“Greening” the Design and Construction CONTRACTS your …



From PLI’s Course Handbook

The Green Real Estate Summit 2009: What Attorneys, Developers, Bankers and Lenders Need to Know

#18490

8

project owner strategies

for “greening” design and construction contracts

Mary Jane Augustine

McCarter & English, LLP

Project Owner Strategies for

“Greening” Design and Construction Contracts

Mary Jane Augustine, Esq.

McCarter & English

PLI Green Real Estate Summit 2009

March 20, 2009

|[pic] | |Mary Jane Augustine |

| | |PARTNER |

| | |NEW YORK |

|PRACTICE GROUP | |Ms. Augustine is Practice Group Leader for the firm's Construction Practice Group, and has provided legal |

|Construction | |representation for more than 30 years to various participants in the construction industry, including owners, |

|CONTACT | |developers, contractors, construction managers and design professionals. Her practice currently focuses on the |

|245 Park Avenue | |development of project delivery strategies, and the preparation and negotiation of design, construction and |

|27th Floor | |related contracts for complex domestic and international construction projects. She also provides general legal|

|New York, NY 10167 | |and business consultation for participants in the construction industry. |

|212.609.6831 | |Ms. Augustine has worked as an attorney in private practice, as a contracts consultant with an international |

|maugustine@ | |project management firm, and as in-house counsel for a “signature” architectural firm. Ms. Augustine has been |

|EDUCATION | |involved with construction projects in South America – where she worked as a contracts consultant on–site at |

|J.D., Emory University School of Law, 1976 | |Venezuela’s Guri Dam for 6 months – and in Asia, Russia, and across the United States. Her contracting |

|M.B.A., Emory University, 1971 | |experience encompasses projects such as the renovation of New York's Grand Central Station; the design of more |

|B.A., Emory University, 1969 | |than 20 museums, including New York's Museum of Modern Art; high rise office buildings in mid-town Manhattan; |

|ADMITTED TO PRACTICE | |infrastructure projects; hospitals; sports facilities, including the new Yankee Stadium and the New Meadowlands |

|New York | |Stadium; cultural facilities; large scale condominium projects; and numerous institutional, mixed-use, |

|New Jersey | |commercial and entertainment projects. |

|MEMBERSHIPS AND PROFESSIONAL ACTIVITIES | |In addition, Ms. Augustine has experience with intellectual property protection and licensing as they relate to |

|New York Bar Association | |the construction industry, and she has negotiated product licensing arrangements for a number of major |

|New Jersey Bar Association | |designers. |

|American Bar Association Forum on the | |Ms. Augustine is a trained mediator and arbitrator in construction and design-related disputes. She has served |

|Construction Industry | |on the American Arbitration Association's National Panel of Arbitrators since 1976, and was an arbitrator for a |

|American Arbitration Association National | |construction failure case where claims exceeded $150 million. |

|Panel of Construction Arbitrators | | |

PROJECT OWNER STRATEGIES FOR “Greening” Design and Construction CONTRACTS

BY MARY JANE AUGUSTINE, ESQ.

MCCARTER & ENGLISH, LLP

“No Longer a Fad, Green Hits Mainstream - Green building for several years had been a novelty, an extra, sometimes expensive, set of bells and whistles to hang on signature buildings. But over the past two or three years, concerns about the environment and global warming have brought sustainable design to the forefront of the construction industry. And with the proliferation of green products and materials, and sudden surge in energy prices, building green no longer is an expensive luxury, but an often cost-effective alternative to traditional design.” ENR Magazine.[1]

In its June 23, 2008 issue, ENR Magazine describes, without hyperbole, what appears increasingly to constitute a construction industry sea change - the Green Building movement. There is no one, universally accepted definition of Green Building. For the purposes of the article, we will adopt Wikipedia’s definition of the “Green Building” process as one which increases the efficiency with which buildings use resources - energy, water, and materials - while reducing building impacts on human health and the environment during their lifecycle, through better siting, design, construction, operation, maintenance, and removal. A new building and an existing building which has been extensively renovated in accordance with these principles will also be referred to as a “Green Building.”

The Green Building movement in the United States has developed rapidly since the founding of its umbrella organization, the U.S. Green Building Council (“USGBC”), in 1993, and the publication of the first Green Building or LEED Rating System in 1999.[2] In the interim, a number of Green Building regulations and incentives have been implemented at the local, state and federal levels[3]. While these have generated many novel legal issues, the courts have to date provided little or no guidance.[4]

One of the most important issues is how best to assure contractually that the design and construction of a project will actually result in a Green Building that satisfies the Owner’s needs and expectations. Appropriately specific provisions in the contracts between key participants in the Green Building process are essential to achieving the desired result, but the requirements for drafting them largely remain to be developed. This paper will discuss some of the important issues that those contract provisions need to address, and suggest guidelines for drafting them.

In order to understand what clauses should be included in contracts for Green Buildings, it is first necessary to understand the existing framework for their design and construction.

Establishing an Objective Standard for Green Building

In the absence of a universally accepted definition of what constitutes a “Green Building”, it is necessary to identify an objective standard against which to measure contract performance. There are several Green Building rating systems currently available that could provide the necessary level of objectivity for contracting purposes.[5]

However, at the present time, perhaps the most widely accepted objective standard for Green Buildings in the United States is the LEED Green Building Rating System developed by the USGBC.[6]

LEED, which is an acronym for “Leadership in Energy and Environmental Design”, provides objective requirements for a variety of building types including, among others, new construction, major renovations and commercial interiors. LEED requirements set Green Building performance standards for both the design and construction phases of building projects.

