Douglas J. Feichtner & Andrew R. Kwiatkowski – April 19, 2012
A deep recession and lethargic recovery have taken their toll on the U.S. construction industry. But despite the overall sluggishness in the construction sector, the U.S. green-building sector has flourished. Due in large part to federal government funding, green-building elements advanced into the building industry mainstream. According to a new study by McGraw-Hill Construction, 35 percent of architects, engineers, and contractors report having green jobs, which represents one-third of the industry. That share is expected to increase so that by 2014 green jobs will comprise 45 percent of all design and construction jobs.
But skeptics have challenged the actual value and energy performance of green buildings. Lawsuits have sprouted up around the country when some green buildings failed to deliver as promised. And beginning in March 2012, the International Code Council International Green Construction Code (IgCC) will offer states, cities, and municipalities the option of adopting an enforceable green construction code. The IgCC may elevate the standard of care for architects and increase liability exposure for architects, contractors, and developers in general.
This article will explore elements of the green-building process and attempt to explain why it has become so popular in the last decade. It will touch on the limitations of the United States Green Building Council (USGBC) Leadership in Energy and Environmental Design (LEED) rating system and the U.S. Environmental Protection Agency (U.S. EPA) Energy Star rating, especially in terms of measuring a building’s actual energy usage. The article also will summarize some of the lawsuits that have arisen to date concerning green-building underperformance. Against the backdrop of these developments, this article will identify the risks posed by green-building codes and recommend strategies that may reduce your building clients’ liability exposure.
Following the Green-Building Trend
In 2009, both the American Recovery and Reinvestment Act (ARRA) and the U.S. House of Representatives’ passage of the Waxman-Markey bill (H.R. 2454) created economic incentives to motivate building owners and operators to reduce their carbon footprints and improve energy efficiency. President Barack Obama aggressively urged Congress to pass a cap-and-trade system to reduce greenhouse gas emissions that would set a ceiling on carbon output while allowing companies to trade permits to meet emissions limits. Tucked inside the 1,500-plus page Waxman-Markey bill in section 204 was a plethora of programs devoted to promoting energy efficiency in buildings as well. But both government officials and the public grew suspicious of the myriad of exemptions and concessions granted to coal companies and other carbon-heavy industries, and cap-and-trade never made it out of the Senate.
From cap-and-trade’s demise emerged a new climate mitigation strategy, one that focused on energy efficiency, which was rooted in the success of voluntary certification programs and standards such as LEED and the U.S. EPA Energy Star. Indeed, President Obama’s ARRA infused hundreds of billions of dollars into new infrastructure that included LEED projects and other high-efficiency energy projects.
Over the years, LEED has become the de facto green-building certification standard in the marketplace. Under the LEED system, a building can achieve a ranking of certified, silver, gold, or platinum based on the number of points earned. To gain points, certain design features must be incorporated into the project. Certification requires independent, third-party verification. The type of building involved dictates the design standard that will apply. Regardless of the building type, the design standard may include five environmental categories: sustainable sites, water efficiency, energy, atmosphere, materials and resources, and indoor environmental quality.
LEED was designed as a voluntary rating system. Passionate, environmentally conscious building stakeholders had the option of pursuing high-performing buildings. But some states and municipalities began adopting LEED as mandatory for public and federal buildings. Some ambitious municipalities such as Baltimore in 2009 even went so far as to mandate LEED design in private construction as well. Naturally, there was some concern that requiring LEED, and the accompanying increased capital up front, would cause a decrease in building construction. LEED proponents routinely advocate that the savings from energy bills promptly pay back those extra costs. The problem with this position is that it is unproven and, in some instances, hotly-contested.
Does Green Really Result in Efficiency?
Energy Star Portfolio Manager, a web-based tool maintained by the U.S. EPA, is one of the most widely used energy benchmarking systems in the United States. The Energy Star program enables users to compare a building’s energy performance to its peer group based on analogous building characteristics, such as 12 months of total energy data, occupancy rates, property type, hours of operation, and square footage. For many types of commercial buildings, a user can enter energy information into the program and it will calculate a score for a building on a scale of 1–100 based on building source EUI. A score of 75 or greater may qualify for Energy Star certification. The score represents the percentile performance above other comparable buildings. The Energy Star Portfolio Manager allows a user to track and assess energy and water consumption throughout the lifetime of a building.
