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CONTRACTS BULLETIN # 112
LEEDigation – The Uncertain World of “Green” Construction
Over two years have elapsed since the Contracts Bulletin examined the legal implications of “Green” Construction. 1 Despite the Great Recession, builders and developers are aggressively incorporating “Green” concepts in construction projects. The United States Green Building Council (“USGBC”) has “attributed $137 Billion of GDP and 2.4 million jobs to green-related construction during the years 2000-2008” and projects “from 2009 to 2013, green construction will dramatically increase to $554 Billion in GDP and bear responsibility for 7.9 million jobs.”2 At the same time, the legal landscape remains unsettled, presenting fertile ground for uncertainty and contractor liability. Contractors must remain diligent in understanding what they are promising and what is being required.3
Footnotes: 1 See Contracts Bulletin #104 “It’s Not Easy Being Green: Legal Pitfalls of Green Construction (April 4, 2009)
2 See D. Prum & S. Del Percio, “Green Building Contracts: Considering the Roles of Consequential Damages & Limitation of Liability Provisions” 23:2 Loyola Consumer Law Review 113 (December 2010) citing Booz Allen Hamilton, US Green Building Council, Green Job Study, 2009.
3 While the focus of this article is on commercial “green” construction, a useful discussion of residential “green” construction can be found at: J. Masters & J. Musitano, “Managing Liability Risks in Green Construction” 30 L.A. Lawyer 17 (December 2007).
What is “Green” Building?
There is no commonly accepted definition of a “green building” or “green construction.” The United States Environmental Protection Agency (“EPA”) defines a “green building” as a building that: (1) increases the efficiency in which a building uses and harvests energy, water, and materials, and (2) protects and restores human health and the environment throughout the building life-cycle, which includes the building’s siting, design, construction, operation, maintenance, renovation and deconstruction.
Other definitions of “green” commonly include other elements, such as using sustainable and renewable energy sources, or reducing unnecessary building materials, usage of fossil fuels, consumption of energy, and pollution.
Being “green” may be thought as the subjective ideological belief of being environmentally friendly, but in this article, the definition of “green” cannot be objectively measured. However, some organizations have instituted objective measures that allow a building to become “green” certified.
The leading organization on “green” certification in the United States is the USGBC which created the Leadership in Energy and Environmental Design (“LEED”) certification. LEED is the most well-known “green” certification program in the United States. “Green” regulations enacted by municipalities often adopt or track closely with LEED certification standards.
The USGBC approved a new version of LEED known as LEED 2009, under which the USGBC may award a project up to 100 points and up to 10 bonus points for innovative design and regional priority in five specific categories:
1. Sustainable Sites – The selection of property that has incorporated key sustainability concepts and practices into design, construction, operation and maintenance activities;
2. Water Efficiency – The water efficiency of a property;
3. Energy and Atmosphere – The individual aspects of energy efficiency, lighting, HVAC, appliances, and equipment at the property;
4. Materials and Resources – The use of certified, recycled, reused, and regional products; and
5. Indoor Environmental Quality – The strategies and systems that result in a healthy indoor environment for building occupants.
Applying the categories above, a score is generated and, based on the point totals, the following level of certification is awarded.
Certified – 40 or more points; Silver – 50 or more points; Gold – 60 or more points; Platinum – 80 or more points.
In addition to certifying structures and projects, the USGBC also has created three tiers of lead professional accreditations for knowledgeable and experienced green building professionals.
Green Associate – Individual able to demonstrate knowledge and skill in understanding and supporting green design, construction and operations.
Accredited Professional+– Individual that has an extraordinary depth of knowledge in green building practices and specialization in a particular field: commercial building design & construction, commercial operations & maintenance, commercial interiors, residential design & construction, and neighborhood development.
AP Fellow – Individual is an elite class of professionals who have years of experience, have undergone peer review for their project portfolio and are true leaders in the green profession.
Associate and Professional+ are required to take exams, and all are required to take continuing education.
Avoiding Litigation and Limiting Liability
The following is a discussion of ways contractors may limit liability and avoid exposure on green projects.
Government Mandates and Incentives
Before beginning a green project, it is crucial that contractors and owners understand the mandates and incentives which can greatly impact the cost and profitability of a green project.4 Many jurisdictions provide tax incentives and credits for construction of green and/or LEED certified projects which may be used to offset the increased costs of green construction. The net dollar impact of such programs should be fully understood before bidding occurs and, where possible, should be built into the net cost of construction. Contractors bidding on such projects should understand not only the costs (discussed below), but also the incentives that may be realized by the owner and which could potentially be passed on to the contractor.