LEED for New Construction standards cover both new construction and major renovations to existing buildings, and are applicable to all commercial buildings as defined by standard building codes. This LEED Rating System was originally designed primarily for application to commercial office buildings. However, in practice, it has found applicability to may other buildings types including retail and service establishments; institutional building such as libraries, schools, museums and churches; hotels and high rise residential buildings.[7]

The LEED Rating System in its current form sets forth a point system which provides a basis for an objective evaluation of how “Green” a building actually is.[8] At the present time, projects can be awarded up to a maximum of 69 points for meeting requirements in the areas of: (1) Sustainable Sites; (2) Water Efficiency; (3) Energy & Atmosphere; (4) Materials & Resources; (5) Indoor Environmental Quality; and (6) Innovation in Design.[9] The points apply to both design criteria and sustainable construction practices. Based on the number of points certified by USGBC upon completion, a project can attain one of the following ratings[10]:

Certified 26-32 points

Silver 33-38 points

Gold 39-51 points

Platinum 52-69 points

Using the LEED for New Construction Rating System as a point of reference, this paper will examine issues relating to Green Building from the perspective of the building owner or developer (“Owner”) who seeks to assure contractually, to the extent reasonably possible, that the final result of the design services and construction work he commissions will be the Green Building that he originally envisioned.

Frequently Used Design and Construction Contracts

A successful Green Building project is based on: (1) development by a knowledgeable design team of design documents - i.e. drawings and specifications - that adequately reflect Green Building principles; and (2) construction of the project by a knowledgeable contractor in conformity with both those drawings and specifications and accepted Green Building practices. Because LEED encompasses both design and construction activities, it is necessary for the Owner to include effective Green Building provisions in his agreements with the Architect (“Architect’s Agreement”), as well as the Contractor (“Construction Contract”).

Within the construction industry in the United States, there is wide-spread use of certain standard form agreements which the parties modify depending on the requirements of their particular project. Prominent among these are the AIA Contract Documents which have been developed and maintained by the American Institute of Architects since 1888.[11] The AIA suite of Documents now comprises more than one hundred forms, and includes the recently revised AIA Document B101-2007 (Standard Form of Agreement between Owner and Architect); AIA Document A101-2007 (Standard Form of Agreement between Owner and Contractor where the Basis of Payment is a Stipulated Sum); and AIA Document A201-2007 (General Conditions of the Contract for Construction). Although there are numerous other AIA Document forms that address various specialized contracting scenarios, these three are the most basic, and perhaps the most frequently used, forms of their type.

Also released in 2007 to coincide with issuance of the revised AIA Documents are the competing ConsensusDocs, developed by a consortium of industry organizations including the Associated General Contractors (AGC) and various owner, subcontractor and engineering trade associations.[12] The ConsensusDocs that correspond to the AIA Documents identified above are ConsensusDocs 240 (Standard From of Agreement between Owner and Architect/Engineer) and ConsensusDocs 200 (Standard Agreement and General Conditions between Owner and Contractor).[13]

While the AIA Documents and the ConsensusDocs provide a familiar (in case of the AIA Documents), generic and reasonably convenient approach to design and construction contracting, it is important for the Owner contemplating a Green Building project to understand that, except for a few provisions in AIA Document B101 and a separate AIA scope Document (AIA Document B214-2007-Standard Form of Architect’s Services: LEED Certification) which are discussed below, these standard form documents are silent on Green Building issues. More importantly, they do not address the peripheral issues that are key to appropriate risk allocation and achievement of the Owner’s Green Building goals.

AIA Document B101 gives a nod to Green Building principles in recognition of the AIA’s stated public policy that architects should perform their services in an environmentally responsible manner, and that they should advocate for sustainability in the creation and operation of the built environment.[14] However, the pertinent provisions in the new AIA Document B101-2007 are not sufficient from the Owner’s perspective to assure that the Owner’s Green Building goals will be met.

For example, Section 3.2.5.1 of AIA Document B101 requires the Architect, as part of his Basic Services (and within the base fee), to “… consider environmentally responsible design alternatives, such as material choices and building orientation …”. However, there is no specific description as to what this effort should entail, and no indication of any liability on the part of the Architect for failing to so advise the Owner. Similarly, Section 3.2.5.2 obligates the Architect, again as part of Basic Services, to “… consider the value of alternative materials, building systems and equipment …”. However, this language is similarly vague and fails to provide guidance to either Owner or Architect as to what is expected of the Architect and what is his exposure if he fails to provide the required guidance to the Owner. The remaining Green Building references in AIA Document B101 offer the Owner, on an Additional Services basis (i.e. for the payment of an additional fee): (1) extensive environmentally responsible design (Section 4.1.23); and (2) LEED Certification (Section 4.1.24). In the event that the Owner authorizes the Architect to perform LEED Certification-related services, the parties would need to add AIA Document B214-2007, which defines that additional scope, to their Agreement. However, neither of these AIA Documents goes beyond the limits of scope of services definition.

The situation is no better with regard to the Construction Contract. AIA Document A101-2007, which serves as a type of “cover contract” between the Owner and the Contractor, sets forth the specific business terms of the parties’ relationship, including a description of the Contractor’s Scope of Work, the Contract Time and the Contract Price. The accompanying General Conditions (AIA Document A201-2007) address the specifics of how the Contractor will perform his contractual obligations including, among others, how the Contractor’s Scope of Work and/or the Contract Time may be changed; how payment will be made; how the Construction Contract can be terminated or suspended; and how disputes between the parties are to be resolved. However, within the AIA framework, these two Documents (A101 and A201), which together define the Owner-Contractor relationship, are completely silent on the issue of Green Building. As a result, although the implementation of Green Building principles and procedures is equally important during the construction phase, the AIA Documents provide the Owner and the Contractor with no contractual guidance for this portion of the project.

