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Environmental Concerns In Construction Agreements

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• Introduction
• The Traditional Contractor Engaged In New Construction
• Asbestos Abatement Contractor or Contractor Hired to Do Clean-Up Work
• The Contractor Involved in Remodeling and Rehabilitation Work
• Conclusion

Introduction

Legislation, regulation, and case law frequently place an onerous burden upon today's owners and developers to preserve the environment and protect individuals from the adverse effects of hazardous substances. Regulation occurs at every level of government. In many instances there is concurrent exercise of state and federal legislation. Many statutory provisions impose strict liability upon owners and developers, regardless of intent of scienter. As a consequence, owners and developers often seek to shift the risk of liability to contractors engaged in the construction process with which these risks are associated.

Contractors must be attentive that, at the behest of the owner, they do not assume more environmental liability than they intend. The purpose of this discussion is to direct attention specifically to contract provisions which serve either to deflect liability from the contractor or expose the contractor to unwarranted liability. These provisions will be examined from the perspective of three different types of contractors: (1) the traditional contractor hired to do new work, the scope of which does not include any reference to environmental issues; (2) the contractor specially hired to do asbestos abatement or clean up work; and, (3) the contractor involved in remodeling and or rehabilitation of an existing structure. The goal is always to minimize contractor liability.

I.  The Traditional Contractor Engaged In New Construction

When an entirely new facility is being built, the most prevalent environmental issue is whether subsurface conditions will cause problems. Such issues usually arise upon the discovery of an underground storage tank or contaminated ground water or soil. The impact of such a discovery upon the contractor will be uncontemplated delay and associated cost, as well as the expense of adequate removal of the discovered hazardous materials in compliance with applicable laws and regulations. As a practical matter, the traditional contractor is usually ill equipped to abate hazardous substances.

Typical owner-contractor agreements contain broad clauses which appear to make the contractor wholly responsible for job completion, regardless of conditions encountered at the site. Broad language should be restricted and replaced with tailored language which restricts contractor responsibility for environmental concerns.

A.  Clauses Which May Expose The Contractor To Increased Liability

There are several ordinarily innocuous clauses which, in an environmentally troubled project, can subject contractors to substantial risk. The most troublesome clauses are those concerning compliance with all laws and regulations, time extensions, delay damages, changed conditions, change orders and site inspection.

Clauses Which Require Compliance With All Laws and Regulations

Contractors may wish to modify standard clauses which require them to comply with and give notices pursuant to all federal, state, and local laws, ordinances, rules, regulations, and lawful orders of all public authorities having jurisdiction over the work. Such a "Compliance" clause could expressly limit a contractor's obligation to comply with laws and regulations to those which specifically address the manner or method of the contractor's work and which are in effect and are actively being enforced at the time the agreement is executed.

Modifications to the compliance clause should serve to relieve the contractor from the burden of notifying appropriate agencies of environmental occurrences and obtaining specialized permits. Additionally, complying with a new regulation which may affect the scope, manner or method of construction may require more stringent procedures.

Time Extension Clauses

Most construction contracts set forth specific commencement and completion dates. These clauses also contain language which permits a contractor to receive an extension of time under specified circumstances. A time extension clause should be modified to clearly entitle a contractor to an extension of time for delays associated with environmental concerns. The clause should explicitly provide for the discovery of hazardous substances and work stoppage associated therewith.

Suspension of Work Clauses

Should hazardous waste be discovered, the mere right to an extension of time does not protect the contractor from added costs which may result from a work stoppage. The contractor is also left unprotected from additional expense which may result from being required to perform work out of sequence or from work procedures which must be modified. As such, the contract might include a clause which required the owner to compensate the contractor for all costs incurred due to the discovery and abatement of hazardous substances including adverse impact on job progress. These costs should include demobilization and remobilization costs, lost labor productivity costs, and delay damages.