Footnote: 4 For an extensive discussion of this topic and other related issues, see D. Aheran & G. White, “Negotiating and Structuring Construction Contracts – Lean Lawyers On Protecting Client Interests, Managing Risk, and Understanding Recent Trends and Developments – Understanding and Mitigating the Legal Risks of Green Building,” Aspatore (April 2007), 2009 WL 1339225.
Clear Contract with Concrete Completion Goals
More than ever, a contract needs to define what constitutes a “green” project. If LEED certification is required as part of the contract, this must be made explicit. Additionally, as discussed below, if the project is delayed or is otherwise not completed, this could directly and adversely impact the ability to obtain a LEED certification.
LEED certification is obtained only after a project is completed. Thus, to the extent a contractor fails to complete a job as a result of events outside of its control, and/or a dispute with the owner or developer, it is important that the contractor limit its potential liability resulting from such delay. Furthermore, most contracts incorporate by reference plans and specifications which describe and mandate the contractor’s responsibilities. In a “green” and/or LEED project, construction methods often contain additional complexity not found in a “typical” construction project. A contractor must fully understand the practical implications and costs of such obligations when bidding the project. 5
Impact of Contract Forms
The two dominant construction forms, AIA and ConsensusDOCS, have both made differing efforts to address “green” contracting.6 The ConsensusDOCS, on November 10, 2009, created the “310 Green Building Addendum.” This first standard document was designed to address risks and responsibilities associated with green building with the intention of causing a collaborative dialogue between owners and contractors. Central to this process is identifying a Green Building Facilitator charged with leading discussions between the owners and contractors on the impact of green construction.
The Green Building Facilitator would then act as an administrator, coordinating performance and services during the construction process. The impact of credits from green construction and the damages resulting from failure to achieve such goals are also dealt with in the 310 Green Building Addendum.
In contrast, the AIA has adopted B214-207 which contemplates the involvement of an accredited LEED professional to assist in project administration, but does not make an effort to address the relative risks and liabilities by and between the parties if the LEED rating is not achieved. As discussed below in the Southern Builders, Inc. v. Shaw Development case, understanding the impact of failing to achieve a LEED certification must be a central issue for any contractor committing to such a project.
Footnotes: 5 SMACNA’s HVAC Contractors Guide to Bidding Green Building Projects. See http://www.smacna.org/members/management/index.cfm?fuseaction=project
6 For an extensive discussion of this and other related issues, see U. Vyas & E. Gentilcore, “Growing Demand for Green Construction Requires Legal Evolution” 30 Construction Lawyer (10 Summer 2010).
Administrative Costs of Certification
In addition to the actual increased construction costs associated with green construction, contractors must also bear in the mind the additional, and sometimes significant, administrative costs and delays associated with obtaining LEED certification. Contractors are required to cooperate in the inspection and certification processes which requires paperwork, time, and interaction with inspection professionals in determining whether a certification is appropriate. This burden largely rests on the contractors, as opposed to the owners, and thus when computing the costs of such “green” construction, these certification costs must be taken into account in estimating the ultimate cost of construction.
Limitations on Warranties
Specific representations and warranties regarding reductions in costs or energy savings, or the purity of air quality, should be made with great care. As any experienced contractor knows, buildings are complex systems impacted by the work of many subcontractors and suppliers. Making specific representations about improved energy efficiency or air quality places a substantial risk on the warranting party. By the same token, a contractor which warrants, without significant caveats and conditions, that a building will achieve a certain level of LEED certification does so at substantial risk (see Southern Builders below). Contractors should only consider making warranties as to environmental performance if there are also significant limitations on damages and clear exceptions and carve outs for events outside the warranting party’s control.
Impact of “Green” Building Codes
Many cities are imposing requirements that certain LEED specifications be met for new construction and major renovations. For example, Minneapolis, Minnesota and Baltimore, Maryland, both include code requirements that projects exceeding 5,000 and 7,500 square feet respectively obtain Silver LEED certifications. If a building code mandates certain LEED certifications, and a contractor fails to meet those standards, it has engaged in “negligence per se.”
