Unexpected Hazardous Materials—What Do You Do When the Owner Says "Keep
Going"?
April 2005
Most of us know what is supposed to happen
when a contractor encounters unexpected hazardous conditions at the site. You:
(1) immediately stop work, (2) notify the owner, (3) wait for the owner to remediate
the problem, and then (4) resume work when the owner says that the conditions
are remediated. But what happens if there is a dispute over whether the materials
are in fact hazardous or have been properly remediated? A recent design-build
case gives us a sense of the challenges.
by Michael
Loulakis
Wickwire Gavin,
P.C.
Empire Energy Management Systems, Inc. v Secretary
of the Air Force, 362 F3d 1343, 2004 U.S. App. LEXIS 5512 (Ct Appeals
Federal Circuit 2004), involved the appeal of a Board of Contract Appeals decision
holding that the government had properly default terminated the developer of
a power generation plant. The government terminated the developer because the
project failed to reach commercial operation within the time required by the
contract. The developer argued that its delays were excused by hazardous materials
encountered at the site. The appellate court affirmed the Board’s decision,
finding that the developer’s claimed environmental concerns were not an excuse
and that the delays were the fault of the developer.
Empire Energy Management Systems entered into a 25-year design-build-own-operate-maintain
contract with the Air Force for a cogeneration facility that was to provide
electricity, chilled water, hot water, and steam to MacDill Air Force Base (MacDill
AFB). Payment to Empire was based on utility charges paid by the Air Force over
the life of the contract. The contract allowed the Air Force to terminate Empire
for default if commercial operation was not achieved on or before August 27,
1993, or if Empire failed to "make progress, so as to endanger performance of
[the] contract." The contract required Empire to comply with all federal, state,
and local environmental and archeological laws and regulations, and contained
several standard contract clauses from the Federal Acquisition Regulations (FAR),
including the standard FAR default clause.
EPA Involvement
Shortly after breaking ground in February 1991, Empire stopped work because
of a dispute with its financer. On August 15, 1991, while the work was still
stopped, the U.S. Environmental Protection Agency (EPA) designated MacDill AFB
as a hazardous waste facility under the Resource Conservation and Recovery Act
(RCRA) and issued a permit that required the Air Force to conduct a RCRA Facility
Investigation (RFI) on several oil-water separator units, including one near
the site of Empire’s power plant. The permit also required the Air Force to
give notice to EPA as soon as possible of any planned physical alterations or
additions to the permitted facility.
Although Empire resumed work on May 4, 1992, it was not made aware of the
RFI until June 5, 1992. Prior to becoming aware of the RFI, Empire had discovered,
on May 15, 1992, some oil-based contaminants near the oil-separator unit located
on its site. As a result, it stopped work and requested a stop work order from
the Air Force on the grounds that it had encountered "an unknown quantity of
an environmentally hazardous substance on the project site."
The Air Force denied Empire’s request for a stop work order, but subsequently
hired Dames & Moore, an environmental contractor, to investigate the soil conditions
on Empire’s power plant site. On July 21, 1992, Dames & Moore began taking samples
throughout the plant site and tested for organic vapors, and ultimately issued
a report that the site complied with all applicable federal, state, and local
environmental laws and regulations and that the site was suitable to complete
construction of the power facility. This report was provided to Empire on August
28, 1992.
On September 3, 1992, Air Force officials met with an EPA representative
and provided her with the Dames & Moore report. Citing this report, the representative
wrote a letter on December 11, 1992, stating that the power generation site
did not need to be subject to the RCRA Facility Investigation. The Air Force
provided this letter to Empire on January 8, 1993, and directed Empire to return
to work. Empire refused, still believing that there were environmental issues
at the site.
The Air Force issued a cure notice to Empire on April 28, 1993, stating that
Empire’s failure to perform work was placing it in jeopardy of missing its required
completion dates. Empire responded to the cure notice on May 10, 1993, asserting
that it had continued performance of the contract by continuing its investigation
into the site’s "environmental status" and that "a fast track construction schedule
would enable Empire to achieve commercial operation on or before August 27,
1993."
Empire resumed work on May 24, 1993, but it remained substantially behind
schedule. Empire requested a schedule extension, which the Air Force refused.
The Air Force terminated the contract for default on September 1, 1993, stating
that Empire had failed to meet the contract’s termination date of August 27,
1993. Empire appealed this decision to the Board of Contract Appeals, and sought
to recover its costs of more than $30 million.
