Green Development Risks

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The emerging market of sustainable, or “green,” construction is attractive to buyers and developers as both a means of conservation and an effective marketing tool. Many buyers, contractors, and subcontractors are now attempting to enact green construction projects through various certification processes, which substantiate a structure as “green”. The LEED (“Leadership in Energy and Environmental Design”) certification, for example, is an internationally recognized verification that a development was designed and built using strategies aimed at improving performance in energy savings, water efficiency, CO2 emissions reduction, and indoor environmental quality. No matter what the primary focus of a green construction project may be, this relatively new frontier in the industry creates both unique economic opportunities and legal risks that contractors and subcontractors must not overlook when taking on sustainable business ventures. These opportunities and risks are ultimately tied to the methods and material of construction, and the contractual relationship between the developer and contractors.

Environmentally friendly developments rely upon “green” materials, eco-friendly fixtures and equipment, and modernized construction methods to achieve a more sustainable standard. However, these new materials, equipment, and methods also present new risks for contractors and subcontractors. Green developments seek to source recycled or reclaimed materials, fixtures, or facades – such as recycled structural steel or reclaimed veneer brick - which may suffer from hidden defects or environmental wear and which may not function as expected when repurposed. Green developments also seek to reduce the carbon footprint of construction by diminishing the use of less efficient, traditional construction materials – such as concrete. Green construction also relies upon efficient electrical, heating, water, and mechanical equipment and fixtures, many of which will have nuanced technical installation parameters that require expertise distinct from that used to install traditional equipment and fixtures. Finally, not only do green developments require use of particular materials, but they also require the use of green construction methods, which often require greater precision, supervision, skill, expertise, and cost than traditional methods. In short, green developments present unique challenges for contractors and subcontractors beyond those seen in traditional developments, and, to find success in green construction, contractors and subcontractors will need to be aware of the legal risks presented by green development and how to minimize the potential for those risks to evolve into costly litigation.

The main risk faced by contractors and subcontractors is litigation regarding the quality of their workmanship. Such claims arise when a current owner alleges that the contractor or subcontractor was either negligent in way it constructed the development or negligently misrepresented something important or material about the development. An example of this is seen in Chesapeake Bay Found., Inc. v. Weyerhaeuser Co., Case No.: PWG-11-47, (D. Md. May. 4, 2015) wherein Plaintiffs sued Defendant, a building contractor, because the LEED-certified beams installed on the building had rotted five years after construction had ended. This was revealed to have occurred because the contractor had not applied the LEED-certified polymer to the beam, as contracted for, because the polymer was found to be chemically incompatible to the beams during construction. In Chesapeake, the contractor’s lack of experience with LEED materials and their installation, on top of false representations concerning their use in this case, resulted in a lawsuit. It is worth noting here, however, that a few, simple precautions could have protected the contractor from what is ultimately unnecessary and costly litigation.

Defending against negligence claims largely comes down to three factors. First, as demonstrated by Chesapeake, a contractor or subcontractor must ensure that the materials, fixtures, and equipment used are appropriate for, versus simply qualified for, their intended use. This can be accomplished by reviewing product specifications and inspecting materials, equipment, and fixtures prior to installation. While it is reasonable to rely upon a supplier to provide materials and equipment, this will not immunize a contractor or subcontractor against liability, and it is always advisable to double check a supplier’s recommendation. Use of sub-par materials may save costs in the short run but lead to expensive litigation in the long term.

Second, a contractor or subcontractor should ensure its employees have the necessary skills, expertise, and supervision for their work. As explained above, green construction involves unique materials and methods, many of which involve nuanced variations from traditional construction methods. For example, in Chesapeake, the contractor’s employees lacked the experience necessary to properly apply the necessary polymer, resulting in beam rot. It is recommended, first and foremost, that the contractor retain the product details for any materials used on a project to rebut any subsequent claim that product specifications or applicable building codes were not followed by a subcontractor. This will, in turn, aid in the employment of properly certified and trained employees to ensure that suitable construction methods are used. This type of preparation, when combined with additional supervision by skilled foreman, will provide an additional layer of protection regarding the sufficiency of workmanship, will confirm that construction is being completed appropriately, and will allow for corrections when necessary.

Finally, a contractor or subcontractor must be diligent and cautious in its documentation concerning construction. A lawsuit may not be filed until years after construction has been completed, and memories can fade. Clearly written, easily understandable, and well-preserved documentation regarding the construction can make all the difference in litigation. Such documents will explain when the construction occurred, what was completed, which contractor or subcontractor had responsibility for what work, what materials and methods were used to complete that work, and what was done to resolve issues that arose during the development. Had the contractor in Chesapeake better reported its problems with the polymer to the developer, it may have addressed the issue before it became a problem or at least better insulated itself from subsequent litigation by documenting its communications with the developer. Additionally, a negligent misrepresentation claim will be based upon a representation from the contractor or subcontractor, and it is essential that all written representations be accurate, complete, and unequivocal. A representation with variable interpretations could open the door to extensive litigation.

Unfortunately, litigation regarding the quality of workmanship on green construction jobs is not the only risk faced by contractors and subcontractors in green development. Many green development projects include contract language requiring that the materials and workmanship of contractors and subcontractor meet certain standards. Contractors and subcontractors must be extremely cautious about the contract language, as certain warranties or requirements may not be feasible and may predestine a development project for litigation. This is especially true for certification-based warranties, as there are usually too many factors beyond the contractor or subcontractor’s control that must be achieved for certification. This is demonstrated, for example, in Southern Builders v. Shaw Development LLC, Case No. 19-C-07-011405 (Md. Cir. Ct. 2007), wherein the developer sued the contractor when a building did not receive LEED certification, complaining that the building was delayed and not made in a “good and workmanlike fashion” per the terms of the contract. Difficulties in construction prevented the contractor from achieving the terms of the contract, resulting in litigation. Similarly, in Chesapeake, the lack of LEED-certified polymer prevented the building from achieving LEED certification. All contractors should be weary of exactly what they promise to achieve in a development contract and should ensure that the contract goals are realistic and attainable.

Lastly, in addition to nebulous warranty clauses like those seen in Shaw, contractors and subcontractors on green construction projects must also be weary of payment-contingency clauses, which condition payment for services on LEED or other eco-friendly certification. Even if said certification is indeed achieved, the process can take months or even years, during which time contractors and subcontractors who have completed performance must nonetheless bear the risk of late or non-payment.

Although the litigation risks faced by parties to green construction projects may appear daunting, careful planning and consideration of the contract terms, personnel selected, and the materials and methods employed can greatly mitigate risk of insurance claims and litigation. Thorough planning, advance consideration of pitfalls, and careful, precise workmanship and supervision are essential to contractors and subcontractors seeking to work on green development projects, bringing renewed relevance to the adage “measure twice, cut once.”

Patrick Sullivan is an associate in the Segal McCambridge Singer & Mahoney Chicago office and a member of the firm’s Construction Practice Group. He can be contacted at 312.644.4940 or psullivan@smsm.com

Adrienne Arlan is an associate in the Segal McCambridge Singer & Mahoney Chicago office and a member of the firm’s Construction Practice Group. She can be contacted at 312.644.4943 or aarlan@smsm.com.

Mary Goers, an additional author of the article, is a former law clerk of the Segal McCambridge Singer & Mahoney Chicago office.

The Segal McCambridge Construction Practice Group is chaired by Michael Barzyk. For more information on the firm’s Construction practice, email mbarzyk@smsm.com.

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