The ConsensusDocs, which do not contain any references to Green Building in either their design or construction contracts, similarly provide no guidance to the contracting parties.

Accordingly, until such time as the standard form contracts are modified to address Green Building issues in more detail (which is unlikely in the near future because of the normal 10-year revision schedule for AIA Documents),[15] the Owner who aspires to have a Green Building, and wants contracts that reflect that aspiration, must either modify the form Documents substantially to incorporate “Green Building” clauses, or develop a custom contract that addresses the specifics of his project. Given that necessity, what are the key contractual issues and how may they best be addressed from the Owner’s perspective?

Green Building Contract Provisions

Whether an Owner intends to modify the AIA Documents or ConsensusDocs, or start from scratch with one or more custom contracts that will memorialize the undertakings of Owner and Architect, and Owner and Contractor relative to a Green Building, these are some of the key issues that need to be addressed:

Documenting the Requirement for a Green Building.

While it seems like the requirement for a Green Building should be nothing more than a simple affirmative statement, this contract provision could prove to be more complicated than anticipated. A statement in either the Architect’s Agreement or the Construction Contract that the project as designed and constructed will be a “Green Building” is both inadequate and ambiguous unless the contract provides its own specialized definition of that term, because, as previously noted, there is no generally accepted definition of what constitutes a “Green Building” without reference to an objective standard such as LEED.

In fact, Shaw Development v. Southern Builders, the country’s first lawsuit involving Green Building issues, arose out of a situation where the Construction Contract did not clearly describe the Contractor’s obligation to construct a Green Building.[16] The Shaw Development case, which was filed in a Maryland Court, but later settled, involved a situation where the specifications provided for a project that was to be designed for LEED Silver Certification, but the Construction Contract itself was silent on the Contractor’s obligation to secure any type of formal Green Building Certification. An important issue in the case involved tax credits under a State-level Green Building program which Shaw Development, the Owner, alleged were lost because Southern Builders failed to deliver a Certificate of Occupancy by the required date. The Construction Contract, which was an AIA Document A101 (1997 version), specified a delivery date for the Certificate of Occupancy, but did not specifically link that delivery date to the regulatory scheme that would have provided the tax credits. Because it was settled, Shaw Development provides no guidance from the courts, but it is instructive regarding the need for contracts that adequately describe the parties’ respective Green Building rights and obligations.

How the requirements for a Green Building are memorialized may depend on whether the Owner intends to seek LEED Certification for the project. For example, assume first that an Owner wants a building that is designed and constructed in accordance with Green Building principles, but does not intend to seek LEED Certification. A clause such as the following in the Architect’s Agreement, and a corresponding provision in the Construction Contract, would be appropriate:

“Within thirty (30) days after execution of this Agreement, Architect [Contractor] shall provide, for Owner’s review and approval, a Green Building Plan for the design [construction] of the Project which is consistent with the Silver Certification level of the U.S. Green Building Council’s LEED for New Construction Rating System. Owner does not anticipate that LEED Certification will be sought for the Project. However, Architect [Contractor] shall track LEED points informally, and provide Owner with such information on a periodic basis. Upon its approval by Owner, Architect’s [Contractor’s] Green Building Plan shall be deemed to be attached to this Agreement as an Exhibit and incorporated herein by reference. Thereafter, Architect shall perform its Services [Contractor shall perform the Work] in a manner consistent with the approved Green Building Plan.”

If, on the other hand, the Owner does want a LEED Certified project, a simple statement in the contract such as: “The Project will be designed [constructed] to achieve a LEED Silver Certification”, may meet resistance from both the Architect and the Contractor.

Counsel for Architects can be expected to advise their clients not to commit contractually to design a building that meets a specific level of Certification such as LEED Silver, or to guarantee specific results, e.g., the achievement of 25% energy cost savings. Such statements in the Architect’s Agreement could be interpreted as an express warranty which would be excluded from coverage by the Architect’s professional liability insurance policy.[17]

More broadly, there is a concern on the part of Architects and their counsel that, because LEED Certification is a collaborative process that involves many variables, including design, construction and operational components, it is unfair to make the Architect alone responsible for achieving the desired level of LEED Certification. There is also concern that contractual requirements related to Green Building may impact the legal standard of care, raising it above the traditional negligence standard that is normally covered by professional liability insurance.[18] There is additional concern about a potential disparity between the Architect’s standard of care obligation to comply with the applicable building codes and conflicting Green Building requirements. Because LEED may not in all cases be consistent with local code requirements, there could be situations in which complying with the LEED Certification requirements could cause a technical violation of the standard of care or vice versa.[19] When an Owner seeks LEED Certification, the Architect’s Agreement needs to recognize and balance both the Owner’s Green Building goals and the Architect’s concern about assuming contractual responsibility to achieve a Green Building goal that may be unachievable as the result of causes beyond the Architect’s reasonable control, and which could, in addition, subject him to an uninsurable risk.

The Contractor can be expected to have similar concerns. The Architect plays a critical role in developing the drawings and specifications that establish the requirements for a Green Building, but the Contractor typically has no input into this process. The Contractor will say that, because he is obligated to construct the project in accordance with the Architect’s drawings and specifications, he should not be held liable if the design developed by the Architect does not meet the LEED requirements for a certain level of Certification. While this is a legitimate argument insofar as the design process goes, the Contactor should nonetheless be held responsible for assuring that his construction operations and materials procurement meet LEED requirements. The goal is to assure that the Certification process for an otherwise compliant project is not derailed by the Contractor’s non-compliant activities. Once again, the applicable provision in the Construction Contract must represent a balancing of the Owner’s LEED-based aspirations with the Contractor’s concerns about complying with both the drawings and specifications and the requisite level of LEED Certification requirements.

