Legal Issues Arising in LEED Construction Marina Pratchett

Legal Issues Arising in LEED™ Construction Marina Pratchett QC LEED Green Associate Fasken Martineau Du. Moulin LLP April, 2012

Overview of Legal Proceeding s New risks Developing Standard of Care Inadequate contract language No precedents

Overview of Legal Proceeding s From the perspective of claims and actions it is early days in development of LEED™ We can predict where legal actions might arise. We look to the US to observe developments

Overview of Legal Proceeding s Types of cases divide into categories: LEED certification process: Responsibility for Damages for failure to obtain Refunds of grants, loans, tax incentives Liquidated damages

Overview of Legal Proceeding s Types of cases divide into categories: Alleged misrepresentations regarding impact of LEED: overpromising, under-delivering – sustainable promises/representations vs actual measured performance – eg energy performance

Overview of Legal Proceeding s Types of cases divide into categories: Product Liability materials or systems that do not work as expected or do not work like non LEED products or require more time or are more expensive or have higher maintenance costs than anticipated Eg paints, glues, green roofs, recycled rainwater . :

Overview of Legal Proceeding s Types of cases divide into categories: Competing Standards/Codes Which applies

Overview of Legal Proceeding s Types of cases divide into categories: Challenges to FSC wood: Wood lobby in US – most local wood not FSC – allege discrimination Dept of Defence US – prohibits appropriation of funds to achieve LEED Platinum or Gold unless can certify no additional costs of show a financial payback. Also required by June 30, 2012 report on energy efficiency standards including cost benefit analysis of ROI of LEED, Ashrae 189. 1 and Ashrae 90. 1 2010

Overview of Legal Proceedings: Some examples: . :

Overview of Legal Proceeding s Henry Gifford et al v US Green Building Council US District Court, Southern District, NY 10 -7747 action alleging deceptive trade practices, false advertising. Alleges that US GBC misrepresents the efficacy of LEED from an energy savings standpoint and misrepresents the results of a 2008 study performed for USGBC

Overview of Legal Proceeding s Henry Gifford et al v US Green Building Council (cont’d) Gifford claims that USGBC and LEED rating systems make false promises Focus of the claim is false advertising and consumer protection

Overview of Legal Proceeding s Destiny USA Holdings, LLC v Citigroup Global Markets Realty Corp. , 69 AD 3 d 212 Injunction requiring specific performance of a construction loan for a ‘green’ shopping centre Part of the funding secured was taxexempt green bonds

Overview of Legal Proceeding s Destiny USA Holdings, LLC v Citigroup Global Markets Realty Corp. , (contd) Green elements – promised conservation and technology goals not achieved Possibility that IRS would review tax exempt status of the bonds This would affect the tax to be paid by investors

Overview of Legal Proceeding s Syracuse Industrial Development had given the project 30 years tax abatement IRS has now announced intention to audit

Overview of Legal Proceeding s Building Industry Association of Washington, Air America Inc et al v Washington State Building Code Council US District Ct. Washington, Conflicting standards Seeks an injunction against enforcement of certain provisions of the Washington State Energy Code, then coming into force, which conflict with federal law and regulations governing energy efficiency of residential HVAC and plumbing products

Overview of Legal Proceeding s The Air Conditioning, Heating and Refrigeration Institute v City of Albuquerque, US District Ct, District of New Mexico, 08 633 Conflicting standards Challenges to green building codes may be on the rise

Overview of Legal Proceeding s Riverhouse Condominium in Manhattan Opened in 2007

Overview of Legal Proceeding s RIverhouse (cont’d) Action commenced based on allegations that the building does not meet the promised/represented sustainability-performance standards. The lawsuit seeks $5. 3 million in damages and alleges that the building's green HVAC system not provide adequate heat and that many green features in each condo are not in fact built to LEED Gold standards.

Overview of Legal Proceeding s Riverhouse complaint alleges that the building “was marketed as being at the cutting edge of ‘green’ technology - a LEED Gold-rated building featuring fresh filtered air, filtered water, ecofriendly materials and is designed for low energy consumption. Complaints: cold drafts. insufficient heat, unsatisfactory energy audit, (a deviation of 49 percent over the LEED standards in air infiltration)

Overview of Legal Proceeding s S Shaw Development v Southern Builders Contract required LEED silver certification Certification not obtained Damages claimed >$700, 000 plus lost tax credits Developer sued builder No clear allocation of risk in contract Action settled.

