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    Business Law Legal Research Blog

    BUSINESS LAW UPDATE: Developments in the Allocation of Risk and Liability in the Emerging Field of Green Construction

    Posted by Gale Burns on Mon, Jun 25, 2012 @ 17:06 PM

    July 3, 2012

    Charlene Hicks, Senior Attorney, National Legal Research Group

    Environmentally friendly, "green" products have become embedded in our culture, and the "green" concept now extends to the building construction industry.  Indeed, many localities now mandate that building construction projects conform with specified standards of green construction.  Although virtually no reported court cases on green issues in the building construction context have arisen to date, it seems only a matter of time before a new body of law develops around such issues.

    Because the engineering and technology behind green construction is so new, the lack of any documented product history poses thorny problems of risk allocation.  If the green building product does not perform at the desired or expected level, should the ensuing cost be borne by the architect/engineer, the contractor, or the owner?  This dilemma has been explained by one commentator as follows:

    With the hyper-growth of [Leadership in Energy and Environmental Design ("LEED")] certifications and laws encouraging green building, the construction industry is flush with new products aimed at cashing in on the sustainable movement.  Manufacturers are putting new products on the market, with limited time for research and virtually no product history of performance.  Go to the Energy Star website, and you will find a link to new products, with this note, "products in more than 50 categories are eligible for the ENERGY STAR.  They use less energy, save money, and help protect the environment."  Architects and engineers who specify such products rely on the manufacturer's data but have no actual experience with the product performance.  So who bears the risk of specifying experimental products?  The client or the design professional?  While permeable paving allows more water to return to the earth, how does it hold up under freeze/thaw cycles?  Who pays to tear up a two-foot thick "green" roof to get access to a leaking roof membrane?  What happens when a "grey water" system does not produce enough water to fixtures, or, worse yet, spreads some virus to those who come in contact with "dirty" water?

    G. William Quatman & Paula Vaughan, Legally Green: What Lawyers Need to Know About Sustainable Design (47th Annual Meeting of Invited Attorneys) 163, 170 (2008).

    In instances where a green component or building fails to fulfill preconstruction expectations, property owners are likely to pursue negligence or breach-of-contract claims against the architect, engineer, or general contractor.  In anticipation of such claims, all parties involved in the green construction project should carefully negotiate the allocation of future liability during the contract negotiation process.

    As a first step in reducing exposure to potential liability, "[d]esign professionals must be leery of agreeing to meet a specific third-party certification standard.  Warranting that the design will achieve a certain standard jeopardizes one's insurance coverage, as liability may no longer be determined by a breach of standard of care, but rather the failure to achieve what one has warranted."  5 Philip L. Bruner & Patrick J. O'Connor Jr., Construction Law § 17:38.62 (Westlaw database updated June 2012).  Stated another way, if a professional within the building construction industry warrants or guarantees that a green product or building will achieve a specific certification standard, such as certification by the U.S. Green Building Council pursuant to its LEED program, failure to meet that standard exposes the professional to great risk of personal liability for breach of warranty and breach of contract.  Notably, liability for this risk may lie outside the scope of the professional's insurance coverage.

    Other potential areas of dispute that may be addressed during the contract negotiation process include the following:

    —Damages for Delays Arising from Certification Process.  If a building construction contract does require LEED or other certification, the property owner may seek delay damages against a contractor, architect, or engineer for the damages arising from any delay the contractor experiences in obtaining the required certification.

    —Changing Legal Standards.  Green construction standards are constantly evolving, and local laws that govern the construction project may change prior to project completion.  A change in the governing legal standards will likely result in construction delays and/or an increase in the costs associated with project completion in conformance with specified green standards or related incentives.

    —Conflict Between Green Objectives and Other Program Requirements.  To achieve a "green" rating, the building must include certain structural components.  These components, however, may compromise the owner's security or aesthetic requirements.  This conflict will likely frustrate the owner's expectations and/or result in delays and increased costs to the project.

    —Consumer Protection Laws.  Advertisement by industry professionals of green credentials or green design may constitute fraudulent inducement within the scope of the State's consumer protection law.  This, in turn, may serve to expose the professional to liability for multiplied or punitive damages.

    In an effort to address these problems of risk allocation, the ConsensusDOCS organization released a Green Building Addendum in 2009.  Entitled "The ConsensusDOCS 310," the Addendum basically competes with standard American Institute of Architects ("AIA") form building construction contracts.  Under Article 8.2 of the Addendum, all contracting parties are subject to any limitations on liability that are included in the underlying contract.  Article 8.2 further specifies that the owner's "loss of . . . profit or inability to realize potential reductions in operating, maintenance or other related costs, tax or other similar benefits or credits, . . . resulting from a failure to attain the [project's green building goals] shall be deemed consequential damages subject to any applicable waiver of consequential damages" in the underlying contract.  ConsensusDOCS 310 art. 8.2.

    Notably, the Addendum recognizes the unique damages that may arise from the breach of a green building contract and classifies such damages as consequential rather than direct in nature.  The Addendum also expressly authorizes the parties to negotiate the allocation of risk for these special kinds of losses prior to the start of construction.  Thus, the parties may expressly agree that the architect, engineer, and general contractor are not liable for any consequential losses sustained by the owner due to the failure of the green building or component to achieve an expected result.  By the same token, the parties are free to place the risk of such consequential losses on a specified professional, such as the engineer or building architect.

    On March 28, 2012, a new green building code entitled the "International Green Construction Code" ("IgCC") was published.  The IgCC, which was cosponsored by the AIA, has been described as follows:

    The IgCC is a national model overlay code to cover minimal sustainable design provisions for commercial buildings and some residential buildings.  It will apply to new construction as well as existing building alterations and additions and will become law in jurisdictions (local municipalities and states) that adopt it.  Its mandatory provisions are expected to push the commercial building sector towards a broader degree of sustainability unattainable through voluntary measures alone.

    Sara Fernández Cendón, IgCC:  A New Baseline for Green Design, AIArchitect (Mar. 30, 2012)     The IgCC focuses on the end product, that is, the actual building constructed.  At this time, it does not appear that the IgCC addresses the problems of risk allocation described above.  Even so, IgCC provisions, if enacted in a specific jurisdiction, may intersect with various provisions of the underlying construction contract and may thereby indirectly impact the issue as to which party bears the risk of a specific type of loss.

    As the above discussion indicates, the legal landscape in the area of green building construction is in a state of constant flux and uncertainty. Traditional concepts of contract, tort, and property law will be challenged as disappointed owners of green buildings that in some way fail to meet with expectations seek recompense for their losses.  All parties involved in any phase of green construction should be forewarned of the potential risks they face upon engaging in such projects, and attorneys within the building construction industry are well-advised to keep abreast of this evolving body of law.

    Topics: legal research, Charlene Hicks, business law, LEED, ConsensusDOCS addresses these problems, International Green Construction Code IgCC, cosponsored with AIA, green construction, specified standards, no documented product history, parties should negotiate allocation of future liab

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