Stites & Harbison, PLLC

Sustainable Design and Construction raises unique legal issues for all parties who touch the project.  It affects sureties, insurance companies, banks, owners, design professionals, contractors, subcontractors, material suppliers, vendors, and their respective employees.   

Design professionals should work with the owner and contractor to develop sustainable goals that are attainable.  Owners and banks want to be sure that they have adequate remedies in case costs exceed what was promised, tax incentives which were being sought by having a sustainable and energy efficient building are lost, or if the design or construction of a project does not result in LEED Certification.   

Contractors and subcontractors need to make sure that they understand the unique requirements for “green” projects such as: (1) following the Erosion and Sedimentation Control Plan adopted for the project, (2) avoiding disturbance of more areas than necessary or allowed by LEED on previously undeveloped land, (3) properly installing the right materials (i.e. materials with low VOC limits, high SRI values, which are recycled, reused, regional, or renewable) and equipment, (4) protecting materials and equipment during construction from moisture or construction debris, (5) collecting and submitting the required documentation for those materials, and (6) following the waste management plan for recycling construction waste materials.  If a contractor fails to comply with one of these requirements which was tied to a sustainable goal or point needed for certification, then it may be liable for any resulting damages suffered by the owner.

Owners, design professionals, and contractors want to make sure that they have adequate insurance coverage in place to cover any potential risks.  However, insurance companies are still evaluating whether special coverage is needed on sustainable design and construction projects; only a few companies are currently offering specialized coverage for “green” projects.  In addition to obtaining insurance coverage to help minimize the risks to your company, here are some ways to minimize the potential legal risks of sustainable design and construction.

1. Don’t Promise More Than You Can Deliver
   In addition to environmental stewardship, there are many recognized benefits to sustainable design and construction such as energy and operational cost savings, healthier workspaces, increased worker productivity, increased tax incentives, and financing incentives.   However, what happens when your marketing materials promise or guarantee these benefits and they are not realized or there is a dispute over whether these benefits are actually realized?  The parties may end up in a dispute alleging breach of an express or implied warranty, fraud, false advertising, or other similar claims.  The key is to monitor your marketing activities.  Only promise what you can measurably deliver, and include clauses in your contracts which limit all warranties to those expressly provided in the contract. 
2. Don’t Guarantee the Level of Certification
   Likewise, if you are a contractor, subcontractor or design professional, do not guarantee the level of certification on any project unless required by law.  In many cases, the determination of whether a project achieves a certain level of certification is regulated by a third party over which you have no control.  For example, under the Leadership in Energy and Environmental Design (LEED) Green Building LEED Rating System, owners who want to design and construct a LEED certified building must first register the construction project with the Green Building Certification Institute (“GBCI”), a third party responsible for project registration and LEED certification.   During the design and construction phase of the project, the project team submits documentation to the GBCI, through LEED Online, verifying that certain points have been achieved.  Ultimately, the GBCI determines whether various points are achieved in order to reach the various levels of LEED certification.  Therefore, instead of guaranteeing a certain level of certification, warrant that the work will be in accordance with the contract, the plans and specifications, and accepted industry standards.
3. Identify the Participants, Their Roles, and Their Responsibilities
   Many disciplines are involved in achieving a project’s sustainable goals (whether obtaining LEED Certification or following the guidelines of the Green Globes rating system).  On most sustainable construction projects, no one party is in control of obtaining all of the points or goals.  The parties must collaborate and work together in order to obtain the project’s goals.  Most importantly, the parties must understand who is responsible for all of the aspects of meeting the project’s goals.  For example, if the owner's goal is LEED Silver Certification, the parties should create a version of the LEED 2009 score card which clearly identifies which parties will be responsible (i.e. architect versus the general contractor and subcontractors) for achieving the various points sought within LEED 2009, and make this document an addendum to each of the contracts on the project.  Additionally, owners and contractors should select an experienced green building team and consider inserting clauses in their contracts affirming that the contractor and/or subcontractor have read, understands, and will comply with the LEED or green requirements for the project.
4. Clarify the Standard of Care
   There is a lot of discussion over whether architects and engineers (and potentially LEED APs) are going to be held to a heightened standard of care on sustainable design and construction projects.  This potential heightened standard of care may arise from one of two sources.  The first, is the 2007 AIA Code of Ethics, which provides:
   
             CANON VI – Obligations to the Environment. 
   
             Members should promote sustainable design and
             development principles in their 
             professional activities.
   
             Ethical Standard 6.1 Sustainable Design: In performing
             design work, Members should be environmentally
             responsible and advocate sustainable building
             and site design.
   
   The second source is the 2007 National Society of Professional Engineers Code of Ethics, which provides:
   
             Engineers are encouraged to adhere to the principles
             of sustainable development in order to protect the
             environment for future generations.
   
             "Sustainable development" is the challenge of meeting
             human needs for natural resources, industrial products,
             energy, food, transportation, shelter, and effective waste
             management while conserving and protecting
             environmental quality and the natural resource base
             essential for future development.
   
