I. INTRODUCTION

In the 1998 film A Simple Plan,[1] three men – Hank, Jacob, and Lou – stumble upon a small crashed plane containing a duffel bag overflowing with over $4 million in cash while pursuing a fox in the snowy woods of Minnesota. Almost immediately, the question arises: What should we do with the money? Jacob and Lou want to split the money among the three of them; Hank believes they should hand the money over to the appropriate authorities. Eventually, a compromise is reached: they will wait and not spend any of the money until the spring thaw, and hope that no one mentions the missing money when the plane is discovered.

The story plays out as a Shakespearean morality tale, as the “simple plan” devised by the three men becomes increasingly complicated. By the end of the story, several persons have been murdered, including Jacob and Lou. Hank is left penniless and miserable, forever regretting the fateful decision not to turn in the money.

Such is the dilemma that faces construction contractors when they encounter certain unanticipated environmental issues, like the discovery of endangered wildlife or hazardous waste, during a construction project. The consequences of choosing the wrong plan for dealing with those issues can be devastating. Federal statutes such as the Comprehensive Environmental Response, Compensation, and Liability Act[2] (“CERCLA”) and the Resource Conservation and Recovery Act[3] (“RCRA”) can impose wide-ranging administrative orders, stiff monetary penalties, civil liability for cleanups, and, even possible jail time for those who fail to react properly when encountering certain hazardous materials. Moreover, in addition to Federal laws and regulations, the states and many localities have enacted their own laws and regulations, which further complicate the decision making process when unexpected environmental issues are encountered on construction projects. Likewise, parties who do not take the proper steps when encountering certain endangered species can face administrative penalties as well as civil enforcement and criminal liability. Citizens, moreover, are authorized to enforce certain requirements of many of these statutes, especially the federal ones, and the possibility of common law tort actions always lurks in the background.

In a perfect world, of course, parties would anticipate all such possibilities at the contracting stage, allocating risk and establishing responsibilities for dealing with these issues before the project is ever commenced. Unfortunately, developers, owners, and contractors rarely foresee and plan for many of these scenarios. This raises the question: What should we tell our construction clients to do when they encounter unexpected environmental conditions on a construction project and the contract terms are unclear, ambiguous, or simply non-existent – debate, mitigate, or wait?

II. Environmental Laws and Regulations Impacting Construction Projects

Since 1970, Congress as well as each state legislature has enacted numerous regulatory measures designed to protect public health and the environment from various kinds of environmental harms. These statutes apply to the construction industry in many ways, and, when viewed in their totality, have changed enormously the way in which the industry does business.

Of all of these statutory provisions, two federal statutes have the greatest impact upon construction: CERCLA and RCRA. These two statutes can impose notification requirements and strict, joint and several cleanup liability upon the parties involved in a development or construction project. Such liability generally arises from soil or groundwater contamination, but it can also arise from contaminated river sediments or any other place where a hazardous material has come to rest. CERCLA is primarily retrospective in nature, providing mechanisms for responding to releases of hazardous substances and imposing Draconian levels of liability in the process.[4] RCRA, in contrast, primarily focuses upon the prospective regulation of hazardous waste: its generation, transportation, storage, treatment and eventual disposal.[5] In addition to CERLA and RCRA, the regulation of certain dangerous substances like polychlorinated biphenyls (“PCBs”)[6] and asbestos are addressed by other statutes: the Toxic Substances Control Act[7] (“TSCA”) for PCBs, and the Clean Air Act (“CAA”)[8] and the Occupational Safety and Health Act (“OSHA”)[9] for asbestos.

The closer one looks, moreover, the more complex things become. Underground storage tanks that contain RCRA “hazardous waste” are dealt with under RCRA’s primary regulatory structure,[10] while storage tanks that contain petroleum or other hazardous substances (excluding RCRA “hazardous waste”) are subject to special regulations and a special cleanup program.[11] Not only does the Clean Water Act[12] regulate discharges of pollutants to waters of the United States, but it also regulates the placement of fill material in those waters, including wetlands.[13] In addition, the Clean Water Act[14] and the Oil Pollution Act of 1990[15] create an elaborate cleanup process, and stunning levels of liability, for oil spills that occur on water or adjoining shorelines.

