Environmental Assessment/Service Contract: Federal Court Considers Scope of Compensation for Alleged Negligence | Mitchell, Williams, Selig, Gates & Woodyard, PLLC

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(co-author: JD Bruning)

In an April 9 opinion, the District Court of Maryland (“District Court”) addressed an issue involving a contract dispute arising out of an environmental assessment. See District of Columbia Water and Sewer Auth. vs. Samaha Assoc, 2024 WL 1537982.

The issue under consideration was whether to grant the defendant's motion to dismiss the counterclaims for contractual damages and breach of contract.

The District of Columbia Water and Sewer Authority (“DC Water”) wanted to construct a fleet maintenance facility. It engaged Samaha Associates (“Samaha”) to provide architectural and engineering services on a potential land purchase and construction project that DC Water was considering undertaking. Under the agreement, Samaha was responsible for conducting a Phase I Environmental Assessment (“Phase I”) at the project site.

Samaha subcontracted Phase I to Adtek Engineers, Inc. (“Adtek”). Adtek then subcontracted Phase I to ECS Mid-Atlantic, LLC (“ECS”).

The ECS conducted the assessment and provided a report to DC Water. The report stated that the ECS found no evidence of recognized environmental conditions related to the property.

Based on the ECS report, DC Water purchased the property and began construction and site work. DC Water subsequently encountered environmental conditions that disrupted the work and required remediation. This resulted in significant damage to DC Water’s project.

The damages included:

• Increased construction costs.
• The need to remove and replace unsuitable soil and debris.
• Associated environmental tests.
• Construction delays.

DC Water filed a lawsuit against Samaha, Adtek and ECS for damages suffered as a result of its reliance on ECS Phase I. Adtek filed a counterclaim against ECS, and ECS filed a motion to dismiss Adtek’s counterclaim.

It is important to note that during the negotiations between Adtek and ECS, Adtek's representative amended a portion of the “Terms and Conditions” included in ECS's contract proposal. Adtek's representative inserted text that read as follows:

“Adtek’s general terms and conditions with the customer will apply to this agreement.”

Adtek was attempting to have the Adtek/ECS contract incorporated and adopted into the “General Conditions” of the Samaha/Adtek subcontract.

The Samaha/Adtek subcontract included similar incorporation clauses, implementing the “general terms and conditions” of the DC Water/Samaha agreement. Among the portions marked by Adtek’s representative was ECS’s standard indemnity clause. However, the adopted and incorporated agreements included an indemnity clause that was substantially similar to that provided by ECS.

Accordingly, Adtek alleged that as a result of this provision, ECS would be obligated to indemnify Adtek against any liability arising from ECS's negligent performance of services if ECS Phase I was found to have breached the standard of care.

The district court's decision to grant or deny ECS's motion to dismiss Adtek's counterclaim for damages and breach of contract against ECS turned on whether the original “Terms and Conditions” included in the DC Water/Samaha Agreement were properly incorporated downstream into the Adtek/ECS Subcontract.

The district court found that Adtek had properly incorporated the upstream contracts, including, among other things, the language of the indemnification provisions, and that ECS's subsequent performance of Phase I evidenced its acceptance of that contract.

The District Court particularly highlighted the similarity between the ECS indemnity clause that was replaced by Adtek's representative and the indemnity clause incorporated into the DC Water/Samaha contract as further illustration of ECS's understanding and acceptance of the liability associated with the agreement.

Finally, the district court held that DC Water had adequately alleged proximate causation of its damages arising from ECS's breach of contract because it was reasonable to infer that if DC Water had known about the environmental condition of the property, it could have affected its decision regarding the purchase of the property and planning of the project.

Accordingly, the district court denied ECS's motion to dismiss Adtek's counterclaim.

A copy of the memorandum of advice can be downloaded here.