holding engineering firms responsible without fault. HWAC publishes a review of state environmental statutes and regulations affecting environmental engineers.
Three California examples demonstrate a range of state statutory schemes.
California Health and Safety Code, 25363, (1993) imposes strict liability for any clean-up costs recoverable pursuant to the Hazardous Waste Control Act (25100 et seq.). Paragraph (f) of that section provides that any response action contractor liable under this standard who proves by a preponderance of evidence that he is responsible for only a portion of the costs shall be required to pay only that portion of expenses attributable to his actions.
California Water Code 13350 (d)(e)(f) (1993) sets a strict liability standard for any person who causes or permits a hazardous substance to be discharged in or on waters where it creates a nuisance or pollution.
Proposition 65, a referendum passed in 1986, effectively imposes strict liability on anyone who causes or contributes to the discharge into water of a known or suspected carcinogen or chemical known to cause reproductive toxicity. The extent of Proposition 65 liability is still unknown. It does not apply to discharges which (1) will not cause any significant amount of the chemical to enter water and (2) is in conformity with other laws. (California Health & Safety code 25249.9.) However, the defendant has the burden of establishing that the discharge is not significant. Proposition 65 permits direct citizen suits.
Mitigation strategies will vary with the type of project undertaken. A few general concepts apply to most projects.
Client Selection
One of the most important risk factors is the identity of the client and the manner in which the engineer's services will be used. For example, a site assessment for a governmental body is less risky than a pre-purchase assessment for a real estate development syndicate. If the information will be distributed to many third parties, risk obviously increases. The first step in managing risk, therefore, is to critically examine clients to determine whether, and on what terms, the assignment is accepted. The following is a list of factors which may be useful in evaluating client based risks.
Project Selection
Project selection is an important component of risk management. General factors to consider include:
Quality Assurance/Creation Mechanisms
Quality assurance programs are especially significant in environmental projects. Since the magnitude of potential loss is great, any steps to reduce error is beneficial. Further, the existence of a quality assurance program may be required by the standard of care. Quality assurance may also assist in deflecting claims of willful violations of environmental statutes. Prosecutors have great discretion in determining whether to institute criminal proceedings. Evidence that the firm has a policy of searching for and preventing error can be used to persuade prosecutors that criminal proceedings are not warranted.
A tenet of Total Quality Management is that quality cannot be inspected in. Quality assurance should go beyond after the fact checking and should endeavor to create structures and systems that avoid error creation.
Contractual Protections
Scope and Limitations
Besides technical excellence, the best method for reducing the risk that work will be deemed to have breached the standard of care is often to carefully delineate the scope of work to be undertaken, including work which will not be performed. The analysis to be performed, the standards being used, and the limits on the investigation should be set forth in writing. This supports the argument that the work was correctly performed within the standards and limits imposed.
The scope of work is usually proven from three documents: proposal, contract and report. It is vital that they be consistent and that important limitations on the scope of work be echoed in all three documents. Many firms have QA/QC review of reports; the proposal and contract should have QA/QC review as well.
Third Party Reliance
The contract should explicitly limit reliance by third parties. This is accomplished by stating:
In conjunction with these limitations, the engineer can request that the client indemnify it from liability to third parties caused by unauthorized distribution or use of the report. If it is necessary to distribute the report to a third party, an agreement should be executed by the third party and the client which states that:
Limitation of Liability
With some exceptions, and depending upon the jurisdiction, one can contractually limit one's liability to one's client. Unlike an indemnification agreement, a limitation of liability provision has little effect on third party liabilities. Limitation of liability, then, is an element of a risk management plan, but not a complete solution.
The limitation provision must be carefully crafted in concordance with the jurisdiction's specific rules and the client's specific needs.53
Consequential Damage Waivers
Many agreements contain provisions waiving consequential damages as between engineer and its client. Depending upon the drafting of the clause and its interpretation in a specific jurisdiction, the consequential damage waiver can preclude claims for indirect economic loss and lost profits. These often comprise the bulk of an eventual claim. The consequential damages waiver may be used in conjunction with other provisions.
Fines and Penalties Waivers
An engineer's failure to timely meet deadlines, discharge requirements or similar goals may result in imposition of significant fines against the client. If this is a significant risk, the engineer may wish to disavow responsibility for such fines and penalties.
Indemnification
Indemnification protects the engineer against claims by third parties by obliging the indemnitor to pay for any liability incurred. Indemnification has three limitations. First, indemnification rarely provides complete protection. In addition, it is difficult to draft clauses that accomplish the exact result intended.
