Shaw Development v. Southern Builders: The Anatomy of America’s First Green Building Litigation

It’s happened: the country’s first litigation arising out of a green building project has been reported in Maryland.

We’ve written extensively here at gbNYC about the potential for litigation arising out of green construction projects. To date the issue has been on the radar screens of numerous industry authors, but real-life application of green legal theory has been relatively difficult to come by outside of a handful of green-related claims reported by insurance carriers. However, a (relatively) recent lawsuit that was filed on the eastern shore of Maryland demonstrates that green building risk is real- particularly in light of rapidly increasing regulatory activity at the state and local levels. The suit suggests the critical importance of clear contract language for each stakeholder on a green construction project and posits that the alternative could be massive exposure to unanticipated liability for every project participant.

Background to the Lawsuit

The lawsuit in question grew out of the construction of a $7.5 million, 23-unit condominium project in Crisfield, Maryland called the Captain’s Galley, which was completed back in 2006. The development is adjacent to a local marina on the Chesapeake Bay and includes a number of green design features that were intended to support an application to USGBC for a LEED Silver rating. Southern Builders, the general contractor on the job, filed a $54,000.00 mechanic’s lien against the project late in 2006. In early 2007, a Maryland Circuit Court both reduced the lien to $12,000.00 and consolidated a related $1.3 million countersuit initiated by the owner Shaw Development that sought, among other things, $635,000.00 in what Shaw claimed were lost tax credits under a state-level green building program.

The Tax Credits at Issue

A brief overview of Maryland’s green building tax credit program is necessary in order to understand how Shaw crafted its counterclaim against the contractor.

Maryland offers state tax credits of up to 8 percent of a project’s total cost for buildings greater than 20,000 square feet. (As a side note, the current iteration of the program has doled out all of the available tax credits and is not currently accepting additional applications). Only LEED projects are eligible to apply for the credits. The program requires applicants to first submit an Initial Credit Certificate Application to the Maryland Energy Administration.

MEA reviews the application and issues an Initial Credit Certificate which sets forth the project’s maximum credit amount and (critically for our purposes) sets an expiration date by which the project must receive a Final Credit Certificate.

Projects can only apply for the Final Credit Certificate upon receiving a certificate of occupancy after construction is complete, and a LEED-AP must submit an Eligibility Certificate to MEA stating that the building meets the criteria necessary to receive the tax credit (i.e., it meets the requirements to qualify for a LEED Silver rating). However, if the Initial Credit Certificate expires prior to the project obtaining its Final Credit Certificate, the available credits are put back into the program’s pool, the project slides back in line, and must reapply to MEA.

Captain’s Galley Contract Documents

The contract documents set forth the project’s LEED requirements in a specification section (it’s unclear exactly how those requirements were delineated, other than language in the project manual which stated that the project was “designed to comply with a Silver Certification Level according to the USGBC’s LEED Rating System, as specified in Division 1 [of the specifications.]“) It does not appear that there was language in the contract documents obligating Southern to secure any formal certification from USGBC. With respect to the tax credits, although the credits were not identified specifically in the contract (which was the AIA’s 1997 version of the A101 Owner/Contractor Agreement) or any of its attachments that were included in Shaw’s countersuit papers, Southern was required to deliver a Certificate of Occupancy within 336 calendar days from the date of the agreement.

Shaw’s Countersuit

In the countersuit, Shaw alleged claims in both negligence and breach of contract against Southern for, among other failures, the contractor’s failure to “construct an environmentally sound ‘green building’ in conformance with the LEED rating system.” However, there was no detail in Shaw’s papers describing precisely how Southern was responsible for the $635,000.00 in lost tax credits. Presumably, Southern failed to deliver the project to Shaw such that the latter could obtain a certificate of occupancy by the date specified in the Initial Credit Certificate; according to Shaw’s papers, the project remained incomplete “[n]early nine (9) months after the required completion date” (i.e., the 336 calendars specified in the A101). In addition to recovery for the lost tax credits, Shaw also sought damages for non-conforming work and loan defaults with its construction lender. The total amount in damages that Shaw sought was approximately $1.3 million. The damages it sought for the lost tax credits were the largest under any of its claims.

The Result & What Could Have Happened

Other than a few newspaper articles that mentioned the delays at the project, there has been nothing written about what appears to have been the country’s first green building litigation. Though the Circuit Court judge did set the case for trial sometime in August of 2007, it appears that the matter has since settled out of court.

The twist in the factual posture of the case is that the allegations were not that the contractor (or a design professional or consultant) failed to secure formal certification from USGBC, as much of the literature written to date in the liability context suggests will be the feeding ground for potential litigation. Rather, it was the failure by both the owner and the contractor to recognize the risk implicated by the regulatory scheme that led to the claimed loss of tax credits. The contract documents included as exhibits to the court papers were devoid of any risk transfer mechanisms whatsoever with respect to securing the tax credits. A tight contract that recognized the risk of failing to complete the project on schedule would have (1) assisted the contractor in determining whether it was capable of bearing a significant portion of that risk and (2) provided the owner some level of assurance that in the event the contractor could not deliver the project as required in order to secure the tax credits, it would still have the ability to assert a breach of contract claim for that specific failure.

