LEED-igation101

Green building practices pose unique legal issues, risks and challenges for unsuspecting roofing contractors. Although many have argued such risks are nothing more than "old wine in a new bottle," the platform for designing and constructing projects that promote environmental sustainability while reducing negative effects caused by the built environment has changed and undoubtedly will foster new challenges for those involved with such projects.

The system by which many green projects are being constructed and evaluated for environmental sustainability is the relatively new but ever-expanding consensus-based and nationally recognized LEED® Green Building Rating System,™ which is funded, developed and maintained by the U.S. Green Building Council (USGBC) and administered by the Green Building Certification Institute (GBCI).

USGBC created the LEED Green Building Rating System as a means to define and measure a building's "greenness." The LEED system fosters and encourages an integrated whole-building approach to environmental sustainability by identifying and rewarding performance in five key areas relative to designing, constructing and maintaining a building: sustainable site development; water use and savings; energy consumption and savings; materials and resources selection, reuse and disposal; and indoor environmental air quality.

As of April, there were almost 4,500 LEED-certified projects worldwide located in all 50 states and 36 countries. Booz Allen Hamilton Inc., McLean, Va., has estimated that $12.5 billion in LEED-certification-related spending will occur during the next five years. During this same period, energy savings directly attributable to LEED certification are estimated to be $4.8 billion.

As LEED and other green building practices become more prevalent, the number of legal disputes arising out of such projects (which have been termed "LEED-igation") inevitably will rise. If you become involved with the installation of "white" roofs, vegetative roofs or solar equipment, it is imperative you understand, appreciate and take proactive steps to address and mitigate the risks before undertaking the work associated with them.

LEED-igation exemplified

Foreshadowing some risks related to green construction, particularly in the context of missed owner expectations, the case of Southern Builders Inc. v. Shaw Development LLC presents a preview of liability exposure that may arise from green construction and the emergence of LEED-igation.

In April 2005, Shaw Development LLC, Joppa, Md., entered into an American Institute of Architects (AIA) A101-1997 standard form agreement with Southern Builders Inc., Salisbury, Md., the general contractor hired to construct a luxury condominium project and mixed-use development along the waterfront in Crisfield, Md. Southern Builders' contractual scope of work required it to construct the building in conformance with LEED requirements. If the condominium project earned a LEED Silver rating and was completed within the specified time frame, Shaw Development was to receive tax credits of up to 8 percent of the building's total cost from the Maryland Energy Administration.

The project was completed nearly nine months late, well after the state tax credits had expired. After being terminated by the owner, Southern Builders filed a $54,000 mechanic's lien against the property to recoup the balance on its contract with Shaw Development. In response, Shaw Development filed a $1.3 million counterclaim against Southern Builders based on alleged material breaches of the contract and Southern Builders' negligence.

In the counterclaim, Shaw Development asserted "[t]he Project Manual and Scope of Work required Southern Builders to construct an environmentally sound 'Green Building,'" in conformance with a "Silver Certification Level according to U.S. Green Building Council's Leadership in Energy & Environmental Design (LEED) Rating System" and that "[i]n failing to comply with this contractual requirement, Shaw Development will suffer damages in the amount of a … $635,000.00 tax credit."

Although the case ultimately was settled by the parties for an undisclosed amount before trial and cannot be used as case precedent to determine future rights and responsibilities of parties involved with similar projects, it nonetheless provides the most tangible example of the potential legal exposure that could arise from participation in green construction projects. Accordingly, the case illustrates issues to identify and address before entering into a green construction contract.

Potential legal exposure

The tax incentives available for green construction projects (similar to those Shaw Development sought from the Maryland Energy Administration) seek to provide owners and developers with incentives to build green buildings.

For instance, according to the Database of State Incentives for Renewables & Efficiency (www.dsireusa.org), at least 18 states offer tax credits aimed at encouraging the installation of photovoltaic (PV) systems. It is safe to assume these tax incentives, perhaps more than the laudable goal of environmental sustainability, are the primary motivators behind the dramatic increase in green construction.