The options are generally too strong or too weak to meet the parties' reasonable expectations. Second, indemnification law is complicated and quirky. Courts do not interpret indemnification clauses in accordance with their plain language.54 Third, many states have statutes that limit the scope of indemnification in construction agreements.55 Such clauses may preclude broad indemnification provisions. Fourth, indemnification depends upon the continued financial viability of the indemnitor. If the client's resources are inadequate, or if the client becomes insolvent, the indemnification clause becomes useless.
Pre-existing Condition Waiver/Indemnification
Clients often resist broad indemnification or limitation of liability provisions. However, they can be convinced that existing contamination is their problem, not the engineer's. Thus, the client may be willing to waive liability and indemnify the engineer against claims arising from contamination that existed on site before the engineer's services.
For a good discussion of the somewhat messy interaction between environmental remediation statutes and federal bankruptcy laws see, In re Jensen, 995 F.2d 925 (9th Cir. 1993), see also, Effects of Bankruptcy on Environmental Liabilities 29 Tort & Ins. L. J. 636 (1993); The Interface Between Bankruptcy and Environmental Laws, 46 Bus. Law. 623 (1991).
In informal discussions with underwriters, the author was told that the underwriters would closely watch claims experience and would retreat from the market before devastating losses occurred. Even if other insurers remain willing to provide insurance, any significant loss in insurance capacity will sharply affect prices.
A few examples of criminalization of environmental acts or omissions are: 33 U.S.C. 1319(c) [Clean Water Act]; 42 U.S.C.A. 6928(d) [RCRA]; 42 U.S.C.A. 9603(b) [CERCLA].
This assumes that insurance coverage is not an issue. If insurance or other proceeds are insufficient to cover potential claims, the engineer may be forced into a settlement to preserve the firm's assets.
Since this problem is common to the entire engineering community, one would assume that professional courtesy would allow access to former employees at cost. But this is not always the case. The author has had new employers refuse to allow their employees to assist in defense of a case unless the employees' litigation expert rates were paid. Since access is critical to the defense, the former firm generally must concede to these tactics.
The engineer may be able to recover compensation related to the value of the services received. This recovery would not be in contract, however, but would be under the theory of quantum meruit.
The difference between these damage measures is best explained by example. Consider the purchase of contaminated property that is sold with the representation that it is not contaminated. Under a negligence theory, the damage is the difference between the actual value of the property and the amount paid. Under a contract theory, the damage would be the difference between the actual value of the property and the amount the property would be worth had the representation been accurate.
Inevitably, the demand for a certification is made shortly before a planned transaction closing. If the engineer refuses to sign a certification, the transaction may not occur and the engineer may be sued by its client. The client may also be planning to pay the engineer from the closed transaction. This carrot and stick approach puts great pressure on the engineer.
In California, professional organizations responded to the certification problem by promoting a legislative definition of certification. Business & Professions Code section 6735.5 states:
The use of the word certify or certification by a registered professional engineer in the practice of professional engineering or land surveying constitutes an expression of professional opinion regarding those facts or findings which are the subject of the certification, and does not constitute a warranty or guarantee, either expressed or implied.
This statute provides a middle ground for an engineer who is forced to provide a written opinion concerning property. By using the defined words certify and certification, the engineer reduces a promise to a professional opinion.
Phase 1 Environmental Site Assessments: The State of the Practice, 1994.
In a published opinion letter, the California Attorney General has stated that a structural engineer who is inspecting a building and discovers a condition which imminently imperils life has a duty to the tenants if the engineer is aware that the owner does not intend to take corrective action. 68 Ops. Cal. Atty. Gen 250, 257. Under this rule, the limited scope of the inspection would seem to be a defense.
For example, in Yow v. Hussey, Gay, Bell & DeYoung Int'l, Inc. (Ga. App. 1991), an architect was not liable for jobsite injury although it was actually aware of the dangerous condition since it had only agreed to inspect the project to determine conformance with plans and specifications. See also, Rodriguez v. Universal Fastenings Corp. (Tex. App. 1989) 777 S.W.2d 513 where the court held, on basis of standard contract language, that engineer was not responsible for death of contractor's employee notwithstanding the engineer's contractual requirement to make periodic site visits and to observe the condition and progress of the work.
Credit Alliance v. Arthur Andersen & Co., 483 N.E.2d 110 (N.Y. 1985).