It should be noted that the addition of such a "compensation" clause usually required the modification of other clauses, including the following: a clause which permits the owner to suspend the contractor's performance on the entire project or any portion thereof; a clause which permits the owner to alter the proposed sequencing of the work; a no-damage-for-delay clause; and, a clause which permits the owner to employ independent contractors and requires each contractor to coordinate its work with the work of the other independent contractors. These modifications, when read collectively, serve to limit the owner's ability to defeat the compensation clause by other contract language.

Changed Condition sand Differing Site Conditions Clauses

The changed conditions or differing site conditions clause, which is most applicable to underground construction, can also apply to conditions in existing buildings. Typically, an excavation contract indicates that if a previously undisclosed and uncontemplated subsurface condition is encountered during construction, the contractor will perform any necessary related work and receive additional compensation on a time and materials basis. Where a contractor enters into a contract for excavation work ignorant of hazardous waste and later some is discovered, it may be obligated to perform remediation under the standard changed conditions clause. If the contractor is not adequately licensed or otherwise prepared to perform the work, this obligation can cause substantial expense and disruption to the contractor. A contractor is best advised to give itself the option to treat the contract as terminated upon discovery of hazardous waste or to provide that the owner is directly responsible for abatement of the waste, associated expense, and impact cost.

Additionally, whether an item of work qualifies as a changed condition may also be a problem. An owner may take the position that the contractor should have become aware of the condition through its pre-bid site inspection and should have included the condition in its lump sum bid. The rationale being that all requirements for performance should have been included in the lump sum price, including the cost of any risk associated therewith. It is imprudent for a contractor on a known or potentially hazardous waste site to enter into a contract without an appropriate changed conditions clause.

Change Order Clauses

In an environmentally troubled construction project, a contractor may be asked to perform an extra or change order it is not qualified to perform. The contractor's inability to perform may be due to a lack of experience handling hazardous materials, a lack of insurance for the operation in question, or because it does not have a required license. In such cases, a contractor should be allowed to refuse the change order without sacrificing the rest of the job. The decision as to who should do the abatement work should be the contractor's. If the contractor is experienced, willing, and able to perform the environmental remediation, it should be allowed to do so.

To protect both owners and contractors, a clear delineation for processing and pricing change orders must be included in the contract. The contract must include a clear definition of how change orders are to be calculated and what records are required to be kept so that later discrepancies and disputes may be avoided. Further, the change order clause should define the circumstances under which a contractor may refuse an environmental remediation change order without risking breach of contract and termination.

Site Inspection Clauses

Typical site investigation clauses state that the contractor has visited the site and is familiar with it and the conditions under which the work is to be performed. These clauses attempt to place the burden of undiscovered or concealed conditions on the contractor. The contractor may choose to avoid wording which specifically requires it to inspect subsurface and concealed areas and, to the contrary, include language which specifically excludes any obligation to investigate, discover, or be responsible for hazardous materials. In this way the contractor may be able to argue that it did not have the duty to perform such inspections and is not responsible for those subsurface and concealed conditions which are materially different from those one would reasonably expect to encounter.

B.  Clauses Which Reduce Contractor Exposure to Liability

Just as there are clauses which subject contractors to inordinate risk, there are also clauses which appropriately distribute risk. These clauses must be considered for inclusion by contractors, even in the face of resistance by owners.

Disclaimers For Hazardous Substances

A contractor might wish to include a clause which specifically states that the contractor takes no responsibility for toxic, hazardous, or other dangerous substances that may be found on the site, even though such substances are not known to be present. The clause might state that any such substances and associated obligations are the responsibility of the owner.

Representation and Warranties

It is appropriate for an owner to expressly set forth what it knows about the site and that the contractor is entitled to rely on what the owner knows. It is unwise for a contractor to place a bid without receiving a statement from the owner of what it knows about the project site. Of course, it would be ideal if the owner would broadly warrant and represent that no hazardous substances are present on the site, but it is doubtful that any owner would agree to such a provision.