The Endangered Species Act[16] (“ESA”) also may apply to construction activities. Section 9 of the Act prohibits the “taking” of any endangered or threatened species,[17] and “take” is defined to mean “harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect.”[18] The term “harm”, however, is defined broadly to include “significant habitat modification or degradation where it actually kills or injures wildlife by significantly impairing essential behavioral patterns, including breeding, feeding, or sheltering.”[19]

The states have also enacted a number of laws, some of which are intended to implement RCRA, while others create mini-Superfunds and special notification requirements. Not to be overlooked is another form of state law: common law tort. Many situations involving environmental hazards that are found or arise on construction sites have the potential to give rise to costly court cases sounding in negligence, trespass, and nuisance.

A. CERCLA

When CERCLA was passed in 1980, many people hoped that the program could be a short-term, one-time effort. Now, however, we know that the task of cleaning up sites where hazardous substances have been released will be with us well into the 21^st century. Not only is it taking longer than expected to clean up sites (especially where groundwater has been contaminated), but new sites are constantly being discovered.

Under CERCLA, the U.S. Environmental Protection Agency (“EPA”) is empowered to clean up a site[20] whenever any “hazardous substance”[21] is released[22] or there is a substantial threat of such a release into the environment. Following such a federal response action, the EPA may bring an action in a U.S. District Court to recover its costs from the responsible parties.[23] The EPA also has the authority to issue administrative orders to force the responsible parties to study the site and possible cleanup options. EPA also may order responsible parties to actually cleanup the site as well.[24] These orders may be negotiated or issued unilaterally. If a responsible party fails without sufficient cause to properly clean up a site, and EPA is forced to do so, EPA may seek punitive damages in an amount equal to three times the cost of cleanup.[25]

CERCLA casts a wide net of liability. The responsible parties who are potentially liable for cleanup costs (plus natural resource damages in some cases and the cost of health assessments carried out under the act) include:

1. Any person who owns or operates a site where hazardous substances have been released;

2. Any person who owned or operated a site in the past when hazardous substances were disposed;

3. Any person who transported hazardous substances to a site which he/she chose; and

4. Any person who arranged for the disposal or transportation for disposal of hazardous substances (commonly referred to as generator liability).[26]

Contractors, therefore, may become potentially responsible parties (“PRPs”) if they are deemed to have been operators due to their control over activities at that site.[27] PRPs may be liable even if the EPA is not the party that cleans up the site. States may also recover their response costs, if they are not inconsistent with the National Contingency Plan,[28] and any other person may recover any costs incurred that are consistent with the National Contingency Plan.[29]

Liability under CERCLA is retroactive. The date on which disposal took place is not a relevant factor. Liability is also strict. A party may be held liable even if its actions were legal at the time of disposal and even if the party exercised due care. Furthermore, CERCLA liability is joint and several, which means that any responsible party may be held liable for the entire cost of cleanup (unless the defendants can demonstrate that the environmental “harm” at the site is divisible among them).[30] Responsible parties, however, may seek contribution from other responsible parties.[31]

A vitally important part of the CERCLA program is the requirement that persons in charge of a structure or site must immediately notify the National Response Center (1-800-424-8802 – located at the headquarters of the U.S. Coast Guard) of any release of a “reportable quantity” of a hazardous substance in any 24 hour period as soon as it is discovered.[32] The list of reportable quantities (which range from 1 to 5,000 pounds) is found at 40 C.F.R. Part 302. Penalties for failing to immediately notify the government of such releases are potentially severe, ranging from administrative penalties to civil penalties assessed by federal district courts[33] to criminal actions.[34]

B. RCRA

RCRA governs the disposal of hazardous waste throughout the United States. RCRA creates a control and tracking scheme that applies to hazardous waste from its generation to disposal. RCRA also authorizes the EPA to compel the cleanup of sites if the past or present handling, storage, treatment, transportation, or disposal of hazardous waste presents a threat of imminent and substantial danger to human health or the environment.[35] The EPA or authorized states may issue corrective action orders to remedy releases caused by leaking underground storage tanks containing gasoline or hazardous substances not governed as hazardous waste under RCRA. Should the EPA or a state incur cleanup costs, the owner or operator of the tank is liable for those costs as well as any costs stemming from a government exposure assessment.[36]

