Loss Prevention Alerts

ALERT 32:  Validation Reports:  The Risks and Ramifications

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS. It highlights issues that the LPWG considers may be of relevance to members. It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

The commercial property market's general fears about contaminated land is such that AGS members are often asked to produce what are termed "validation reports". The risks can be significant especially where, as if often the case, the consultant's brief is poorly defined. 

For example, a buyer of a site in some way affected by contamination might agree with the seller that the seller will conduct remediation prior to completion. Although the buyer may have collateral warranties from the seller's contractors, the buyer may feel that he needs to employ consultants to validate or confirm that the contractor has undertaken satisfactory remediation. 

The situations in which a perceived need for validation reports can arise are extremely varied. For example, it may well be that the consultant is employed by the seller of a site in which case a primary objective of the report is to reassure the buyer. Sometimes, consultants are employed by a landowner to assure a regulatory authority, such as the Environment Agency, that remediation has been conducted to an agreed specification. There are instances where the consultant employed by a buyer is required to have an on-site presence, keeping what was in one case termed in the contract as a "watching brief" on the seller's contractor's work, so that he could confirm in a validation report that the contractor had completed remediation to a satisfactory standard. In this case, the contractor was employed by the seller and the consultant by the buyer and, effectively, the consultant had to employ engineers to check that the soil which the contractor was bringing on to site to use as fill material was "clean and of good quality". 

What is the consultant validating? 

A common question that arises is whether the consultant is validating or, as it is sometimes expressed, certifying that the design of the remediation is appropriate in the circumstances or whether he is merely confirming that the contractor has conducted remediation according to that design. Vagueness in the terms upon which the consultant is employed can lead to contentions that, by validating that remediation is satisfactory, the consultant is warranting the fitness for purpose of the remediation design against his/her client's commercial objectives. 

To whom are duties of care owed? 

Consider a situation where a consultant is employed by a seller to provide a validation report to a buyer. This is a situation of particular danger. In such circumstances it suits the seller (the consultant's client) for the consultant to gloss or attenuate his views so as to reinforce the point that the contractor has worked appropriately. Of course, consultants should stick to their opinions but in situations where payment of their fees might be delayed or withheld, and where they are facing commercial pressure from their client's professional advisers, it is commonplace for consultants, consciously or unconsciously, to fall in with their client's wishes. It is though the buyer who might suffer loss and in situations such as this it is perfectly possible that the buyer would nonetheless have a claim against the consultant in tort (irrespective of whatever rights that buyer had against the contractor who might have furnished a collateral warranty) on the basis that the consultant owed the buyer a common law duty of care. After all, it could hardly be said by the consultant that he/she did not intend the buyer to read and rely on the report; that is exactly what was intended. In such a situation any wording in the report that the duty of care is only owned to the seller fails to meet the commercial objectives of anyone involved in the work, and is unlikely to afford the desired legal protection to the consultant.

Extreme care should be used where a consultant is employed to produce a validation report which is intended to comfort and be relied upon by someone other than the consultant's client. If such work is undertaken, then senior staff should be used so that any commercial pressure brought to bear by the client or its advisers can best be resisted. Collateral warranties between the consultant and buyer are often requested, but particular care needs to be taken in their drafting because of the differing commercial objectives of the seller (the consultant's client) and the buyer (the proposed beneficiary of any warranty). 

Inspecting ongoing contractor work 

In many areas of construction work architects or engineers are required to supervise contractors. There are various reasons for this. Typically, it is envisaged that consultants might prevent, detect or correct defective work, that they might intervene if the work is done poorly and they might approve alterations to the previously agreed work of the contractor so as to better achieve the client's wishes. Of course, in many of the cases that we are considering the contractor will be employed by one entity and the consultant by another in circumstances where the contractor's and consultant's clients have conflicting objectives, one wants to sell the site at the highest price and the other buy it at the lowest. 

The significant liability risks created by such a relationship are exacerbated by poor definition of the work the consultant is required to do. As an illustration, it is reckoned that several very harsh Canadian decisions which appear to place onerous obligations on supervising architects or engineers arose as a result of an unreasonable degree of responsibility imposed on the those architects and engineers under certain Canadian standard form contracts. Accordingly, in one case the engineer's contract with the owner offered "supervision …. or inspection and guidance of the contractor". This would be entirely inappropriate in a situation where the contractor and consultant have different employers. In another, the engineer agreed to be "available at all times" to the client to ensure that the work was conducted properly. In another, the engineer offered "guidance, assistance and supervision to resident engineers, inspectors, contractors and sub-contractors to ensure construction of the works in accordance with the drawings". The last looks very much like a fitness for purpose obligation. 

In cases such as these, consultants might think hard about whether the rewards can ever be sufficient to justify the risks. However, if a decision is made to assume these risks, then at least sensible negotiation over the nature of the brief can help to make the position more acceptable. In particular, the consultant's brief should make it clear that he is not approving the fitness for purpose of the design of the work. It should state that the consultant will only have a limited site presence and that therefore he cannot warrant or guarantee that the contractor's work has been done to the standard set out in the contract. For example, if a large part of the work involves introducing clean fill material to a site, then the consultant might need to make it clear that he will only witness a small number of the lorry deliveries to the site and that he will only be able to see some of the material in each load. 

The consultant should accept no obligation to give instructions or guidance to the contractor or to direct the contractor to work in a particular way unless it has been agreed in the contract between the contractor and its client that the contractor will follow any instructions given by the consultant. But even this situation gives rise to a range of possibly unsatisfactory outcomes. It might be alleged in such a situation that the consultant owes a duty of care not only to his own client (in our example, the buyer) but also to the seller who employed the contractor so that if because of the consultant's instructions the work takes longer than was envisaged so that the seller has to meet a contractor's claim for loss and expense he has a right of action against the consultant. 

Conclusion 

In all the cases that we have outlined there is a risk that the normal relationship between the parties to the potential property transaction and the consultant will become so intertwined that confusion is a real risk. The consultants can easily be caught up in the commercial imperatives of the client. The risks though can be reduced by paying close attention to the brief, the information the consultant will consider and any important caveats, for example, making it clear that the consultant is not approving the design but is merely, in the context of the limited information he has considered, offering an opinion as to whether he is reasonably sure that the contractor's work has been carried out in accordance with any design drawings or specification.

Prepared for the AGS by Steven Francis, DLA

Date of Issue: 10 January 2005