Identifying the Green Building Team

From an Owner’s perspective, securing the proper design and construction team for the Project is always essential, but it is doubly important in the case of a Green Building project. Accordingly, the Owner will want to assure that staffing issues are appropriately addressed in the relevant project contracts.

The USGBC does not just “certify” buildings based on the LEED Rating System; it also “accredits” individuals who have the training and experience to shepherd a Green Building through to successful completion. LEED accredited professionals (“LEED APs”) have “demonstrated a thorough understanding of Green Building practices and principles and the LEED Green Building Rating System”,[20] by passing the LEED accreditation exam offered by the Green Building Certification Institute, an affiliate of USGBC. More than 60,000 building professionals from a variety of practice areas have become LEED APs since the Professional Accreditation program began in 2001.[21] Although many LEED APs are also architects, engineers, construction managers or contractors by training, this is not required, and representatives of other disciplines and professions - including attorneys - have taken and passed the exam.

There are many independent LEED APs available to provide Green Building-related services to the Owner on a consulting basis. If the Owner elects to engage a LEED AP (“LEED Consultant”) independent from the Architect, the Owner will need to enter into an agreement with the LEED Consultant (“LEED Consultant Agreement”) that describes the scope of services to be provided. AIA Document B214-2007 provides a good starting point for describing the LEED Consultant’s scope of services. However, the LEED Consultant Agreement should also address risk allocation issues, as well as how the LEED Consultant will interact and coordinate with the Architect, other members of the design team such as engineers, and the Contractor. In turn, the Architect’s Agreement and the Construction Contract need to contain corresponding provisions that address coordination and risk issues, such as, for example, the extent of the Architect’s obligation to incorporate Green Building specifications proposed by the LEED Consultant into the Architect’s set of design documents. The goal should be to create a Green Building team in which each participant knows his scope of responsibility, and is contractually obligated to coordinate and cooperate with other team members in what is, ideally, a highly collaborative process.

However, an independent LEED Consultant is not the Owner’s only option. Most large and many medium to small-sized architectural, engineering and construction firms now have one or more LEED APs on staff. Accordingly, assuming that the Owner intends to engage an Architect to provide Green Building-related services, he will want to assure that the Architect’s Agreement identifies one or more LEED APs among the “Key Employees” to be assigned to the project. The Construction Contract would have a corresponding provision. Individuals employed by the Architect or Contractor who are designated as Key Employees are normally assigned to the project for the duration of his or her employer’s involvement with it, and may not be re-assigned to another project without the Owner’s prior written consent. This assures continuity of Project staffing. The applicable contract should provide that, in the event a Key Employee voluntarily leaves the employing firm, dies, becomes disabled or is otherwise unable to serve effectively (in the Owner’s reasonable determination), the employer would be contractually obligated to replace the departed Key Employee (at no additional charge) with someone of comparable training and experience. This replacement Key Employee should likewise be subject to the Owner’s written approval.

The services of a LEED AP are critical to the Green Building process, regardless of whether the Owner’s goal is LEED Certification for the project. Where the Owner does seek LEED Certification, the Architect’s LEED AP or the LEED Consultant will: (1) register the Project with the USGBC; (2) work with the Owner and other consultants to evaluate the feasibility of targeting a particular level of LEED Certification, given the Owner’s budgetary and time requirements; (3) develop a strategy for attaining the desired level of LEED Certification; (4) document the design and construction process as required by LEED; (5) seek Credit Interpretation Rulings (CIR) from the USGBC in those situations where the LEED Reference Guide does not sufficiently address a specific issue arising in connection with the requirements for a LEED point, or there is a conflict that needs to be resolved; (6) coordinate with the USGBC regarding the Design Phase Review and the Construction Phase Review; (7) assist the Owner in evaluating contractor and subcontractor candidates on the basis of Green Building experience; and (8) otherwise coordinate and facilitate the process for a particular Project until LEED Certification is obtained at the end of the Project.[22]

During construction, the Architect’s LEED AP or the LEED Consultant can monitor compliance by the Contractor with LEED requirements. This service would be akin to the site observation services normally provided by an Architect during the Construction Phase. However, a specific requirement for it would need to be added to the Construction Phase scope of services description. The LEED AP or LEED Consultant would report to the Owner regarding any Contractor or subcontractor activities that are inconsistent with obtaining the desired level of LEED Certification for the project. Such site observation would not replace the Contractor’s LEED-related services, but would augment them and provide the Owner with a “second set of eyes” with regard to how the Contractor is actually carrying out the construction. Note that a corresponding provision should be included in the Construction Contract advising the Contractor of this monitoring function during the Construction Phase, and obligating the Contractor to cooperate and coordinate with it.

Even if the Owner does not intend to seek LEED Certification, but merely wants to informally apply Green Building principles to his Project, the inclusion of a LEED AP on the design team can be worth the additional cost. In such a case, the LEED AP may, again, be either an employee of the Architect, or an independent LEED Consultant. When LEED Certification is not the end goal, functions such as project registration, obtaining CIR’s and coordination with the USGBC would be eliminated from the LEED AP’s scope of services. However, the Owner would still want the LEED AP to: (1) assist in developing an overall Green Building strategy; (2) track LEED points informally during both the Design and Construction Phases of the project; (3) monitor the design as it develops for compliance with Green Building principles; (4) advise the Owner regarding the Green Building qualifications of prospective contractors and subcontractors; (5) review the selected Contractor’s Green Building Plan; (6) oversee how the Contractor is implementing Green Building practices and procedures during the Construction Phase; and (7) report to the Owner periodically on the status of the project relative to the Owner’s Green Building goals.