In addition to these incentives, many federal agencies and state and local governments have adopted certain green mandates that require public buildings to meet green building standards, which often are linked to specific minimum threshold levels of LEED certification. Similarly, in what has been termed "LEED creep," many state and local governments are mandating that new private construction and renovation projects meet certain green requirements.

According to USGBC, 21 states, including California, Florida, Michigan, New Jersey, South Carolina and Wisconsin, have adopted mandatory green building standards for state-owned or -financed construction or renovation projects. A survey compiled by the University of Wisconsin-Extension, Madison, reported that, as of June 2009, 194 municipalities had passed green building policies. Of these 194 municipalities, 184 use the LEED Green Building Rating System as their benchmark for some portion of their programs.

This targeted "carrot and stick" approach to encourage environmentally sound construction practices is cause for excitement, especially for those waiting on the so-called economic recovery to result in actual opportunities for growth and development in the construction industry.

However, as Southern Builders Inc. v. Shaw Development LLC demonstrates, there also is a need for heightened awareness and understanding of the unique risks inherent in green construction projects, such as those involving the installation of vegetative and PV roof systems. For those involved with the construction of such projects, the risks and resulting legal exposure arising from them typically turn on the meaning and intent of specific contractual provisions governing a given project. This underscores the need for clear contract language intended to address, prevent, minimize and/or shift the risks related to green construction projects.

Generally, the level of contractual protection necessary for roofing contractors engaged in green building construction may not be found in standard form construction documents. Rather, you can minimize or shift the risks unique to green building projects through careful and pointed revisions to the contracts proposed by your customers and/or through specifically tailored green contract addenda, such as the new ConsensusDOCS 310 "Green Building Addendum," which is available at www.consensusdocs.org.

ConsensusDOCS 310 designates a green building facilitator (GBF) to coordinate or implement a project's desired green building goals, which includes reviewing the plans and specifications to ensure the appropriate green measures are being incorporated. The GBF can be the architect/engineer or a contractor.

The ConsensusDOCS 310 contract addendum also clearly states that unless otherwise specifically provided in the underlying governing contract to which the addendum is attached, no project participant other than the GBF will be liable for a project's failure to achieve the contemplated certification or benefits. This provision is critical for limiting your potential liability exposure in the event a completed project fails to meet the required or desired level of LEED or other green building certification.

Even if you elect to use ConsensusDOCS 310 or some other green contract addendum, we highly recommend you carefully examine the contract to ensure potential areas of risk have been appropriately identified and addressed before the contract is signed and the labor, materials or services are furnished.

Construction defects

Because some green roofing technologies are relatively new and untested and never have been used with the frequency with which they currently are used, the risk of construction defect claims arising from the use of green materials likely is higher than those arising from typical roofing projects. These claims may arise from various green or LEED-based projects but specifically may emanate from the particular scope of labor or materials to be provided for a project.

For instance, according to a November 2009 article in Construction Specifier entitled "Light-colored TPO & Condensation," a "unique moisture problem" recently has been observed in connection with certain "cool roofs" on large warehouse facilities in northern climates.

According to the article, this problem results "in the formation of condensation at the underside of the roof" which possibly could result in roof leaks or other negative consequences related to excessive moisture in the roof system. The authors postulate "the introduction of white-colored membranes in these systems appears to be the primary factor related to any condensation forming below the roof membrane."

Vegetative roof systems also are a potential source of construction defect claims, which could range from leaks caused by rips or tears in a roof membrane or those associated with excess debris clogging the drainage system. Claims also could result from possible structural problems, including total roof collapse, which may result from the additional weight of soil, vegetation, and any precipitation trapped in or on the roof.

Decreasing the risk of liability for green construction defect claims involves a proactive approach intended to identify potential issues that could arise with the use of certain materials or methods before a project begins. This approach is especially important for typical "build-to-design" projects that specify and require the use of particular environmentally friendly products or materials. To the extent these green products and materials are new and untested, you should investigate them thoroughly before entering into a contract and agreeing to perform the scope of work on a job.

NRCA and material manufacturers recommendations should be reviewed in detail with a watchful eye on how and to what extent a specified material or product has been tested and accepted by the industry. If a product or material required is particularly cutting-edge and not well-proven in the field, you should be especially diligent in your investigation. Any concerns with a specific construction method, material or product should be raised in writing as they are identified and any potential adverse consequences from their use should be communicated in detail.