Form Contracts Won’t Fly! gbNYC’s Top 5 Legal Issues for Green Construction Projects in Action

The critical lesson from the lawsuit is that there is no one-size-fits-all form agreement for a green construction project. The case also demonstrates the absolute necessity of two of my five most important legal issues to consider on green construction projects. First, a thorough understanding of existing legislation that may apply to a green project is critical. Retaining counsel that understands the regulatory landscape and can assist stakeholders in managing the risk that it implicates, regardless of which side of the table they may find themselves, is key. This point is becoming increasingly salient as more municipalities legislate green initiatives and third-party rating systems continue to evolve and proliferate. Second, the possible failure on the contractor’s part (and probably the owner’s as well) to translate the procedure for securing the LEED-driven tax credits into the contract documents exposed both sides to unanticipated liability. Indeed, the lack of any disclaiming language in the contract- or any indication that the contractor attempted to shift some of the risk off of itself- is perhaps indicative of where green liability may actually exist.

Conclusion: Insurance & Other Implications Moving Forward

Sustainability is changing the risk management equation and the Shaw case will likely go down as just the very tip of the iceberg. Again, the lawsuit demonstrates the danger for contractors, owners, and design professionals to simply rely on form construction agreements on green projects. Although the claim was asserted by the contractor, a slight twist in the facts could have just as easily resulted in the suit being asserted against the architect, engineer, or LEED consultant. While owners obviously want to get their projects out of the ground as quickly as possible, and given the deteriorating economic conditions here in the U.S., contractors and design professionals may feel pressure to sign up for work quickly, Shaw Development v. Southern Builders teaches caution during the course of negotiations for green construction work.

The lawsuit also raises some important insurance implications. Could the contractor’s commercial general liability policy have provided coverage for the owner’s claim for the lost tax credits? CGL policies typically only cover property damage, so it seems highly unlikely. From the owner’s perspective, if there was a waiver of consequential damages provision in the contract documents (which is unclear from the Shaw court papers), the owner would have a difficult time arguing that its claimed damages for the lost tax credits should not be considered consequential.

The potential lack of insurance coverage for this type of claim demands its own discussion, but it suffices to say that the insurance industry is examining these issues closely to determine whether an endorsement for green projects might be necessary. In fact, a recent report prepared by Marsh called The Green Built Environment in the United States: The State of the Insurance Marketplace evaluated not only property insurance policies, but how the insurance industry is considering professional liability, pollution liability, builder’s and owner’s risk insurance, surety bonds, and casualty coverage in the context of green risk management.

Please let me know if you’d like more information on the case and I’d be happy to pass along the materials that I was able to dig up online. Feel free to chime in below if there are any other legal issues arising out of the Shaw fact pattern that deserve discussion.

About Stephen Del Percio

Stephen Del Percio has written for gbNYC+ since 2006 and currently serves as in-house counsel for one of the world's largest engineering, construction, and technical services companies. He earned a B.Eng. from Columbia, his J.D. at William & Mary, and lives in New York City with his wife and daughter. You can follow Stephen on Twitter, email him at stephen@gbNYC.com, or join gbNYC on Facebook to continue the conversation.

about gbNYC

gbNYC is a multi-disciplinary consulting and real estate services firm. In addition to representing office tenants and commercial buyers in leasing and acquisitions, we also provide innovative consulting solutions from a unique, green building perspective. We advise on green building financial incentives, comment on proposed green building marketing strategies, author white papers, treatises, and market analyses, organize seminars on the LEED process and professional accreditation, and provide advice and analysis on green building risk management and the overall state of green real estate, leasing, and construction, in New York City and beyond.

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18 Responses to Shaw Development v. Southern Builders: The Anatomy of America’s First Green Building Litigation

  1. RealLifeLEED Wednesday, August 27, 2008 at 3:23 pm #

    Excellent reporting on this suit!!! First I’d heard of an actual LEED-related claim…

    Thanks,

    Joel

  2. Larry Schnapf Wednesday, August 27, 2008 at 4:15 pm #

    BOMA has issued a green building lease and there are some interesting forms that the State of Pennsylvania has placed on their website.

  3. Mitchell Wednesday, August 27, 2008 at 10:08 pm #

    Stephen,

    great article! Thanks! It seems those concerns we’ve discussed often in the past are coming to the surface, especially the tax credit issue. That is a potential liability with a big bite!

    Mitchell S.

  4. Sagi K. Monday, September 1, 2008 at 12:29 pm #

    Stephen,

    Thank you for putting together a well written and informative article on what appears to be the beginning case of a new green real estate law case book!

  5. Alice Spencer Tuesday, September 2, 2008 at 11:02 pm #

    Very interesting article,a new one for the record books. Your blog is very up to date and an informative an enjoyable red, thanks.

  6. Green Living, LLC Thursday, September 4, 2008 at 4:52 pm #

    This confirms…a LEED project needs all hands on deck to have a good handle on green design.