The database driving the Energy Star Portfolio Manager—the Commercial Building Energy Consumption Survey (CBECS)— contains the peer-to-peer data to which a building is compared. The current CBECS database dates back to 2003, and much of the data is derived from buildings significantly older. Unfortunately, in April 2011, the U.S. Energy Information Administration (EIA) announced that it would not release the results of its 2007 CBECS due to statistical errors. Then in May 2011, the EIA reported that it had to suspend work on the 2011 CBECS edition due to budget cuts. So Energy Star certification will rely on 2003 data for the foreseeable future, and as years go by, older, less efficient buildings will dominate the database since the U.S. EPA will not have added data on the newer buildings to CBECS. What this means is that today’s Energy Star scores may be misleading—showing high scores that do not necessarily correlate to efficient energy performance.
In a similar vein, LEED has faced increased scrutiny, especially as green-product companies have failed in the marketplace. Since its inception, LEED focused on building design, not on actual building performance. And LEED has always preached that its system is about more than energy usage. To its credit, beginning with the 2009 version of LEED, LEED required building owners to report energy and water use to the USGBC as a minimum requirement of the certification process. However, building owners only have to promise that they will report this data in the future to receive the certification. LEED certification does not depend on building owners satisfying a pre-determined energy-use threshold. And the USGBC has never de-certified a building based on its failure to meet energy performance modeling.
So what happens, for example, if a LEED-certified building uses more energy than promised? This hypothetical goes beyond the environmental ramifications of an underperforming building. In reality, most building owners today pursue a green certification or score for the tangible benefits that it entails: reduced operating costs, higher resale value, and qualification for financing incentives or tax abatements. If an owner doesn’t realize those tangible benefits, the owner’s bottom line will suffer. Unfortunately, when building owners lose money, they often begin looking for someone to blame.
Green Liability—Courts Weigh In
Beginning in 2007, green-building lawsuits began emerging in various jurisdictions across the country. This article will discuss some of these lawsuits for the purpose of highlighting three different but related liability issues: (1) identifying the responsible party when a building fails to obtain a LEED rating or other green credential; (2) issues related to defective green-building products; and (3) allegations of fraud and misrepresentation involving buildings designated as LEED certified that fail to deliver energy efficiency or reduce costs.
Shaw Development v. Southern Builders
Shaw Development v. Southern Builders, Case No. 19-C-07-011405 (Md. Cir. Ct. 2007), is commonly referred to as the country’s first green-building case. It involved construction of a $7.5 million, 23-unit condominium project in Crisfield, Maryland. The project included green-design features that were intended to support an application to USGBC for a LEED Silver rating. The LEED rating was critical to the project because the project had been accepted into a state-level green-building program that provided an 8 percent green-building tax credit. Upon completion of the job, the general contractor, Southern Builders, sued the developer, Shaw Development, and filed a lien against the project. Shaw Development filed a countersuit claiming that the contractor was responsible for losing the tax credit because the LEED rating was never obtained, and the project was completed after the deadline imposed by the green-building program. The lost tax credit was valued at $635,000. The contract documents failed to mention anything about securing the tax credit.
Even though this matter was settled out of court, the filing reinforces two key points. First, anyone involved in green building needs to understand the existing legislation that may apply to green projects. As more cities, states, and municipalities undertake green initiatives, those involved in a building project must investigate the green initiatives that govern their particular project location. Second, they must ensure that contract documents account for and anticipate liability consequences of the nuances associated with green-construction work. While the economic climate for construction work has not improved much since 2007 when Shaw was filed, architects, contractors, and developers should still exercise caution before signing up for sought-after green projects.
Steven Gidumal, et al. v. Site 16/17 Development LLC, et al.
