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January 2010

Appellate Court Addresses Consultants’ Liability re: Failure to Timely Prepare an EIR under CEQA

Lake Almanor Associates v. Huffman-Broadway Group, Inc.

178 Cal App 4th 1194

Under the California Environmental Quality Act (CEQA), public agencies must prepare an environmental impact report (EIR) for any proposed project that may have a significant effect on the environment.  Although CEQA places responsibility on the "lead agency" to prepare the EIR, in most circumstances the agency requires the project proponent to pay for the cost of the EIR. The decision in Lake Almanor v. Huffman-Broadway explored whether the consultant hired by the County to provide an EIR could be held liable to the developer for the developer's damages stemming from the consultant's failure to provide a timely EIR.  The Court held that the developer failed show that they were a third party beneficiary of the contract between the County and the consultant and further held that the consultant did not owe a duty of care to the developer for a timely completion of the EIR.  

Developer Lake Almanor Associates (Almanor) submitted a project application to Plumas County  for a mixed-use development.  The County  contracted with Huffman-Broadway Group(HBG), to prepare the EIR.  Under a separate agreement  Almanor was required to reimburse the County for the cost of HBG's services. HBG failed to submit an acceptable EIR in a timely fashion and was terminated by the County.  Almanor filed suit against the consultant for breach of contract, negligence, and negligent interference with prospective economic advantage.  Almanor sought to recover the fees it had paid the County for HBG's services and $50 million in damages due to the lost sale of the project because of the uncompleted EIR.   

Almanor argued it was a third party beneficiary of the contract between the County and HBG.  The Court, relying on section 313 of the Restatement Second of Contracts, found that the Almanor was not an intended beneficiary of the County's contract with the consultant.  The Court also found that although a governmental entity can be held liable for due process violations when a failure to complete a timely EIR is malicious, irrational, or arbitrary, that was insufficient to support the Almanor's third party beneficiary claim.  Finally, the Court did not consider the Almanor's direct action against the consultant consistent with CEQA's purpose.  Exposing environmental consultants to liability in this manner could compromise their independence and objectivity given their potential exposure.  The rationale, the Court explained, is twofold: first, potential liability exposure such as a developer's $50 million damages claim would alter the availability of consultants and the fees they charge; second, potential liability exposure would create incentives for the consultant to complete the report at the expense of the analysis of environmental issues.  The Court did not believe consultants could remain objective in their duty to the public if the fear of possible retaliatory action from developers existed.       

Turning to the negligence claims, the Court noted that tort liability for purely economic losses is the exception and found that based on the factors set forth in Biakanja v. Irving. no duty of care ran from HBG to Almanor.  First, the transaction was intended to benefit the County and the public, not the developer directly.  Second, the foreseeability of harm to the developer should receive little weight as foreseeability tends to carry on endlessly.  Next, there was little degree of certainty and little closeness of connection between the consultant's conduct and the developer's injury because the County determines independently whether to approve the project.  Lastly, the Court explained that a suit such as the developer's would create a conflict for the consultant between their duty to the public and their duty to the developer as project applicant.  This conflict would undermine CEQA's goal of obtaining an accurate EIR for proposed projects. The Court also noted that if a public agency fails to comply with CEQA, the proper remedy is a petition for writ of mandate seeking compliance with the law.         

The Court's decision clarifies that an environmental consultant's obligations are owed to the public agency and not to the project proponent.  While the relationship is complex because of the potential impact of the EIR on the project  and the proponent's responsibility to reimburse the lead agency for the cost of the EIR, this decision should alleviate consultant's concerns that they could be subject to liability if a project is negatively impacted by their efforts preparing the EIR. 1

    1 Sometimes either project proponents or consultants have suggested a three party contract with the lead agency in order to clarify payment responsibilities.  It is our view that such three party contracts subject the consultant to much more pressure from project proponents  to shape the contents of the EIR and would also vitiate the protections offered by this opinion while providing little benefit in securing payment.