How to Protect Your Construction Business Against LEED Litigation

Prepare for future problems that could arise from LEED construction projects.

Imagine this scenario: General contractor John Smith, the owner of ABC Construction, met with his attorney, Bob Andrews, to discuss ABC’s latest project, the Watkins Building, Smith’s first LEED project. Smith was excited about expanding into the sustainable building business, but he had some concerns about LEED-specific legal issues that could arise.

Smith and Andrews had met previously to discuss legal issues relating to record-keeping requirements for LEED projects. Smith had implemented many of Andrew’s recommendations, and he now wanted to prepare himself for any other LEED-related legal actions that could occur.

LEED-specific legal actions are relatively rare, and very few published cases or court documents exist. However, Andrews told Smith that at least four general categories of legal disputes had arisen during the past few years: administrative actions regarding the LEED certification process, tax-related actions initiated by government entities, materials litigation and litigation for alleged guarantees of LEED certification. Andrews suggested that a general contractor like Smith should be most knowledgeable about materials litigation and LEED certification litigation.

Materials Litigation

Andrews first told Smith about a recent court case. In this case, The Chesapeake Bay Foundation (CBF) contracted with a general contractor, Clark Construction Group, LLC, and an architect, SmithGroup, Inc., to design and construct CBF’s new sustainable headquarters. The general contractor contracted with a company that creates an engineered, glue-laminated structural product made from a renewable wood source.

The project specifications and contract documents identified materials, products, preservatives, equivalents and alternatives that the architect had approved for incorporation into the project. And the subcontract between the general contractor and the materials manufacturer contained a clause that required the manufacturer to obtain written approval from the architect for any substitutions or alterations to pre-approved items. It also contained a clause by which the manufacturer agreed to indemnify the general contractor against any claims, losses, damages or lawsuits that could arise from any negligent acts or omissions.

After the subcontract was executed, the manufacturer submitted shop drawings to the general contractor that indicated plans to use a specific sealant on the laminated structural product. The sealant’s product data specified that it was intended for interior or weather-protected exterior applications, and exposed exterior applications were only possible if the sealant was used with a water-resistant coating.

Although the sealant was not identified in the specifications or the contract, the manufacturer used it without obtaining the architect’s approval. After the project was completed, CBF followed the sealant’s recommended maintenance program. CBF noticed significant water intrusion shortly after completion and suspected the building’s structural integrity had been compromised. Structural experts concluded that the water damage was caused by improperly applying the sealant.

After this, the general contractor demanded indemnification from the manufacturer and CBF, and the architect entered an agreement to pursue litigation against the manufacturer and perform remedial architectural and contracting work.

As of this article’s publication date, this litigation has not been resolved, and they estimate the repairs will take six to eight months to complete and cost $6 million at a minimum.

This case revealed several legal issues that Andrew told Smith he should be aware of and take action in his LEED project. First, all contracts between ABC Construction and the subcontractor need to clearly specify approved materials and acceptable substitutes. And the contracts should identify well-defined non-compliance penalties, including a requirement that subcontractors indemnify ABC Construction for using unapproved materials, products and/or installation techniques.

Andrews also suggested that Smith require subcontractors to obtain product warranty information for all materials incorporated into the project. He said the subcontracts should contain provisions requiring the subcontractors to obtain appropriate insurance and name ABC Construction as an additional insured.

LEED Certification Litigation

Next, Andrews told Smith about a Maryland case between a developer and a general contractor.

In this case, the developer, Shaw Development, contracted with a general contractor to construct a mixed-use, residential and commercial waterfront project.

The developer wanted to take advantage of a Maryland tax credit program that provided owners with a tax credit for new commercial construction or renovation projects (exceeding 20,000 square feet) if the project obtained LEED Silver certification. The program contained a deadline for obtaining a certificate of occupancy. If the project did not meet the deadline, the tax credits went back into the tax credit pool, and the owner had to start the application process over. Once the pool was exhausted, the tax credits were no longer available.

The contract documents contained a clause that set a 366-day project completion deadline. They also specified the project was “designed to comply with a Silver Certification Level according to the U.S. Green Building Council’s … LEED Rating System.”

The contractor completed the project after the 366-day construction period had expired, and the developer missed out on the tax credit program. The contractor decided to record a $54,000 mechanic’s lien. And in response, the developer filed a $1.3 million counterclaim, saying it had lost a minimum of $635,000 in tax credits because the contractor failed to construct a LEED Silver certified building “as required by the contract and the project manual.”

The parties agreed to a confidential out-of-court settlement, so it is unclear whether the contractor or developer would have won.

Andrews provided Smith with several suggestions that he should follow before taking on the Watkins Building LEED project. First, the contract documents between ABC Construction and the owner of the Watkins Building should contain clearly defined responsibilities, timelines and penalties. Smith should not guarantee the project will obtain LEED certification, even though he had a responsibility to construct the project according to the design documents. If the owner insists that the contract documents contain this guarantee, Andrews told Smith he should contact his insurance broker to obtain LEED certification insurance.

The project, individuals and entities identified in this article are fictitious, and no connection to any actual project, individuals and/or entities is intended or implied.

Construction Business Owner, September 2011