Southern Builders, Inc. v. Shaw Development L.L.C.,

Shaw Development purchased property and retained a contractor, Southern Builders, Inc., to build Captain’s Galley, a $7.5 million 23-unit condominium project in Crisfield, Somerset County, Maryland that was to achieve Silver certification under United States Green Building Council’s Leadership in Energy and Environmental Design (LEED) rating system.  At the time, Maryland offered state tax credits of up to 8% of the total project cost for LEED Silver certified buildings that were greater than 20,000 square feet.  Applicants received an Initial Credit Certificate that established the maximum tax credit amount available for the approved project and set an expiration date by which time the project must be completed and the certificate of occupancy issued and a Final Credit Certificate obtained under the program.  If the expiration date passed before the Final Credit Certificate was issued, the credits would go back into the program pool and the project would have to start over and re-apply under the program. 

Shaw Development and Southern Builders entered into a standard form contract (AIA A101-1997 Standard Form of Agreement Between Owner and Contractor) that did not specifically address obligations related to the tax credits or contain any specific green building requirements.  The contract did, however, require that Southern Builders deliver a certificate of occupany within 336 calendar days of the contract date and it incorporated green building requirements in a Project Manual that stated in pertinent part:

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, as specified in Division I Section “LEED Requirements.”

The project was completed in late 2006, but long after the initial contract schedule and only after the state tax credits had expired.  Southern Builders subsequently filed a $54,000.00 mechanic’s lien against the property that was later reduced to $12,000.00 by the court and consolidated with Shaw Development’s $1.3 million countersuit.  Shaw Development claimed, among other things, that it was entitled to recover damages of $635,000.00 for the lost state tax credits. 

Much of the initial discussion regarding potential green building litigation has revolved around the failure to design or construct a project in accordance with green building standards and/or the subsequent failure to obtain certification or a specified level of certification.  The Shaw Development case did not involve these kind of allegations, but rather centered on the parties’ apparent  failure to recognize the risk inherent in the state tax credit program’s expiration provision and to incorporate into the contract documents appropriate risk management provisions should the project not be completed on time and the tax credits lost as a result.  Because the case settled before trial, some facts are not fully developed in the record and there is no precedent resolving specific liability and damage issues.  Nevertheless, certain lessons may be learned from this case based on what is known. 

First, the contract documents in Shaw Development case appear to have lacked clarity with respect to the contractor’s obligation to construct the project to LEED standards (as opposed to contructing in accordance with the design documents) or to obtain formal LEED certification from USGBC.  The Project Manual appears to have been intended only to serve as a description of the building’s design and may not have obligated the contractor to comply with any specific green building requirements.  Although these facts do not appear to have been in dispute in the Shaw Development case, reliance on standard form contracts may not be appropriate for green building projects at this time because they may not account adequately for the rating system’s documentation and submittal process; the requirements of applicable legislative mandates, incentives and/or initiatives; or allocate all of the potential liabilities. 

In the LEED rating system, there are both Design and Construction phase submittals.  The design team will typically have possession of the information required to complete the design submittals while, on the other hand, the contractor and subcontractors will typically have possession of much of the information required to complete the construction submittals.  If the responsibility for tracking and managing the collection of information throughout the construction process is not properly addressed in the contract documents (and it is not in standard form contracts), valuable time may be lost sorting out and arguing over who is responsible for what and some points may be irretrievably lost.  Standard form contracts stating that the contractor is responsible only for building according to the design documents may obligate the contractor to comply only with the LEED Design submittals and may absove them, albeit unintentionally, of any responsibility for the LEED Construction submittals.  

Standard form contracts may also fail to address certain potential liabilities.  In the Shaw Development case, for example, only six of the twenty-three condominiums had been sold and three other units were under contract when the Captain Galley’s Restaurant was forced to close and Shaw Development filed a Chapter 11 bankruptcy petition to avoid a foreclosure auction and to restructure and proceed to close on the units under contract at significant discounts from the original purchase price.   Had the case gone to trial, Shaw Development would certainly have argued that Southern Builder’s failure to deliver the project on schedule and to obtain LEED Silver certification led not only to it’s loss of $635,000.00 in tax credits, but also to the failure of the restaurant and loss of condominium sale revenue, and to the eventual bankruptcy of the project that would entitle it to recover damages for all lost sales or any decrease in the sale price of units sold during the automatic stay period and the associated professional fees and other carrying costs incurred by Shaw Development and the trustee during the course of the bankruptcy.  Depending on whether the contract documents contained a cap or a waiver of consequential damages or damages incidental to a bankruptcy filing were foreseeable by the parties, the contractor could face significant additional liability or the project owner could be barred from recovering consequential damages flowing from the contractor’s breach of the contract.   

If the contractor is to guarantee certification, standard form contract documents should be modified to detail the specific obligations and liabilities of subcontractors and other parties and to absolve or limit the contractor’s liability for the actions or omissions of other parties that are beyond its control. 