As is the case with many environmental statutes, RCRA contains a citizen suit provision. In addition to authorizing “private attorneys’ general” actions against those who breach permits and other regulatory requirements, this citizen suit provision permits private citizens to obtain injunctive relief to abate an activity that is creating an imminent hazard and to require any necessary remedial action. Such liability may be imposed on any person “who has contributed or who is contributing” to the hazard.[37]

C. Clean Air Act and OSHA (Asbestos)

Various federal requirements exist for both construction and renovation work that may disturb asbestos and for its removal. First, OSHA has established detailed worker protection measure for activities involving the demolition or renovation of structures containing asbestos, the installation of asbestos-containing materials, or the removal or encapsulation of asbestos in a structure.[38] Second, under the CAA, the EPA has promulgated regulations applying to work practices, handling, and disposal of asbestos. These regulations explicitly apply to the demolition or renovation of structures containing asbestos. They require notice before any friable asbestos is removed or otherwise disturbed and set forth detailed instructions on removal and disposal.[39] Of course, CERCLA will apply to any site at which asbestos has been improperly dumped.

D. Clean Water Act (Wetlands/Dredge and Fill)

Section 404 of the Clean Water Act restricts the placement of dredged or fill material into “waters of the United States,”[40] a term which is defined by regulation to include “wetlands.”[41] Wetlands are not limited to coastal areas since fresh water systems are included. Wetlands are defined by the regulations as “those areas that are inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and that under normal circumstances do support, a prevalence of vegetation typically adapted for life in saturated conditions. Wetlands generally include swamps, marshes, bogs and similar areas.”[42] It may not be easy to determine whether property to be developed contains a wetland subject to Clean Water Act jurisdiction, and, if so, what the boundaries of it are. The primary factors are hydrology, vegetation, and soils, as well as its adjacency or other relationship to a navigable stream or water.[43] The U.S. Army Corps of Engineers will make jurisdictional determinations upon application.

Anyone proposing to discharge dredged or fill material into a wetland or any water of the United States must first obtain a section 404 permit.[44] Such permits are issued by the U.S. Army Corps of Engineers but are subject to an EPA veto.[45] Furthermore, the Corps must comply with the National Environmental Policy Act[46] (“NEPA”) before issuing a section 404 permit. In some cases, therefore, an environmental impact statement (“EIS”) may have to be prepared. An EIS is required for “major federal actions significantly affecting the quality of the human environment.”[47] In most cases, however, the Corps will satisfy NEPA by doing an environmental assessment (“EA”) followed by the issuance of a finding of no significant impact (“FNSI”), which is a quicker and less expensive process than the production of a full-blown EIS.

Certain construction projects involving minimal wetland disturbance may avoid the necessity of receiving an individual section 404 permit if they meet the requirements of general permits which have been issued on a national basis. Coastal areas and wetlands along the coast are subject to additional regulation under the Coastal Zone Management Act[48] and its state counterparts. Many development activities in these coastal areas are subject to additional permitting or approval requirements.

E. Clean Water Act and Oil Pollution Act (Oil Spills)

The federal approach to oil spills strongly resembles CERCLA. Section 311 of the Clean Water Act authorizes the federal government (the EPA or the U.S. Coast Guard) to direct, monitor, or even clean up smaller spills and to either direct or clean up spills that pose a substantial threat to public health or welfare.[49] The Oil Pollution Act, in turn, subjects the responsible parties to strict, joint and several liability for the removal costs as well as damages to natural resources, real or personal property, lost revenues, and lost profits.[50] Any spill of oil into waters of the United States or adjoining shorelines in quantities that are harmful (the “sheen” test applies) are also subject to administrative penalties, civil penalties,[51] and even criminal prosecution.[52] Of utmost importance is the requirement that any person “in charge” of an onshore facility or vessel give immediate notice of a spill of a reportable quantity of oil (creating a sheen) to the National Response Center (1-800-424-8802 – located at the headquarters of the U.S. Coast Guard).[53]

