An Overview of the Additional Legal Exposure That a Contractor May Encounter in Constructing a Green Building

By
William C. Last, Jr.
Attorney at Law

In recent years there has been an increasing governmental and public focus on the use of “green building” in the construction industry.

Green buildings can be designed to include any of the following goals: (1) achieving a LEED certification; (2) setting energy performance consumption levels; (3) use of recycled materials; (4) self-generation of energy; (5) water use reduction; (6) indoor environmental quality including air quality; and (7) operation and manufacturing green standards. Some green buildings may be designed to simply incorporate sustainable goods and recycled building materials into the project. While other buildings are designed to obtain both sustainable goals as well as cost saving goals such as a reduction in usage of energy and other natural resources. These high performance buildings are intended to obtain measureable improved energy savings.

Disputes concerning the outcome of a green building project can result when the project owner has an expectation of how the building will perform which is different than that of the design team or the contractor. They can also result when the materials and products incorporated into the project do not perform as expected.

The remainder of this article will provide an overview of the green building concept and unique legal issues that impact a green building project.

What are benefits of green building?

Aside from the environmental benefits there are financial benefits to the owner of a green building. Typically, the costs of designing, engineering, commissioning and certifying a green building are greater than a traditional building. However, those up front costs are expected to be more than offset by an energy cost savings over the life of the building. Furthermore, there are a number of financial incentives in the form of tax credits, exemptions and grants which are available to green buildings. These include municipal grants, project permit fast tracking, solar tax credits, utility incentives and rebates. Furthermore, green buildings can provide further benefits to the owner and developers in terms of utility rate savings and public relations benefits. Due to the aforementioned incentives it is important that the “as-built” green building performs in the manner that was intended by the designer.

How is a green building certified?

Before discussing the certification process it must be noted that a building does not have to be certified in order to be a green building. Any building that is sustainable and has a beneficial or mitigated affect on the environment can be determined to be a green building.

Since there are very few if any governmentally adopted building codes for green buildings the standards and certifications are being set by non-profit organizations. The primary organizations are U.S. Green Building Council (USGBC) which created the Leadership in Energy and Environmental Design (LEED®) Green Building Rating System. The LEED program established a certification program for green buildings.

The LEED rating system allots a certain number of points in the design process and is primary concerned with environmental and human health. LEED projects are certified on four levels. The level is based on the total points that are accumulated. The levels are: (1) Basic; (2) Sliver; (3) Gold; and (4) Platinum. In order to apply for certification a LEED project must have at least one designated LEED accredited professional involved in the project. For a professional to obtain LEED accreditation that person must apply for accreditation and pass an examination administered by USGBC.

There are other rating programs that are being used in the United States. The Building Research Establishment Environmental Assessment Method (BREEAM) Has created another rating system that is referred to as the Green Globes Rating System. Their system is web-based and is primarily used in Canada and the United Kingdom. The Green Building Initiative (GBI) is a nonprofit organization to help home builders promote the National Association of Home Builders established the Model Green Home l Guidelines GBI as licensed the use of Green Globe system for use in the United States. Other organizations that have green building programs include, but are not limited to, International Organization for Standardization (ISO 14000), Energy Star and California Green Builder.

Are there specific regulations that apply to green builders?

Yes. There are regulations on the federal, state and local levels. On the federal level there is Executive Order No. 13423, as well as performance standards that have been established by the Department of Energy. Executive Order No. 13423 requires: (1) new construction and major renovation to comply with Guiding Principles for Federal Leadership in High Performance and Sustainable Buildings; and (2) by 2015, 15% of the existing federal buildings must incorporate sustainable practices. The DOE’s standards can be found a 10 CFR §§ 433.1-435.306.

California’s energy regulations are found in the following locations: (1) Assembly Bill 4420 (1988); (2) Executive Order No. S-20-04 “The Green Building Initiative” which concerns energy reduction in State buildings and sets certain LEED standards for design and construction of new buildings; (3) California Energy code (Title 24 at 24 Cal Regs Part 6) which has standards for the building envelope and mechanical systems; (4) the California Green Building Standards Code (24 Cal Code Regs Part 11) which seeks to reduce greenhouse gas emissions; (5) Global Warming Solutions Act of 2006 which requires the California Air Resources Board (CARB) to regulating air quality and set greenhouse emission standards to 1990 levels by the year 2020 has resulted in CARB starting to set energy efficient standards for green buildings; and (6) new supplements, addendums and practices that are designed to work with USGBC LEED Standards for certification. In addition to California statewide statutes and regulations that apply to green buildings a number of lesser public entities have adopted regulations and ordinances that apply to green buildings, as well as promote green building projects. The California Department of Justice has a directory of Local Government Green Building Ordinances in California that can be found at http://www.ag.ca.gov/globalwarming/pdf/green_building.pdf.

What additional liability exists in constructing a green building?

Exposure associated with the project delivery method.

The primary exposure that a contractor can have in building a green building flows from the project delivery method. There are three primary methods: (1) the owner retains a designer who prepares a complete set of plans and descriptive/method specifications upon which the contractors bids and builds the project (design-bid-build); (2) the owners design team prepares a general set of plans and project performance specifications and/or end result specifications from which the contractor bids and then takes on the responsibility for designing a building that meets the performance criteria or alternatively the contractor takes on all the design and construction obligations (design-build) and; (3) a construction manager is retained (either at risk or not at risk) to build the project. When the contractor takes on some or all the design responsibility for a green building its risk substantially increases.

