Green Risks

 LEGAL ISSUE 01Builders need to take a close look at sustainable project requirements. 

By George D. Carry

Since 2000, commentators in the design and construction industries have questioned whether the green building movement would become mainstream or would fade away. More than 15 years later, it is clear that efficient, sustainable, and “green” project development is here to stay. The federal government and the majority of state and local governments have adopted programs and legislation that encourage or require energy efficient and resource-friendly building through green building codes and tax credits.

The U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) rating system is the recognized leader in commercial green building certification. In addition, other green product certifications and building rating programs have emerged over the past decade including the Green Building Initiative’s Green Globes program, Energy Star building certification and the International Green Construction Code.

Commercial construction projects are inherently risky with potential for delays, defective work and cost overruns. Owners and builders need to be aware that “going green” adds to these inherent risks. Green-related construction disputes and legal claims arise generally fall into two categories: loss of tax benefits because of the failure to achieve the target rating, and the failure of “green” materials and techniques to produce the desired results.

Missing the Target

In the first category, consider the cautionary tale of the “Destiny USA” mega shopping center project in Upstate New York. Proposed as a 4.5 million square-foot LEED Platinum certified shopping and entertainment complex, developers and project investors received more than $200 million in government subsidized federal “green bonds” for the construction. Construction delays and financing problems made the promised green building features and LEED certification uncertain, and the project’s tax-exempt status and entitlement to subsidies were jeopardized. Although the project was built with enough environmentally friendly features to achieve a LEED Gold certification, it fell short of the points to achieve LEED Platinum status. Because the project failed to incorporate certain green building components and failed to achieve the LEED certification promised to the federal government, the IRS, after an audit, sought to revoke the project’s tax exemptions, and the developers and investors risked losing up to $120 million in saved financing costs.

The second category includes green construction disputes and legal claims that arise when new (and sometimes unproven) green building materials and techniques fail to live up to their marketed performance expectations and the building suffers from cost overruns, increased maintenance costs and/or expenses for remediation work. The first building to be certified LEED Platinum provides an unfortunate example. The construction of the headquarters for the Chesapeake Bay Foundation in Annapolis, Md., generated long-lasting litigation over defective green building products. In that case, the building contract specified that the Parallams, a green building product comprised of engineered wood made with polymer and second-growth trees and used for structural wood on the outside façade of the building, be preserved using a then-new but untried sealant. Within a year following construction, occupants discovered significant deterioration, rotting and water infiltration. Expensive remediation and litigation ultimately ensued, involving the design and construction firms.

Owners’ Responsibilities

So how can owners and contractors identify and mitigate such risks? The following are several guidelines that every owner and builder must know about green building.

Owners must not rely on standard form, unmodified contract documents, and instead should specially tailor their agreements with counsel because there is no uniform definition of “green.” Owners must know and understand the meaning of “green” as it applies specifically to each development and construction project. When an owner intends to achieve green certifications or yield certain efficiencies in building performance, it is critical that every green term, product, performance standard, and specification in the design and construction contract is set forth clearly and specifically defined. Risk can be minimized by performing due diligence and selecting general contractors with proven green building track records.

Owners must also identify, with counsel, the unique risks and requirements of the project and include express provisions in the contract documents which provide for an agreed-to matrix of risk allocation and sharing in the event the work fails to meet the green requirements or performance standards.

Builders’ Responsibilities

Builders must set objective green building goals that clearly identify and define all green-related or building certification responsibilities and duties.

Do not overpromise. Builders must refrain from making statements in any form that imply a promise, commitment or guarantee regarding the future performance of the building. Likewise, builders should not overstate their level of experience with green building products and techniques and avoid using general, non-specific, references to “climate” or “green” credits.

Builders must avoid relying on undocumented claims of “high” or “efficient” performance by its suppliers and vendors. Demand that such claims be substantiated by reliable data and warranties.

Whether driven by virtue or revenue, the demand for green building continues to grow. And while going green may be beneficial by creating new businesses, markets and possibly healthier living and working environments, like almost anything that is still evolving, green building still carries with it increased risks. Owners and builders will be better equipped by approaching each green building project with a clear and mutual understanding of the scope, goals and risks; and they need to strive to manage such risks through specially tailored contracts.

George D. Carry is a member of Shapiro Lifschitz & Schram, PC’s trial and construction practice groups and lead e-discovery counsel. He has extensive experience representing both plaintiffs and defendants in discovery matters in federal and state courts as well as arbitration, and specializes in all aspects of electronic discovery, document review management, and litigation support systems. He can be reached at carry@slslaw.com.

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