Not to be outdone by the Architects, many contractors and construction managers are also experienced with Green Building practices, and now have LEED APs on staff. Keeping in mind that if LEED Certification is sought, construction practices and procedures must also comply with LEED requirements, the Contractor should be obligated in the Construction Contract to have at least one LEED AP - usually at the Project Manager level - assigned to the Project to monitor the work of the Contractor and its subcontractors. This LEED AP should also be designated as a Key Employee under the Construction Contract.

Allocating Risk for Failure to Achieve LEED Certification.

One of the most difficult issues relating to Green Building involves how to contractually allocate the risk of failing to obtain the desired level of LEED Certification. This difficulty arises from the confluence of the following factors that materially impact project economics from the Owner’s perspective:

▪ Tax Benefits. Many States now offer tax credits relating to Green Building projects. If the credit is tied to LEED Certification (or compliance with LEED requirements that are tracked, even without Certification), the credit may be lost if the required level of Certification is not attained.[23]

▪ Grants and Loans. Some States also offer Green Building-related grants and loans, which may be tied to LEED Certification.[24]

▪ Special Regulations and Codes. Some municipalities have enacted additional requirements that specifically benefit Green Building projects. For example, the Town of Babylon, New York requires all new buildings of more than 4,000 square feet to obtain LEED Certification. Applicants for building permits must submit LEED for New Construction checklists with their applications. In addition, every applicant must pay a fee of $0.03 per square feet of the project, not to exceed $15,000, to the township Green Building Fund. These fees are refunded to applicants that ultimately achieve LEED Certification.[25] Similarly, the Town of Riverhead, New York assesses lower building permit fees for projects that qualify for any Federal, State or local Green Building tax exemption.[26] There are many such programs in states and municipalities around the Country, and the number and innovative nature of these programs can be expected to increase in the coming years.[27]

▪ Expedited Permitting. In some jurisdictions, the availability of an expedited permitted process for a Green Building could provide a significant financial benefit for the project Owner, For example, a program in Chicago reduces the permitting process to less than 30 business days, and in some cases less than 15 days, depending, in part, on the number of Green Building elements in the Project, and the LEED Certification level being pursued.[28] This type of incentive program provides a monetary benefit to Owner by reducing the time spent on the approval process, thereby allowing construction to get underway more quickly.

▪ Mandatory LEED Certification. In the future, LEED Certification may increasingly be mandated by statute. For example, Howard County, Maryland has enacted a statute (effective July 1, 2008) requiring most new private buildings larger than 50,000 square feet to attain at least a LEED Certified rating.[29]

▪ Increased Density and other Zoning Incentives. In some jurisdictions, Owners of Green Buildings may be entitled to density and other zoning benefits. For example, the Town of Cranford, New Jersey has enacted an Ordinance that establishes a “Green Building Density Incentive Program” which allows redevelopers of property to construct a larger building than would otherwise be permitted on the property in return for achieving LEED Certification. The size of the increase is based on the type of project and the level of LEED Certification being sought.[30] Similarly, Pittsburgh, Pennsylvania has supplemented the City Code on Zoning to add a new section covering “Sustainable Development Bonuses” that provide for an additional 20% in floor area and a variance of 20% in additional height, for LEED Certified buildings in non-residential zoning districts.[31]

▪ Financing. To the extent that financing for the project is in any way tied to LEED Certification, failure to ultimately achieve that Certification could, in some circumstances, have a detrimental impact.[32]

▪ Marketing the Building. According to ENR Magazine, LEED has become “…an important brand name that owners and the public alike have come to identify with sustainable design.”[33] This branding is important not just for prospective tenants and purchasers, but is also affects the Owner’s ability to attract “…sophisticated employees who want to work in an environmentally friendly facility.”[34] As a result, if a completed project fails to achieve the LEED Certification, or Certification at the anticipated level, then there could be a negative impact on future rents and sale prices, and on the Owner’s ability to brand his building and distinguish it from the competition. Because Certification is awarded to a completed project, these negatives would only be magnified if the building is pre-marketed as being at one level of LEED Certification, but ultimately achieves a lower level or no Certification at all.

Given the benefits summarized above, and other more amorphous ones such as increased employee productivity or branding advantages, the potential direct and consequential damages to the Owner whose project fails to achieve the anticipated level of LEED Certification can be enormous. At the same time, were they to guarantee Certification at a certain level, such a failure would represent a large liability exposure for the Architect and the Contractor who would probably not be able to procure appropriate insurance to cover the risk. Given this dynamic, it is not surprising that contract provisions allocating the risk of Certification would be among the most difficult to negotiate in both the Architect’s Agreement and the Construction Contract.

Part of the problem stems from the fact that, because achieving LEED Certification is a collaborative process involving all members of the Project team, failure to achieve Certification may not be the fault of any one party.

Counsel to design professionals advise their clients against warranting that a particular project will ultimately be LEED Certified at a particular level, and recommend, instead, that the Architect or engineer tie his potential liability to a professional negligence standard.[35] This recommendation is consistent with the normal contractual approach taken by design professionals relative to the services they provide because, as previously noted, express warranties regarding the performance of professional services are not covered by professional liability insurance.

Contractors have similar concerns, but for different reasons. The Contractor faces a real risk of being caught in the middle if the Architect’s drawings and specifications ultimately do not satisfy the requirements for LEED Certification. The Contractor also faces potential liability for not procuring the types of materials that satisfy LEED requirements, and for failing to assure that his own work force and his subcontractors perform the work in a LEED-compliant manner.

Because it is necessary to balance these competing concerns, there is no one standard contract clause that will be appropriate in every situation. Rather, we suggest that a series of clauses, each addressing a different aspect of the overall effort to attain LEED Certification, be crafted by counsel for the parties based on the requirements of the particular situation.

