The Environmental Consultants' Opinion Letter: A Step Beyond an Environmental Audit

Patrick Del Duca

Patrick Del Duca, Ph.D., European University Institute; J.D., Harvard Law School; D.E.A., Universite de Lyon; dott. di giur., Universita di Bologna. Dr. Del Duca practices law with O'Melveny & Meyers in Los Angeles.

[20 ELR 10184]

Buyers of any real property, a facility, or a company that owns real property or facilities should understand their potential exposure to environmental liability as a result of such acquisitions before closing any deal. Buyers, sellers, and lenders can avoid onerous demands and outright refusals to undertake a transaction if sufficient information is available to manage, if not eliminate, uncertainties about environmental liability. Quantifying the potential risks of environmental liability serves each of the parties by providing them with the facts necessary to negotiate risk allocation.

An environmental audit,¹ prepared by environmental consultants, is the foundation for any negotiation and needs to be intelligible and complete. While lawyers investigate environmental liabilities by inquiring into litigation, administrative investigations, indemnification agreements, and other matters, the parties to a transaction turn to environmental consultants to investigate the physical conditions and regulatory postures that help determine the nature and amount of environmental liability.² This Article focuses on the environmental consultants' opinion letter, which is increasingly used to focus the environmental consultants' work and to clarify its significance.

The Scope of an Opinion Letter

Environmental consultants' opinion letters should promote the intelligibility and completeness of the consultants' investigation. A well-drafted opinion letter recites the kinds of investigation that the consultants have undertaken. The letter then states the consultants' opinion as to the adequacy of that investigation (i.e., the kinds of information that investigation would or would not reveal). The letter should also briefly summarize the consultants' conclusions as to the environmental liabilities involved.

These conclusions should be specific and bounded. Bounded conclusions attempt to quantify liabilities to the extent possible. To the extent the liabilities cannot be precisely quantified, the consultants should attempt to indicate probable liabilities and worst case scenarios. A clear statement of any uncertainties in these conclusions, resulting from limited information, is appropriate and important.

The consultants should state in the opinion letter their standards for determining material environmental liability. Guidance on this point from the parties and their counsel, who are more likely to understand the financial aspects of a transaction, is appropriate. Indeed, clear direction as to what the parties consider material may greatly simplify the consultants' work by enabling them to minimize the amount of investigative effort devoted to smaller matters.

In large transactions, the consultants may not have the opportunity to, or it may not be cost effective to, perform environmental audits on all locations. Questionnaires and telephone surveys of an individual facility's environmental or management employees may be the only means of obtaining information. The consultants will need to use their business judgment to determine how reliable that information is and what judgments can be formulated on it. The limitations associated with this kind of investigation should be set forth in the opinion letter.

The parties who have engaged the environmental consultants will rely on the consultants' professional judgment to determine what topics the opinion letter should cover. The environmental consultants may protest that they have been engaged to perform only specific, limited tasks. In fact, the scope of the consultants' engagement may have been narrowly defined for cost or other reasons. In such a case, it is appropriate to request that they declare how the limited scope of their engagement requires them to qualify their opinion. If the qualifications are unacceptable, the parties may wish to broaden the scope of the consultants' engagement. Topics generally covered include the risks associated with hazardous substances and wastes and the risks associated with failing to obtain, maintain, or comply with necessary permits.

Many industrial activities require the routine use of hazardous substances, such as solvents, degreasers, and motor fuel. Hazardous substances in building structures (e.g., asbestos or polychlorinated biphenyls in electrical equipment) may also be of concern. Hazardous substance issues that the consultants may address include environmental contamination, health concerns, cleanup costs, and the costs of additional control equipment and changed work practices.

Liabilities associated with waste disposal practices, particularly off-site disposal, may be difficult to quantify because information may not be readily available. Many companies learn of their liability only when notified by an environmental regulator that wastes produced by the company, perhaps in the distant past, have been found in a condition requiring remediation. To some extent, the environmental consultants may still be able to quantify the risk of liability by analyzing the characteristics of the waste streams involved, by reviewing what information is available about waste disposal practices, and by extrapolating from the company's current experience with environmental claims.

The consultants should also address the adequacy of permits held and of compliance with those permits. Failure to comply with permit requirements may lead to significant fines and penalties, as well as to the interruption of business activities. The likelihood of more stringent future [20 ELR 10185] regulatory standards and the additional costs that will be involved should also be assessed.

Investigation Elements

Much of the environmental consultants' work can be done without visiting the property involved. This avoids alerting the present owner or regulators of the consultants' interest in the site. Permits, real property ownership records (e.g., deeds, mortgages, notices, etc.), geological and hydrological data, and aerial photographs are publicly available on an anonymous basis. Reviewing this information can expose the potential liabilities of owning a property. However, important and often essential information may only be obtained by site inspections, on-site sampling of soil and groundwater, and interviews of regulators and individuals familiar with the site.

It is important, due to the variety of investigations possible, that the consultants' opinion letter review summarily the investigations actually performed and their significance. Sometimes because of time constraints or sensitivities of the parties, it may not be possible to have complete onsite investigations. Based on what is learned from review of publicly available information and whatever other investigation is performed, the environmental consultants' opinion letter should make clear the risks associated with not having performed the on-site investigations or with having taken only limited samples for laboratory analysis.

As is the case for legal opinions, environmental consultants' opinions should not be last-minute matters. A draft of the opinion should be prepared early on so that all parties involved are aware of what the environmental consultants perceive as their task. The parties and their counsel should review this draft opinion soon after the work has begun to ensure that the environmental consultants' efforts are properly directed.