Indemnification

Owners will resist indemnification of the contractor. The contractor has a convincing argument, however, that an owner should not protest a clause requiring it to indemnify the contractor for all loss or expense incurred which relates to an environmental risk, which was not caused by the contractor, and which was not adequately disclosed in the construction documents.

C.  Industry Standard Forms

Standard contract forms developed by both the American Institute of Architects (AIA) and the Engineers Joint Contracts Document Committee (EJCDC) have come to include provisions which specifically address contractors' environmental concerns. Article 10, of the AIA's 1987 edition of the General Conditions of the Contract for Construction (AIA A201), includes a series of provisions which attempt to place responsibility for detecting and dealing with hazardous substances on owners.

Article 10

For contractors, one of the problems with Article 10 lies in the limited number of contaminants for which protection is provided. Should the contractor unearth petroleum or discover toxins previously dumped at the site the contractor is not afforded adequate protection under Article 10. It is therefor suggested that the contractor attempt to substitute broader language for "asbestos or PCBs", such as toxic substances, or other known carcinogens.

Clause 10.1.4 provides that the contractor shall be indemnified for damage and losses arising out of or resulting from performance in affected areas, if in fact the material is asbestos or PCBs. Similar provisions appear in the AIA subcontract agreement (AIA A401).

The indemnification language of Article 10.1.4 also posses a problem for the contractor. The words "[b]ut only to the extent caused by the owner" raise comparative fault issues.

The EJCDS Standard General Conditions of the Construction Contract 1910-8 (1990) goes further in extending protection to the contractor. The applicable provisions read as follows:

4.5.Asbestos, PCBs, Petroleum, Hazardous Waste or Radioactive Material:

As with the AIA general conditions, the EJCDC provisions are designed to permit the contractor to stop work where hazardous materials have been discovered. Unlike the AIA language, the EJCDC provisions are broader, in that the contractor is protected upon discovery of asbestos, PCBs, petroleum, hazardous waste and radioactive materials as well. Additionally, the contractor may incorporate its own definition of hazardous waste into the agreement or utilize that which has been provided in various state and federal laws.

As under any contract, should environmental concerns unexpectedly arise, a separate agreement should be prepared to cover abatement of the hazardous materials.

II.  Asbestos Abatement Contractor or Contractor Hired to Do Clean-Up Work

The contract between the developer and the abatement contractor must clearly set forth the liability assumed by each party.

It is impractical for a developer who wishes to shift the risk associated with removing or stabilizing asbestos abatement contractor assumes no liability for the effectiveness of its services. Conversely, the abatement contractor's liability is not without limits.

Scope of Work

It is essential that all construction projects have a well-defined scope of work. This rule is particularly true with regard to asbestos abatement contracts. A good scope of work clause, together with well-defined plans and specifications, does two things. First, it locates, describes, and qualifies all asbestos-containing material (ACM) in the building or facility. And, second, it identifies the response action required to be taken with respect to each item of ACM so designated.

If the owner's consultant has prepared a report that contains the necessary information, this report should be incorporated by reference into the contractor's agreement and attached as a rider. If the consultant's report does not contain all the necessary information, for example, the appropriate response action with respect to a particular ACM, the report should still be incorporated into the agreement by reference and the missing information must be furnished elsewhere in the contract documents.

Under no circumstance should a contractor agree to remove 'all' asbestos within a given structure. It should be the responsibility of the owner to discover the presence of asbestos and to determine the corresponding response action. If the owner is unwilling to provide information necessary to accurately price the work, the contractor should think very seriously about not taking the job.

It is a good idea to list those items of work that are specifically excluded from the contractor's scope of work. This added language may prevent the owner from requiring the contractor to perform additional work at no extra cost.

Clauses Which Require Compliance With All Laws and Regulations

Many construction contracts contain a clause that requires the contractor to follow all federal, state, and local laws, regulations, rules, and ordinances that relate to the work of the contractor. For asbestos abatement contractors, this clause could mean disaster. The contractor should only agree to follow those laws and regulations that concern the manner or method of performance, which are in effect and which are actively being enforced at the time the contract is executed.

