Case History 45
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Liz: [00:00:00] Welcome to the GBA case history series, brought to you by the GBA podcast. My name is Elizabeth Brown, principal geotechnical engineer at JLT Consultants.

Abi: And I'm Abi Corbett, a project consultant at SME.

Liz: Today we are looking at case history number 45. It is a classic story of how a project that seems small and routine can suddenly spiral into a multimillion dollar legal nightmare.

Abi: I feel like we talk about this pretty frequently, but I think that just emphasizes the importance even more. I mean, this case that we're talking about today, it's gonna be the perfect example of project risk is almost always inversely proportional to the project size and complexity. When we treat these projects is the, the quote, easy projects.

It's so easy to let your guard down, and I feel like that's always where the trouble starts.

Liz: Absolutely. Like I [00:01:00] think even in life, not necessarily just projects, right? Something's easy and you just kinda like going with the flow, going through the motions. Not necessarily paying the best attention to things and things can go south quickly.

Abi: Absolutely. Autopilot can be the best and the worst.

Liz: Oh, so true, so true. So in this scenario, we have a commercial real estate developer that is looking to buy two parcels of land with a 300,000 option deposit. So the land was valued at $2 million. But before they closed the deal, they heard that the state found coal tar deposits during a nearby highway project.

Abi: Which can't blame 'em here Naturally. They're gonna get nervous.

Liz: Yeah, I think I would too.

Abi: Yes, absolutely. And they did the right thing. They reached out to a GBA member firm, and it actually was the same firm that [00:02:00] worked on that highway project for the state, and they asked them to perform an environmental site assessment or an ESA.

Liz: So, I mean, that's kind of cool, like maybe luck or whatever, right. That it actually happened to be the same firm. That sounds good, right? Like things are starting off well, maybe.

Abi: You think so? That's, you always think so.

Liz: Right. Fingers crossed. So now the member firm saw this is a minor assignment. They're like, eh, whatever. It's not a big deal. But because of that, the principal in charge made a decision that would later come back to haunt them.

Abi: It always does. So that principal basically just went with the assumption, it's a typical ESA. They ended up assigning a relatively new employee to act as the PM and. We always have to make matters a little bit more difficult. So the client was in a massive rush [00:03:00] and like, let's be real ESAs. There's always a time crunch. But this one's worse because it was in that year end holiday period where sometimes people are in, sometimes they're not.

Everyone's trying to get all their things wrapped up, but they're the priority. You're not, you know, the hot mess.

Liz: Oh, absolutely. At that point in the year, everybody's halfway checked out anyway, maybe not working on all cylinders, right? Their mind is, more concerned about other items at that point. So in this situation, like, uh. Like inexperienced pm a holiday skeleton crew, a super tight deadline like, I mean, we are talking a recipe for disaster.

Abi: And unfortunately, there's always some more seasoning to go in there to make it worse. They needed help with the soil testing soil for the second property, they ended up hiring an out-of-state lab to handle the analytical testing. The real kicker though, [00:04:00] they didn't have a written contract with that lab.

Liz: Oh no, really no written agreement. Oh, that's just a recipe for disaster. In a field as regulated as environmental testing. Right. So regulated, it's kind of like a big no no.

Abi: Yes, and I know sometimes we rely on these oral agreements, but this time period it just, it's, it's like we said, a recipe for disaster. So they're relying on an oral agreement, which meant there's no documented requirements for the testing methods, there's no reporting procedures, and there's no penalties for errors.

They are essentially flying blind with the subcontractor they really didn't have a formal tie to at all.

Liz: Uh, yeah, that's just asking for trouble right there.

Abi: Yes.

Liz: So what happens is the, the lab gets the samples, right? The firm that [00:05:00] collects the samples, they get 'em shipped out and the results come back and, tell us what they found Abi.

Abi: Yeah, they reported Halogenated Hydrocarbon concentrations that, of course, exceeded state cleanup levels. Given the industrial history of the area, the project manager didn't really question it, and why would they? He ended up issuing a report stating that the property was contaminated and would require a costly cleanup.

Liz: Oh, and it makes you wonder if, yeah, I didn't question it again given the circumstances. Tight timeframe, end of year holidays, right? Like, let's just get this done. We're just gonna tell 'em it needs cleaned up and move on. Right? 

Abi: Yes, absolutely. Here's the info, here's the report. Let's, let's go to the holidays.

Liz: Yeah, I totally can see this happening. So in this case though, based on that, the report. If the developer walked away from the $2 million deal, right? He's like, nah, I don't wanna deal with a [00:06:00] costly environmental cleanup. I'm just gonna walk away from the project altogether.

Abi: Yeah, there's gotta be another site where he doesn't have to deal with that. But, they actually did more than just walk away. They demanded their $300,000 of earnest money back claiming that the seller misrepresented the property. The seller, of course, refused. The developer sued the seller, and then the whole thing just lands in court just like we expected.

Liz: Right. And in this case, I am sure that it's gonna come back to the ESA firm because that's how this works. So, I mean, really the story doesn't end there. It's not, it's just, oh, it went to court. They settled, whatever. I mean, the seller didn't just sit back like they, they kept going. They're like, no, I'm not gonna accept this.

Abi: Exactly. They were a firm. No, the seller hired their own consultant to double check the member firm's work, and that's where the House of Cards [00:07:00] collapsed. The new consultant, found that the contamination levels were actually nowhere near as high as the member firm reported.

Liz: Okay, so the member firm's report was, was wrong?