In Steven Gidumal, et al. v. Site 16/17 Development LLC, et al., No. 105958/10 (N.Y. Cty. Sup. Ct. 2010), the owners of a $4.2 million condominium unit in the Riverhouse apartment building in New York City sued the building’s developer and manager for $1.5 million for damages related to a variety of alleged green-construction defects, for example, insufficient heat from the “energy efficient” HVAC system. The owners’ cause of action included breach of contract and fraud based on alleged misrepresentations in the condo offering plan about the building and the units. While this case was resolved out of court, it is a reminder that developers can face allegations of fraud, misrepresentation, or both when promoting a building’s LEED certification or performance expectations to prospective owners, tenants, or both.
The Chesapeake Bay Foundation, Inc., et al. v. Weyerhaeuser Co.
The Chesapeake Bay Foundation, Inc., et al. v. Weyerhaeuser Co., No. 8:2011cv0047 (Md. Dist. Ct. Jan. 6, 2011), involves the first building to achieve LEED Platinum certification. The owner, designer, and contractor of the Chesapeake Bay Foundation’s Philip Merrill Environmental Center sued the subcontractor, Trus Joist MacMillan, a subsidiary of Weyerhaeuser Co. seeking damages in excess of $6 million. Weyerhaeuser supplied parallel strand lumber with the brand name Parallams for the roof truss system, columns, and beams—many of which all parties knew at all relevant times had been exposed to the weather. Weyerhaeuser also chose the PolyClear 2000 sealant. Within 10 years of the structure’s completion, the plaintiffs alleged the weather-exposed wood elements experienced widespread rot that jeopardized the structural integrity of the building. The allegations included breach of contract, negligence, and negligent misrepresentation—specifically that the plaintiffs relied on Weyerhaeuser’s assurances that PolyClear 2000 was suitable for weather-exposed material and had been adequately applied to the Parallams lumber. At the time of writing this article the case was scheduled for a trial in May 2012.
Henry Gifford, et al. v. United States Green Building Council, et al.
In Gifford, the plaintiffs, professionals in the environmental engineering and design industry alleged that the USGBC made false statements under the Lanham Act and New York state law regarding the energy and money-saving aspects of LEED certification. No. 10-CV-07747 (S.D. N.Y. 2010). Support for this contention rested on Mr. Gifford’s analysis of a 2008 New Building Institute (NBI) study sponsored by the USGBC comparing actual energy use in LEED-certified buildings with actual energy use in non-LEED-certified buildings. In the study, the NBI concluded that LEED buildings were 25–30 percent more energy efficient compared to the national average. To the contrary, Mr. Gifford concluded that LEED-certified buildings used 29 percent more energy than the national average. He also argued that the NBI results were skewed in part because the NBI study compared the median energy use of LEED buildings to the mean energy use of non-LEED buildings. In the end, Mr. Gifford’s position was that the NBI’s statements related to the study were false and diverted customers from the plaintiffs’ business to LEED-accredited professionals.
The court disagreed. Granting the USGBC motion to dismiss, the court held that the plaintiffs could not establish standing for the Lanham Act claims because (1) the plaintiffs and the USGBC were not competitors, and (2) the plaintiffs did not adequately allege that they had a reasonable commercial interest that the purported false statements by the USGBC involving the energy performance of LEED-certified building would likely damage. Because jurisdiction was predicated on the dismissed federal claims, the court also dismissed the plaintiffs’ state law claims. In sum, the outcome of Gifford hinged on the plaintiffs’ inability to show that they were either competitors of the USGBC or lost business because consumers purchased the LEED brand. The court never addressed the merits of the plaintiffs’ claim that the 2008 NBI conclusions were false, or more generally, that LEED buildings were less energy efficient compared to non-LEED buildings.
Parties have engaged in limited green-building litigation to date. Perhaps, given the economic climate, building stakeholders are not interested in protracted litigation that ultimately would delay payment to the professionals and occupancy that would generate revenue for the owners. Or perhaps green buildings are so new that not enough time has elapsed for owners and operators to assess the energy-efficiency or inefficiency of their green buildings compared to traditionally-built peers. But the simplest and most logical explanation could be that, for building owners in the United States, green improvements are voluntary and most owners do not pursue them. That could all change beginning in 2012.
