A situation faced by a City Council in England highlights some of the issues Public Sector organisations need to consider when appointing contractors, including:
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  • Having appropriate and effective procedures in place for the selection, appointment, monitoring and management of contractors employed to conduct site reclamation and redevelopment works.
  • Ensuring appropriate environmental insurance protection against the costs and liabilities that can result if things go wrong.

 

Background

The Council engaged a demolition contractor to clear the site of a former school, prior to its intended redevelopment. Unfortunately the contactor, unbeknown to the Council, filled at least two voids on the site with contaminated materials for which the contractor did not have the necessary permits. The material illegally deposited contained a variety of contaminants, including materials containing asbestos.

At the time, an Environment Agency (EA) investigation was on-going and was expected to lead to prosecution of the contractor. The Council had also ordered the contractor to remediate the site. However, both the Council and EA believed there was a high risk of the contractor declaring itself bankrupt, which raised the question of who would pay for the remediation and meet the cost of any liabilities that may result, such as claims for harm to health, property damage and environmental damage.

Implications

In this type of situation, the answer to the question of who will pay for remediation largely depends on the outcome of the EA’s investigations, in terms of what remediation requirements the EA considers necessary and how soon they need to be implemented. This is primarily determined by whether the contamination is deemed likely to pose a significant potential of harm to the public or to the environment, and whether the risk is considered to be imminent:

  • If there is considered to be a significant imminent risk, then the EA is likely to order the contractor (or the Council, if the contractor is bankrupt) to take remedial action to deal with the contamination — or it may potentially take action itself and seek to recover its costs from the contractor or the Council.
  • If there is not considered to be a significant risk, the EA may be happy for the site to be remediated under planning conditions as a part of the proposed redevelopment of the site. In this situation, the Council may be able to sell the site on with full knowledge and contractually transfer the responsibilities/liabilities associated with the contaminated materials to the purchaser. However, any purchaser will, of course, factor the costs of the required remediation works and associated risks into the price it is prepared to pay for the property, so ultimately the cost will still fall back on the Council in the form of reduced revenue from the sale.
  • If any damage or harm results from the incident, then claims are most likely to be brought against the Council, if the contractor has gone bankrupt.

The situation described serves as a timely reminder of the costs/ losses Public Sector organisations can face when their appointed contractors cause pollution/contamination, whether deliberately or unintentionally, and the contractors are unable or unwilling to meet their liabilities as polluter. Corby Borough Council1 incurred multimillion pound costs in legal fees and out-of-court settlements, as a result of birth defects held to have resulted from contamination released by the former Corby Steelworks reclamation works. Poor selection/appointment and monitoring/management of the contractors who conducted the works was cited as one of the principal reasons Corby Borough Council was found liable. Whilst that was an extreme case, which is unlikely to (and hopefully never will) be repeated, the situation described clearly demonstrates that far smaller and more apparently innocuous projects can still result in potentially significant costs/losses for the Public Sector employer, as well as reputational damage, internal resource time and costs, etc.

Possible Solutions

To help minimise the risk of facing such costs/losses, Public Sector organisations should carefully review their procedures for selecting and appointing works contractors and also for monitoring and managing their contractors’ activities, to ensure their controls are sufficient. In the situation described, whilst the Council’s initial selection procedures did not identify problems with the contractor, it was their contractor monitoring procedures that alerted the Council to the problem shortly after the contaminants had been buried — unfortunately this was still too late.

Whatever procedures are put in place, Public Sector organisations still face a long-term residual risk, as the employer, if a contractor’s activities cause pollution/contamination — especially if the appointed contractor does not have the financial resources to meet the consequent liabilities. The increasing prevalence of contractor insolvency clearly increases this risk2.

To help protect against this residual risk, Public Sector organisations can ensure appropriate environmental insurance protection is in place, in the form of a Contractor’s Pollution Liability policy. This can either be made a required insurance to be taken out by the Contractor, with the Public Sector employer named as an additional insured on the policy, or it can be taken out directly by the Public Sector organisation — either on a project-wide basis to protect all interested parties, including both the Public Sector organisation and the contractor, or on a contingent basis, solely for the benefit of the Public Sector organisation. The latter approach could have the advantages of i) being significantly cheaper and ii) potentially covering liabilities arising from pollution/contamination caused by deliberate actions of the contractor.

Sources:

  1. Corby Group Litigation v Corby Borough Council [2009]
  2. Major insolvencies: High frequency, increasing severity, October 31 2018: https://www.eulerhermes.com/en_global/economic-research/news/majorinsolvencies--high-frequency--increasing-severity.