Limiting the requirements that the contractor must follow those laws governing the manner or method of performance will prevent the owner from forcing the contractor to comply with regulatory requirements directed at the owner. For instance, if a local law requires that the owner notify the city department of environmental protection of the removal and disposal plan, the clause set forth above would prevent the owner from claiming that the notification requirement is the responsibly of the contractor, because such a notification requirement does not affect the contractor's manner or method of performance.

In addition, it is important that the contractor only agree to follow those laws and regulations that are in effect at the time the contract is executed. Industry laws and regulations are in a constant state of flux. By specifying the body of law which governs the contractor's performance, the contractor is in a better position to accurately price the work. Also, if applicable laws and regulations change, thus requiring the contractor to follow more stringent job procedures, the contractor should be entitled to additional compensations from the owner.

Finally, it is necessary for the contractor to make sure that the specifications are consistent with the governing laws and regulation. Any discrepancies should be resolved prior to executing the contract. If the owner requests the contractor to follow higher standards than those required by law, the different standards must be clearly identified in the contract documents.

Clauses Which Set Forth Start and Completion Times and Dates

Because many abatement projects are carried out under stringent time restriction, the contract documents should set forth precisely the time within which the contractor must perform the work. Although this clause may appear to work against the contractor, in fact it works to the contractor's advantage.

By defining the time within which the contractor must perform the work, the contract implicitly requires that the owner give the contractor access to the work area for the defined period of time. If the owner fails to make the building available to the contractor, as scheduled, the owner has breached the agreement and the contractor should be able to recover damages occasioned by the breach.

Start and completion times and dates will also assist the contractor in determining its potential liability with respect to a liquidated damage clause. A typical liquidated damage clause provides that if the contractor is not finished with the work by a certain day, a stated sum will be assessed for each day past the scheduled completion date on which the work remains incomplete. The contractor must be certain that it can finish the work with the time period set forth in the contract. If not, the bid price should be increased to account for the possible assessment of liquidated damages.

Any benefit that a contractor may receive from a clause defining the time period within which the work is to be performed can be nullified by other contract language. There are two clauses in particular, which can lead to considerable expense for the contractor: a clause which allows the owner to suspend the contractor's performance; and a clause which prevents the contractor from recovering damages for delays in performance which are caused by the owner or the owner's consultants.

If the contract provides that the owner can suspend the contractor's performance or contains a no damage-for-delay clause, the owner can reschedule the work with impunity. If the work is suspended or delayed several times by the owner, the contractor might incur substantial remobilization cost.

Access to the Work Clauses

Although defining access to the work area in terms of time is important, by itself, it is not sufficient to ensure that the contractor will be free from obstacles during performance. The contract must also address such matters as who is responsible for moving furniture and office machines, disconnecting and reconnecting power systems, communication systems, and computer systems, and providing temporary electricity and water.

In addition, if the contractor requires the use of a freight elevator to perform the work, the owner should guarantee that the contractor will have uninterrupted use of an elevator. If local union rules demand that the elevator be run by a union operator, then the contract should spell out who is responsible for hiring the operators and who is to pay for their services.

If the contractor will require space outside the building or facility for placing a dumpster or loading and unloading equipment and supplies, the contract should state that the owner will provide such a designated location.

Permits, Notifications and Record Keeping

Each abatement project is governed by a labyrinth of federal, state, and local permitting, notification, signage, and record keeping and reporting requirements. Many regulations identify the party who is responsible for complying with a particular requirement. However, where a law or regulation does not assign responsibility for compliance to one particular party, or where the parties wish to alter the statutorily assigned responsibilities, care must be taken that the contract document accurately reflect the agreement reached between the owner and the contractor. The contractor's agreement should specifically address all requirement and clearly set forth who is responsible for each one.

Indemnification Clauses

The indemnification clause can be a major stumbling block in owner-contractor negotiations. A provision requiring the contractor to indemnify the owner against any loss, damage or expense relating to the contractor's performance, whether or not caused in whole or in party by the owner, is not uncommon.