From the Owner’s perspective, we suggest using contract clauses similar to the following as building blocks to address the Owner’s potential damages from a failure to achieve LEED Certification. In addition, the inclusion of some or all of the following clauses can effectively turn a standard contract into a “Green Building” contract:

|Contract Issue |Suggested Contract Language |

|Certification level being sought by the |“Architect [Contractor] acknowledges that Owner|

|Owner |intends to seek LEED Silver Certification for |

| |the Project.” |

|Green Building credentials of the |“Architect [Contractor] represents to Owner |

|Architect and/or the Contractor |that it is experienced with Green Building |

| |principles and practices consistent with the |

| |LEED Rating System, and that it has sufficient,|

| |experienced personnel on staff including, but |

| |not limited to, one or more LEED APs, who will |

| |be Key Employees for the Project, and who will |

| |oversee and coordinate the LEED Certification |

| |process on behalf of the Architect. |

| |[Contractor]”. |

|Representations by the Architect or |“Architect [Contractor] acknowledges that |

|Contractor were a material inducement to |representations by Architect [Contractor] |

|engagement by Owner |regarding its knowledge of and experience with |

| |Green Building principles and practices |

| |including, but not limited to, those associated|

| |with the LEED Rating System, constituted a |

| |material inducement in Owner’s decision to |

| |engage Architect [Contractor] in connection |

| |with the Project.” |

|Confirmation of Team Maintenance |“At all times during the performance of its |

|throughout the Project |Services [Scope of Work] under this Agreement |

| |and through Final Completion of the Project, |

| |Architect [Contractor] shall maintain a team |

| |including, but not limited to, the Key |

| |Employees, that is knowledgeable about and |

| |experienced with Green Building principles and |

| |practices including, but not limited to, those |

| |associated with the LEED Rating System.” |

|Performance of Services and Work in |Architect: |

|conformity with LEED requirements |“Subject to the applicable standard of care, |

