Each green building contract exhibit we review here at GRELJ comes closer to addressing some of the core risks inherent with sustainable design and construction. Consider the Design-Build Institute of America’s (“DBIA”) Sustainable Project Goals Exhibit, which was released last May. Although the document is intended to be annexed to a design-build contract, the ways through which specific risks are allocated between the owner and design-builder are worth describing in some detail and have implications for general contractors, construction managers, design professionals, and consultants alike.
Article 1 of the Exhibit – Project Goals – allows the parties to describe the project’s green building aims with specificity and align their expectations from the beginning; as many insurers have observed, “claims begin with violated expectations.” Article 5 addresses some of the insurance claims which have been reported to date, and includes language that aims to manage the risks that may arise from the use of experimental products, designs, or building systems. (Note that “aggressive design” was one specific risk identified by Marsh in its report last summer about green building-related risks perceived by A/E/C executives).
However, Article 4 – Remedies, is the provision which I think deserves the most attention. It offers the owner and its design-builder a menu of options to choose in the event that the project fails to earn the anticipated level of LEED or other third-party certification, or other green building project goal that may be described elsewhere in the Exhibit. Critically, though, the obligation for determining whether any green building regulatory requirements exist with which the project must comply rests not with the design-builder, but with the owner. More on that in a moment.
With respect to how potential remedies are organized in Article 4, the owner can first expressly agree that a failure is not a breach of contract, and simply waive any claims against the design-builder arising out of the project’s failure “to satisfy or achieve LEED certification at any level or other sustainable standards.” If the owner’s green goals for the project are purely aspirational, this may be a viable request for the design-builder or contractor to make during negotiations. Of course, if third-party or other certification is required by code or other legislation, such a provision will likely be unacceptable to the owner.
Alternatively, the parties can agree to a fixed dollar amount as liquidated damages in the event of a failure. In this provision, the owner also provides the design-builder with a waiver of claims for other related damages, including consequential damages. As we have discussed here at GRELJ previously, this may be problematic for a variety of reasons. From a legal perspective, whether a liquidated damages provision in this context would be considered a penalty rather than a legitimate estimate of the damages the owner would stand to incur is still a question mark. It will likely be a significant period of time before we have a court opinion weighing on this critical issue.
Finally, the Exhibit includes what I believe to be the most interesting approach to allocating risk in Section 4.3. There, the parties can choose to impose a limited obligation to cure the project’s failure on the design-builder. This obligation is “to cure the situation through the addition, replacement or correction of materials, configurations, systems or equipments in order to obtain the level of LEED certification indicated above and/or to satisfy or achieve other sustainable standards as are identified, or as required by the Legal Requirements [defined in Article 3 of the Exhibit].”
However, the extent of the curing costs for which the design-builder will be responsible is limited to: (i) any remaining funds in the construction contingency (typically a percentage of the overall cost of the work that exists to cover unanticipated construction expenses, which requires the builder to obtain the owner’s prior written approval before accessing it); (ii) the design-builder’s share in the savings if the cost of the work comes in less than the design-builder’s guaranteed maximum price of the work; or (iii) a fixed sum agreed to by the parties.
What is also important to note about the Exhibit is that it places the obligation for determining the Legal Requirements (again, as defined in Article 3) squarely on the shoulders of the owner. In other words, the party which is generally in the least adequate position to determine what those legal requirements might be is actually responsible for them by contract. This makes little sense, and I cannot imagine an owner agreeing to carry that burden, particularly in the current regulatory climate which is changing so rapidly and varies so widely depending on the particular jurisdiction. It seems like an odd approach, and I am curious if anyone has any insight or feedback as to why DBIA crafted Article 3 in this manner.
The entire Exhibit is certainly worth reviewing in detail, but one other provision that I want to draw your particular attention to is Section 6.2, which states clearly that “[i]n no event shall the dates of Substantial Completion and Final Completion be contingent on any certification of the Project to meet any level of the USGBC’s LEED rating system or other similar system.” This is critical, particularly where project schedules are tight and other penalties – liquidated or otherwise – may begin accruing if substantial completion is not reached as required.
One other final thought – it’s also interesting to me that the first green building contract addendum – the AIA’s B214-2004 – purely addressed scope when it debuted three years ago. Notwithstanding the inherent limitations with form contracts and exhibits, and the fact that scope documents such as the B214 do remain useful tools for project teams, the industry clearly perceives risks arising out of green building projects. I anticipate that we will see more organizations developing and promoting similar consensus documents with risk management provisions as we continue to move forward in 2010.