Keeping The Facts (And Advice) Straight: Recognizing And Preventing Conflicts Of Interest When You Hire An Environmental Consultant

Sunday, April 1, 2007 - 01:00

When your company is faced with remediation responsibilities at a contaminated site, you will almost certainly need an environmental consultant. The consultant will be the company's "face" with the agency and at the same time your trusted advisor, orchestrating a sampling strategy, interpreting the data and presenting the results and recommendations in the light most favorable to your company. You may view the government as your only adversary, at least where no lawsuit has been filed, and thus might assume that there is little potential for a conflict issue to crop up with your environmental consultant. You should think again, because such problems can and do arise.

In recent years, environmental consulting firms, like law firms, have engaged in a merger frenzy. In addition, environmental consultants seem to change companies almost as often as lawyers change firms. This combination of market consolidation and employee mobility creates a very real potential for conflicts of interest, especially in the context of a large multi-party site or proximate properties in a heavily industrialized area. In these situations, several different companies may present alternative, conflicting theories or conclusions about the source of the contamination to the regulatory agency. The agency must determine which party is responsible, and may compel that party to conduct the entire investigation and eventual clean-up.

What if those conflicting theories and conclusions come from the same environmental consulting firm? At a minimum, it will severely undermine the position of both clients and will ultimately cost both clients substantial time and money. The presentation of conflicting analyses to the agency by the same consulting firm, even if the analyses were performed by different project managers or teams and for different clients, will inevitably undermine the credibility of the consultant. To avoid such problems before they arise, you need to be aware of the duties and obligations owed by an environmental consultant, as well as any initial conflicts that may exist, when engaging or while working with an environmental consultant. An environmental consultant owes its client several duties, including a potential fiduciary duty. Its ability to discharge these duties may be affected by conflicts of interest that can arise when the consultant works for two or more different clients.

Analogies From The Law Governing Other Experts: The Environmental Consultant As A Fiduciary

No cases squarely impose a fiduciary duty on an environmental consultant, but cases involving other types of professionals (typically lawyers and accountants), consultants, and contractors provide legal support by analogy. The Restatement (Second) of Torts states that "[a] fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." Restatement (Second) of Torts 874 cmt. a (1979). In F.G. v. MacDonnell, 150 N.J. 550 (1997), the New Jersey Supreme Court adopted this definition and further wrote that "the essence of a fiduciary relationship is that one party places trust and confidence in another who is in a dominant or superior position." Id. at 563. When the relationship arises, the fiduciary's obligations include a duty of loyalty and a duty to exercise reasonable skill and care. Id. Is your environmental consultant just a provider of technical services, like an electrician? Or, is he a fiduciary?

In an unpublished decision in Interactive Logistics, Inc. v. Answerthink, Inc., 2001 WL 1825982 (D.N.J. 12/18/2001) the federal district court in New Jersey opined that a fiduciary relationship may exist between a technology consultant and his/her client. The court wrote that when the relationship goes beyond providing a distinct service, and includes providing advice upon which the client would rely in making important decisions, a fiduciary relationship may exist, though it is a fact-sensitive question. The court found that the allegations of the plaintiff in Answerthink were sufficient to demonstrate that the client had reposed trust in the superior skill and knowledge of the consultant and relied upon the consultant's expertise, and the consultant provided advice to the client with knowledge of the client's limitations.

It is by no means a stretch to apply such thinking to an environmental consultant. Clearly, in the context of an ongoing investigation of contaminated property, a company is reposing its trust and confidence in the skill and expertise of its environmental consultant. Indeed, the company is hiring the environmental consultant specifically for its expertise in environmental matters. Under the Restatement approach, as reflected in cases like MacDowell and Answerthink, this should qualify as a fiduciary relationship.

A fiduciary relationship imposes a variety of legal duties. As an agent, a fiduciary is subject to a duty of loyalty to act solely for the benefit of the principal in connection with the relationship. Restatement (Second) of Agency 387, (1958). "Unless otherwise agreed, an agent is subject to a duty to his principal not to act on behalf of an adverse party in a transaction connected with his agency without the principal's knowledge." Id. 391. When an environmental consultant works for more than one client on the same site or nearby sites, then it may constitute a breach of a fiduciary duty, and a breach of the duty of loyalty owed as a result of the fiduciary relationship.

