The incentives to “build green” are strong among U.S. corporations, with 82% of corporate America expected to be greening at least 16% of its real estate portfolio this year.1 Developers see “green” as a market advantage for new projects, employing words, symbols and other depictions to herald their “sustainable” construction and “green” features to attract high-end tenants. Bragging rights aside, however, what do the terms “sustainable” and “green” really mean, and – absent reliable evidence – are such claims legally defensible? What happens if the buildings fail to obtain whatever specified green building certification is attached to the project? Who is liable when the local government will not issue a use and occupancy certificate because of that failure? These are some of the new legal risks in the field of green building construction. This article discusses sources of legal exposure and talks about the potential nature of “green” lawsuits.
Green Marketing Claims
Industry and consumers are being swamped with vague and confusing claims about the environmental benefits of building products and services. The Federal Trade Commission (FTC or Commission), the agency charged with protecting consumers against false advertising claims, has stepped into the fray, seeking to protect consumers by fast-tracking a long overdue update to its “Green Guides,” the Commission’s cornerstone tool for preventing consumer deception in the ever-expanding arena of environmental claims. The update is expected to include new direction to industry regarding so-called “green building” claims, an area in which the Green Guides had previously provided little instruction.
First issued in 1992 and thereafter revised in 1996 and 1998, the FTC’s “Guides for the Use of Environmental Marketing Claims” (Green Guides or Guides)2 provide direction to help industry avoid overstating the environmental qualities of a product or service in violation of the Federal Trade Commission Act (FTC Act) prohibitions against deceptive advertising. Neither the Commission nor the Guides set environmental standards. Rather, the Guides describe the basic elements needed to substantiate specific environmental assertions with regard to consumer products and services. The Guides also contain general examples of acceptable versus unacceptable claims. By standardizing the meanings of terms like “biodegradable” or “carbon neutral,” the FTC Guides help industry to achieve clarity in claims about the environmentally friendly nature of products and services.
To determine how to most effectively update the Green Guides, over the last two years the FTC conducted its own research on consumer understanding of advertising terms currently in vogue, such as “eco-friendly” and “sustainable.” The Commission hosted a series of public workshops to solicit comments on the issue. The third, and perhaps last, workshop included an interactive panel on green marketing of buildings and construction.3 Panelists pointed out that determining whether something is truly “green” requires an in-depth life-cycle analysis of the environmental impact of everything from the embodied energy of the materials for the building or product to what can be done with it once it is obsolete. For example, while the term “PVC-free” tends to connote, in the minds of consumers, a more environmentally-friendly building material, a PVC (poly vinyl chloride) treated product may actually be more environmentally friendly in the long term, due to its longer life and less frequent need to be replaced, leading to less manufacturing and renovation, and the avoidance of the energy consumption those processes require. Experts also suggested that third party certifications such as Leadership in Energy and Environmental Design (LEED®), Energy Star Qualified Homes, Green Globes and National Association of Home Building (NAHB), all of which may have slightly differing standards, should have a place in reliably substantiating whether or not a building is “green.” This place should, however, depend on the impartiality and balance of the certifying entity.
While the Guides “provide the basis for voluntary compliance” with Section 5 of the FTC Act regarding deceptive advertising, “[c]onduct inconsistent with the positions articulated…may result in corrective action by the Commission under Section 5 if, after investigation, the Commission has reason to believe that the behavior falls within the scope of the conduct declared unlawful by the statute.”4 The FTC actively pursues civil prosecutions against misleading green claims. In the field of “green” energy efficiency claims, for example, the FTC has undertaken recent actions against marketers of home insulation materials. In one of its enforcement actions against the manufacturer of insulation products, the agency alleged that R-value (measure of resistance to heat flow) of the insulation was only one-quarter of what the advertiser claimed. A court order required the defendants to pay a $155,000 civil penalty, revise its claims, and substantiate any future energy-related claims.
If the FTC adds guidance related to green buildings and construction in the next edition of the Green Guides, which is expected either late this year or early 2010, it is fair to assume that there will be increased FTC scrutiny of those entities who market “green” or “sustainable” buildings and building products.
Mandatory Green Building Laws
Mandatory laws that require green building construction may move the question of who is liable for the failure to obtain LEED® certification to the courts. In NYC, for example, the NYC Green Building Law (Local Law 86) requires municipal projects to be LEED® certified, effective January 1, 2007. Before that, the Town of Babylon was the first Long Island town to require LEED® certification to all commercial buildings, office and industrial buildings or multiple residences or senior citizen multiple residences, equal to or more than 4,000 square feet. Every entity who files a building permit application must provide a completed LEED® checklist or other comparable and acceptable reporting mechanism. No Certificate of Occupancy shall be issued unless and until the applicant produces proof acceptable to building inspectors that the building has sufficient points to achieve LEED® status.
The difficulty with mandatory green building legislation, however, is the quandary that independent “green” rating entities and regulators have different definitions of what is “green” or “sustainable.” The US Green Building Council (USGBC) introduced the Leadership in Energy and Environmental Design (LEED®) rating system as a pilot program in 1998. LEED® ratings are applied over five factors: (1) sustainable site development; (2) water savings; (3) energy efficiency; (4) materials selection, and (5) indoor environmental quality.
