Lessons Learned – Environmental Consultants’ Limits of Liability

August 24th, 2014 by Geoffrey di Mauro Leave a reply »

31 March 2014

Recently, a consultant delivered a phase I environmental site assessment (“Phase I”) to a lender client which included a limit of liability of the lesser of $50,000 or the value of the Phase I assessment contract. For a number of reasons, clients should avoid accepting contracts with such limits of liability, which limits are not in the clients’ best interest and may easily be negotiated to a much higher level, often at no charge.

While the Phase I did meet the basic ASTM E1527-05 due diligence standards, it was missing certain elements that the client requires in Phase I’s, including visual examination of structures for mold, asbestos containing materials, emergency power generators, elevators and onsite/adjacent product pipelines, among other things. This type of situation may be avoided if the consultant is following a scope of work included in a specifically tailored environmental Master Services Agreement (“MSA”).

In this particular situation, a loan officer of the client ordered a Phase I from an environmental consulting firm which was somewhat unfamiliar with the client’s typical scope of work requirements, since that consultant did work for the client rather infrequently. Therefore, the consultant’s office was unaware of the usual practice of other consultants providing an expanded/additional set of elements in Phase I reports for this client. The Phase I had to be returned to the consultant for revisions and updating, which delayed the final report. As indicated above, one way to prevent inadequate report deliverables is to use an MSA with every consultant, in order to provide a uniform product platform from the same scope of work.

Many lenders have a number of service providers on pre-approved bank vendor lists. These lists identify service providers which the lenders feel provide acceptable levels of service, availability and pricing for products required by the lenders. For example, it is not uncommon for a lender to have 4-7 environmental consultants on a pre-approved vendor list. These consultants may have different geographic coverage capabilities, pricing structures or average turn around times. However, what they should not have are varied Phase I products. The client needs to know that a Phase I will cover the same issues and elements no matter which consultant is selected.

An MSA provides a way for the client to ensure uniformity of Phase I (or other specified) report deliverables no matter which consultant is retained. The MSA would include a specific scope of work which sets forth all the elements expected by the client, including the typical Phase I elements. The MSA scope of work can also, and often does, include some additional elements, including such things as mold, asbestos containing materials, emergency power generators, elevators and onsite/adjacent product pipelines. These are elements that are beyond the scope of the ASTM E 1527-05 scope, but if not identified during pre-loan or pre-purchase due diligence, may lead to significant unexpected and avoidable delays, costs and expenses.

The MSA also allows the client to require items such as specific recommendations on further action, like whether additional investigation or Phase II testing is appropriate (a Phase I done solely to current ASTM E 1527-05 standards only requires a environmental conclusion, as to whether there are or are not Recognized Environmental Conditions impairing a property; it does not require that a consultant make a recommendation on a further course of action).

The MSA also ensures that all consultants are operating on the same contractual basis, such as similar liability requirements, professional liability coverage and amounts, project staffing criteria, delay penalties and so forth. Finally, having an executed and operable MSA gives lenders/clients the right to have a non-conforming Phase I (or other covered) deliverable updated and corrected at the consultant’s expense. As an added consideration, lenders only have to create a single model or template MSA, since the idea is to have all parties agree to uniform terms and conditions, which does not happen if lenders execute standard General Terms prepared by individual consultant groups. Therefore, it is both prudent and efficient for clients to consider implementing MSAs in situations were clients are ordering multiple, standard deliverables from a class of service provider.