Some states have passed legislation that prevents an owner from being indemnified for losses occasioned by the owner's sole negligence. Where the loss is caused by the acts or omissions of both the owner and the contractor, however, some states allow the owner to obtain indemnification from the contractor for the full amount of the damage.

Each contractor must determine how much risk it is willing to take. The contractor must also factor into its decision the inability to control the owner's actions. The contractor's ability to minimize its risk decreases proportionately with the inability to control the activities or circumstances that may cause loss. Ideally, the contractor should only be required to indemnify the owner from loss, damage, or expense directly caused by the contractor's breach of contract or negligence.

Clauses Governing Time Limits For Consultant Response

Because of the time restrictions generally associated with the performance of many abatement projects, it is essential for contractors to receive a prompt response from the owner's consultant. The contract should specifically require the owner's consultant to render a decision within a give time.

As industry groups, asbestos and other abatement contractors would be well advised to convince owners and their consultants that the various risks associated with an abatement project should be apportioned among the parties according to the principle that a particular risk should be assumed by the party in the best position to identify, quantify, and control the risk.

III.  The Contractor Involved in Remodeling and Rehabilitation Work

The contractor involved in the renovation of an existing structure faces an array of risks beyond those ordinarily encountered during the construction of a new building. Among these risks, most common are asbestos, PCBs, lead paint, chemicals still present from past use of the property, and underground or aboveground storage tanks. Often, it is either known, or known to be a possibility, that some abatement procedure will be required in order to complete the project. As such, the contractor should be sure that hazardous substance abatement therewith are clearly understood. More so than the contractor engaged in new construction, the renovation should not assume risk inadvertently. The likelihood that environmental problems may arise during renovation of an existing building is far greater than during the course of new construction.

A.  Contract Interpretation Which Leads to Liability

There are several typical clauses which appear in general renovation contracts. When read together, these clauses could be interpreted to require an unsuspecting contractor to abate an unknown hazardous substance.

For example, assume that a general contractor agreed to renovate an entire structure. After the start of construction it was determined that there was a considerable amount of asbestos in the building. The agreement between the owner and the contractor contained the following clauses:

If it were determined that the contractor is not responsible for the actual abatement work, it is likely that the entire job, or at least a portion of it, would be suspended until the asbestos is stabilized or removed. If the contract is not cost-reimbursable and includes a clause giving the owner the right to suspend the contractor's performance, a no-damage-for delay clause, or a clause which permits the owner to hire independent contractors and requires the contractor to coordinate its work with the independent contractors at no increase in price, the contractor could be required to expend unrecoverable and substantial sums for remobilization and increased labor or materials costs.

Time Extension Clauses

A contract which includes a time extension clause may still subject the contractor to additional expense, should environmental problems develop on the project. Even if the owner allows the contractor additional time to complete its work, the contractor is not protected from cost associated with delay. The advantage of including an extension of time clause which explicitly addresses environmental issues lies in the protection a contractor enjoys from liability for any expense incurred by the owner. What remains problematic for the contractor are its own expenses, such as additional overhead, increased labor costs, and remobilization costs.

B.  Additions to the Contract Which Minimize Liability

The inclusion of certain clauses can reduce the risk assumed by the renovation contractor. Like those which increase risk, these are similar to those which effect the traditional contractor engaged in new construction. It cannot be over-emphasized that since the likelihood of an environmental occurrence is significantly greater where the contractor is engaged in the renovation of an existing structure, it is especially important that these clauses be considered.

Differing Site Condition Clauses

A differing site conditions clause may be sufficient to relieve the contractor of the responsibility for dealing with a hazardous substance or for absorbing resulting expenses. But as a general rule, the contractor may not rely on these provisions unless they specifically address environmental risks. An owner will argue that a changed condition clause applies only to traditional changed conditions, standard geotechnical problems, not hazardous wastes. On the other hand, a contractor will argue that an environmental risk is a changed condition. Such arguments can be avoided by specifying in the clause that it is, or is not, intended to include the discovery of hazardous materials.

