Little more than 10 years ago, discussions of “sustainable building” programs, or “green building” initiatives, were relatively rare among owners, contractors, and design professionals involved in commercial construction projects. Initially, there was little notice taken in 1998 when the U.S. Green Building Council developed the Leadership in Energy and Environmental Design (LEED) Green Building Rating System. The LEED system employs a rating system in evaluating the operation, construction and design of buildings, either new or renovated, and now constitutes a “voluntary national standard” for sustainable buildings. For reasons both economic and noble, the construction industry now is rushing to embrace sustainable construction techniques, products and projects. And yet, the industry already is beginning to see that new liability issues and litigation claims are accompanying the sustainable design and construction revolution. Consider the following ways in which owners, contractors and designers may find increased legal risks associated with green building.
The Failure To Meet Governmental Design And Performance Mandates
A number of states, including Florida, have adopted aggressive green building standards for state projects. For example, Executive Orders issued by Florida’s Governor in 2007 require that all new state construction projects comply with the USGBC LEED Green Building Rating System and that those projects “strive” to meet LEED Platinum level certification. Several state and local municipalities have passed, or are contemplating the passage of, very similar regulations. Green building regulations now are in effect in New York City, Washington, DC, Atlanta and Seattle, to name a few. Atlanta’s regulations require that newly-constructed city facilities and buildings which are larger than 5,000 square feet, or which have a total cost in excess of $2 million, “must” achieve a LEED Silver rating. By mid-2008, there were at least 70 jurisdictions in 28 states that required some form of green building standard for new construction projects. For contractors doing business with the federal government, similar federal regulations and legislation are impacting many federal construction projects. Designers, contractors and developers doing business with state and federal agencies need to be aware of, and intimately familiar with, the dictates of these legal mandates. And, to the extent that governmental mandates regarding green building are not met, by either design professionals, contractors or suppliers, there lies a potential for negligence-based or contract-based claims by disappointed governmental entities or others claiming to be the intended beneficiaries of these governmental mandates.
The Inadequacy Of Form Contracts
Some of the legal risks and liabilities which have affected, or soon may impact, contractors, design professionals and developers pursuing green building projects are born out of the inadequate treatment of green building concepts and risks in standard form construction contracts. For example, standard form construction contracts often fail to address the following green building concepts and attendant risks:
- “Green building” terminology, such as “sustainability” and “green building certification” are frequently not defined, creating uncertainty in the meaning of contractual promises.
- The party or parties responsible for administering the LEED certification process may not be clearly spelled out in the contracts.
- The consequences of a failure to achieve LEED certification or the specified level of LEED certification may not be specified.
- Appropriate insurance coverages for green building issues may not be provided or available.
- Appropriate professional errors and omission coverage for designers and to cover potential failures to meet green building design or performance criteria may not be required or provided.
- Warranty provisions may not have been adjusted to make them consistent with “sustainability” promises.
- Long-term performance issues, such as the down-the-road loss of LEED certification, may be ignored in the contract.
- The consequences of delays or additional costs associated with hard-to-find “green” products or materials may not be defined as an excusable delay.
- The long lead time associated with LEED certification may be ignored.
- The consequences of consequential damages (e.g., lost tax credit, lost rents, or diminished asset value) as a result of LEED design or performance shortcomings may not be contemplated in the contractual risk allocation.
- The contractor’s performance bond requirements may not be structured to cover green building risks assigned to the contractor.
- Standard contract terms (e.g., “substantial completion”) may not be defined in ways that take into account the added wrinkles associated with green building certification.
- Contract documents may not be structured to “flow down” sustainable design requirements to suppliers and subcontractors.
- Force majeure delays may not be defined to include such common green building occurrences as difficulties in obtaining special green materials, shortages of appropriately skilled labor, the unfamiliarity of inspection officials with green building projects, extra work necessary to achieve certification requirements, and delays associated with certification approvals.
- The owner’s maintenance obligations may not be spelled out clearly and comprehensively, so as to maintain green building systems appropriately.
The often-used standard form construction agreements cannot be counted on to anticipate and properly allocate all of the risks associated with green construction. Careful attention to these matters at the contracting drafting stage is essential.
