Lessons from the United States – Green building alarm bells

To date, there does not appear to be any useful case authority in Australia that deals directly with the legal consequences of a failure to achieve a green rating or a failure to comply with “green obligations” in a commercial construction project.  For the time being, we can draw upon a recent case in the United States dealing with green building risk.

The U.S. commentary on that case has acknowledged that “green legal theory has been relatively hard to come by outside of a handful of green-related claims reported by insurance carriers“: “Shaw Development v Southern Builders: The Anatomy of America‘s First Green Building Litigation” (Stephen Del Percio, Green Buildings NYC, 20 August 2008).

The facts in Shaw Development can be summarised as follows:

• Southern Builders was the head contractor for the construction of a US $7.5 million 23 unit condominium project in Crisfield, Maryland called the Captain’s Galley in 2006.  The development was to include a number of green design features that were meant to support an application to the U.S. Green Building Council for what was known as a LEED (Leadership in Energy and Environmental Design) Silver rating.
• Southern Builders sued Shaw Development for US$54,000 in late 2006.  In early 2007, a Maryland Circuit Court reduced Southern Builders’ claim to US$12,000 and consolidated a related US$1.3 million proceeding commenced by Shaw Development that included a claim for US$635,000 in alleged lost tax credits under a State-level green building program.
• Maryland’s green building tax credit program was such that this State offered State tax credits of up to 8 per cent of the project’s total cost for buildings greater than 20,000 square feet and this program applied to the LEED project that Southern Builders had contracted to build.  The program required applicants to submit what was known as an Initial Credit Certificate Application to the Maryland Energy Administration (“MEA”).
• The MEA would then review the application and issue an Initial Credit Certificate setting out the project’s maximum credit amount and an expiration date by which the project must receive a Final Credit Certificate.
• Projects under this regime would apply for a Final Credit Certificate only upon receiving a certificate of occupancy after completion of construction, and a LEED applicant had to submit an Eligibility Certificate to the MEA stating that the building satisfied the criteria necessary to receive the tax credit – in other words, that it qualified for a LEED Silver rating.
• If, however, the Initial Credit Certificate expired before the project obtained its Final Credit Certificate, the available credits would be returned into the State credit program’s “pool”, the project had to get back on schedule and a new application to the MEA would be required.
• In relation to the Captain’s Galley contract documents, Del Percio gives a good summary:

“The contract documents set forth the project’s LEED requirements in a specification section (it’s unclear exactly how those requirements were delineated, other than language in the project manual which stated that the project was ‘designed to comply with a Silver Certification Level according to the USGBC’s LEED Rating System, as specified in Division 1 [of the specifications]’). It does not appear that there was language in the contract documents obligating Southern to secure any formal certification from USGBC.  With respect to the tax credits, although the credits were not identified specifically in the contract (which was the AIA’s 1997 version of the A101 Owner / Contractor Agreement) or any of its attachments that were included in Shaw’s countersuit papers, Southern was required to deliver a Certificate of Occupancy within 336 calendar days from the date of the agreement.”

• Shaw Development alleged claims in both negligence and breach of contract (causes of action which, of course, also exist in Australia and other common law jurisdictions) against Southern Builders for, among other things, failing to “construct an environmentally sound ‘green building’ in conformance with the LEED rating system“.  Del Percio continues:

“However, there was no detail in Shaw’s papers describing precisely how Southern was responsible for the $635,000 in lost tax credits.  Presumably, Southern failed to deliver the project to Shaw such that the latter could obtain a certificate of occupancy by the date specified in the Initial Credit Certificate; according to Shaw’s papers, the project remained incomplete ‘[n]early nine (9) months after the required completion date’ (i.e., the 336 calendars specified in the A101). In addition to the recovery for the lost tax credits, Shaw also sought damages for non-conforming work and loan defaults with its construction lender. The total amount in damages that Shaw sought was approximately $1.3 million.  The damages it sought for the lost tax credits were the largest under any of its claims“.

Conclusions

Proper risk allocation is always a project-specific exercise, however it will be interesting to see how long it will take for the major standard form construction contracts in Australia to evolve by providing some guidance or industry consensus.  Even then, such amendments would be a mere working template for review among a whole suite of project documents.

On the other hand, as recently as February 2010, it was announced in the United States that ConsensusDOCS, comprising numerous leading American industry associations ranging from principals, contractors, design consultants and lenders, has released the “ConsensusDOCS 310 Green Building Addendum” to set out the parties’ liabilities when entering contracts for green construction.

Shaw Development was set down for trial in August 2007 although it settled out of court.  The learnings that can be applied to the Australian construction industry are obvious:

• although the claim was asserted by the contractor, slightly different facts could have just easily resulted in the case being asserted against the architect, engineer, or LEED consultant;
• failure to obtain a “green certification” per se is just one of the potential breaches that could be attributed to, say, a contractor or consultant.  Careful consideration needs to be given as to what is required to obtain a rating or performance standard, as well as to document clearly the responsibility that each of the parties will have both during and after project delivery.  In addition, what sorts of financial incentives, grants, rebates, operating costs savings and enhanced marketing opportunities are relevant to the negotiations, particularly where government funding may be available?  (For example, Sustainability Victoria’s rewards for ResourceSmart Business / Commercial Buildings and other rebates or the Federal Government’s Green Building Fund program targeted at owners of existing commercial buildings with grants ranging from $50,000 to $500,000 available for up to 50% of project costs);
• many of the early green projects were iconic and were driven by idealism.  Hence, less focus on the contractual risk allocation for achieving rating outcomes.  Now that green projects are becoming more the norm ranging not only from “the big end of town” but also within the mid tier and niche construction markets, contract negotiations are likely to be driven by a more arms-length commercial focus.  Accordingly, project participants (whatever their bargaining power) should seek early front-end legal advice.

MST News articles published in the latter half of 2009 addressed a number of legal liability issues relating to green design and construction:

Greenwashing Construction Materials & Products

Going Green In Commercial Construction: Green Rating Regimes

Lifecycle Performance in Commercial Design & Construction

Author: Stuart Miller