Taking an arguably longer view, the U.S. Environmental Protection Agency defines “Green Building” as “the practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building’s life cycle from siting to design, construction, operation, maintenance, renovation and deconstruction.” The NYS Department of Environmental Conservation focuses on the conditions created by a “green building.” Its website pronounces that “Green Buildings use resources-energy, water, materials, and land more efficiently and effectively and they provide healthier environments for working, learning and living.”5
Fortunately, national efforts are afoot to standardize green building codes, which should assist the businesses in determining what green building claims are appropriate. On June 29, 2009, the International Code Council (ICC), in conjunction with the American Institute of Architects (AIA) and the American Society for Testing and Materials (ASTM) announced the launching of a new initiative, the International Green Construction Code (IGCC). The IGCC will be a model code for commercial and high performance buildings, with a framework based on environmentally sound standards. The goal is to create a sustainable regulatory framework that can be adopted into local, state, and federal law.
Construction Contract Litigation and Insurance Claims
It is critical that builders and manufacturers agree on a certain lexicon appropriate for green representations within their industries, as well as what claims or terms to avoid. Otherwise, disputes as to whether the good or service delivered is what was expected are inevitable. At present, only one instance of private litigation exists which was triggered by vague “green” claims. The case was dismissed before any adjudication on the merits, but the pleadings offer guidance as to future causes of action in this area. In Shaw Development v. Southern Builders (No. 19-C-07-011405, Somerset County, Maryland), the contractor agreed that a $7.5 million, 23-unit luxury condominium and restaurant project in Crisfield, Maryland, called Captain’s Galley, would be environmentally friendly. The contract between Southern Builders and Shaw Development was a standard AIA form that included the following representation expressed through specifications and incorporation of a Scope of Work and Project Manual: “Project is designed to comply with a Silver Certification Level according to the US Green Building Council’s Leadership in Energy and Environmental Design (LEED®) Rating System.”
In January 2007, Southern Builders, the general contractor, commenced a mechanics lien action in the Circuit Court. When USGBC did not certify the completed condominiums, the developer counterclaimed against the contractor for breach of contract and negligence, claiming, inter alia, $635,000 in lost state tax credits. (Maryland offers state tax credits of up to 8 percent of a project’s total cost for buildings that are greater than 20,000 square feet and are certified under the USGBC standards.) Significantly, a motion to stay proceedings and compel arbitration was granted by the court, since the contract mandated binding arbitration. However, before the arbitration commenced, the dispute was resolved and a stipulation of dismissal was filed in June 2007. Although not adjudicated on the merits and thus of no precedential value, the Shaw case underscores the importance of understanding the Green Building rating process before making representations regarding third party certification or taking on contractual obligations.
Parties will look to the contract documents to see who has liability in green construction disputes. The AIA Docu-ment B214™ is an excellent checklist of services required to obtain LEED® certification, but it does not clarify or apportion liability between the architect and the owner as to who will accomplish what to achieve LEED® status.
Accordingly, appropriately drafted contracts with consultants and contractors engaged to achieve green building certification are also a must. Suitable representations and warranties of “green” competencies, certifications and materials are imperative. A detailed scope of work and standards of care should clearly articulate performance expectations. The contract should provide for substitution of supplies if certain green materials become unavailable or if delays are incurred due to the unavailability of certain certified products. Allocation of damages should be addressed if there is a failure to achieve the desired certification. Furthermore, as shown by the Shaw case, compliance with legal requirements may be necessary to obtain special tax or financial benefits.
Insurance carriers are seeing a rise in construction claims related to green buildings. Claims are being lodged against contractors and design teams under various theories, such as design defect, breach of a green guarantee or green performance specification, and liability for construction and development delays due to failure to timely receive green materials. Now, in addition to the standard choices of mediation and binding arbitration, the new AIA contracts include “litigation by a court of competent jurisdiction” as a modality of dispute resolution. This is quickly becoming the more commonly invoked check-box. Such changes in protocol foretell the likelihood of more judicial redress in the green building construction industry.
Tenants in commercial green buildings have begun pursuing claims against owners when expectations for green building performance are not met. Drafters of a lease involving space in a green building will want to specify who receives credit for satisfying the performance benchmarks that result in green building certification and whether the landlord or tenant is required to pay for capital expenses incurred in obtaining certification. Several organizations, such as the Building Owners and Managers Association, have developed model green leases or riders to address typical issues. However, these are merely templates and should not be used wholesale in place of individually crafted agreements. Poorly drafted leases that either do not contemplate or in-artfully express green building obligations between the parties for such issues as energy and water efficiency, indoor air quality or building materials, will be fertile ground for litigation in the coming years.
Green building law is an evolving landscape of statutes, regulatory initiatives and private contract rights. The best defense is working with an experienced environmental attorney to precisely craft the appropriate “green” provisions in your purchase and sale, construction, or lease agreement.
Suzanne M. Avena, Esq. is a Partner at Garfunkel, Wild & Travis and Chair of its Environmental Practice.
1. McGraw Hill Construction, Greening of Corporate America SmartMarket Report, 2007.
2. 57 Fed. Reg. 36363 (Aug. 13, 1992); 61 Fed. Reg. 53311 (Oct. 11, 1996); 63 Fed. Reg. 24240 (May 1, 1998).16 C.F.R.Part 260.
3. “FTC Announces Workshop on “Green Guides and Environmental Claims for Building and Textiles,” available at http://www.ftc.gov/opa/2008/06/greenguides.shtm
4. 16 C.F.R. § 260.1
5. New York State Department of Environmental Conservation, Green Buildings, available at http://www.dec.ny.gov/energy/218.html
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