Legal Risks And Considerations For The Design Professional
Most professional liability policies exclude claims based on or arising out of liability assumed by the design professional under a contract, unless that liability would have existed in the absence of the contract. In other words, if the liability exists under a negligence standard, the liability is covered, even if the liability also arises from the breach of a contract promise. With respect to sustainable design issues, design professionals may be asked to sign contracts in which they “promise” to meet certain sustainability thresholds or LEED certification levels. Although it seems clear that design professionals today have a duty to practice sustainable design, that professional standard of care may or may not rise to the level of promising the achievement of a certain LEED certification level. Unless the owner addresses this issue with a design professional and its insurance carrier prior to the start of the project, the outcome of such a professional negligence claimed by the owner against the design professional’s insurance carrier is uncertain. In addition, owners desiring to insure adequate insurance protection against green building design failures by design professionals face great difficulty in finding professional insurance products which will match their goals. The number and scope of the risks associated with green building are sufficiently new to the insurance underwriting marketplace that insurance carriers are struggling with the need to develop new insurance products to address risks specific to green building projects. And, without professional liability insurance coverage, an owner disappointed by the failure of the design to bring about a stated level of LEED certification may be faced with a claim against a design firm with assets inadequate to offset the owner’s consequential damages.
Similarly, owners facing significant economic consequences of a failure to reach green building certification goals should pay increased attention to limitation of liability and waiver of consequential damages clauses in their design contracts. And, architects and engineers facing sustainable design mandates should be careful to limit the owner’s right to make design changes, or provide in their design contracts that the owner will assume the risk of a loss of certification, or lower level of LEED certification, where significant changes are directed by the owner.
The Shared Risks Of Green Building Goals
Another complicating factor for contractors and designers is that stated green building goals require the proper performances of both design professionals, contractors and trade contractors, as well as material suppliers. No one party controls all of the project aspects which must come together in order to achieve the sustainable building goal. As a result, sorting out the responsibilities of the various parties for failures to achieve the green building goals can be difficult, expensive and time consuming. Each member of the construction team is cautioned to carefully document the correctness of each of its steps toward the satisfaction of green building requirements. Designers, contractors, trade contractors and suppliers are cautioned to avoid LEED rating “guarantees,” in favor of contract references to certification “goals” or desired performance metrics for the building (e.g., energy and water efficiency targets).
Liability Resulting From Documentation Failures
In order to gather the LEED certification desired on a project, all of the members of the construction team bear a significant responsibility for documenting compliance with LEED certification requirements during each step in the construction process. Thus, it is critical not only that all of the parties correctly design and construct in order to meet LEED certification requirements, but that the project team maintain the contemporaneous documentation necessary to support the certification request. Contractors unfamiliar with the process will have to adjust their project practices accordingly, and all project team members may be at risk for claims (e.g., certification delays leading to delayed occupancy or sale of a building) as a result of their failure to properly document even correctly constructed systems.
The Potential For Fraud Claims
Many developers are aggressively marketing the sustainable design and construction aspects of their projects to potential buyers and tenants. The absence of uniform, and well defined, green building standards, as well as the overly aggressive marketing efforts by some developers, may combine to create a real danger of misrepresentation or fraud claims by potential consumers of “less-than-green” buildings. The downturn in the economy, and the increased competition which sellers of construction projects now face, increase the risk of such fraud or misrepresentation claims. Developers must carefully consider the risks associated with overly broad representations regarding the sustainable building aspects of their projects. Such intentional or negligent misrepresentations claim may flow from imprudent promises of a specified level of green building certification, promises of performance efficiencies which cannot be achieved, claims related to the “health” or “environmental cleanliness” or “air quality” of a building, and so on.
Public companies must take added care that exaggerated or false claims regarding green building systems and certifications do not find their way into the company’s securities disclosures. Shareholder or SEC civil claims for securities fraud, as well as potential criminal prosecutions for “willful” violations of federal securities laws, are possible consequences of exaggerated green building claims by public companies.
Product Liability Claims
The insurance company underwriters of casualty liability policies understandably are concerned that the increased use of innovative and untested “green building” products and materials may result in increased numbers of product liability lawsuits. The untested nature of the products and systems, when combined with the absence of familiarity by the contractors called upon to install these systems and products, seems to be a recipe likely to make the underwriters’ nightmare come true. Owners or purchasers of green buildings containing such innovative systems are cautioned to make certain that their property insurance policies provide adequate protection. Standard property insurance policies may not be adequate to insure the project owner against all of the costs, including soft costs, associated with a green building loss claim.
Industry estimates indicate that, as of 2005, “green buildings” made up only approximately 2% of the new construction in this country. This percentage is projected to increase to at least 10% of new construction by 2010. And, although the construction community rushes to embrace the sustainable building goal, the development of the legal principles necessary to fairly sort out the risks and responsibilities of the project participants will require some time. In the interim, owners, designers, contractors and suppliers are encouraged to tread carefully. If you find yourself for the first time as a participant on a “green building” project, consider the wisdom in consulting with your construction attorney regarding your potential risks and the adequacy of the contract documents in allocating green building risks.