   Dissatisfied owners may argue that because these Codes of Ethics require design professionals to promote sustainable buildings, they should be held to a higher standard of care which ensures the building is sustainable.  In 2007, the AIA Standard Form of Agreement between Owner and Architect, B101 (2007), expressly identified the standard of care that design professionals would adhere to in the performance of the contract.  It provides:
   
             § 2.2 The Architect shall perform its services consistent
             with the professional skill and care ordinarily provided
             by architects practicing in the same or similar locality
             under the same or similar circumstances. The Architect
             shall perform its services as expeditiously as is
             consistent with such professional skill and care
             and the orderly progress of the Project.
   
   Similar language can be incorporated into “green” construction contracts in an effort to decrease the risk of being held to a heightened standard of care.
5. Only Take Responsibility for Delays You Can Control
   Delays may arise from lack of green material availability, the lack of workers skilled in sustainable construction technologies, longer durations to install new materials and technologies, flushing out the building, or the time to obtain certification from the GBCI.  The key is to only take responsibility for delays that you can control.  Include or revise force majeure clauses to account for delays from lack of green material availability or lack of skilled workers due to unforeseen events.  Also define what is meant by substantial completion, and don’t tie substantial completion to the achievement of certification. 
6. Include a Mutual Waiver of Consequential Damages
   Although many construction contracts include mutual waivers of consequential damages, it is unclear whether courts would consider lost tax incentives and/or credits, decreased energy savings, decreased water bill savings, green grants, future development rights consequential damages.  To be certain that these types of damages are deemed consequential damages, and therefore, waived by the parties, they should be expressly included in the clauses waiving consequential damages.
7. Insurance
   Insurance companies and underwriters know that sustainable design and construction may present increased risks for claims associated with the failure to achieve energy and operational cost savings, healthier workspaces, increased productivity, tax incentives, and/or  LEED Certification.  Currently there are few insurance companies that provide “green insurance,” but more are exploring special coverage for green projects.  In order to minimize the level of exposure your company has on sustainable design and construction projects or to know what exposure your company will have, show your risk management advisor a copy of the contract before executing it, and talk with him/her about what will be covered by insurance in the event that the building fails to achieve energy and operational cost savings, healthier workspaces, increased productivity, tax incentives, and/or LEED Certification.
8. Don’t Tie Payments to Achievement of Certification
   GBCI is a third party which determines whether various points are achieved in order to reach the various levels of LEED Certification.  The submission, review, appeal, and award of credits may take months or up to a year to be completed after substantial completion has been reached.   Therefore, if you are a contractor or design professional, then you should avoid tying payment to the achievement of a certain level of certification.  Consider including a clause which provides: “Attainment of LEED Certification shall not be a condition precedent to progress payments or the final payment on the project.”
9. LEED Rating System Appeals
   Be familiar with the LEED Rating System Appeals process and timing established by the GBCI.  Updates can be found on the GBCI website.   The current appeals policy provides for two levels of appeal for decisions on program requirements, prerequisites, credits, or Credit Interpretation Requests: First Level Appeal, and Final Level Appeal.
   
   The First Level Appeal must be filed (with the required fee and documentation) with the GBCI through LEED Online within twenty-five (25) business days from the applicable action or determination by GBCI.  The Project Team should consider and specify who should pay for appeals of various credits in the contracts.  The GBCI will attempt to render a decision within twenty (20) business days from the initial filing of the appeal. 
   
   If the Project Team is not satisfied with the GBCI’s determination on the First Level Appeal, they can file a Final Level Appeal, using LEED Online, within twenty-five (25) business days after receiving notice from GBCI as to the determination of the First Level Appeal.  The owner can submit written briefs to the GBCI within twenty-five (25) business days following submission of the appeal request.  The Appeals Board will meet and render a written decision, which shall be final.
10. Include a Notice and Opportunity to Cure
    Sustainable design and construction projects tend to use new materials and technologies in buildings, which may not have a proven track record of performance.  This may lead to long-term maintenance and performance issues.  Specify who will bear the responsibility for maintenance of building components, and who will bear the risk if a manufacturer goes out of business or the component malfunctions.  Additionally, incorporate a clause which provides that the owner shall give the contractor notice and an opportunity to cure or correct any alleged defective work, materials, or equipment installed by the contractor prior to withholding amounts from payments or hiring another contractor to repair or replace the work. 

While the 10 suggestions above may not eliminate all of the risks of sustainable design and construction, they will go a long way in minimizing those risks.  For more information about this topic contact Angela Stephens at astephens@stites.com.

Angela Stephensis an Associate at Stites & Harbison and is a member of the Green Law and ConstructionService Groups where her practice is devoted primarily to construction law.  She is a LEED Accredited Professional and is Green Advantage^® Certified in both Residential and Commercial Construction.  Her construction practice has involved services to contractors, construction managers, design-builders, steel fabricators, owners, subcontractors, sureties, and vendors in matters ranging from construction claims for alleged defective work or payment, to the defense of OSHA citations, to contract negotiations and drafting.  Ms. Stephens has an undergraduate degree in Civil Engineering from the University of Louisville Speed Scientific School, and is a graduate of the Louis D. Brandeis School of Law at the University of Louisville.  She is an active member in the ABA's Forum on the Construction Industry.