Rosenblum v. Adler 461 A.2d 138 (N.J. 1983); Citizens State Bank v. Timm, Schmidt & Co. 335 N.W.2d 361 (Wis. 1983).
Thing v. LaChusa, 48 Cal.3d 644, 668 (1989). <
See International Mortgage Co. v. John Butler Accountancy Corp., 177 Cal.App.3d 806 (1986).
552. Information Negligently Supplied for the Guidance of Others
(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information;
(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered;
(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them
No. C-91-0272 MHP (U.S.D.C. N. D. Cal. Sept. 29, 1992).
Restatement of Torts, Second, 520.
972 F.2d 1527 (10th Cir. 1992).
Forrest v. Imperial Distribution Services, 712 P.2d 488 (Colo. App. 1985), revd on other grounds, 741 P.2d. 1251 (Colo. 1987).
See Smith v. Lockheed Propulsion Co., 247 Cal.App.2d 774 (1967); Chavez v. So. Pacific Transp. Co., 413 F.Supp. 314 (E.D. Cal. 1976).
(See, e.g. Indiana Harbor Belt R.R. Co. v. Am. Cyanamid Co., 517 F.Supp. 314 (N.D. Ill. 1981) (applying Illinois law) strict liability for company that manufactured and shipped a hazardous substance that leaked in a rail car.
Burlington Northern v. Woods Industries, 815 F.Supp. 1384, 1387 (E.D. Wash. 1993).
A release is defined to mean [A]ny spilling, leaking, pumping, purging, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment 8 (42 U.S.C.A. 9601(22)).
A facility is defined broadly as any building, structure, installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located; but does not include any consumer product in consumer use or any vessel. (42 U.S.C.A. 9601(9)).
If the plaintiff is the United States, this requirement is relaxed such that the response costs incurred are allowable if not inconsistent with the national contingency plan. (42 U.S.C.A. 9607(a)(4)(A)).
42 U.S.C.A. 9607(a); United States v. Aceto Agricultural Chemicals Corp., 872 F.2d 1373, 1378-9; Environmental Transportation Systems, Inc. v. ENSCO, Inc., 763 F.Supp. 384, 387 (C.D.Ill. 1991) United States v. Bliss, 667 F.Supp. 1298-1304 (E.D.Mo. 1987).
New York v. Shore Realty Corp., 759 F.2d 1032,1042, fn. 13 (2nd Cir. 1985); United States v. Aceto Agricultural Chemicals Corp., 872 F.2d 1373, 1377 (8th Cir. 1989).
See Gagne v. Bertam, 43 Cal.2d 481,489 (1954); Swett v. Gribaldo, Jones & Associates, 40 Cal.App.3d 573, 576 (1974); Allied Properties v. John A. Blume & Associates, Engineers, 25 Cal.App.3d 848, 855-56 (1972) [doctrines of implied warranty and strict liability not applicable to consulting engineers].
See, generally, Ashcraft, CERCLA ARRANGER LIABILITY: EMERGING RISK FOR ENVIRONMENTAL CONSULTANTS, THE CONSTRUCTION LAWYER, V. 14, NO. 1, JANUARY 1994.
834 F.Supp. 1018 (N.D. Ill. 1993).
828 F.Supp. 401 (E.D. Va. 1993).
976 F.2d 1338 (9th Cir. 1992).
775 F.Supp. 1227 (E.D. Mo. 1991).
No. 93 C 2905 (N. D. Ill. 1994); 1994 U.S. Dist. Lexis 5901.
Information regarding limitation of liability can be obtained from ASFE and EJCDC as well as errors and omissions insurers. The author also has two papers, available on request, entitled Enforceability of Limitation of Liability Clauses and Drafting and Managing Limitation of Liability Clauses.
Courts generally do not like liability transfer mechanisms, such as indemnification clauses and have developed interpretation rules that limit the affect of particular language. Without understanding these interpretations, one can not draft clauses that surmount the interpretations problems.
Although designed for construction projects, these clauses generally define construction quite broadly and would cover remediation projects and many environmental studies.
* Howard W. Ashcraft is the lead partner in the Construction Group at Hanson, Bridgett, Marcus, Vlahos & Rudy, where he specializes in representing design and environmental professionals in litigation, contract and professional practice matters. He is a Fellow of the American College of Construction Lawyers, a member of the Governing Committee of the American Bar Association's Forum on the Construction Industry, and a member of the American Arbitration Association's construction panel of the Large and Complex Case Program. He is also an active member of the ACEC Legal Counsel Forum and the HWAC Legal Counsel Roundtable.
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