F. Endangered Species Act

Construction activities also may be regulated by the Endangered Species Act. Section 9 of the Act prohibits the “taking” of any endangered or threatened species,[54] and “take” is defined to mean “harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect.”[55] The term “harm”, in turn, is defined broadly to include “significant habitat modification or degradation where it actually kills or injures wildlife by significantly impairing essential behavioral patterns, including breeding, feeding, or sheltering.”[56] Incidental take permits may be obtained; however, the steps and conditions involved in obtaining such a permit are rather involved.[57] Penalties for violation of the Act can be severe. The federal government can assess administrative penalties, which are enforceable in district court; the federal government may undertake a criminal prosecution for knowing violations; and citizens may seek to enjoin anyone who is in violation of the Act.[58]

G. State Laws and Regulations

Every state has legislation and regulations which enable them to operate portions of the RCRA regulatory scheme. In addition, many states have enacted mini-Superfund statutes. Some states also have adopted laws that require provision or planning for the clean up of industrial sites before ownership can be transferred. A number of other states require sellers to disclose the presence of hazardous waste or hazardous substances to purchasers. Several states also have enacted “superlien” statutes, which give the state a first priority lien on contaminated property to cover the cost of a clean up.

H. Common Law Tort

A person responsible for contamination may become liable for third party claims under a variety of common law theories, including the following:

a. Trespass

When pollutants physically invade the property of another, liability may be premised on a theory of trespass.[59]

b. Negligence

A negligence action may arise with respect to environmental injuries when the plaintiff can prove that one’s actions or inactions were below legal standards, industry standards, or any other reasonable standard of care. Although a toxic tort negligence action is subject to ordinary negligence analysis, the plaintiff’s burden of proof may be heightened by the difficulty of showing that a particular pollutant caused the health or property damage in question.

c. Nuisance

Private nuisance actions require a showing of significant injury. In addition, the interference with one’s property rights must be both intentional and unreasonable. While such showings may result in the award of pecuniary relief, a balancing test will be engaged in before a court issues an injunction to stop the polluting activity. This balancing test will pit the environmental damage against the value of the polluting activity.

A public nuisance, on the other hand, is an unreasonable interference with a right common to the general public.”[60] In deciding whether an activity is unreasonable, the Restatement of Torts (Second) directs courts to consider whether the conduct: (1) involves a significant interference with public health; (2) is illegal; or (3) is of a continuing nature or has produced a long-lasting impact on the public right that the defendant has reason to know will be significant.

d. Strict Liability

Damages arising from abnormally dangerous conduct or activities may give rise to strict liability; in other words, liability without a showing of fault.[61]

III. Anticipating and Providing for Possible Environmental Issues

A. Contract Rights and Remedies

In a perfect world, parties to a construction contract would identify any and all potential environmental issues that could possibly arise during each and every phase of a construction project. Then, a seasoned team of business professionals (owners, developers, and contractors), financial lenders, lawyers, risk managers, and insurance representatives, to name a few, would roll up their sleeves and meticulously address and negotiate each issue. Finally, the team would reach a consensus and create the consummate construction contract. This never happens – it is impracticable. In fact, the “consummate construction contract” is a nothing more than a fairy tale.

In reality, however, many opportunities exist for participants in a construction project to anticipate and provide for potential environmental issues and hazards before entering into a contract to perform work. Some of these opportunities include preliminary site investigations; review of geotechnical reports, prior land use and property ownership; negotiation of contract terms; and the purchase of insurance. Contractors should seek proactively as much information about a project site as possible from both the owner and from public records.

