CSG Law Alert: Environmental Arbitration Decision Vacated Because Arbitrator Excluded Sampling Reports and Misperceived Facts

In August, the New Jersey Supreme Court took the extraordinary step of vacating an arbitration decision that denied payment from New Jersey’s Spill Fund for damage allegedly caused by oil spills during Superstorm Sandy. That decision, US Masters Residential Property (USA) Fund v. NJDEP, highlights the critical importance of clearly communicating expert testimony to the tribunal.

After DEP denied its Spill Fund application, US Masters requested arbitration pursuant to DEP regulations. At arbitration, US Masters had the burden of establishing that it had incurred costs from a post-Spill Act discharge of hazardous substances. Both DEP and US Masters presented expert opinions during the arbitration. US Masters’ expert explained that Sandy caused oil spills in the vicinity of the property, that when visiting the property shortly after the water receded he smelled oil and saw an oil-like substance staining buildings at the property, and that three soil samples collected at the property contained hydrocarbons exceeding screening thresholds. DEP’s expert explained that most of the soil contamination was from historic fill, the staining was from silt in the bay churned up during the storm, and the hydrocarbons could be attributed to atmospheric deposition of soot or diesel exhaust from random, non-attributable sources of air pollution (i.e. “diffuse anthropogenic pollution” or “DAP”).

In the arbitration decision affirming DEP’s denial, the arbitrator mashed together DEP’s theories regarding hydrocarbons from DAP and staining from sediment into a new theory that had not been advanced by DEP’s expert. Specifically, the arbitrator found that DAP settled on the bay and precipitated into bay sediment, which was then transported by Sandy onto the property. DEP did not contest that the arbitrator’s theory of liability had not been included in DEP’s expert report. The Supreme Court concluded that the arbitrator’s “misperception of the facts” rendered the DEP’s decision infirm as arbitrary and capricious.

In addition to misperceiving facts, the arbitrator also unfairly precluded reports of environmental sampling. Specifically, 20 days before the arbitration and more than two years after denying the application, DEP produced an expert report that mentioned DAP for the first time. The DAP theory was necessary to plug a hole in DEP’s historic fill basis for denial, since historic fill did not explain the presence of certain hydrocarbons. Confronted for the first time with DEP’s new theory, US Masters collected additional samples that, according to US Masters, show that the hydrocarbons are not DAP. The report was not complete until the day after arbitration began and was excluded by the arbitrator. The preclusion of that supplemental report and the associated sampling reports, combined with the misperception of facts by the arbitrator, compelled the Supreme Court to vacate the arbitration decision.

US Masters does not change environmental law. However, the case is notable for two reasons. First, it highlights the importance of clearly communicating expert opinions to the tribunal not only within the expert report but also during testimony, particularly when multiple lines of evidence need to be addressed. The arbitrator’s decision may have been upheld had the expert testimony – and therefore the arbitrator’s opinion – clearly delineated between an explanation of the staining and the presence of hydrocarbons.

Second, US Masters is the first reported New Jersey decision addressing DAP as a source of contamination detected at a property. Surprisingly, the DEP argued that DAP deposition at a property does not constitute a discharge, lending substantial credence to property owners who will argue in the future that contamination at their property does not trigger Spill Act liability because it is from DAP and therefore not a discharge.

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