Second, reliance on legal counsel familiar with green building and the documentation and submittal requirements of the rating system as well as the regulatory landscape is essential to managing risk for the reasons stated above.  This familarity will become increasingly more important as municipal, county, state and federal green building requirements, incentives and initiatives continue to proliferate.  For example, the failure of the parties in the Shaw Development case to properly identify and incorporate the requirements of the state tax credit program (and specifically the expiration of the tax credits) into the contract documents exposed both parties to liability they may not have anticipated.  Identifying and addressing these kinds of risk in the contract documents allows the contractor to determine ahead of time whether it is willing or even capable of bearing some or all of the risk and the project owner to have some assurance that if the contractor does not deliver the project as required or on schedule, it would have the ability to assert a breach of contract claim for the contractor’s specific failure.  The proliferation of public mandates and public and priviate incentives and initiatives will likely require the incorporation of green building strategies into all construction projects.  Locally, for example, the municipalities of Chamblee, Doraville and Conyers have enacted green building mandates, and the City of Atlanta is considering an amendment to its building code to incorporate green building requirements. 

While the Shaw Development case was a dispute between the project owner and the contractor, change a fact or two and claims might have also been brought against the architect, engineer or a LEED consultant.  Given the current depressed state of real estate development, design professionals, contractors and consultants may feel pressured to enter into contracts for any kind of work whenever it is available and to do so as quickly as possible.  Cheif among the lessons that can be learned from the Shaw Development case is that caution should be taken to properly evaluate the risks in green building projects and to manage that risk in the contract documents. 

 

General recognition goes to Chris Cheatham and Stephen Del Percio, among others, for their discussions of this case and the issues it raises.  For their comments, please go to http://www.greenbuildinglawupdate.com/ (Chris Cheatham) and  http://www.greenrealestatelaw.com/ (Stephen Del Percio).

AHRI v. City of Albuquerque

In January 2008, Alburquerque implemented a new green building code that included energy efficiency requirements for air conditioners, furnaces, heat pumps and water heaters that were more stringent than U.S. Department of Energy requirements.  The legislation prompted a group of heating, ventilation and air conditioning and water heating equipment trade organizations, contractors and distributors to sue the City to stop the new requirements from taking effect on the grounds that the federal Energy Policy and Conservation Act of 1975, National Appliance Energy Conservation Act and other federal laws preempt the City’s new building code provisions related to energy efficiency and the City did not have a waiver of preemption from the federal government. 

Specifically, Plaintiffs argued that they would be harmed by the new legislation because sorting through conflicting standards will cause confusion and complying with conflicting standards will increase equipment costs causing consumers to repair rather than replace equipment and driving up the cost of new homes and other projects.  

As a general matter, it is well-established that a federal law that conflicts with a state law will “preempt” the state law if Congress intended, either expressly or implicitly, to preempt the state law.  Absent Congress expressly stating its intent to preempt, Courts will infer the intent to preempt if the federal law conflicts with state or local law or if the state or local law is an obstacle to the execution of the federal law (conflict preemption) or if the federal regulatory scheme is so pervasive as to “occupy the field” in that area of law (field preemption).  Absent demonstration of a compelling interest or a federal waiver of preemption, local or state laws preempted by federal laws have no effect.   

Judge Martha Vazquez of the United States District Court for the District of New Mexico granted Plaintiffs a preliminary injunction barring the enforcement of the new green building code pending the outcome of the lawsuit.  Judge Vazquez acknowledged that the City’s objectives were “laudable,” but “unfortunately, the drafters of the code were unaware of the long-standing federal statutes governing the energy efficiency of certain HVAC and water heating products and expressly preempting state regulation of these products when the code was drafted and, as a result, the code, as enacted, infringes on an area preempted by federal law.”  

Although in this instance Congress stated expressly its intent to preempt state and local law, this case may prove significant if it portends a precedent pursuant to which local energy efficiency and high performance building regulations are challenged more often and more aggressively as federal regulatory activity increases.  Federal tax incentives and building programs now actively encourage green building and President Obama has pledged to increase federal regulation of high performance buildings.  The lack of federal regulatory action under previous administrations prompted numerous state and local government initiatives intended to increase building energy efficiency and performance.  These local requirements will have no effect, however, if Congress intends, either expressly or implicitly, to preempt the field of energy efficiency in particular or green building generally.  

A uniform federal standard is one answer, but it will prove difficult to create a uniform national standard that can adequately address environments as diverse as those found between San Diego and Boston or between Anchorage and Miami or in Las Vegas and Buffalo.  Moreover, the comprises that are necessary to gain the cooperation of national constituencies will almost assuredly result in a uniform federal standard that is lower than the standards acheived (or achievable) by local regulation in many if not most communities. 

Absent careful analysis of the potential conflicts between local, state and federal regulatory action related to green building and energy efficiency, expect more active opposition and legal challenges to state and local green building requirements.