Generally, participants in a construction project have some ability to negotiate contractual provisions that allocate environmental risks. Ideally, risks should be allocated to the party most willing or best suited to bear those risks. In transactions for the sale and financing of property, it is commonplace for the buyer and seller or lender and borrower to negotiate vigorously over environmental representations and warranties, covenants, and indemnities. Each party endeavors to apportion the risk of future environmental liabilities to the other, which may result in a “fair” risk allocation. Even if acceptable warranties, covenants, and indemnifications are negotiated, each party should keep in mind that they are only as good as the bound party’s financial capacity to pay in the event that they are breached, and the same is true of covenants that allow the purchaser or lender to demand in certain instances that the seller or borrower clean up the property. In addition to negotiating contract provisions to address environmental issues, a detailed scope of work may provide contractors with another layer of limited protection when faced with unexpected environmental issues on construction projects.[62]

When one of the goals of negotiating a construction contract is to limit liability for potential environmental hazards (planned or unplanned) during the course of a construction project, there a several key provisions that the parties should consider, including, but not limited to, hazardous conditions, indemnification, differing site conditions, and changes. The following is a brief discussion of select provisions that may be used to limit liability (shift the risk to one party or the other) for environmental hazards encountered (planned or unplanned) during the course of a construction project.

a. Hazardous Conditions

Hazardous conditions on a construction site may take many forms ranging from dust to toxic substances with a myriad of conditions in between. Some of the most common hazardous conditions include: underground storage tanks, contaminated soil, containers holding hazardous substances or residue, asbestos, old equipment filled with PCBs, and contaminated groundwater. As previously discussed, addressing the possibility of a hazardous condition during contract negotiations is the best way to avoid being placed in the precarious situation of having to “debate, mitigate, or wait.” Below is an example of a hazardous substance clause that may be considered in a cost plus environmental management contract as opposed to a traditional fixed price construction contract:

Hazardous Substances and Conditions. Owner agrees to advise Contractor of all known hazardous substances and conditions existing on or near a project site that present a potential danger to health, the environment or Contractor equipment, if any. Should Contractor encounter conditions on or near any project site which were not reasonably anticipated and/or which increase the risk involved in Contractor’s performance of the services, upon notice to Owner, Contractor, in its sole discretion, may (i) continue to perform the services to completion, (ii) suspend activities and prepare a change order request prior to proceeding or (iii) terminate all services. Such termination shall not be a breach of this Agreement by Contractor. In the event that the unanticipated condition is the presence of any hazardous substance or other condition that presents a potential danger to health, safety, the environment or Contractor’s equipment, Contractor has no obligation to assume, and does not assume, control of or responsibility for the project site or the person(s) in charge of the project site, or responsibility to report to appropriate federal, state or local agencies, except as required by law. Owner acknowledges that Contractor may be required to provide such notice or to make such disclosures if Owner fails to do so and agrees to hold Contractor harmless therefore.

Hazardous conditions clauses are commonly found in form construction contracts such as those promulgated by The American Institute of Architects (“AIA”). Below are samples of some of the newly revised clauses found in the 2007 version of AIA Document A201:

The Contractor is responsible for compliance with any requirements included within the Contract Documents regarding hazardous materials. If the Contractor encounters a hazardous material or substance not addressed in the Contract Documents, and if reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons resulting from a material or substance, including but not limited to asbestos or polychlorinated biphenyl (PCB), encountered on the site by the Contractor, the Contractor shall, upon recognizing the condition, immediately stop Work in the affected area and report the condition to the Owner and Architect in writing.[63]

Upon giving notice of hazardous materials encountered on a construction site that were not contemplated in the AIA Contract Documents, the burden of taking the next steps shifts to the owner, as set forth in Article 10.3.2:

Upon receipt of the Contractor’s written notice, the Owner shall obtain the services of a licensed laboratory to verify the presence or absence of the material or substance reported by the Contractor and, in the event such material or substance is found to be present, to cause it to be rendered harmless…When the material or substance has been rendered harmless, Work in the affected area shall resume upon written agreement of the Owner and Contractor. By Change Order, the Contract Time shall be extended appropriately and the Contract Sum shall be increased in the amount of the Contractor’s reasonable additional costs of shut-down, delay and start-up.[64]

If the contractor suspects the possibility of hazardous conditions on the construction site, negotiating contract clauses that address hazardous substances and hazardous conditions is recommended.