| |Architect shall develop Drawings and |

| |Specifications for the Project in a manner |

| |consistent with Green Building principles and |

| |practices including, but not limited to, those |

| |associated with the LEED Rating System, and |

| |with Owner’s goal of attaining LEED Silver |

| |Certification for the Project. Architect shall|

| |engage Subconsultants who have knowledge of and|

| |are experienced with such Green Building |

| |principles and practices. Architect shall |

| |include a corresponding obligation in its |

| |agreement with each of such Subconsultant.” |

| |Contractor: |

| |“Contractor shall perform its Scope of Work in |

| |accordance with Green Building principles and |

| |practices including, but not limited to, those |

| |associated with the LEED Silver Rating System,|

| |and in a manner consistent with Owner’s goal of|

| |attaining LEED Silver Certification for the |

| |Project. Contractor shall engage |

| |Subcontractors who have knowledge of and |

| |experience with such Green Building principles |

| |and practices, and Contractor shall include a |

| |corresponding obligation in the Subcontract |

| |with each of them regarding proper conduct of |

| |the Work.” |

|Performance Remedies for actions that |Architect: |

|threaten the LEED Certification |“In the event that any action or inaction on |

| |the part of Architect or any Subconsultant |

| |threatens Owner’s ability to obtain LEED Silver|

| |Certification for the Project, Architect and |

| |its Subconsultants shall promptly take all |

| |actions that may be reasonably necessary to |

| |correct the situation, including, but not |

| |limited to, revising the Drawings and |

| |Specifications, at no additional cost to |

| |Owner.” |

| | |

| |Contractor |

| |“In the event that any action or inaction on |

| |the part of Contractor or any Subcontractor |

| |threatens Owner’s ability to obtain LEED |

| |Certification for the Project, Contractor and |

| |its Subcontractors shall promptly take all |

| |actions that may be reasonably necessary to |

| |correct the situation including, but not |

| |limited to, replacing materials and equipment |

| |that do not meet LEED requirements, and |

| |removing and redoing any Work that does not |

| |meet LEED requirements including, but not |

| |limited to, those instances of non-compliance |

| |discovered during Contractor’s return and |

| |repair period after Final Completion of the |

| |Project.” |

|Basic Services and Base Contract Work to |Architect: |

|continue until issuance of the LEED |“Architect’s obligation to perform Basic |

|Certification |Services relating to LEED Certification for the|

| |Project shall continue until issuance of the |

| |Certification by the U.S. Green Building |

| |Council, including but not limited to, the |

| |filing of an appeal and participation in the |

| |appeal process in the event that LEED |

| |Certification is denied for any reason that |

| |relates, in whole in or in part, to negligence |

| |or failure to comply with LEED requirements on |

| |the part of Architect and/or its |

| |Subconsultants. Architect shall remain |

| |similarly involved if any delay in issuance or |

| |denial of LEED Certification is attributable to|

| |the actions or inactions on the part of |

| |Contractor or any Subcontractor; provided, |

| |however, that in such an event, Architect shall|

| |be compensated on an Additional Services basis |

| |for its services.” |

| |Contractor: |

| |Contractor’s obligations relating to LEED |

| |Certification are part of its base Contract |

| |Scope of Work. The Contract Time and |

| |Contractor’s obligations relating to LEED |

| |Certification shall continue until issuance of |

| |LEED Certification for the Project including, |

| |but not limited to, the filing of an appeal and|

| |participation in the appeal process in the |

| |event that LEED Certification is denied for any|

| |reason that relates, in whole or in part, to |

| |any negligence or failure to comply with LEED |

| |requirements of the Contract Documents on the |

| |part of Contractor or any Subcontractor. |

| |Contractor shall remain similarly involved if |

| |any delay in issuance or denial of LEED |

| |Certification is attributable to Architect or |

| |any Subconsultant; provided, however, that in |

| |such an event, the Contract Price and the |

| |Contract Time shall be equitably adjusted by |

| |Change Order.” |

|Calculation of Damages/Limitation of |Architect: |

|Liability[36] |“Architect shall be liable for all damages, |

| |losses, costs and expenses (collectively, |

| |‘Damages’) incurred by Owner, that arise out of|

| |or relate to the failure to obtain LEED |

| |Certification for the Project to the extent |

| |caused by or arising out of negligence on the |

| |part of Architect in the performance of |

| |professional services under this Agreement; |

| |provided, however, that Architect’s liability |

| |under this Section for LEED-related Damages |

| |shall not exceed $ ___________ (‘LEED |

| |Limitation of Liability’)”. |

| |Contractor: |

| |“Contractor shall be liable for all damages, |

| |losses, costs and expenses (collectively, |

| |‘Damages’) incurred by Owner, that arise out of|

| |or relate to failure to obtain LEED |

| |Certification for the Project to the extent |

| |caused by or arising out of negligence in |

| |performance of the Work, or failure to comply |

| |with the Contract Documents by Contractor or |

| |any Subcontractor; provided, however, that |

| |Contractor’s liability for LEED-related Damages|

| |under this Section shall not exceed |

| |$____________ (‘LEED Limitation of |

| |Liability’)”. |

The foregoing sample provisions are not intended to constitute an all-inclusive formula for “Greening” the Architect’s Agreement and the Construction Contract. Rather, in each case the Owner’s specific goals – e.g. securing specified tax incentives or grants – should be clearly stated in the contract. However, these provisions are intended to demonstrate how a large risk such as failure to achieve LEED Certification might be de-constructed into component parts which may be more acceptable to the various parties involved. In every case, however, this risk and others associated with Green Building need to be analyzed and negotiated in the context of each party’s rights and obligations under the Architect’s Agreement and the Construction Contract.

Green Insurance Provisions

As with other contract provisions, there is at present little guidance as to how to document insurance requirements for Green Building projects. The insurance industry appears to be approaching Green Build-related issues cautiously, in recognition of the fact that new technologies and building practices can present both benefits and additional risks. For example, green roofs can reduce energy costs, carbon dioxide emissions and urban hot spots, but they also pose increased risks of structural problems and water infiltration.[37]

Architect’s Agreements typically require that the Architect maintain certain types of insurance and specific coverage limits for the duration of the project.[38] In the case of professional liability insurance (“E&O Coverage”), Architects are often contractually required to extend the duration of E&O Coverage for a stated period of time after completion of the Architect’s services - frequently three years – to allow design defects time to manifest themselves in the use and occupancy of the building.

Because many of the risks associated with Green Building relate to design services, it might be expected that there would be specific policies to address Green Building risks. However, an industry survey by Marsh indicated a wait-and-see attitude:

“As of May 2008, the design firm professional liability markets acknowledge that it is premature to determinate the exact impact of green design or to know whether the risks are materially different from those emanating from traditional design. Although none of the markets surveyed has developed new policies or coverage enhancements, many are providing their clients with risk management advice. Most are keeping a watchful eyes.”[39]

Accordingly, at the present time, the Architect’s Agreement need not provide specifically for Green Building insurance coverage. However, Architects and other design professionals can be expected to increasingly seek guidance from their insurance brokers as to how Green Building-related risks should be addressed in the Architect’s Agreement because of what they perceive as an “evolving Standard of Care”.[40]

With regard to construction aspects of the project, Green Building may be regarded by insurers providing environmental/pollution coverage as less risky than traditional construction because of increased recycling of construction waste, greater attention to health and safety of workers, and decreased impact on the environment. The one notable exception is an increased potential for mold on Green Projects.[41] However, rather than creating new products, early indications are that the insurers may grant discounts for Green Building projects, In other words, at the present time, normal contractual requirements for pollution coverage would seem to suffice without the requirement for specific Green Building modifications.[42]

In connection with Builders Risk insurance, the perceived risks specific to Green Building center on potential delays, particularly those associated with LEED Certification.[43] There is presently only one Green Building builders risk insurance product, an endorsement to an existing policy type, that covers Green Building soft costs associated with a covered loss, although insurance experts expect that more products will be developed as insurers become familiar with Green Building risks.[44] Accordingly, the Owner may want to explore whether a specific Green Building endorsement is appropriate and/or available for his project, and whether specific references to such coverage need to be included in the Construction Contract.

Conclusion

Like Green Building itself, the “Greening” of design and construction contracts is an evolving area. Lacking guidance at the present time from the courts and industry-accepted standard form contracts that definitively address Green Building issues, Owner, Architect and Contractor should proceed on a case-by-case basis to carefully analyze the particular risks and rewards attendant to their project, and to address them creatively, comprehensively and in a coordinated manner in their respective contracts, and in the contracts of all other parties who make up the Green Building team. This is worth doing because, in the words of :

“Green buildings are replacing traditional construction as corporations and organization become aware of the financial and environmental advantages of sustainable building development. Many anticipate that green construction will eventually become the norm and that non-green buildings will likely become functionally obsolete.”[45]

-----------------------

[1] ENR Magazine, June 23, 2008 (p.116)

[2] LEED New Construction and Major Renovation Reference Guide (Version 2.2), Third Edition, October 2007 (p.12)

[3] State of Indiana, Executive Order 08-14 (enacted June 24, 2008 established an energy efficient State buildings initiative; State of Virginia, Executive Order 48 (2007), requiring energy efficiency in State Government; State of Maryland, High Performance Buildings Act (approved by the Governor, April 24, 2008).

