Soil Contamination: Lessons to be Learned

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John P. Nicolucci
Foster Swift Construction Law News
November 2008

FACTS

Two real estate agents (owners) formed a limited liability company to purchase vacant property. The owners intended to construct a building on the property to be used by their customers for both indoor and outdoor activities. The owners purchased the land from the city. The property consists of two parcels. One parcel formerly contained a school which had been demolished several years before. The abandoned school and its property had environmental issues, including asbestos, an underground storage tank and elevated levels of several soil contaminants including arsenic. The other parcel of land previously contained a railroad right-of-way and a main line railroad track. The track had not been used for a number of years and some of the track had been removed.

At the real estate purchase closing, the owners were provided with a copy of an environmental report indicating one or both of the parcels had prior contamination issues which had been addressed adequately. No one involved is able to locate this report. Prior to purchasing the property, the owners did not undertake any inspections of the property nor any environmental assessments of their own.

The owners hired a general contractor to oversee the construction of the building and the outside grounds.

The general contractor hired an excavating subcontractor to excavate the property for the building, a parking lot and a retention pond. Six months after the building was complete, the owners became aware of a soil contamination issue, elevated levels of arsenic, on the property. The owners hired an environmental consulting/ engineering company to formulate a soil contamination remediation plan.

The owners approved the remediation plan without first obtaining review and approval by the Michigan Department of Environmental Quality (MDEQ). The owners undertook the remediation plan which consisted of bringing in a layer of soil to cover the contaminated soil. The owners sought approval by the MDEQ after the plan was implemented. The MDEQ rejected the plan because it did not include a barrier between the clean fill soil and the contaminated soil.

The owners subsequently filed a lawsuit against the excavating subcontractor alleging the subcontractor brought contaminated soil onto the property from an adjoining property owned by the city which also previously contained a railroad line. The railroad slag used to create a berm for the tracks contained arsenic. The owners also filed a claim for arbitration against the general contractor seeking, among other claims, damages based upon the excavating subcontractor’s alleged negligence.

LESSONS TO BE LEARNED

City

Although not a party to the litigation or the arbitration proceeding, as the seller of the property, the city should maintain complete documentation (i.e. all reports) concerning the condition of the property prior to its sale.

The city should notify all potential buyers of potential soil contamination issues. Disclosure of known contaminants likely will prevent the city from potentially becoming a party to the lawsuit.

Owners

One or both of the owners had knowledge of the existence of the prior railroad and the former school, as well as contamination issues related to the demolition of the school. The owners should have undertaken inspections of the property before purchasing the property from the city. In addition, the owners should have undertaken an environmental assessment of the property before purchase to determine the condition of the property and the existence of any contaminants. Perhaps the cost of the inspections and environmental assessment could have been negotiated with the city.

Further, the owners should have checked with the MDEQ as to the history and current status of the property. Finally, the owners should have sought approval from the MDEQ before undertaking the due care plan which was later rejected by the MDEQ thereby causing additional unnecessary expenses.

Subcontractor

The subcontractor performed additional work at the request of the owners on the adjoining city property during construction. The owners later alleged that some of that work caused the soil contamination on the property. The subcontractor should have ensured that the scope of all of the work performed, either for the owners or for the general contractor, was clearly agreed upon by the parties in writing before performing the work. The subcontractor should have also inquired as to all environmental conditions of which both the owners and the general contractor were aware before commencing work. All known environmental issues should have been disclosed in writing before work was commenced. Lastly, the subcontractor should have documented its work by daily written reports, as well as digital photographs and videotape during its phase of the construction.

General Contractor

The general contractor should have asked for documentation from the owners verifying all known environmental conditions on the property before construction was undertaken.

The general contractor should have also, in conjunction with the owners, inquired into the history and status of the property with the MDEQ. The general contractor should have performed daily oversight of work on the project, including excavation and should require and review daily reports, photographs and videotape. Finally, the general contractor should insist upon written approval from the owners for each specific segment of the construction project upon its completion.

SUMMARY

The above facts resulted in costly and time consuming litigation involving both a civil lawsuit and an arbitration proceeding. All of the time and expenses related to the litigation could have been easily avoided if the city, the owners, general contractor, and subcontractor, had undertaken the steps recommended above. All parties to a construction contract should ensure that soil contamination issues are identified and addressed at an early stage. Failure to do so will likely result in costly and unnecessary litigation.