b. Indemnification

In addition to contract clauses specifically addressing hazardous substances and conditions, another well-known and widely used risk-shifting clause found in construction contracts is an indemnity clause. Parties to a construction contract should carefully review indemnity provisions, especially if there is potential for exposure to liability for environmental issues on a project. Standard construction contract indemnification clauses, however, generally do not fully cover environmental risks. A sample of a general indemnification clause is as follows:

Indemnity. Contractor hereby agrees to indemnify and hold harmless Owner, its officers, directors, employees, and agents from any and all liability, loss, penalty and cost, including cost of defense, which Owner may incur, be obligated to incur, or to which it may be subjected, with respect to: (i) destruction of or damage to property of any kind and by whomsoever owned; (ii) any violation of any statute, law, or ordinance or any provision of this Agreement arising out of or related to, or in any way associated with the performance of any work or services covered by this Agreement, to the extent caused, occasioned, or contributed to by acts or omissions, whether negligent or not, of Contractor, its agents, servants or employees, or by acts or omissions, whether negligent or not, of any of the subcontractors of Contractor or agents, servants, or employees of any such subcontractor. Contractor agrees, upon receipt of notice from Owner, to assume and conduct at its sole expense the defense of Owner against any such claim.

An indemnification clause that embraces environmental issues may be warranted on some projects. An example of such a clause, running in favor of the contractor, is as follows:

Environmental Indemnity. To the maximum extent permitted by applicable law and for additional consideration of $10.00 from Contractor, the receipt and sufficiency of which is hereby acknowledged, Owner (i) hereby releases Contractor, its parent, subsidiaries, affiliates and subcontractors, including their respective officers, directors, employees, principals, partners, agents, successors and assigns (“Indemnitees”) from and against all claims, judicial and administrative proceedings, demands, damages, liabilities, losses, settlements, judgments, awards, penalties, costs and expenses, including reasonable attorneys’ fees and experts’ fees related to or arising out of exposure to or release of asbestos, toxic or any hazardous constituents at or from the project site, before, during or after performance of Contractor’s services (“Environmental Liabilities”) and (ii) shall defend, indemnify and hold Indemnitees harmless from and against all Environmental Liabilities, except to the extent such Environmental Liabilities are determined to have been caused solely by the negligence, or the willful violation of any applicable environmental law by Contractor.

To maximize protection and avoid disputes related to the extent of protection provided by an indemnification provision, the contractual language should be explicit to demonstrate the parties’ intent to assign or shift the risk of environmental liabilities. This is particularly critical with regard to indemnification agreements between parties related to hazardous waste cleanups under CERCLA.[65]

Contractors providing services to the United States Government should be aware of Public Law 85-804, the National Defense Contracts Act,[66] which provides a means by which the United States can indemnify contractors against “unusually hazardous or nuclear” risks when such an action would facilitate national defense. The extent of protection afforded contractors for environmental liability is unclear. Further details and application of Public Law 85-804 are beyond the scope of this paper.[67]

c. Differing Site Conditions

Typically, environmental issues on a general construction project (setting aside environmental remediation projects and the like), are hidden from plain view. Unexpected subsurface conditions, contamination, or the existence of other hazardous substances on a site (above or below ground) may increase the time and cost for completion of the project.[68] Parties to construction contracts may be able to rely upon the procedures set forth in a differing site clause to address situations of this nature. Below is an example of such a clause:

Concealed or Unknown Conditions. If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature, that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or in time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15 [Claims and Disputes].[69]

In essence, owners attempt to balance the cost of extensive site investigations and research against the risk of little or no site investigation and research at all. Theoretically, if a construction contract contains a differing site conditions clause, an owner will receive lower construction bids, and, in turn, the contractor is afforded a level of protection against the unexpected conditions. In theory, the owner will pay no more than if it knew about the conditions before breaking ground. The use of a differing site conditions clause does not always guarantee this to be the case. In fact, significant delays, disruption, and increased costs may be encountered on a project governed by a differing site condition clause. It is, however, commonly used for the purpose of shifting liability for unexpected conditions on construction projects. A differing site clause may provide a contractor with a means and method for dealing with liability for unanticipated environmental substances, hazards, or issues encountered on a project; however, the extent to which a differing site condition clause may apply likely will depend upon the presence or absence of other contract clauses, including, but not limited to, clauses relating to compliance with laws and regulations, site management and control, guarantees, and warranties.

d. Changes

Most construction projects undergo changes after the contract is executed. Where the volume or nature of work, the time for performance, or the manner of performance differs from the understanding in the original contract, a change may result. Changes occur for multitudes of reasons – value engineering, re-design by an architect or major equipment supplier, code compliance, force majeure events, differing site conditions, delay by other contractors or suppliers – the possibilities are limitless. Certainly, the discovery of a hazardous material on a project site may result in a contract change.