IgCC—Green Becomes Enforceable
The International Code Council, in collaboration with ASTM International and the American Institute of Architects (AIA), planned to release the International Green Construction Code (IgCC) in the spring of 2012. It applies to all new and renovated commercial buildings and residential buildings over three stories high. The IgCC will provide state and local governments with a first-ever “model code” to require new and existing buildings to reduce their energy usage. It creates a mandatory “floor,” meaning enforceable minimum standards on every aspect of building design and construction that a green building will have to reach, including things such as on-site renewable energy production and energy-use tracking.
This new standard represents a fundamental shift in the standard of construction, which traditionally emphasized health or structural provisions as opposed to green provisions. To be clear, local and state governments have the option of adopting the code. They can even add their own requirements on top of the code, termed “electives,” that address local concerns such as agricultural land use or storm-water management. Whatever requirements local and state governments select, once a government adopts the code, it will become enforceable. If a building design fails to meet the specifications of a state that has adopted a version of the IgCC model code, the architect could be liable for failure to comply.
Among other provisions, the IgCC includes the following:
- With some significant exceptions related to existing infrastructure, greenfield development is not permitted;
- At least 50 percent of construction waste must be diverted from landfills, and at least 55 percent of building materials must be salvaged, recycled content, recyclable, bio-based, or indigenous;
- Certain levels of submetering and demand-response automation are required, and minimum mechanical system requirements and distribution efficiency are addressed;
- The code requires 20 percent water savings beyond U.S. federal standards for water closets in residential settings;
- It includes new requirements for identification and removal of materials containing asbestos; and
- It prohibits smoking inside buildings.
In theory, this “floor” through the code creates the opportunity for owners and operators to pursue LEED certification pushing buildings to a higher “ceiling.” One question beyond the scope of this article is whether owners and operators will have the patience, resources, and need) to pursue the lofty goals of LEED and to satisfy the requirements of the IgCC.
We can safely assume that green-building codes will proliferate in the next five years. Adoption of the IgCC has already started in some jurisdictions, including, but not limited to, Rhode Island, Maryland, Oregon, North Carolina, Richland, Washington, and Scottsdale, Arizona. It was drafted so that it would integrate with the other ICC codes that state and local governments already trust and use. It can be customized to a particular jurisdiction’s needs and preferences and, unlike those jurisdictions that require projects to obtain LEED certification from the USGBC, removing certification from the local government’s control, local building departments will administer the IgCC-based codes. Finally, consider that according to the USGBC website various LEED-building initiatives are already woven into the fabric of legislation, executive orders, resolutions, ordinances, policies, and incentives in 45 states, including 442 localities and 35 state governments. Jurisdictions large and small all over the United States have already demonstrated a vested interest in the greening of buildings.
Will the IgCC “LEED” to More Lawsuits?
Unfortunately, the IgCC may lead to more lawsuits for architects, contractors, and developers. For one, the IgCC will elevate the standard of care for architects. In most jurisdictions, an architect must perform his or her services to the degree of knowledge, skill, and judgment ordinarily possessed by members of that profession. Indeed, in those jurisdictions adopting the IgCC, architects will need to “ordinarily” possess sustainable design skills and incorporate sustainable design into their everyday practices.
Therefore, an architect will not only have a duty to serve the needs of his or her client, but he or she will have a duty to design a building that does not negatively impact the neighbors or the environment. As architects inevitably struggle to comply with code-compliant performance standards that are as ill defined as the term “sustainability,” the probability of lawsuits will increase. This, of course, will lead to higher professional liability premiums, assuming that coverage for sustainability compliance remains available in the future.
Second, the IgCC is not a “universal” green code that will apply to every building in every adopting jurisdiction the same exact way. Each state, city, and municipality can and will select different provisions of the IgCC as mandatory. Therefore, it will be critical for architects, contractors, and developers to read and understand the unique requirements applicable to a particular customer’s jurisdiction. This can impose a significant burden with an associated cost, especially for building professionals working on projects going in multiple jurisdictions.
Failing to comply with a local or a state green-building code will have significant consequences. It could significantly delay a project completion and ability of an owner to use and enjoy the building, leading to claims for liquidated or other delay damages. Further, surrounding property owners, tenants, or taxpayers may claim that a project’s noncompliance with a green construction code has harmed them.