Overview of Legal Proceeding s S Washington DC v Washington National Owner alleged green expectations not met and withheld $3. 5 million

Overview of Legal Proceeding s Eagle River Wisc. A group of residents challenged (unsuccessfully) the LEED rating given to a new high school.

Overview of Legal Proceeding s Chesapeake Bay Foundation v Weyerhaeuser Co. Allegations of “defective, inferior or unsuitable building products for a construction project. ” Design called for certain re-cycled and environmentally friendly products Product was parallam beams and preservatives

Overview of Legal Proceeding s Chesapeake Bay Foundation v Weyerhaeuser Co. Specs provided that materials had to be approved by architect. Manufacturer’s shop drawings indicated intent to use a particular sealant Architect’s approval to the sealant not obtained (review of shop drawings not = approval) Claim amount $6 million

Sample Taken from a full page advertisement in the Okanagan SNAP, vol 5, no 9, April 2011, re SOPA Square Development: “Why Sustainable Choices Matter! : Sustainable designed buildings like SOPA use about 36% less energy than conventional buildings. Green buildings have operating efficiencies that reduce emissions and are less harmful to the ozone layer“

Turning to the Contracts Contractual drafting and negotiation all about identifying risks and allocating In theory allocation should be fair, going to the person best able to control and contain the risk In practice allocation is lob-sided in favour of the person with best leverage at time of tender/contract – market driven risk assumption

Overview of Legal Issues Liquidated Damages vs Penalties Consequential Losses Waivers Impact of Changes New Players - certification body, GBF, energy modelers

Overview of Legal Issues Warranties Third party warranty providers Product Liability Costs not properly explained Emerging technologies – eg green roof systems, geothermal systems,

Turning to the Contracts In the US Consensus. Docs 310 Green Building Addendum AIA -

Turning to the Contracts Consensus. Docs 310 Green Building Addendum Defines the role of a “Green Building Facilitator: GBF could be architect, contractor or a third party Defines role of GBF – does not necessarily impose liability for certification on GBF

Turning to the Contracts Consensus. Docs 310 Green Building Addendum Comments on risk allocation – defaults to underlying contracts Defines ‘consequential losses’ broadly as including owner’s loss of income, loss of profit, reductions in operating and maintenance costs, tax or other benefits, marketing opportunities, credits and says that all of these are subject to waiver of CD”s in underlying contracts

Turning to the Contracts Consensus. Docs 310 Green Building Addendum Also says no project participant other than possibly the GBF is responsible for failure to achieve Green Status (as defined)

Turning to the Contracts AIA B 214 (2007) Identifies LEED AP No responsibility for failure to certify

Turning to Contracts Canadian Approach Typically, architectural contracts expressly state that they are not liable for certification and contain limitation of liability clause

Turning to Contracts Canadian Approach Some drafters appear not to understand LEED Loosely worded “LEED” sections being added to contracts without reference to any other provisions

Turning to Contracts Drafting Tips Consider and deal with a risk of changes in laws and standards, and even changes in professional requirements. Identify clearly who plays what role – and what the deliverables for each party will be

Turning to Contracts Drafting Tips All of the following clauses must be looked at through green eyes Change orders Delays Force Majeure Substitution

Turning to Contracts Holdbacks Representations and warranties bonding, insurance damages, LD’s, -consequential losses, waivers

Turning to Contracts Close out procedures Substantial Completion Document Retention Submittals, O & M training QA/QC

Turning to Contracts Drafting Tips Consider issues around concurrency of “faults”

Turning to Contracts What are the actual and real consequences and damages to the owner of not achieving a ‘certification” Holdbacks disproportionate to real costs and damages may be classified as ‘penalties’ or forfeiture and thus rendered unenforceable or in BC subject to being set aside under s. 24 of the Law and Equity Act (“The Court may relieve against all penalties and forfeitures”)

Turning to Contracts Costly Contract Terms Mandating certification Costs of LEED rating and certification LEED point chasing Maintaining Holdback pending certification Recent example – defined LEED as version 1 Major holdback to certification

Turning to Contracts In US third party certification being replaced with green building codes. International Green Construction Code

Turning to Contracts Costly Contract Terms Product specifications that have the effect of sole sourcing

Turning to Contracts Where products and systems are specified, contractors are asserting they are not responsible when the product or system fails

QUESTIONS