The consultants' physical and regulatory investigations will often overlap with the lawyers' due diligence investigations into ownership, litigation, contractual liabilities, and other matters. Drafts of the consultants' opinion letter should be reviewed by the lawyers as a vehicle for directing the consultants into additional areas that should be investigated. For example, a lawyer's investigation into the contractual liabilities of a company may reveal that the company has by contract agreed to indemnify owners of businesses it once owned for environmental liabilities arising from activities during the prior period of ownership. The draft opinion letter in such an instance should be revised to include an assessment by the consultants of the nature of such liabilities. Unless it is clear to the consultants early in their work that such liability is of legal concern, they may not have sufficient time to thoroughly investigate the potential liability.

Credibility

Choose Credible Consultants

An environmental consultants' opinion letter is only as credible as the consultants rendering it. Accordingly, hire the most competent and reputable consultants available.

Prior to their engagement, environmental consulting firms are more than willing to provide promotional brochures describing their qualifications and resumes of individuals who would work on a particular matter. To ensure the credibility of the consultants' opinion letter, it is advisable to obtain a commitment from the consulting firm that particular qualified individuals will be made available. A further step is to check references, including present and former clients, provided by the consultants.

The technical qualifications desirable for a particular matter will depend on the circumstances. In some instances, doctorate-level chemists or geologists may be required. In other instances, a general familiarity with how regulators approach specific environmental problems (e.g., underground storage tank leakage) may be sufficient. The environmental consultants should be willing to declare and document their competence to perform the services required.

Business judgment is another important characteristic of good environmental consultants. That judgment will be most evident in questions of materiality. In large matters, the consultants will need to know how to abstract from particulars so as to form a general impression of overall environmental liabilities. Their ability to form an overall assessment of a company's environmental management program, for example, is of value to the client. Likewise, they should be able to identify the primary material liabilities in an aggregate sense from information about specific liabilities. References from past and present clients and evidence of business experience on resumes should be evaluated in assessing the business judgment of consultants.

Ways for the Consultants to Stand Behind Their Work

The consultants should be willing to agree contractually to use due care in the performance of their work and, at the very least, not to perform their services in a negligent manner. Even if the consultants are willing to accept such a standard in their engagement agreement, they may wish to limit their liability to the amount of insurance coverage available. Exploring these issues with several consulting firms helps make the parties aware of insurance limits. Many consultants are able to provide $ 1,000,000 of professional errors and omissions insurance. Likewise, consultants who are to be retained to perform remediation, as distinguished from solely investigative work, are often able to provide insurance against environmental liabilities arising from their remedial work. For small transactions, insurance may provide a meaningful solution. For larger matters, however, limitations on the amount of available insurance, and the typically low net worth of environmental consultants, may make it impossible to obtain any significant recourse against the consultants in the event that services, including the rendering of an opinion letter, are improperly performed.

Professional consultants are not insurers against environmental liability. Rather, they are providers of professional services to identify and quantify environmental liabilities. Contractually, requiring that they provide professional services with due care and that they be liable in some non-trivial amount for failure to act with due care, even if through insurance coverage, will encourage the standard of competence needed. The best protection, however, is to obtain services from experienced and competent consultants with good reputations.

[20 ELR 10186]

Relying on the Consultants of Others

The party with the most to lose from inadequate quantification of environmental liabilities should have its own environmental consultants. Ordinarily that party is the purchaser or lender because such a party would assume new environmental liabilities by virtue of undertaking the transaction.

In some instances a seller or borrower will be sufficiently concerned about protecting against improper disclosure of environmental information to regulators and prosecutors so that it will require its consultants to prepare the report. The environmental consultants' opinion letter may serve as a device for breaking the deadlock over which party's environmental consultants will undertake full fledged investigations. The parties may be able to agree in advance on the form of the opinion that the consultants would render if their investigations in fact support such an opinion. The opinion should be addressed to all parties who will be relying on it. In addition to agreeing on the form of the opinion, it may also be possible to agree in advance on the form of the protocol for investigation that the environmental consultants will be requested to employ in establishing whether there is a basis for them to render the opinion.

Parties who intend to rely on the opinion letter of consultants other than their own should have confidence that such environmental consultants will perform the investigations in a thorough and unbiased fashion. The parties' comfort will derive from the reputation of the consultants and the agreements as to the forms of the opinion and protocol of investigation. If the transaction goes forward, the relying parties may require access to the report as a further source of comfort.

Conclusion

Environmental liability risks are everywhere in transactions. If they are properly managed, however, they need not be an obstacle to successfully completing transactions. The environmental consultants' opinion letter is a tool to promote proper management of transactional environmental liability risks. It assists the direction of the environmental consultants' work and clarifies the factual basis for negotiating the allocation of environmental liability risks.

1. Environmental Auditing Policy Statement, 51 Fed. Reg. 25004 (July 9, 1986), ELR ADMIN. MATERIALS 35001, is the Environmental Protection Agency's statement on good environmental auditing practice. See also F. FRIEDMAN, PRACTICAL GUIDE TO ENVIRONMENTAL MANAGEMENT (Environmental Law Institute, 1988).

2. For a description of what environmental consultants are frequently asked to do, see Finkelstein, An Overview of Environmental Considerations Before You Buy or Lease Commercial Real Property, 7 CALIF. REAL PROP. J. 1 (1989).