[4] Stephen Del Percio, Shaw Development v. Southern Builders: The Anatomy of America’s First Green Building Litigation, August 20, 2008, .

[5] Green Globes, developed in Canada by the Green Building Initiative, has gained some acceptance as an alternative to the LEED rating system developed by the USGBC. Other such rating systems include: BREEAM (UK); CASBEE (Japan); Green Star (Australia); and GB Tool (Europe). See Richard W. Gaeckle, Esq. and Daniel J. Cogan, Esq., Legal Issues in Green Building & Sustainable Design, Half Moon LLC Continuing Education, for a presentation made October 16, 2008.

[6] Edward B. Gentilcore, Esq., Duane Morris LLP, Help on Avoiding Red Ink, Red Tape and Being Red-Faced while Building Green; for Lorman Education Services teleconference on “Problems and Risks Associated with Green Construction, September 9, 2008 (pgs. 36-37)

[7] LEED New Construction and Major Renovation Reference Guide (Version 2.2), Third Edition, October, 2007 (pgs. 14 and 15)

[8] An updated version of LEED will go into effect in approximately July, 2009. LEED v3 or LEED 2009 will build on the existing rating system, but expand and refine it to address the needs of the market. LEED 2009 will be based on a possible 100 rating points instead of the current 69 points. See USGBC, LEED 2009 Vision & Executive Summary, . See also Bion D. Howard, What’s New for LEED in 2009: The Overhaul of the Green Building Council LEED Program; teleconference materials presented for Lorman Education Services, December 4, 2008.

[9] LEED New Construction and Major Renovation Reference Guide (Version 2.2), Third Edition, October 2007 (p.14).

[10] Id at p.17

[11] James C. Jankowski, Suzanne H. Harness and Michael B. Bomba, AIA 2007 Update: How does it Affect Architects?; 2007, .

[12] See ConsensusDocs Home Page,

[13] Id.

[14] AIA Board of Directors, Directory of Public Policies and Position Statements, September 2005, .

[15] James C. Jankowski, Suzanne H. Harness and Michael B. Bomba, AIA 2007 Update: How does it Affect Architects?, 2007, .

[16]Stephen Del Percio, Shaw Development v. Southern Builders: The Anatomy of America’s First Green Building Litigation, August 20, 2008, .

[17] James K. Schwartz, The Green Machine – Sustainable Design is Rolling, A&E Reporter, Volume 2 – Issue 2, April, 2007.

[18] Guy Carpenter and Oliver Wyman, The Green Built Environment in the Unites States – The State of the Insurance Market; 2008, available at

[19] For example, water saving strategies such as dual flush or composting toilets may not be consistent with local code requirements. Accordingly, USGBC advises that the acceptability of non-traditional approaches be confirmed with local code officials before there is a commitment to specific water saving strategies. See LEED for New Construction and Major Renovation Reference Guide (version 2.2), Third Edition, October 2007 (p. 146).

[20] USGBC Home Page, .

[21] Id.

[22] LEED New Construction and Major Renovation Reference Guide (version 2.2), Third Edition, October, 2007 (pgs. 14-17).

[23] Mary Jane Augustine, Frank Kirk and Brian Rice, Why Commit to Green Projects?; New York Law Journal, November 3, 2008 (p. S-3). City of Cincinnati Property Tax Abatement for Green Buildings, City Ordinance 182-2007 (enacted 5/16/07) and City Ordinance 446-2007, (enacted 12/12/07).

[24] ID at p. S-3. See also the New York State Energy Research and Development Authority (NYSERDA) Home Page,

[25] General Code, Town of Babylon, Sections 89-83 to 89-87.

[26] General Code, Town of Riverhead, Section 52–10(f).

[27] Richard W. Gaeckle and Daniel J. Cogan, Legal Issues in Green Building & Sustainable Design, Half Moon LLC Continuing Legal Education, for a presentation made on October 16, 2008 (pgs. 14-15).

[28] See The City of Chicago’s Department of Buildings Home Page, .

[29] Council Bill No. 47-2007, passed July 30, 2007.

[30] Code of the Township of Cranford, New Jersey, Section 1-1-3

[31] Pittsburg Code, Title 9, Zoning, Subsection 915.04, approved November 19, 2007.

[32] Investing in the Environment – The Financial Industry’s Approach to Green Building, Environmental Building News, Volume 16, Number 11, November, 2007 (p.12).

[33] ENR Magazine, June 23, 2008 (pg.118).

[34] Id.

[35] James K. Schwartz, The Green Machine – Sustainable Design is Rolling, A&E Reporter, Volume 2 – Issue 2, April 2007 (p.3).

[36] Owners who are considering Limitation of Liability provisions as part of a contractual scheme to allocate liability for failure to achieve LEED Certification need to be aware that AIA Document B101-2007 provides for a mutual waiver of consequential damages in Section 8.1.3. A similar waiver provision appears in Section 15.1.16 of AIA Document A201-2007, in which the Owner waives his right to recover damages for, among other things, losses relating to “. . . income, profit, financing, business and reputation . . .”. Since damages flowing from failure to achieve LEED Certification would seem logically to fall within the excluded categories of consequential damages, the waiver provision should be deleted.

[37] Guy Carpenter and Oliver Wyman, The Green Built Environment in the United States – The State of the Insurance Market, 2008, available at .

[38] See AIA Document B101-2007, Section 2.5.

[39] Guy Carpenter and Oliver Wyman, The Green Built Environment in the United States – The State of the Insurance Market, 2008, available at .

[40] Id at p.3.

[41] Id at pgs. 5-6.

[42] Id at p.6

[43] Id at p.7

[44] Id at p.7

[45] State of Green Business 2008 by Joel Makower and the editors of , January 2008, Greener World Media.

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