Is Failure To Achieve LEED Certification Consequential Damages?

The LEED Certification process can be quite complex.   It takes months after a project's completion to get the paperwork process, the paperwork itself can be a heafty stack, and that's not even taking into account the complicated points framework, the certification gray-areas, the de-certification process and more.... (Want a good discussion of all these frustrating and unanswered questions?  -  See our friend Chris Cheatham's great Green Building Law Update Blog). Since I'm a lawyer, the LEED rating system begs this question:   What happen is a project shoots for certification, and fails?   What are the damages?   Whose on the hook? These are some intensive questions and I can spend a few posts trying to answer.    See some of our previous posts for discussions, including review of the the LEED tag, and this post:  Uh-Oh:  I Made A LEED Mistake and Don't Know What To Do. What I want to focus on in this post is an interesting point that I recently read in legal article hosted at  Legal Commentary:  Green Building Risks.   The well-written article, by attorney Martha Perkins, discusses some issues a contractor should keep in mind when entering a green building contract. It is the following point, however, that caught most of my attention:
Generally, a contractor should include a disclaimer guaranteeing a particular outcome such as a green-building certification or specific energy efficiency. Failure to achieve a desired certification or a specific green performance is often deemed a consequential damage. As a result, ensure that consequential damages are waived.
Two things strike me. First, her statement that certification failures are "often deemed a consequential damage" seems a bit off the mark.    I'm not saying that these failures will not be considered consequential damages - they may - but, I'm not aware of any case law on the issue.   I would be particularly concerned about advising a construction client that a simple waiver of consequential damages could plug this liability hole. Second, however, is her opinion that a LEED Certification failure might be considered a consequential damage...and therefore, sometime waived out of many construction contracts. Could this be the case? Wikipedia, the great collection of legal definitions, defines consequential damages pretty well, as follows:
When a contract is breached, the recognized remedy for an owner is recovery of damages that result directly from the breach, such as the cost to repair or complete the work in accordance with the contract documents, the loss of value of lost or damaged work. Consequential damages (also sometimes referred to as indirect or “special” damages), include loss of product and loss of profit or revenue and may be recovered if it is determined such damages were reasonably foreseeable or "within the contemplation of the parties" at the time of the contract.
Looking at this issue from a big-picture standpoint and not getting bogged down with case-law, I think there is some argument on both sides of the issue. On the one hand, failure to certify can be considered a damage caused to the owner directly from the breach.   Now, just as the owner may have to repair an improperly constructed wall, so too does the owner have to repair his building to achieve the proper certification (or take it without the certification and assume a credit). On the other hand, a failure to certify certainly is different than an improperly constructed item within the building.  You sometimes can't put a dollar figure on a certification failure to calculate a credit, and the "loss" may be more closely aligned with a loss of profit or revenue as a result of the certification failure. I found this to be an interesting point made by Ms. Perkins...but not one that is settled.    What does everyone think about this question - a consequential damage, or no?   Anyone know of any case law on the topic?
Scott Wolfe
About the Author: Scott Wolfe
Scott Wolfe, Jr. obtained his J.D. degree from Loyola University of New Orleans, and his B.A. from Southern Methodist University in Dallas, TX. In 2006, 2007, 2008 and 2009, Scott was recognized as a Leader in Law by CityBusiness Magazine. The son and grandson of general contractors, Scott is a construction litigator in the Pacific Northwest, and the founding member of the bi-coastal law firm, Wolfe Law Group. Scott is also the founder and CEO of Express Lien, Inc., a legal document preparation service for contractors. In 2008, City Business Magazine recognized Scott as one of its Innovators of the Year for the Express Lien concept. As an entrepreneur himself, Scott has a strong background in business and commercial transactions and laws. He focuses his practice on the legal issues facing the construction industry, and has represented clients in multi-million dollar construction disputes in litigation and alternative dispute resolution proceedings. Scott is a LEED AP.

6 comments on “Is Failure To Achieve LEED Certification Consequential Damages?”

  • I am aware of two cases, one Shaw Development v. Southern Builders, near Baltimore MD. (2008) involving a condo project that failed to attain the LEED status of Silver as expected, so the owner sued for $635,000 in lost tax credits. Parties settled for an undisclosed amount. The second is still ongoing,the owner of a condo in New York’s Riverhouse at One Rockefeller Park who is suing for $1.5 million in damages due to the profect was not green encoung and did not live up to the marketing materials. Are you aware of any other suits at this time? Have you encountered any issues with rebuilding green after a loss such as a fire etc. that the insurance company failed to build back to LEED status already attained prior to the loss?

  • Hi Mary Anne – Thanks for stopping by and commenting on the Monitor. I’ve heard of the Shaw case as well, but don’t know it to be very revealing. As you mentioned, it settled out. I did not hear of the New York Riverhouse matter.

    Other than the Shaw case, the Washington Nationals lawsuit had some LEED aspects / disputes. But, like Shaw, it settled and isn’t helpful.

    We’ve worked with a few clients over the past two years on LEED contracts and disputes, but none of them have evolved into litigation. I’m not aware of anything going on now – or at least publicly. I imagine there are some disputes out there not publicized…or, possibly in arbitration and subject to confidentiality requirements.

    When we hear of these types of actions, we post about them. So, stay tuned.

  • I do not know of any suits others than the ones above, but can easily see the potential for one, because in many west coast cities, there are bonus square footage allowances and tax credits for meeting LEED silver and above. Since the municipality can’t take the bonus square footage away after its been built, the potential exists for a heavy fine in case of non-compliance.
    In the Riverhouse example above, the building did achieve LEED status, but there is often a large difference between being a LEED building and being a “better” building — and the buyers thought that “LEED” meant “better”. In this case, they are suing not because the building wasn’t LEED rated, but rather that they didn’t get as high performance as marketed.

    • Seems like a very interesting case. I just got finished presenting at Green Legal Matters in New Orleans, and spent a good deal of time talking about this problem: that people’s expectations about green buildings are a little out of wack (and uninformed). And if you get involved with one of these green building construction projects, it’s important to define the expectations at the offset…

      But, I find it really difficult to advise how to manage all of those expectations with contracts.

      Judicial system seems a little short on disputes right now (at least publicized ones)…but like you said, there is potential. We’ll all see soon enough.

      Thanks for the comment! I’m enjoying the conversation.

  • the big stumbling block i have is the idea that any impact from a failure to recieve the targetted certification level is ‘consequential’. It would seem to me that the importance of teh cert level is known by all parties and that a negative impact from failing to get that level is foreseeable by all concerned. quantification of the damages my be a challenge, but the idea that a “silver” building is not as valuable as a ‘gold’ building is pretty obvious and a negative impact from dropping a notch is foreseeable. Just lookk at teh difference in endorsement contracts for Mike Phelps from the Olympics compared to ‘the silver medal guy’ (what? you forgot his name too?)

    • Hi Mitchell – Thanks for the comment. To weigh in on this, I think it’s always best to be best. Of course. But, since getting these buildings certified is not really done to create a position in any marketplace, I do still feel like the lower rankings have relevance.

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