When a contractor is provided with a complete set of plans and descriptive/method specifications that set forth the full scope of the work the primary source of dispute will concern whether or not the plans and specifications were complete and accurate. Generally, if the contractor builds in accordance with the plans and specifications and the system doesn’t work as designed the contractor has little if any liability. However, many contacts contain clauses intended to make the contractor responsible for a poorly designed project (e.g. requiring review of plans and specifications, requiring compliance with all applicable building codes and advances). A contractor whose intention it is to simply follow the descriptive/method specifications should review the contract to ensure that it does not include clauses that shift some of the design, outcome (e.g. certification) and/or performance risk to the contractor.

When a project is “design-build” the contractor takes on the liability for ensuring that the completed project performs in accordance with the performance specifications. If the performance specifications include a requirement that the completed building is to achieve LEED certification, than the contractor’s liability is increased.
Exposure associated with the certification process.

In addition to liability that may flow from project delivery system, a contractor can also be liable if it fails to comply with green building practices. For example LEED certification awards points for green construction practices. Those practices that may be added to a contractors responsibilities includes: (1) managing construction waste; (2) meeting storm water prevention requirements; (3) selection and use of green building materials (e.g. recycled materials); (4) use of materials with low level volatile organic compounds; and (5) providing the owner with documentation necessary to get LEED certification.

Since documentation of the project is critical to obtaining certification, delays in obtaining those documents or not being able to obtain them can result in LEED certification being lower than planned.
Exposure associated with using new products and materials.

Since many green buildings include the use of new and innovative products and materials, there is typically additional uncertainty about whether the products will fail to perform as advertised or be incompatible with other materials used in the project. This uncertainty results in an increased risk of liability for product or material failures. Over the years there have been numerous construction defect cases that are attributable to new materials that failed to perform as marketed by the manufacturer. Plaintiffs in such cases typically assert that any person in the chain of distribution from the manufacturer to the contractor.
Exposure associated with misrepresentation of the outcome.

Designers and contractors must be careful not to oversell the benefits of the green aspects of the project. If there are affirmative misrepresentations as to the outcome of the project a party whose expectations are not satisfied may proceed with a fraud and/or negligent misrepresentation claim or a claim under various consumer protection statutes. A party’s expectation could concern such issues as the energy savings that may result from building a green building, the health benefits of such a building, or other sustainability claims. It is also conceivable that prior to the completion of the building the owner has entered into a lease with a tenant that is based on energy savings. If the building doesn’t meet the representations the tenant could possibly sue the owner. The liability from the lessor of a green building all the way down to claims made by a subcontractor to the general contractor.
The damages that can be awarded can be greater for a green building.

The damages an owner may recover from a contractor for a failed green building project may be greater than those awarded in a traditional project. Primarily the potential consequential damages (e.g. cost of reconstruction process, loss of tax credits, loss of goodwill, added energy costs, and diminution in value since non-compliant) will be greater.

For the foregoing reasons the contractor must review its prime contract and subcontracts to determine if the risks associated with a green building project are limited and, if not, a least clearly set forth.

What additional legal exposure does an architect/engineer have in a green building project?

An architect’s exposure flows from whether or not the architect/engineer has committed to a specific performance standard. If the architect/engineer commits to designing a project to obtain a specific LEED certification he/she will likely have exposure if the project fails to meet that outcome. As such, architects and engineers should be wary of contractual or implied guarantees that the project will achieve a specific certification. If the architect/engineer fails to meet its contractual obligations it can be sued by both the owner and the contractor (the contractor will assert it is the third party beneficiary of the architect/engineers contract with the owner). Additionally, a design professional holding himself out as qualified to perform this work may be held to a higher standard of knowledge and skill.

What are some Do’s and Do Nots for a green building project?

Do not increase the owner’s expectations relative to the outcome of the project.
Do modify your standard prime contract so that it anticipates the legal and economic risks associated with a green building project, and do include flow down clauses in your subcontracts.
Do anticipate and include all the additional administrative expenses and other expenses associated with obtaining certification in your bid and contract.
Do choose and review selected products and materials to determine if they will perform as marketed by the manufacturer.
Do not make excessive representations about your experience and/or the outcome of the project.
Do ensure that you understand all the applicable building codes and regulations that impact a green building project.
Do ensure that you have on staff or access to personnel who understand green building practices and the pitfalls associated with such projects.
Do not rely on assumptions based on experience with standard products. Read and follow all manufacturer-supplied instructions for installation and obtain written approval of any deviations from them.
Do seek to limit your warranty liability, especially on new products to the same level afforded by the manufacturer.
Do review the risks associated with green buildings with your insurance broker to determine if you should add any endorsements or coverage to your liability insurance coverage.

Conclusion

Green building practices will become widespread in coming years. The law is evolving relative to green building requirements and the exposure for failing to build a compliant building. Before entering into a contract to provide design services and/or construction services for a green building it is important to contractually set forth what risks are being accepted. The use of standard or unmodified contracts should be avoided when a green building as the end result.

©2009 William C. Last, Jr. wrote this article. Mr. Last is an attorney who has been specializing in Construction Law for over 29 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.