To limit liability for green construction defects, you also may choose to include language in your contract disclaiming any obligations regarding the design or manufacture of prefabricated equipment, such as PV panels, specified to be installed. Such a provision may appear as follows: "The roofing contractor shall not have any obligation with regard to the design, manufacture, or fabrication of the equipment to be installed on the Project. The roofing contractor's sole obligation will be to procure such equipment and necessary permissions, and install the equipment as specified in the roofing contractor's scope of work."

Obligations

In many instances, the incentive and mandate programs associated with green construction are tied to achieving a certain LEED rating. When the specified rating is not achieved, which may affect the owner or developer financially through the loss of the expected incentives or failure to meet applicable federal, state or local mandates, you could be exposed to substantial unintended liability similar to what Southern Builders encountered.

Such liability exposure could arise even if you do not have a direct contractual relationship with the owner or developer.

For example, if your contract with a customer warrants or guarantees a specific green building certification or some other level of performance or incentive to be gained (such as energy savings, water consumption reductions, tax credits achieved, overall building maintenance and operations savings, etc.) and that level of performance or incentive ultimately is not achieved, the owner may seek to make you legally responsible for the failure.

During a LEED or other green construction project, you may be responsible for implementing certain green building measures, such as construction waste management and diversion, material selection and helping maintain indoor air quality. You may be called upon to provide specialized labor, services and/or materials relative to aiding the project developer to achieve LEED points for reduced energy consumption and renewable energy sources, which may include installing white or vegetative roofs or PV panels.

However, regardless of the means and methods required to meet LEED-based goals, great care and attention should be devoted to ensuring additional and over-arching responsibilities over which you have little, if any, control, are not imputed to you through the contract. Any contract provisions that seek to shift the risk of failure to achieve a specific rating or financial benefit or meet applicable government mandates should be clearly identified, addressed and mitigated through revisions to these contract terms.

In many instances, such language will be difficult to identify and may seem harmless upon initial review. These provisions could be as simple as a reference in your scope of work or a statement buried in the project specifications requiring a particular certification level.

Recall that in Southern Builders Inc. v. Shaw Development LLC, the owner filed suit against the general contractor because the contract documents required the contractor to construct an environmentally sound green building in conformance with a LEED Silver rating. Given that state and local governments are now incorporating green building requirements into building codes, language in contracts that requires compliance "with all applicable federal, state and local laws" also could result in an implied promise of obtaining certain green certifications or incentives.

To avoid design obligations with respect to a particular project, we advise seeking to include specific contractual language that shifts the risks associated with green design away from you and to the proper parties, such as the designated design professional or GBF under the ConsensusDOCS 310 addendum, who are otherwise responsible for the project's achievement of sustainable building goals or compliance with institutional mandates or criteria.

This language should make clear you are not a design professional and do not provide design services; it is the responsibility of the design professional, not you, to determine proper design and code compliance; and your customer, ostensibly through the design professional, furnishes sufficient and code-compliant plans, specifications and design documents from which to build.

You also should attempt to negotiate and include language that clearly limits your liability with respect to the financial incentives or mandates to be achieved through a particular green project by disclaiming any warranties regarding the benefits to be gained through the construction project.

For instance, you could include the follow disclaimer: "The roofing contractor makes no representations or warranties, express or implied, regarding the potential certification, efficiency, savings, tax credits, or other benefits achieved, derived or to be achieved or derived from the roof system installed by the roofing contractor. THE ROOFING CONTRACTOR'S WARRANTIES ARE SOLELY LIMITED TO THE INSTALLATION OF THE ROOF SYSTEM OR ITS COMPONENTS."

Flow-down provisions

The risk of unintentionally assuming responsibility for achieving a particular level of green building certification or financial benefit or for meeting applicable government mandates is especially high when you serve as a subcontractor on a green construction project.

Flow-down provisions in a subcontract, which typically will require you to assume the same duties and responsibilities toward the general contractor with respect to your portion of work as the general contractor has assumed toward the owner in the prime contract, are the most likely culprit in this regard.