Finally, working in a green=construction code zone involves researching green-building products, which will created another burden with associated expenses for a building professional. A building’s success in satisfying a green code may hinge on the ability of its components to work together. Over the last decade, market demands have fueled the creation of more green-construction materials and green-building techniques. While they are innovative, they probably haven’t undergone as much testing as more traditional building materials may not be as reliable. Make certain that employees and subcontractors are familiar with their uses and limitations. Does a product meet recognized industry performance standards? What does the warranty say? What is the product’s performance history? Is this product’s performance tied to other products manufactured and controlled by other companies? Has anyone used this product before? Failing to consider these and other product performance-type questions could invoke lawsuits that mirror traditional theories of liability. It could also enhance risk and liability based on consumer expectations in a rapidly evolving green world.
Mitigating Green-Building Risk
Lawyers representing construction clients involved in green-building projects can mitigate the liability risk by clearly setting forth the rights, remedies, and responsibilities of parties in construction contract documents. Traditional standard form building contracts may not address issues that could arise from green-building projects such as disputes regarding LEED certification or claims that the performance of a green building fails to meet expectations of a building stakeholder. Over the last two years, form green-building contracts or addenda, such as the ConsensusDOCS 310 Green Building Addendum issued by the Associated General Contractors of America, have emerged to clarify the rights and responsibilities of the parties in the unique scenarios that can arise in green building.
Perhaps the most popular publication to address green-building scenarios is the American Institute of Architects (AIA) Guide for Sustainable Projects, D503™-2011. The guide, issued in May 2011, recognizes the additional requirements borne from the proliferation of green-building codes and third-party certifications. It also acknowledges that green building creates new roles, responsibilities, and risks in the design and construction industry. As a result, the guide sets forth specific contracts and contract provisions that attorneys can use to identify clearly what roles and responsibilities an owner, an architect, and a contractor have in a green-building project.
The guide revises the model language in contracts between an owner and an architect of form B101-2007, as well as between an owner and a contractor in form A201-2007, to reflect that neither an architect nor a contractor warrant or guarantee that a project will achieve a “sustainable objective,” defined in A201-2007 as “the Owner’s goal of incorporating Sustainable Measures into the design or construction of the Project to achieve a Sustainability Certification or other benefit to the environment, enhance the health and well being of the building occupants or improve energy efficiency.” A “sustainable objective,” such as LEED certification, can rely on third-party approval, and many different components of the building process, such as the design and as-built performance of the project, can play a part in achieving certification. Thus, a disclaimer of warranties and guarantees is based on the recognition by the AIA that achieving a “sustainable objective” depends on many factors beyond the control of an architect or a contractor.
The model language additions to section 9.8.1 of A201-2007 in the guide also clarify that verification or achievement of a sustainable objective, such as LEED certification, is not a precondition to issuing a “Certificate of Substantial Completion.” Implementing these additions to the model language can significantly impact whether a party can assert a delay claim or liquidated damages. Lastly, the guide addresses issues raised by minimum green-building codes. For example, in recognizing that many state and local jurisdiction have or will soon adopt green-building codes, the guide clarifies that under A201-2007, section 3.7, a contractor bears responsibility to comply with and give notices that accord with to these green-building codes applicable to its performance of the work on a project.
Overall, the standard form green-building contracts suggested in the guide and elsewhere provide deliberate and planned mechanisms to address, define, and allocate legal risks in green building. Lawyers can use these contracts not only to mitigate risk but also to predict their clients’ liability exposure. An attorney needs to stay up-to-date on the latest developments of green-building law to ensure that he or she understands, evaluates, and considers all legal risks and responsibilities properly when drafting a contract for a green-building project.
Conclusion
The codification of green-building standards will likely complicate green building. Designing, building, and operating environmentally conscious and energy-efficient buildings are noble goals to pursue. Voluntary third-party certifications such as the USGBC LEED certification offer avenues to reach that goal. But the IgCC changes that goal into a requirement. For architects, engineers, contractors, and developers, this may mean an that they must observe an elevated standard of care face increased liability exposure, higher insurance premiums, or both. As green-building codes proliferate, it is imperative that building professionals stay abreast of the building code requirements in their respective jurisdictions, take advantage of the model language recommendations in form green-building contracts or addenda, and allocate legal risk accordingly.