    Beth

  7. Stuart Thursday, September 4, 2008 at 9:31 pm #

    Very good article. I would like to take you up on your kind offer to provide more information about the case, including what materials you found online. Thank you.

  8. paul levin Friday, September 5, 2008 at 1:08 pm #

    Excellent article Stephen; and a terrific website. This is what I would give my right arm for to anchor GreenBuildingInsider.com. At any rate, maybe you would like to write an article for us once in a awhile and you’ll get more visitors.

    Meanwhile, we might be interested in advertising one of our future teleconferences; please send your advertising kit. I guess I should also ask if you would be interested in speaking at one?

    Thanks again.

    Paul Levin
    Publisher
    http://www.greenbuildinginsider.com
    Paul

  9. Al Tibbs Friday, September 5, 2008 at 2:12 pm #

    Excellent reporting. The only surprise is that the first litigation took so long. The GREEN building craze has brought out plenty of experts with limited talents, the contracts have not been tested and many take LEED obligations VERY lightly. I am sure this is the first of what will become many.

  10. K Joslin Monday, September 8, 2008 at 12:49 pm #

    This is not unexpected—but why would anyone suggest a “green” endorsement to insurance policies? Any green requirements should be considered exactly the same as building code requirements. At some point owners will realize there is important expertise needed and hire LEED consultants instead of believing design teams and contractors when they claim they’ve got it covered…

  11. Anne W Wednesday, September 10, 2008 at 1:15 pm #

    I bed to differ: green requirements are not even remotely like a building code requirement.

    there is no relationship between a LEED rating and a “building code”. In theory, codes are enacted to ensure safety of the building occupants. LEED is enacted (and the USGBC stated early on that the development of LEED was to build new markets in a slowing construction climate) to …perhaps save energy. the problem is that when cities and states adopt a building code, they take on the interpretation and enforcement of that code, and in theory train their code authorities to make decisions based on the code language. And, in many locales, the model code has been adopted and modified to fit local climate and economic issues.
    LEED is not localized, and its well known that many of its recommendations are not suitable for all climate and exposure conditions (light-activated sensors burn out continually in the northwest due to changing cloud cover, for example). Local energy codes are modified to meet local climate conditions; LEED remains the same.
    If you have a code issue, it is typically possible to appeal to your local building authority for a review. If you have an issue with LEED, its nearly impossible to get another decision from the USGBC — their reviewers are not local, they are located in one spot.
    And, for another example: the code requires fire resistive construction: there are mulitple testing agencies that have rated (and code accepted) assemblies: UL, FM, Warnock Hersey, and Interteck. If a city requires LEED, that does not mean that they will accept Green Globes, or any other alternative assessment device.
    I think that if a municipality decides to require LEED, then it is their responsibility to adopt LEED to the location, and train their code officials to interpret and enforce it. By passing the enforcement on to a third party, (and a third party that is not accountable to anyone, and cannot be voted out of office, or fired) the municipality is being short-sighted, and opening themselves up to litigation.

  12. Mitchell Sunday, September 21, 2008 at 3:22 am #

    Anne W, very interesting comments. I would like to speak with you further about them.

    Mitchell S.

  13. Anne W Tuesday, September 23, 2008 at 1:05 pm #

    Mitchell: you can contact me though my linked-in page; go to http://www.linkedin.com and access my name.
    Anne Whitacre

  14. steve jenings Tuesday, December 2, 2008 at 3:33 am #

    Great news this may add some teeth to the LEEDS accreditation.

  15. John Trevino Saturday, December 6, 2008 at 9:02 pm #

    Stephen, excellent reporting, Currently doing research on legal issues associated with green buildings for my legal opinion paper in my Environmental Law class. This article helps alot, I will have to use it and include you in my bibliography. By the way if you are ever in the St.Louis area, you need to check out the LEED Platinum Alberichi Building, Talk about Sustainable! Thanks John Trevino

  16. Mark R Wednesday, December 31, 2008 at 9:28 am #

    Stephen,

    I think this is a great summary of the first LEED related lawsuit. I am an insurance professional and am committed to educating my clients about the various risks related to both green building (liability issues for contractors) and re-building (property insurance for owners). I represent all of the major carriers that have either addressed or incorporated green risks within their coverage forms (Fireman’s Fund, AIG, Travelers & Liberty Mutual). At present, I am in the process of establishing a curriculum for a presentation to address the major risks of green building for design professionals, developers and contractors. I would be honored to speak with you further on the details of not only this case, but the legal environments reactions to green risks.

    Thanks!

    Mark Rabkin
    merabkin@althans.com
    Cleveland, OH

  17. Chris Hill Wednesday, December 31, 2008 at 9:53 am #

    Stephen,

    Thanks for the analysis. It will be quite interesting to see what, if anything arises regarding standard of care/building code issues when these requirements are incorporated into local building codes.

    Keep up the good work,

    Chris

  18. Pasadena Roofing Wednesday, November 16, 2011 at 1:20 pm #

    You will see this trend coming and prepare for it through and early consultation with a knowledgeable attorney. Your contracts, actions, and insurance will all need to be reviewed in order to assure that you are properly prepared for the next wave of innovation. I will be back soon with more updates. Thanks.

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