Through these provisions and any other provisions that incorporate by reference the provisions of the prime contract or other collateral documents that shift the responsibility for achieving green certification or satisfying green mandates away from the owner and design professional and to parties within the contractual chain, you may become responsible for a roof system's failure to perform as required under the prime contract.

In the event a flow-down clause is contained in a subcontract, it certainly is advantageous to request a copy of the prime contract and review its terms before entering into the subcontract. If you elect to enter into a subcontract that includes a flow-down clause, careful measures similar to those discussed earlier should be taken to limit or otherwise shift the risks of satisfying the desired green benefit or mandate. Similar protections also would be afforded through the use of a green measures addendum similar to ConsensusDOCS 310.

Other design-related issues

When you have limited control over the products or materials to be installed on a particular green project, you may be susceptible to liability because of other issues related to those products or materials, such as delays associated with limited availability or poor quality.

When a project requires a particular material or product and you do not hold primary responsibility for its fabrication or manufacture, attempt to negotiate language in your contract to the effect that you make no representations as to the suitability of the specific product or material for the project and disclaiming any liability caused by delays or other damages associated with the use or installation of the specified product or material.

Damages

The scope of your contractual indemnity obligations always is key to determining your potential liability on a particular project. In contracts for green projects, the owner or general contractor may attempt to broaden the indemnity language beyond the recommended scope found in AIA A401 subcontract form (which limits a subcontractor's obligation to indemnify the owner and general contractor for claims, damages, losses and expenses attributable to bodily injury or property damage to the extent caused by negligent acts or omissions of the subcontractor or those for which the subcontractor is responsible) to include liability for failing to achieve specific green benefits or certification or for defects in green materials or products.

Unless you are providing design services on a project, do not undertake this expanded scope of liability and take appropriate measures to limit your indemnification obligations to those contemplated by AIA A401 or via the use of alternative contract language.

Similarly, a contract may contain broad language making you liable for even the most indirect and remote damages that flow from your failure to install a green roof or other product or system as specified, obtain a particular benefit or certification, or meet a government mandate.

For example, such damages could include problems arising from mold or loss of business profits caused by a vegetative roof system leak or collapse, depending on the specific circumstances.

As Southern Builders Inc. v. Shaw Development LLC reveals, such consequential damages also may include loss of valuable tax incentives anticipated by the project's owner or developer. Therefore, priority should be placed on developing contract terms where consequential damages are well-defined and exclude, at the very least, financial benefits or incentives contemplated by the owner or developer. And, if legally permitted within the jurisdiction to which the contract is subject, you should include an express waiver similar to the following: "THE ROOFING CONTRACTOR SHALL NOT BE HELD LIABLE FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING IN ANY MANNER FROM THE WORK."

Final payment

A green project contract's payment provisions often will require the project to obtain green certification before final payment is released. Under the newly launched LEED version 3, there are six distinct LEED rating tracks that may be applied, depending on project type, to determine certification.

Each rating track has individual requirements and, therefore, its own time frame for obtaining certification. For instance, the track for New Construction and Major Renovations, which is designed primarily for commercial buildings, including offices, institutional buildings and residential buildings of four or more habitable stories, addresses design and construction activities for new buildings and major renovations of existing buildings.

Regardless of the specific track taken, the road to final certification—and final payment to you—often is much longer than expected. GBCI, which administers LEED project certification for commercial and institutional building and tenant spaces, targets (but does not guarantee) that a project's preliminary construction review will be complete within 25 days of completion and submission of the detailed application for review by the owner.

Following the review, the owner has 25 business days to submit a response to GBCI's preliminary construction review. GBCI then will review the owner's response and aim to deliver the results of GBCI's final construction review within 25 business days of the date the owner submits an additional application. After the final review is complete, an appeals process may be conducted, which could last upwards of 140 business days.

Ensuring your final payment is not subject to this lengthy certification process requires a relatively straightforward modification to the final contract payment provisions to exclude any condition that LEED certification be achieved before final payment is made. Your final payment should be due within a reasonable time after work is completed and all post-completion requirements (other than those related to green certification) have been met.

For additional protection in this regard, you also can insert language that plainly states "certification under LEED or any standard for sustainable construction practices is not required for the roofing contractor to receive final payment."

