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Overview

Green building design adds a layer of complexity to traditional construction projects and their financing that should be considered in the planning stages to avoid future litigation.  Identifying the responsible party if a purported green building fails to attain the intended green certification will become a primary litigation issue.  This is a new area of law; not many cases have been brought, and those that have were settled out of court.

The first green construction case in the United States was the Maryland case of Shaw Development v. Southern Builders.¹  In Shaw, a development group contracted for a building with green features to support a Leadership in Energy and Environmental Design (LEED) silver rating.  The development group sought $635,000 for lost state tax credits after a nine-month delay in project completion.  The case settled out of court, and no other cases have reported opinions.  However, as interest grows in green buildings and more financial incentives are enacted, claims such as those in the Shaw case, as well as claims for breach of warranty, fraud, unfair trade practices, and the like, are likely to proliferate.  This article is intended to advise attorneys of potential issues to avoid green building litigation traps.

Project Design

"Thinking green" at the earliest stages of project planning reduces the likelihood of problems during the design and construction process and prevents built-in obsolescence.  Green building projects face a greater potential for cost overruns and performance problems than traditional buildings.  When green building considerations are added as an afterthought to an existing project design, those risks are compounded.

Using "fast-track" construction methods (in which construction of portions of a project begins before the design is completed on other portions) allows for projects to begin months earlier.  However, because the engineering and architectural design documents have not yet been finalized, fast-track construction can lead to major cost overruns and a failure to attain green building certification.  When evaluating proposed construction methods, question whether fast-track construction techniques will put your green certifications at risk.  Also determine who will have responsibility for the various parts of the green certification and whether responsibilities have been properly allocated between prime contractors and subcontractors.

Energy Modeling

Energy modeling can be an effective tool to simulate a building's energy use and to quantify the savings that can be attributed to the proposed green design elements.² Energy modeling can also optimize the building design by allowing the design team to prioritize its investment in the design elements that will have the largest effect on the building's energy use.  Using energy modeling early in the project design phase will enable the design team to compare alternatives to show the relative differences between design options and their cost consequences in the financial pro formas for the project.

The Project Team

To ensure an experienced project team, request detailed references that demonstrate both the respondent's and its subcontractor's experience with green buildings and energy efficiency.  Incorporate claimed experience into contract representations and warranties when negotiating project agreements.  Limit personnel change-over through the use of liquidated damages for such changes.  Above all, clearly assign responsibility for each green building element among the project team members to avoid confusion, particularly among subcontractors, and properly allocate the expertise among the project phases

Materials, Equipment, and Resources

Because green building materials are still relatively new and not widely available, obtaining the correct materials and equipment can introduce significant project delays.  Identify materials and equipment with long lead times for advance ordering.  Design professionals should make decisions about sustainable products, using technical data provided by the manufacturers, not promotional materials, because allegations of "greenwashing" are an increasing market threat.  These technical performance parameters should be incorporated into warranties and performance guarantees in the agreements.  Design professionals should keep their clients regularly informed of any risks (performance, schedule, or cost) that they uncover during their green due diligence support for the project.

Managing Expectations

Manage expectations about the green building's performance from the initial design stages.  A clear definition of project scope requires balancing aesthetic and other demands with green building requirements.  The legal practitioner should clearly define the level of performance and standard of care owed by project team participants in the project agreements.  In contract default provisions and remedies, clearly define the consequences that will result if the design does not attain the desired level of building certification.

Building Certification and Commissioning

The project design team must have a thorough understanding of the requirements of the project and building certification process to ensure that the level of certification sought is actually attained.  This involves fulsome knowledge of the details of any necessary registration process, the certification timeline, requisite documentation, and third-party verification requirements.  Unanticipated delays in the certification process may delay the overall project schedule for a building and could result in a loss of local, state, and federal financial incentives or tax benefits.

Building commissioning is as critical a project phase as design and construction; however, this phase is frequently overlooked, unless required.  Commissioning is a risk reduction method for new construction or major capital improvements conducted through a systematic and documented confirmation that the building systems function according to the specifications in the project documents and satisfy the owner's operational needs.  Commissioning is particularly critical for green buildings, which tend to have a more complex design and systems.  During commissioning, the building should be treated as a system to perform functional tests to optimize overall energy and non-energy performance (air quality, water use, renewable energy performance, integration with control systems)

State and Local Regulations

Increasing numbers of towns, cities, and counties are adopting mandated green building codes for various classes of construction, while numerous others have voluntary programs.  Conducting thorough research into the current state and local codes where the green building project will be located is critical

Local Building Codes and Regulations

Changes to building codes or interpretations of those codes that occur mid-project may require the project to be redesigned and ultimately delayed.  Further, the regulatory requirements for securing tax credits, grants, stimulus funding, and other economic development incentives that are part of the developer's value proposition (like expedited permitting, density bonuses, and floor-area ratio bonuses) must be translated effectively into the project contracts.  New requirements in land use planning and development are prompting a transition from low-density exburbs to higher density, transportation-oriented development.

