February 26, 2020

By: Brian S. Wood, Partner, and Miranda R. Millerick, Associate, Smith, Currie & Hancock LLP

Indemnification Against Release/“Disposal” of Hazardous Materials

It is very common, if not nearly an industry standard, for construction contracts and subcontracts to contain provisions addressing the discovery of unanticipated hazardous materials. Many of these provisions require a contractor or subcontractor to discontinue work where hazardous materials are discovered. An example of such a clause can be found in the American Institute of Architects (AIA) Document A201 (2017), Section 10.3.1, which states in part:

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 notify the Owner and Architect of the condition.

A similar clause in ConsensusDocs does not require the contractor to stop work, but provides that the “Contractor shall not be obligated to commence or continue work until any Hazardous Material discovered at the Work site has been removed, rendered or determined to be harmless by the Owner as certified by an independent testing laboratory and approved by the appropriate government agency.”

While these types of clauses afford some level of protection to the contractor or subcontractor, alone they do not address:

· Liability for releases or discharges of hazardous materials occurring before materials are identified as hazardous and/or indemnification against claims asserted by third parties for the release of hazardous materials.

· The exposure of the contractor’s or subcontractor’s employees to such hazardous materials.

· The effect of hazardous materials on the contractor’s or subcontractor’s ability to perform work.

· Entitlement for delays caused by the suspension of work or for costs associated with changes caused by the presence of hazardous materials.

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” or “Superfund”) imposes significant liability for the release or disposal of hazardous materials. CERCLA defines “disposal” to include the:

discharge, deposit, injection, dumping, spilling, leaking, or placing of any solid waste or hazardous waste into or on any land or water so that such solid waste or hazardous waste or any constituent thereof may enter the environment or be emitted into the air or discharged into any waters, including ground waters.

A 1992 decision of a federal appeals court in the case, Kaiser Aluminum & Chemical Corp. v. Catellus Development Corp., 976 F.2d 1338 (9th Cir. 1992), applied an expansive interpretation of “disposal.” There, the court held a contractor liable under CERCLA as an “operator” of a facility and disposer and “transporter” of hazardous materials, reasoning that the contractor had transported and disposed of the materials by virtue of handling and moving soils on the construction site. The contractor operated the “facility” (jobsite) because the contractor “had authority to control the cause of the contamination at the time the hazardous substances were released into the environment.” In 1996, the United States Court of Appeals for the Eleventh Circuit applied the same reasoning to hold that “‘disposal’ may occur when a party disperses contaminated soil during the course of grading and filling a construction site.” Redwing Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489, 1511¬-12 (11th Cir.1996). In 2011, a federal district court held that disposals are not limited to the initial release or dispersal of hazardous materials, “but instead include times when hazardous materials are moved or dispersed,” as work that “redistributed the soil … spread the contamination on the Site.” Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.Supp.2d 431 (D. S.C. 2011).

As construction contractors can inadvertently release and disperse hazardous materials, whether by uncovering or disturbing such materials in existing structures, by drilling/excavating subsurface materials, or by using technologies that displace soils or otherwise produce spoils, indemnification for such unwitting releases is critical. While some form contract and subcontract documents (such as produced by AIA and ConsensusDocs) contain clauses calling for the owner to indemnify the contractor for hazardous materials discovered on site, the majority of contracts and subcontracts do not. In the absence of express owner indemnification for hazardous materials, general indemnification clauses typically found in contracts and subcontracts would govern claims arising from hazardous materials. These general indemnity clauses commonly require a contractor to hold the owner harmless from and against claims arising from or relating to the contractor’s work. In other words, contractors and subcontractors risk having to indemnify the owner (and contractor, if a sub¬contractor) from and against claims, including remediation costs, fines and penalties imposed by CERCLA and other environmental laws, arising from the release or “disposal” of hazardous materials, to the extent such releases arise from or are related to the contractor’s or subcontractor’s work.

While a contractor cannot contract away its liability to the government under environmental laws, a contractor is free to seek protection from third parties, including an owner, for such liability. Thus, a contractor or subcontractor is well advised to insist on indemnification for hazardous material claims and damages. A clause incorporating indemnification could also address entitlement to equitable adjustments to the contract or subcontract for impacts caused by the presence of unanticipated hazardous materials. If the work may become impossible or impracticable due to the presence of hazardous materials (e.g., soil-mixing or grouting affected by petrochemicals/hydrocarbons), a clause might be included to specifically and explicitly recognize changes caused by hazardous materials as “cardinal” changes or to otherwise expressly allow the contractor or subcontractor to terminate the contract/subcontract for convenience in such situations.

The takeaway: common contractual clauses addressing the discovery of unanticipated hazardous materials typically do not adequately protect contractors and subcontractors from the impacts of such conditions. Contractors and subcontractors should be aware of liability under environmental laws and consider other possible impacts caused by such materials and seek comprehensive protective language in contracts and subcontracts.

An original version of this article (since modified for this publication) was published in the Jan/Feb 2020 edition of Deep Foundations, the magazine of The Deep Foundations Institute, www.dfi.org. Reproduced with permission.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.