 

General recognition goes to Stephen Del Percio and Shari Shapiro, among others, for their previous discussions of this case and the issues it raises.  For their comments, please go to http://www.greenrealestatelaw.com/ (Stephen Del Percio) and www.greenbuildinglawblog.com (Shari Shapiro).

If you own or operate a business and are considering an investment in social responsibility, you might ask yourself: Does it pay to be good?

That question is the title to a recent article by Remi Trudel and June Cotte in the MIT/Sloan Management Review[i]  discussing their research on consumers’ ‘willingness-to-pay’ for ethically-produced goods and services.  Specifically, Trudel and Cotte examined: 

  1. Whether consumers are willing to pay a premium for ethically-produced goods;
  2. Whether consumers will demand a discount from companies that produce goods in an unethical manner; and
  3. Whether a moderate (rather than a large) investment in ethical production is sufficient to obtain any premium for ethical production and avoid any discount for unethical production.

Trudel and Cotte found that consumers were willing to pay a premium for goods they considered ethically-produced and that they demanded a discount (or penalty) for goods that were produced in an unethical manner.  Interestingly, the penalty consumers imposed on a company that produced goods in an unethical manner was greater than the premium they were willing to pay to a company that produced goods in an ethical manner.  Moreover, the data also suggested that consumers imposed a more severe penalty for unethical behavior as their expectations rose for socially responsible behavior.   

Whether consumer expectations are driving the increase in corporate socially responsible behavior (or at least corporate social responsibility reporting) or whether the rise of corporate social responsibility reporting is raising consumer expectations for socially responsible corporate behavior (or perhaps a little of both), there is clearly an increase in consumer expectations for socially responsible corporate behavior.  And if consumers’ willingness to pay a premium and their demand for a discount both increase as their expectations for socially responsible behavior increases, there will soon come a time when the premium and penalty work together to create a substantial cost differentiation in the marketplace for “green” versus “brown” goods, services and behavior.  

What does this mean for you and your business?  First, doing good can pay off, and even in terms of profitability.  Second, your initial investment need not be substantial.  Trudel and Cotte found that a company did not necessarily need to be entirely ethical in its production of goods to capture the willingness to pay a premium (and avoid the penalty).  Therefore, even a moderate initial investment in ethically producing even a portion of your signature product or service may be profitable.  Third, you should continue to examine and adopt more ethical behavior in producing your goods and providing your services because once you start to raise consumer expectations for your own behavior, failing to meet those rising expectations may cost you.  On the other hand, doing nothing or doing too little too late to meet the rising tide of consumer expectations for socially responsible corporate behavior could leave you with declining market share, eroding brand identity and lost opportunity.  And the increasing cost differential between “green” and “brown” goods and services could manifest more quickly and be greater than you might imagine.   

By just about any measure, doing good is a good business investment.


[i] Does It Pay to Be Good?, MIT Sloan Management Review (Winter 2009), at 61.

Recently, HSBC Bank plc determined that the US target of 12% of its federal stimulus money for “green” projects ranks it fifth percentage-wise worldwide behind South Korea (81%), China (34%) and France and Germany.  In terms of volume, the US target of $94 billion puts it second behind only China at $200 billion.  How the money is spent will ultimately determine whether it was a good investment, and the US had the largest allocations going to building effiency and renewables — the top two categores in terms of reducing climate change impacts.  See HSBC Bank report update    

With respect to building efficiency, the American Recovery and Reinvestment Act of 2009 (ARRA), signed into law by President Obama on February 17, 2009, required GSA to identify by April 3rd federal government building projects to receive $5.5 billion authorized by ARRA — $4.5 billion of which is earmarked for high performance/green building improvements.  In Atlanta, GSA identified three such projects: 

• Richard B. Russell U.S. Courthouse in Atlanta — $2,779,000.

• IRS Annex in Chamblee — $2,711,000.

• Peachtree Summit Federal Building in Atlanta — $279,000.

These are limited scope projects incorporating advanced metering for both electricity and water, and replacement of all seriously deteriorated roofs with maximum reasonable insulation for the climatic zone and either integrated photovoltaic roof membranes, green roofs or cool roof membranes as warranted by individual project factors.  Specific provisions of ARRA are complex and some details are still being worked out, but GSA has previously made a substantial commitment to high performance green buildings by establishing an Office of Federal High Performance Green Buildings and adopting the U.S. Green Building Council’s LEED certification rating system and requiring that all new construction or substantial renovation of a building or leased space over 10,000 rentable square feet receive at least LEED Silver certification.  Among other green initiatives, ARRA also provides grants to help state and local governments improve energy efficiency and reduce carbon emissions ($6.3 billion), rebates for consumer replacement of old appliances with ENERGY STAR products ($300 million) and $4 billion for the Public Housing Capital Fund to improve the energy efficiency of public housing projects.  

For the full list of federal building projects GSA submitted to Congress, see GSA Spending Plan.  For more information on these and other GSA projects, visit GSA’s Website or Recovery.gov.  In the meantime, let me know if you have other information or if you are successful in obtaining work in connection with any of the these federal building projects.