Effective, comprehensive environmental due diligence is critical to the success of a transaction. Failure to adequately assess the environmental condition of a target company or property not only jeopardizes the future business goals that motivated the transaction in the first place, but can also expose the acquiring entity to significant environmental liabilities. Because of the role played by the environmental consultant in environmental due diligence, it is imperative that the consultant be selected carefully and that the contractual arrangement with the consultant be structured with equal care. Our purpose in writing this article is to offer some observations concerning both issues.
1. The Importance of Trust: In any sophisticated transaction a triangular relationship is formed by the acquirer, the environmental consultant, and the acquirer's counsel (we'll return to this relationship later in this article). At the top of the triangle sits the client, supported, on each side respectively, by the consultant and counsel. For ease of reference, throughout this article we refer to the three as "consultant," "counsel" and "client." The consultant and counsel have their own respective roles to play in the relationship. While there is inevitably overlap between the two support functions—and this overlap can cause friction between the two—each must have a zone of autonomy for a truly beneficial relationship to exist. Put simply: the consultant must accept, in certain areas, the advice of counsel and vice versa. Experienced environmental counsel can, and should, offer opinions and advice on technical issues, but it cannot micromanage or second-guess the consultant's professional judgment. Such an intrusion can destabilize the triangular structure to the ultimate detriment of the client. Accordingly, both the client and counsel must trust the ability and integrity of the consultant. For this reason, we encourage clients to conduct almost as robust an investigation into prospective environmental consultants as they conduct regarding the target company or property. From our perspective, when we refer consultants, we select names from a short list of people with whom we have worked and from whom we have received quality product.
2. Establishing an Institutional Relationship: Some clients (such as large-scale convenience store operators, commercial developers, or banks engaged in expanding their branch platform) are in businesses that involve multiple acquisitions. We encourage clients like this to establish a master service agreement relationship with a single or small group of consultants that allows the consultant to complete multiple projects. We have found that an institutional relationship, as opposed to having each consultant work on only one project, has multiple benefits. Each client has its own risk tolerance and particularized preferences regarding the performance of professional services. The more opportunities a consultant has to work with a particular client, the more that consultant can tailor its services to that client. This familiarity leads to smoother and more efficient communication. It is also true that consultants often treat institutional clients differently than one-and-out clients because the consultant's goal becomes not only performing high quality services on a particular job, but also maintaining a profitable, long-term relationship. In the unfortunate event that a mistake is made during the environmental investigation, an institutional consultant is more likely to step forward, accept responsibility for the error, and work proactively and collaboratively with the client to address the consequences of that error.
3. "Boots on the Ground": The former Speaker of the House of Representatives, Tip O'Neill, once quipped: "all politics is local." The same can, at least to some extent, be said for environmental consulting. It is not difficult to find a consultant who can apply accurately the ASTM Phase I standard or correctly interpret soil samples gathered and analyzed as part of a Phase II limited site investigation. This objective analysis is unquestionably important and we do not mean to minimize or belittle it. However, the consultant's advice truly adds value where it sheds light on the nuances of that information. For example, the consultant may observe that changes within the state environmental agency have led to more aggressive delineation requirements, or note that elevated levels of a particular chemical are being taken more seriously by the agency because of an ongoing dispute with the EPA over a superfund site, or that the assignment of a particular state employee to a leaking underground storage tank site may mean that the site will be subject to far more significant scrutiny because of the diligence of that particular person. One area where a knowledgeable, local consultant can help is in providing input on precisely how long it will take for a regulatory agency to do something and what might be done to move things along more quickly. Often, particularly in smaller states, an out-of-state consultant cannot provide this type of help.
4. Candor and Willingness to Offer Opinions: Consultants, like lawyers, are risk-averse. For this reason, they generally seek to limit their advice to technical conclusions based upon objective data obtained during their investigation of the property. Many consultants are reticent to answer broad, subjective questions such as "how much do you think a remediation would cost" or "how significant is the problem" (these are, admittedly, essentially the same question). In many instances, however, it is precisely these questions a client needs to have answered. And, more often than not, the client implicitly understands that the consultant's answer is qualified and represents the consultant's best professional judgment based upon expertise and experience. Too many consultants retreat into technical jargon, rather than endeavoring to clearly and concisely answer the question in front of them. In interviewing prospective consultants, one thing we look for is willingness to answer the "big questions," even if those answers are followed by qualifications and limitations.
5. Flexibility: An ideal consultant is flexible on various aspects of the consultant/client relationship. Often, this can be seen from the outset of the relationship, when the consultant provides a scope of work (SOW) and terms and conditions (T&C) to the prospective client. Most consultants either expressly or implicitly present the T&C as "boiler plate" to be used without change by every client. As we discuss below, we advise clients to review the T&C and propose changes where appropriate. A consultant who refuses to even consider such alterations—and some do—is not likely to be a consultant willing to exhibit flexibility later in the relationship. Always remember that environmental consulting work is equal parts art and science and that a consultant can, at least to some extent, tailor its work-product to meet the needs of its client. Complete, un-bending rigidity, even if cloaked in devotion to the objective mandates of the scientific method, is not necessarily beneficial to the client's long-term, strategic goals. The T&C negotiation process can thus be another aspect of carefully vetting potential consultants.