Board of Contract Appeals
The Board found that the Air Force was not justified in terminating Empire
because the August 27 completion date had passed, since the facts showed that
Empire was entitled to 53 days of excusable delay. However, the Board nevertheless
concluded that termination for default was proper given that Empire failed to
make sufficient progress on the work.
After examining the facts, the Board found that Empire had only completed
28 percent of the work as of the termination, and needed 154 additional days
to complete the project. Since there was "no reasonable likelihood Empire could
have met [Commercial Operation] with a 53-day extension," the Board concluded
that the Air Force had a reasonable basis for default termination of the contract
on September 1, 1993.
The Board also rejected Empire’s claims that it had been justified in refusing
to work on the site because of environmental concerns, believing that Empire
could not have had, and did not in fact have, any reasonable environmental concerns
that its action would create a material violation of environmental regulatory
requirements. After considering the evidence, the Board found that "construction
work could have been done on site without interfering with the RFI work" and
that "construction could have proceeded without violating the permit." The Board
stated:
- There is no evidence of any remediation at or near the [power generation]
site, no proof of actionable contamination and MacDill was never cited by
EPA for violations of any kind at the [power generation] site…. Thus, we
cannot find that the effluent from the [oil-water separator] contained actionable
contamination, i.e., matter that violated the environmental laws and regulations
of the United States or Florida.
It also concluded that Empire "was posturing when it stopped work" and that
Empire was attempting to establish grounds for a claim.
U.S. Court of Appeals
Empire fared no better in its appeal to the U.S. Court of Appeals for the
Federal Circuit. This court rejected Empire’s argument that it would have been
"flatly unlawful" for Empire to have commenced work before the Air Force notified
EPA of the construction activity and the EPA approved the work. If this were
the case, then Empire would have been entitled to a time extension of at least
217 days, which would have protected it from a termination. However, the RCRA
permit did not require EPA approval for any particular action by the Air Force—it
only required that the Air Force notify EPA of planned physical alterations,
which it had done on September 3, 1992. No legal authority was cited by Empire
for the proposition that EPA approval was required under a RCRA permit.
Empire’s next argument was that even if EPA approval was not required under
the permit, Empire could reasonably have insisted on it before beginning work,
since the contract required Empire to comply with all federal laws and regulations.
It claimed that possible environmental problems had been identified at the site,
including potential contamination of the soil, and that it risked having environmental
liability if it dispersed any contaminated soil during the course of grading
and filling the construction site. Under these circumstances, Empire argued
that it could reasonably insist on EPA approval before resuming work.
While the court agreed with Empire’s general views on possible environmental
liability, it found that "the mere assertion of a colorable claim by the contractor
(later found to be meritless) that its actions would violate some regulatory
requirement does not excuse performance." The court found substantial evidence
to support the Board’s findings that Empire’s environmental concerns were "pretextual"
and "unsubstantiated," and that Empire was "posturing" to take advantage of
the situation.
Empire next argued that "time was not of the essence" and that the Air Force
could not have terminated the contract because of Empire's delays since the
unique nature of this contract placed the risk of failure entirely upon the
contractor and its lender. It also argued that the liquidated damages clause
precluded a termination for default because of late completion. The court’s
rejection of these arguments was not only based on the language of the contract,
which specified that failure to meet commercial operation by August 27, 1993,
was a "condition of default," but also prior caselaw giving the government the
right to terminate for late completion even though the contract contained a
liquidated damages provision.
The court quickly disposed of Empire’s argument that the Air Force had used
an improper basis for terminating the contract:
- Our decisions have consistently approved default terminations where
the contracting officer’s ground for termination was not sustainable if
there was another existing ground for a default termination, regardless
of whether that ground was known to the contracting officer at the time
of the termination.
Given this, the Board had the right to justify the termination on the "failure
to make progress" language of the default clause if it reasonably concluded
that Empire would be unable to complete the project by the proper completion
date. Given the evidence, the appellate court agreed that there was no "reasonable
likelihood" that a 53-day time extension would have enabled Empire to achieve
commercial operation on time.
Conclusion
What are the lessons to be learned from this case? Perhaps the most important
is that a contractor cannot simply sit back and raise unsubstantiated fears
about a contamination problem. After the Dames & Moore report was issued, Empire
did not appear to have a basis for arguing that the work should remain suspended.
If it reasonably believed there was a problem, then perhaps it should have retained
its own experts, demanded indemnification, or taken similar measures that would
have placed the burden of the "next move" on the Air Force. Both the Federal
Appeals Court and the Board made it appear that Empire was playing games, and
that it had other reasons for stopping the work.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
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