Environmental cleanup costs incurred with government contracts can be extremely high when applying Public Law 85-804.
It is important to understand when you, as a government contractor, are liable for these costs and when you may be able to recover them from the Federal Government, potentially saving you millions of dollars.
Allowable costs, or costs that can be attributed to the government and are reimbursable, are determined by the Federal Acquisition Regulation (FAR § 31.201-2). To be allowable, a cost must be:
- In accordance with Cost Accounting Standards or Generally Accepted Accounting Principles, and
- Must comply with the terms of the contract
Government contractors must first attempt to recover the environmental cleanup costs elsewhere, such as through insurance or other responsible parties. Once that has been done, government contractors have been successful in recovering environmental cleanup costs under indemnification clauses(Public Law 85-804) in their contracts, federal laws, or both.
CERCLA & Environmental Cleanup Costs: How to find the Government Responsible
The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) is a federal law requiring the responsible parties to pay for the “costs of removal or remedial action.” Contractors can seek to hold the Federal Government liable for the environmental cleanup costs as a co-polluter. In a recent case, Shell Oil Company v. United States, the Court of Appeals for the Federal Circuit overturned the Court of Federal Claims which held the contractors liable for the cleanup costs.
The government entered into the contracts in 1942 and 1943; the contracts stated that the government will reimburse the contractor for “any new or additional…charges” that the government imposed on the contractors by reason of the contracts. The Court of Appeals found that the CERCLA costs are charges within the meaning of the contract provision and thus the government had to reimburse the contractors for CERCLA environmental cleanup costs incurred by reason of the contracts. The promise to pay for new or additional charges must extend to all claims, foreseeable or not.
To be held responsible for either all or a portion of the environmental cleanup costs, the government simply needs to be a potentially responsible party at a contaminated facility.
“Hold Harmless” and “Allowable Costs” Clauses – Government Liability
If the contract has a “hold harmless against any loss or damage” provision, the court will likely infer, as the Court of Appeals for the Federal Circuit did in DuPont v. United States, an intent to divide all possible liabilities among the parties. The court in DuPont noted that CERCLA, and the resulting environmental cleanup costs, must be included as part of the future unknown liabilities.
Similarly, in Ford Motor Co. v. United States, the government provided for allowable costs including loss or destruction of damage or property that may arise out of or in connection with work performance under the contract. The Court of Appeals held that CERCLA liability was covered under the allowable costs.
In Shell Oil, DuPont and Ford, the court held that CERCLA could apply even though it was enacted in 1988 and the government contracts in question were entered into well before. The contracts did not include an expiration date in the termination agreement/supplement.
Indemnification Clauses under Public Law 85-804
If the contract or subcontract contains language referring to indemnification against “unusually hazardous” risks, then you may be able to recover environmental cleanup costs. In a 2006 ASBCA decision, the Boeing Company cited an indemnification clause contained in the contract where the government, pursuant to Public Law 85-804, agreed to reimburse unusually hazardous risks. So long as the risk definition is broad enough to cover the resulting contamination or environmental cleanup costs, then the indemnification clause should cover all third-party claims for bodily injury or property damage.
If the government fails to follow their indemnification promise, then claims can be brought under the Contract Disputes Act.