II. Signing the Right Consultant Contract
1. Confidentiality: It is amazing how many consulting agreements do not include a basic confidentiality provision binding the consultant. In particular, the consultant should agree that it will not (a) use information concerning work it did for the client without the client's consent, and (b) submit information obtained during the due diligence to any government regulatory authority without the client's consent. This latter point can be important because some consultants believe that they have an independent obligation, as an environmental professional, to report certain information to the government. If this issue arises after an agreement has been signed without a confidentiality provision, it can be difficult for the client to stop the consultant from submitting the report. It is much better to have that particular discussion with the consultant before the contract is signed and before any work is performed. There are also instances where the government might seek information from an environmental consultant about work it has performed for the client. To avoid the dilemma of having to choose between defying the government or breaching the contract, the consultant will ordinarily request a contractual right to disclose the information. Such a provision is not uncommon and the client will ordinarily respond by seeking a right to notification along with an opportunity to challenge the government's right to disclosure. Obviously—and this is true with regard to each item in this section—the exact language of any proposed modification to the T&C will depend upon the facts of the situation and should be prepared in consultation with counsel.
2. Indemnification Limitations: It is common for environmental consulting contracts, particularly Phase I contracts, to contain limitations on the consultant's liability. Some limitations may be reasonable, such as a limitation capping the consultant's liability at the greater of a fixed amount ($100,000 is not uncommon) or the amount paid to the consultant by the client. Other limitations, however, such as caps that limit the liability to the amount paid to the consultant, are far more problematic. Additional limitations may include attempts to exclude special, consequential, indirect, and punitive damages, or to shorten the period within which a claim may be brought against the consultant. Depending upon the nature of the services and the client's particular policies (if any), categorical exclusions such as this may or may not be acceptable. Some clients also take the position that indemnification limitations should be mutual—in other words, whatever limitations are imposed on the consultant's obligations should also apply to the client's obligations ("what's good for the goose is good for the gander"). A client may also have the option of paying an additional amount to the consultant to have the liability cap increased, which we recommend clients seriously consider. Regardless, the indemnification provision is probably a good place to start when reviewing the T&C. One final note: where the contract contains no express indemnification obligation on the part of the consultant, we usually request that such a provision be included.
3. Standard of Care: In performing services under the agreement, the consultant should be willing to offer an affirmative statement (a representation and warranty) about the quality of services it is going to provide. More often that not, the standard is something along the lines of "the level of services provided by environmental consultants in the same geographic area as the consultant." Such language is ordinarily acceptable, but the client should make sure it understands the relevant geographic area if such a limiting concept is included. Remember that a breach of this representation and warranty is often what gives rise to the indemnification obligation described above.
4. Selecting the Right Contracting Entity: Some clients prefer that the consultant be engaged by counsel. By doing this, they believe, information obtained through due diligence is covered by the attorney-client privilege. Assuming, arguendo, that this belief is accurate (this is not the place for a discussion on whether or not it is), the parties must carefully calibrate the contract so that the duties, obligations, and liabilities flow in the correct directions. For example, the T&C will ordinarily refer to the "Consultant" and the "Client." If counsel signs the contract, it may become the "Client" under the contract. It is unlikely, however, that counsel has any interest in assuming an obligation to indemnify the consultant. In addition, the client will want to retain the right to bring an action for negligence against the consultant, if necessary, and an agreement that runs between the consultant and counsel may not permit that. To avoid unintended consequences such as this, the contract should be structured to acknowledge the triangular relationship.
5. Insurance. Part of evaluating a prospective environmental consultant is determining the measures they have taken to adequately protect themselves against risk. One way to investigate this is to evaluate the insurance coverage the consultant has obtained. Does their professional liability coverage seem adequate (over two million dollars is good, under one million is probably not)? What types of coverage has the consultant obtained (professional liability coverage is a must)? For this reason, we recommend that clients ask the consultant to provide them with a certificate of insurance showing the coverage they have in place. From a contractual perspective, the client should consider including an insurance provision in the T&C. Ordinarily, the provision should contain an affirmative statement by the consultant about existing levels of insurance and a covenant whereby the consultant agrees to (a) maintain the level of coverage reflected in the certificate of insurance during the term of the agreement, and (b) add the client as an additional insured under the applicable policies.
The right environmental consultant can play an invaluable role in investigating, negotiating, and structuring an acquisition. Working closely with counsel in a cooperative and collaborative manner, they can help the client understand the environmental landscape of a piece of property and quantify the potential environmental exposure that may be associated with that property. Once this information has been obtained, the consultant and counsel can then help the client develop contractual mechanisms to allocate and address those issues in the property transaction with the seller. Given the potential significance of this aspect of the transaction, it is important for clients to devote attention, early on, to selecting an environmental consultant and structuring the contractual relationship with the consultant. Seemingly negligible mistakes made at the front end can bear bitter fruit later on.
Footnotes
* David is a partner in the firm's Environmental & Toxic Tort practice group and is based in the firm's Birmingham office. David is a frequent author and speaker on environmental issues. He is listed in Best Lawyers in America for Environmental Law and has been included in Alabama Super Lawyers for Environmental. He is a member of the ASTM E1527 Task Group.
** Molly is an associate in the firm's Environmental & Toxic Tort practice group and is based in the firm's Nashville, Tennessee office. While at Stanford Law School, she served on the Environmental Law Journal and in the Environmental Law Clinic. Prior to law school, she worked for Forest Trends, an environmental non-profit based in Washington, D.C., where she focused on mobilizing private-sector investment in market-based conservation mechanisms, such as water quality trading and carbon trading, and on addressing the policy and trade issues surrounding illegal logging in East Asia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
