Chapter 13 - § 13.7 • ALLOCATION OF RISK: ADJUSTING CONTRACTUAL RELATIONSHIPS TO ALLOCATE ENVIRONMENTAL LIABILITIES

• Jurisdiction: Colorado

§ 13.7 • ALLOCATION OF RISK: ADJUSTING CONTRACTUAL RELATIONSHIPS TO ALLOCATE ENVIRONMENTAL LIABILITIES

The risks associated with an environmental incident at a construction site are uncertain but potentially substantial. The ultimate impact of these risks can be additional project costs, construction delays and cleanup costs, and liability associated with long-term disposal. The contractual relationships among the parties to a construction project govern the allocation of these risks among the parties.

Contract language is the primary source of such risk allocation, but many construction contracts do not contemplate potential liability for environmental incidents. Those that do, for the most part, address only a few risks, such as those associated with PCBs or asbestos. Well-drafted contract provisions should define and allocate most of the risks before an environmental problem arises so that the parties are clear on their relative rights and responsibilities when an incident occurs. Such provisions may also reduce dispute resolution costs after the project has been completed.

§ 13.7.1-Owners

The owner's objectives in a construction project are to design a facility for a specific property and have it constructed within a specific time frame at a known cost. Many business decisions are based upon these parameters. If the objectives are not met because of an environmental incident, the owner's business can be severely disrupted. For example, the discovery of a hazardous substance during excavation for a major structure in Colorado would require that all work in the affected area be stopped, site evaluations made, and remediation performed, all, potentially, under the auspices of the CDPHE and, perhaps, the EPA. This takes time. Work on other parts of the site, even if not stopped, will be affected, and the Critical Path Method (CPM) schedule would likely change dramatically.

The effect of this upon an owner can be devastating. Overall project costs can increase, the project schedule can be delayed, work sequencing can be changed, and the ultimate use of the structure can be postponed, perhaps requiring the use of other facilities and even loss of business.

Under most environmental statutes, the owner of a site at which an environmental incident occurs is one of the primary potentially responsible parties for remediation liability. The value of the property itself will probably be affected as well.

The owner should recognize these issues from the very beginning of the project. There is a great opportunity to do appropriate investigation during property acquisition. The purchase/sale contract for real property should require environmental review and provide for contingencies if problems are discovered. That way, environmental problems are not as likely to come up during construction.

During the design process, an owner can require warranties and indemnification from the general contractor to ensure compliance with environmental regulations during construction and after completion. If the potential risk of environmental problems is high enough, the owner should retain an environmental consultant. In addition, pollution insurance may be available to cover a variety of risks.

§ 13.7.2-Design Professionals

Although historically insulated from liability in construction disputes between owners and contractors, design professionals are no longer protected. In most instances, a design professional has only a common law duty to exercise the same degree of skill and care as would other design professionals under similar circumstances. However, when it comes to environmental risk, all bets may be off.

The greatest exposure of design professionals to environmental risk is under...