Legal Issues Arising in LEED ™ Construction

1. Legal Issues Arising in LEED™ Construction Marina Pratchett QCLEED Green Associate Fasken Martineau DuMoulin LLP April, 2012

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

3. 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

4. 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

5. 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

6. 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 . :

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

8. 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

9. Overview of Legal Proceedings: Some examples: . :

10. 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

11. 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

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

13. 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

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

15. 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

16. 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

17. Overview of Legal Proceeding s • Riverhouse Condominium in Manhattan • Opened in 2007

18. 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.

19. 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, eco-friendly 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)

20. 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.

21. Overview of Legal Proceeding s S • Washington DC v Washington National • Owner alleged green expectations not met and withheld $3.5 million

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

23. 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

24. 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 $6million

25. 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“

26. 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

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

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

29. Turning to the Contracts • In the US • ConsensusDocs 310 Green Building Addendum • AIA -

30. Turning to the Contracts ConsensusDocs 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

31. Turning to the Contracts ConsensusDocs 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

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

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

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

35. 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

36. 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

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

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

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

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

41. 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”)

42. 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

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

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

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

46. QUESTIONS