Permitting

Zoning variances may be required for the higher density and building heights for certain levels of green building certification.  Green building attributes can be used as bargaining chips when seeking a zoning variance for any type of project.  Because many government incentives are issued prior to the project certification, permitting authorities will often include the applicable green building eligibility criteria in project conditions of approval.  Therefore, local permits and policy documents should specify the consequences that will result if the building does not achieve the specified green building goal.

Contract Considerations

Achieving a building certified to the intended level may depend on individual material, equipment, and systems choices.  Contract for a design with specificity in support of certification that requires specific materials and systems that can verifiably deliver necessary green performance.  If the material or system called for in the building specification is unavailable or is delayed, an "or equal to" clause can permit the substitution of another material or system.

Allocating Liability

A building owner should include a waiver that prohibits designers or contractors from relying on compliance with green building certification requirements as a defense to traditional construction and design claims.  In addition, the owner may enforce green building requirements by specifying that a project participant's failure to perform his or her respective green building obligations is a breach of contract.  The contract may only state that the design professional should "endeavor" to meet the requisite green building rating; however, the design professional could be held liable to the owner for failure to attain the rating.

An owner's waiver of consequential damages may preclude recovery of damages in the event that the project loses tax credits or other economic incentives due to project delays because those damages may be considered consequential.  Each project is unique-form contracts, like those provided by The American Institute of Architects, have provisions that allow the construction team to assert claims against the owner, and leave the owner to bear the risk of all uncertainties.

Even after commissioning, green buildings require accountability for the dynamic systems in the building from multiple parties over different timelines.  This accountability must be incorporated into the contract.  Auditing of operations and maintenance services should be linked back to verify compliance with specifications and design in the contract.

Aligning Contract Incentives for Project Participants

The contact incentives for all project participants should be aligned to advance green building goals.  Prime contracts should define substantial completion so as to obligate the contractor to complete building commissioning before being relieved from liability for late completion.  Design contracts should require that design services continue through project completion, and if applicable, building certification.  Include the treatment of all procurement requiring long lead time issues in the contracts.

Aligning Contracts and Performance Guarantees with Tenant Leases

Oftentimes, leasehold improvements are completed after the lease is signed; therefore, both the landlord and tenant will participate in the design process.  If it is the tenant that is seeking green certification of the space, ensure that the landlord agrees that the tenant may disapprove elements of the design plans that are inconsistent with that objective.  Define what each party means by "green" and allocate responsibilities between the landlord, tenants, vendors, and contractors.  Specify critical design elements in the lease; if any of these features are common area improvements, building materials, or building systems, the lease should obligate the landlord to maintain them throughout the lease term.  Further, specify the obligation to maintain green status-one time as opposed to ongoing certification.  If ongoing, state the frequency of recertification as well as the definition and consequences of failure.

Insurance

Determine whether a contractor's general liability policy provides coverage for an owner's claim for lost tax credits, grants, or other incentives in the event of project delays.  Architects and engineers who sign green building certification submittal templates may trigger an exclusion in their professional liability insurance.  Most coverage for errors and omissions contains exclusions for warranties and guarantees.  Such design professionals thus must insist on language indicating that their signature is solely for the satisfaction of the particular rating system credit and that it does not constitute any type of warranty or guarantee.

Insurance Scope

The scope of insurance coverage for green building elements is still undergoing development.  Most policies will likely exclude nanotechnology in system materials.  New insurance risks are appearing for green building operations.  With vegetative roofs, traditional policies contain limits for trees and shrubs.  Treatment of gray water through recycling pipes and tanks may face underground exclusions.

Conclusion

All levels of government are taking a more active role to encourage green building investment through financial, energy, efficiency, and climate change policies.  As developers take advantage of these incentives, the pace of green building construction will increase and managing the risk of attaining green certifications will be critical.  Green buildings provide numerous business opportunities, but a savvy attorney must help the client avoid the litigation traps and pitfalls that accompany those opportunities.

Michael J. Zimmer and Jennifer Rohleder are with Thompson Hine, LLP, in Washington, D.C. Mr. Zimmer is also a member of the USGBC Energy Atmospheric TAG Committee, cochair of the American Bar Association's Renewable Energy Resource Committee, and ABA vice-chair of the Energy and Carbon Trading and Finance Committee.

Endnotes

1 Shaw Development v. Southern Builders, No. 19-C-07-011405 (Somerset County Cir. Ct. Feb. 16, 2007).

2 Marc Rosenbaum, Understanding the Energy Modeling Process: Simulation Literacy 101, The Pittsburgh Papers (Building Green 2003), available at http://www.buildinggreen.com/features/mr/sim_ lit_101_2.cfm.

For More Information

Please contact Michael J. Zimmer or any member of our Climate Change & Sustainable Business Solutions or Energy practice groups for more information.

Disclosure

Published in Commercial & Business Litigation, Volume 10, Number 4, Summer, © 2009 by the American Bar Association.  Reproduced with permission.  All rights reserved.  This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.