Put another way, if a code provision is violated, there is a presumption that the contractor is negligent. This “negligence per se” presumption, as a result of code violation, shifts the burden to the contractor to prove its innocence. This contrasts with the typical situation, where a code mandate does not exist, that the burden is on the party claiming the violation to prove the contractor violated law. This mandated green requirement not only places a significant burden on the contractor to actually construct the project to meet LEED requirements, but also adds further burdens if a dispute arises.
Insurance Implications of Green Contracting
While this is a rapidly changing area of the law, many insurance policies do not cover green construction. For example, the “replacement” provisions in a standard insurance policy may only contemplate replacement construction consistent with industry standards. The higher level of green construction may require additional insurance endorsements, resulting in higher insurance costs to the contractor. Thus, once again, this increases the contractor’s cost which must be taken into account when bidding green projects.
It should also be noted that to the extent a contractor advises an owner or developer concerning the appropriate construction methods in order to obtain a LEED certification, this advice is likely to be interpreted as “professional” services, for which a typical builder’s risk or comprehensive general liability policy will not provide coverage. Instead, a contractor providing any advice relating to LEED certification, should talk to its insurer and determine whether an additional endorsement or professional liability policy is necessary. Once again, obtaining such coverage imposes additional costs on the contractor.
Limitations on Damages
There are significant differences between direct and consequential damages.7 “Consequential” damages are all damages which reasonably and proximately flow from the breach or injury. See A201-2007, § 15.1.6. In contrast, “direct” damages are those damages which result directly from an injury or breach. For example, if an HVAC system fails, the “direct” damages would be the costs to replace the HVAC system itself. “Consequential” damages in that situation could include the business interruption costs for the owner of the business where the HVAC system failed, the shutdown of computer systems, or any other consequence of the failure of the system. Obviously, the impact of consequential damages is far larger and more uncertain than direct damages.8
While the “best” solution for a contractor is to include a provision which limits consequential damages for any failure to achieve “green” construction goals. In this highly competitive and repressed construction market, if an owner insists on representations concerning achieving green certifications, a contractor should be careful to review the provisions and understand the risks in order to make an informed decision.
Footnotes: 7 See Contracts Bulletin #67 “Limitation on Damages Clauses – We Made a BIG Mistake!”
8 For a detailed discussion of consequential damages and limitation on liability provisions, see D. Prum & S. Del Percio, “Green Building Contracts: Considering the Roles of Consequential Damages & Limitation of Liability Provisions” 23:2 Loyola Consumer Law Review 113 (December 2010).
The best example of the significant exposure and possible impact of failure to achieve a LEED certification is in the often discussed (although unpublished) Southern Builders, Inc. v. Shaw Development, LLC case. (Maryland Circuit Court Case No. 19-C-07-11405, filed February 7, 2007). In Southern Builders a dispute arose out of the construction of a condominium project in Somerset County, Maryland. The developer desired the project to receive a LEED Silver certification. Southern Builders commenced an action enforcing its rights to payment and claiming a lien of $54,000. The owner counterclaimed that it had not received the required LEED Silver certification and as a result had suffered consequential damages of $635,000 in unobtained tax credits. The standard AIA-A101-1997 agreement between the parties contained no specific green provisions and the project manual only provided: “Project designed to comply with a Silver Certification Level according to the U.S. Green Building Council’s Leadership and Energy Environmental Design (LEED) Rating System.” The lack of unequivocal contractual provisions assessing risk, limiting liability, or addressing substantial completion created substantial uncertainty for the parties.
While the contractor in Southern Builders sought to rely upon a limitation of consequential damages provision, the case was fraught with uncertainty. Courts have yet to establish a definitive precedent whether failure to achieve specified green certifications amounts to consequential or direct damages. This uncertainty can be alleviated by clear contractual provisions. The case was ultimately settled, but it demonstrates the serious potential liability for contractors and the pitfalls of failing to include a detailed contract with clear plan specifications and risk shifting in the event failure to obtain the certification occurs, for whatever reason.
While some progress has been made in standard form contracts, and the increasing ubiquitous nature of green contracting will, eventually, create a stable legal framework for such construction, that goal has not yet been achieved. Contractors bidding on green projects must recognize not only the increased costs associated with the complexity of green construction, but also the increased administrative burden, the need to limit warranties, obtain adequate insurance coverage, and assess the risks and limit damages associated with failure to achieve environmental goals or warranties. During this period of uncertainty, if a contractor is bidding on a green project, diligence and understanding the construction requirements, as well as the legal implications of their duties and responsibilities must be of central importance.
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