An environmental consultant also owes a general duty of care that may also be breached by a conflict of interest. In general, a professional holding himself out to serve clients is liable for negligent performance and may be held liable in either a professional negligence action or a professional malpractice action. The United States District Court, District of New Jersey has recognized that "it is well settled that an environmental consultant must conform to a standard of care possessed by members of the profession in good standing" Grand Street Artists et al v. General Electric Company et al, 19 F.Supp.2d 242, (D.N.J. 1998). It should be noted, however, that (unless the consultant is a licensed professional engineer) there are no licensing requirements or rules of professional conduct governing the conduct of environmental consultants which provide guidance on their ethical responsibilities. The District of New Jersey has written that when there is an absence of authority on issues regarding professional negligence and malpractice of environmental consultants, courts will look "for guidance to the jurisprudence dealing with the liability of professionals such as lawyers and accountants to third parties." Grand Street Artists.

Analogies From Rules Governing Other Professionals: The Environmental Consultant As Engineer (or Legal Advisor)

Many environmental consultants are professional engineers who have their own rules of conduct. These engineering rules of conduct are also relevant to evaluate the potential ethical requirements for environmental consultants. Published by the National Society of Professional Engineers, the "Code of Ethics for Engineers" requires engineers to adhere to the highest principles of ethical conduct. Rule 4 of the Rules of Practice provides that "[e]ngineers shall act for each employer or client as faithful agents or trustees," and "shall disclose all known or potential conflicts of interest that could influence or appear to influence their judgment or the quality of their services." In New Jersey, engineers are regulated by the State Board of Professional Engineers and Surveyors. Among the regulations governing the conduct of engineers, N.J.A.C. 13:40-3.1 defines misconduct in the practice of professional engineering to include, "[a]cting for his or her employer in professional matters otherwise than as a faithful agent or trustee" and "[e]ngaging in any activity which involves him in a conflict of interest."

The Rules of Professional Conduct governing attorneys also provide some guidance on the reasonable expectations for the ethical conduct of an environmental consultant. Rule 1.7 provides that an attorney shall not represent a client if the representation involves a concurrent conflict of interest such as when the representation of one client will be directly adverse to another client or if there is a risk that the representation of one client will be materially limited by the lawyer's responsibilities to another. Notwithstanding the conflict, the rule allows a lawyer to continue representation so long as each client provides informed consent after full disclosure. A similar requirement should therefore be imposed when an environmental consultant becomes aware of a conflict.

How Can You Protect Yourself?

In view of the lack of a binding code of ethics governing environmental consultants, a prudent company should be pro-active in preventing conflicts by demanding protection in the engagement contract. This is the time to define what constitutes a conflict and how to resolve it. The engagement contract should prohibit the environmental consultant from working with another client on a multi-party site or on a proximate site. It should also prohibit the environmental consultant from taking a position adverse to the client before the regulatory agency.

To preserve a potential fiduciary duty, the contract should specify that your company is relying on the expertise, advice and guidance of the consultant. In an ordinary contractual relationship where the parties have divergent interests, a fiduciary relationship does not typically arise. However, a fiduciary relationship may arise when one party contracts to act for the benefit of the other and their interests are perfectly aligned toward a common goal. Articulating these considerations in the contract should help impose fiduciary duties on the environmental consultant.

You should make sure that your engagement contract places an affirmative obligation on the consultant to avoid conflicts and to immediately disclose a conflict as soon as it becomes evident. You should also insist that the consultant disclose any prior representation of other clients in connection with the same or nearby sites, lest a position taken by the consultant in the past come back to hurt you. You are far better off negotiating appropriate protections in an engagement letter than facing the headaches of a conflict armed only with analogous standards applicable to other professionals.

Susanne Peticolas is a Director and David A. Brooks is an Associate in the Gibbons Real Property & Environmental Department. Ms. Peticolas can be reached at (973) 596-4751. Mr. Brooks can be reached at (973) 596-4719.

Please email the authors at speticolas@gibbonslaw.com or dbrooks@gibbonslaw.com with questions about this article.