Suspension of Work Clauses

In order to deal with the costs likely to result from a delayed completion date, the contractor should include language which explicitly provides that the contractor shall be reimbursed for any additional cost due to the discovery of hazardous substances and resulting delay.

Disclaimers For Hazardous Substances

The inclusion of a clause disclaiming responsibility for the discovery of hazardous substances extends the protection afforded by a suspension of work clause. Where a suspension of work clause protects the contractor form cost directly associated with delay and a modified change order clause allows compensation for abatement work not contemplated in the scope of the original agreement, a disclaimer for hazardous substances will relieve the contractor from any affirmative obligations arising from an environmental occurrence.

Indemnification

An indemnification agreement which protects the contractor from claims which arise from an environmental occurrence is particularly important to the contractor performing renovation work. Due to the increased likelihood that hazardous substances may be discovered, it is also more likely that accidental contamination will occur as a result of such a discovery. This is particularly so where the contractor is inexperienced in dealing with hazardous substances. For the contractor, the cost of insuring against such an occurrence is a convincing argument to the owner for inclusion of such a clause in the contract documents.

Representation and Warranties

In combination with a proper indemnification clause, a clause which sets forth that the owner has fully disclosed all that it knows about the site will allow the contractor to submit a lower bid. Even though an owner may resist the inclusion of such a clause, as with an indemnification clause, lower construction costs may serve as an inducement for the inclusion of a warranty provision.

Conclusion

Under present day circumstances, a construction contract which does not specifically contemplate environmental concerns provides little protection to the contractor. In addition, such a contract may initially appear advantageous to an owner because risks related to environmental concerns are assumed by the contractor. In order to discourage an owner from insisting on such a contract, the contractor should emphasize that the assumption of uncontrolled risk will result in higher building costs.

The contractor must deal with the possibility of environmental occurrences prior to the execution of the contract. This process should include an accurate assessment of what types of problems may arise and the contractor's ability to deal with such problems once they are apparent. The contractor should look at the type of project to be undertaken, the location of the site, the previous use of the site or building, and the age of the building should one exist. In this manner the contractor should be able to identify the types of risks that may be encountered. Having done so, the contract can be drafted with specific problems in mind.

All contractors, whether the traditional builder hired to do new work, the abatement contractor hired to remove or stabilize hazardous substances, or the renovator who is likely to encounter hazardous materials during performance, need to be sure that their bid includes an appropriate adjustment consistent with the assumption of risk imposed by their respective contracts.

The clauses which have been discussed provide the means by which the contractor can accurately price its work and control the extent of environmental risk assumed by entering into an agreement with an owner.

In the preparation of this paper, the assistance of James Biondolillo, a law student at the University of Connecticut, School of Law, is gratefully acknowledged.

For a more thorough discussion of environmental issues see the publication: Postner & Rubin, New York Construction Law (published1992 by Shepard'/McGraw Hill).

AIA Document A201, General Conditions of the Contract for Construction, The American Institute of Architects (1987).

Engineers Joint Contract Documents Committee, Standard General Conditions of the Construction Contract, EJCDC No. 1910-8 (1990).

For a more detailed discussion see Osborn & Schreyer, Asbestos Abatement Contractor Agreements, NIAC Outlook, July 1989, at 29.

National Insulation and Abatement Contractors' Association, The NIAC Owner-Contractor Agreement Guide, (2d edition, October 1990). This guide provides an owner-contractor agreement which attempts to appropriately divide environmental risks.

The remedial action contractor engaged in subsurface work faces formidable liability risks. Even though federal legislation provides certain indemnification protections, the remedial action contract must be drafted with caution. For more information see, Hazardous Waste Disposal and Underground Construction, (Robert F. Cushman & Bruce W. Ficken, published by John Wiley & Sons, Inc. 1987.)