Abi: When the member firm reevaluated, they realized the out-of-state lab that they were using was unfamiliar with this specific analytical procedure required by that state. They just reported the test results incorrectly

Liz: Oh no, that's awful.

Worst case, right? If you would've had a contract, probably could have helped, right? 'cause they would've said, Hey, you know, these are the test methods that needed to be used? Oh no. And not only that, like the point that they used an out-of-state lab, but yet the member firm knew that the analytical procedure was like specific to that state.

I know in situations I've been in like that 'cause, where I'm at, there are some state [00:08:00] specific standards and I always make sure that I ask can you test to this specific standard? To clarify so that something like this doesn't happen.

Abi: Yes, and I think I remember even that , some of the state requirements had changed recently too. The case study didn't give me exactly how, like recently those changes were made, but that's gotta play in this obviously.

Liz: Right, just, just more added insult there. So now it's like everyone's finger pointing, right? Everyone's pointing who gets sued, who's really at fault? Is it the member firm? Is it the testing lab? You know what I mean? Everyone's just blaming everybody.

Abi: Yes. So who's getting sued? Basically, everyone, the developer and the seller actually ended up joining forces though, and they sued the member firm. the member firm in turn, sued the lab. And I mean, we're pretty far into the story at this point, and the amount of [00:09:00] money in the controversy was over $4 million

Liz: oh man. That is so much money.

Abi: for an ESA project.

Liz: Right. So, so how did the member firm's contract hold up? I know that they had a limitation of liability clause. So how did this all work out?

Abi: Right. So they did have a limitation of liability clause, but unfortunately it had a major flaw. It didn't require the developer to protect the firm against third party claims. So, and in ESA third party suits like the one from a seller you didn't even have a contract with can be way more dangerous than a suit from your own client.

Liz: Oh man, that is awful. So really then what happens is that after a year of discovery, so this is stretching on for a year. They finally tried to go to mediation. How did that work out, Abi?

Abi: You know what? [00:10:00] Some good news, it was remarkably successful. They were able to settle everything in one day, which it feels, feels pretty big to get a year of discovery done in a day, but sometimes we get a bright side, so the GBA member firm and its insurer paid $200,000 to the developer and then a hundred thousand dollars to the seller, and the lab ended up paying the member firm $185,000.

Liz: Whew. So still unfortunately, like money still had to change hands, but I mean, definitely could have been way worse than what it was.

Abi: Oh, no doubt and all that lost time. That was money too. Let's be real.

Liz: Oh yeah, absolutely. Which doesn't always get taken into consideration here.

Abi: Mm-hmm.

Liz: So let's break down some of the lessons learned from this case. The first one coming to my mind is that small project trap.

Abi: Yes. [00:11:00] GBA research actually shows that when a project is small, firms will just kind of skip the go no go analysis and a lot of times assign the junior staff. Minimal oversight. This case proves that one or two minor projects can cost a firm more than the profits of 50 or 60 successful ones.

Liz: Wow. That's kind of some mind blowing statistics there.

Abi: Yeah, that'll, that'll scare you real good.

Liz: Well, and then there's the issue of quality control, right? I mean, the sources mentioned that December is a high risk time.

Abi: Just like you were saying earlier, when people are distracted by holidays and workloads, you know, it's the time for enhanced qc, not less. I bet a senior review likely would've caught the lab's procedural error before that report even made it to the client, and I mean, we wouldn't even have something to talk [00:12:00] about today if that happened. 

Liz: Right, exactly.

So really, I mean, it goes to show quality control really needs to be embedded into everything we do. And especially 'cause like, I don't know about you Abi, but like you're working on a project and you're so involved

That sometimes you come become kind of blind to things, right?

And it takes that outside view, that outside perspective to kind of be like, oh, well what about this? Or have you thought about that? And it's like, oh. No, I haven't. Why didn't I think about that? So, that quality control can be super beneficial.

So I think something Abi that we still need to talk about is subcontractor diligence. 

Abi: Right. You have to ensure any lab that you hire has successful experience with the very specific state regulations where the property you're testing is actually located. Furthermore, you should probably have a written agreement. Without one there's literally no leverage when they make a mistake, and that's what lands you [00:13:00] into a $4 million lawsuit.

Liz: Oh, absolutely. And in this case, I mean, really mediation was the hero of the legal side here. That's really what kind of brought this all together. And was able to let it get settled out was that mediation process.

Abi: Yes, especially in one day that feels like something we don't see a lot in these cases. 

Liz: Agreed. 

Abi: And it really was too, the member firm's representative noted that they've could have saved massive amounts of that mental anguish if they just chosen to mediate sooner. And now they include mediation in their standard contract.

Liz: Oh, see. At least they're like, okay. Hey, somewhat wrong. We're learning from it. Right? We're, we're improving And doing better, which is a good thing, right? 

Abi: Yes. Actually learning from the lessons. 

Liz: Exactly. So really it's a sobering reminder that a routine phase one ESA can be a

poster child for risk [00:14:00] because they're often done hastily and without high level credentials.

Abi: As we saw here, the financial stakes are anything but those routine. You can't afford to assign experienced personnel to oversee it. As we saw here, the financial stakes are anything but routine. If you cannot afford to assign an experienced person to oversee a small project, you might be better off just referring that project out to somebody else.

Liz: Wise words there, Abi.

So we wanted to thank you today for joining us for this episode of the Case History Series, brought to you by the GBA podcast. I hope you're able to take away some useful information that will help you and others at your firm make good risk-based decisions in the future.

Abi: Stay vigilant and we'll see you next time.