Greenwashing

In light of heightened sensitivity to environmental issues, more companies are marketing their products and services to take advantage of growing consumer demand for green products. These companies use phrases such as "energy-efficient," "environmentally friendly," "renewable," "sustainable" or "biodegradable" to describe their products or services. When the environmental benefits of a particular product or service are overstated in advertising and unable to be supported through experimental data or scientific testing, these companies are said to have "greenwashed" those products or services.

The Federal Trade Commission (FTC) has promulgated rules against such false, misleading and deceptive marketing claims. If a company is identified as greenwashing its products or services, the company could be subject to fines up to $10,000 per violation. Additionally, if any individual is found to have greenwashed a product or service with the intent to defraud or mislead customers, he or she may be subject to a criminal sentence of up to one year in prison.

Any misleading advertising claim regarding the environmental benefits of a particular product or service also is likely to be punishable under state law pursuant to false advertising statutes that carry similar penalties.

According to recent testimony before the Senate Subcommittee on Consumer Protection by David Vladeck, director of FTC's Bureau of Consumer Protection, FTC's agenda will include tougher enforcement and environmental guidelines aimed at punishing companies that greenwash. This regulatory push likely will result in more complaints similar to those FTC filed in June 2009 against a national retail chain and two other companies for overstating the environmental benefits of certain paper products.

Even when a certain representation does not rise to the level of greenwashing, you still could be exposed to liability for failing to meet customer expectations, possibly resulting in claims of misrepresentation or fraud. This liability is most likely to occur if you make written or oral representations about the type, amount or extent of benefit to be gained by a particular green construction project.

For example, you will expose yourself to additional liability through the use of a system manufacturer's calculations or estimates that promise certain incentives and/or energy savings related to the purchase and installation of a particular solar or vegetative roof system.

Obviously, the key to avoiding potential liability for greenwashing or some other type of misrepresentation or fraud is to be truthful. This should not be difficult with respect to the services you provide; however, this may be more problematic to the extent that the particular products, materials or systems you install are supplied by manufacturers who may tout the environmental benefits of their products or materials.

As a result, caution your customers in your marketing materials, estimates and contracts that the representations made with regard to financial savings, LEED credits, tax incentives, government grants or other incentives or benefits derived or to be derived from the installation of a roof system are estimates only and originate solely from representations, calculations and assumptions provided by the manufacturer. You should advise your customers to consult competent tax and/or legal counsel to determine the true scope of available benefits.

Insurance issues

Insurance coverage issues also may play a role in determining the extent of any liability exposure arising from green construction practices. Standard builder's risk and commercial general liability insurance coverage applicable to green projects likely will not cover many of the unique risks we discussed.

Therefore, if you contractually agree to deliver a particular result, level of performance, benefit or incentive, consult your insurance adviser to determine whether insurance coverage exists. If coverage exists, you should determine whether and to what extent coverage should be purchased to protect against possible failure to meet those contractual obligations or from personal injury or property damage emanating from such work during your performance or after you have completed work.

Insurance carriers are beginning to identify sources of liability emanating from green building projects, which may be entirely different from what may surface from more conventional construction. As insurance providers become more acquainted with green building practices and products, they should be in a better position to discern the risks and, therefore, offer specific and narrowly tailored products to help mitigate those risks.

No doubt, as newer and more sophisticated green products and services are offered, it will be difficult for insurance providers to determine the risk. Accordingly, the more a green product or service is tested and used to determine its respective efficacy and to the extent any claims originate from such innovative products or services, the more likely a carrier will be in a position to offer policies to address the risks and protect the project and contractor.

Exercise caution

Based on the issues emerging from Southern Builders Inc. v. Shaw Development LLC, you should exercise care when preparing to enter into a green construction contract to ensure important rights are not negatively affected and additional responsibilities are not mistakenly or unintentionally undertaken or assumed.

Implementing the appropriate contractual safeguards upfront—before a contract is signed and work begins—will go a long way toward limiting potential adverse consequences and liability exposure and maximizing profitability.

Brian P. McCormick is an associate attorney and Bart W. Reed, LEED AP, is a shareholder with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.