In the traditional design-bid-build context, a construction bid is essentially an offer to perform a certain scope of work for a certain amount of money. The scope of work includes not only some understanding of the breadth and nature of the work, but also an understanding as to timing, the way in which the work will be performed, and other factors. A changes clause provides the parties with a means and method for changing the original scope and adjusting the contract price and schedule to reflect the change.

In federal contracts, the formal changes procedure begins with a written order from the contracting officer.[70] The contractor must then price the cost of the change, calculate any additional time needed, and submit his request for an equitable adjustment to the contracting officer. In the event the parties cannot agree on the amount of the contract adjustment, the Government may direct the contractor to perform the changed work and defer resolution of price and time.

Private construction contracts provide the parties with additional flexibility in developing a change procedure. The provisions in AIA Standard Form A201 General Conditions of the Contract for Construction regarding the origination of changes are similar, however, to the federal procedures described above. Article 15.1.1 of AIA Standard Form A201 provides, in part:

A Claim is a demand or assertion by one of the parties seeking, as a matter of right, payment of money, or other relief with respect to the terms of the Contract. The term “Claim” also includes other disputes and matters in questions between the Owner and Contractor arising out of or relating to the Contract. The responsibility to substantiate Claims shall rest with the party making the Claim.

For a changes claim to be considered timely, it must be submitted within twenty-one days of the underlying event or from the time when the party submitting the claim learns of it.[71] If the parties agree on the fact and price of the change, the owner, architect/engineer (“A/E”), and contractor sign a change order.[72] The drafters of the AIA documents recognize that a situation involving an emergency may require the parties to a contract to act differently with respect to changes. Depending upon the environmental issue encountered on the construction site, it may constitute an emergency. In the event it does, Article 10.4, of AIA Document A201 states:

In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury or loss. Additional compensation or extension of time claimed by the Contractor on account of the emergency shall be determined in Article 15 [Claims and Disputes] and Article 7 [Changes in the Work].

Contract language designed to allocate risk for changed or unexpected conditions that may or may not constitute an emergency are essential to allocating risks associated with potential environmental issues that may arise on construction sites.

B. Insurance

In addition to considering contractual modifications, parties to a construction contract should evaluate their current insurance coverage and investigate new coverages that may be available. This is especially true if, after reviewing the scope of work, there appears to be a risk of damages for environmental substance, hazards, or other related issues. Insurance products for environmental and pollution risks vary in breadth of coverage, exclusions, and costs – each party should conduct a risk benefit analysis and carefully evaluate options prior to making a decision on each construction project – one size does not fit all. Moreover, parties to a construction contract should be aware that costs and liabilities associated with environmental hazards may not be covered by standard Comprehensive General Liability (“CGL”) policies.[73]

Many current policies include a pollution exclusion clause that deprives an insured of this type of coverage. In general, the costs associated with environmental losses fall into two broad categories: (1) the cost of defense and (2) liability for damages and cleanup. Upon discovering the existence of a situation that may result in such costs, businesses frequently find that their CGL policy is not as “comprehensive” as originally believed. A basic understanding of both the principles underlying insurance law and the particular portions of the standard CGL policy related to pollution will help a business to prepare for what is certain to be a battle with the insurance company.

In recent years, insurance companies have begun to offer expanded environmental insurance coverage through specialized environmental policies. Although many of these policies are relatively new and, in some cases, quite expensive, those attempting to address environmental risks should investigate the availability of these products. Among the emerging forms of coverage are policies directed at:

(a) Underground Storage Tanks;

(b) Closure/Post-Closure;