TABLE OF CONTENTS Dec 2012 - 0 comments

Failing the LEED Test

More than 7,000 projects, comprising 1.5 billion square feet in 30 countries have received the LEED stamp of approval. But builders are in uncharted legal water in Canada if they come up short. Which begs the question: who pays when green isn't green enough?

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By: Sharon Vogel
2012-12-01

Green building projects are becoming the new normal. Design professionals are increasingly involved in such projects, but that also means design professionals are increasingly exposed to potential liability for associated design issues. More and more projects are being designed in accordance with environmental sustainability strategies, which can include changing the ways in which a building is structured and the materials used to execute the design. This means with new approaches come uncertainties and therefore risk. Significantly, innovative approaches to construction may create expectations which cannot be satisfied (or differences of opinion about what was agreed), unexpected costs and unforeseen structural failings.

So far there do not appear to have been a large number of claims in Canada, or the U.S. for that matter, relating to the design of green buildings, but claims against developers and design professionals, when they do arise, will be for breach of contract, negligence, products liability, and misrepresentation. Class actions against design professionals and developers are also possible, for example, by disgruntled purchasers alleging that a building does not live up to its promises of energy efficiency.

Breach of contract

A professional services agreement will in all likelihood govern the relationship between the design professional and the developer of the project, and require the fulfilment of the client’s expectations with respect to the project. Close attention should be paid to the scope and duration of the design professional’s obligations under the agreement. The actual terms of the contract may specify that the design of the project is to be green, likely according to some identifiable benchmark like obtaining a particular level of LEED or other third-party certification (such as BOMA BESt, Green Globes, BREEAM, or BuiltGreen Canada). The design professional will be exposed to liability under the professional services agreement if the project fails to meet a required standard on completion.

On an innovative project, there is the potential for the design professional to take on a higher and less-predictable level of risk than would be present on a more conventional one. Designers may be held to account for cost over-runs. Some public projects require LEED Gold certification at a minimum, which may be more difficult to obtain and expensive than the parties expected at the outset of the project.

There is also the potential for liability if the professional services agreement requires the design professional to make recommendations on sustainable design alternatives and to evaluate the costs associated with their implementation. If those costs exceed what the client expected, the design professional may also face a claim for breach of contract. It is not always easy to predict costs, much less over-runs, and any design professional will want to think carefully before making a commitment to specific numbers or ranges.

Damages payable for breach of contract could also include amounts representing loss of tax credits, penalties on tendered projects, loss of rentals or sales, failure to achieve promised savings in operating costs (e.g. for energy and water) and diminished asset value. Design professionals will want to be certain that they can live with the scope of the damages clause in the professional services agreement, especially as it relates to ‘consequential’ damages (i.e. those which result from special circumstances outside the ordinary course and which can include lost profits, loss of use of defective property and third-party claims). In the design professional’s ideal world, liability for consequential losses would be excluded altogether in the design services agreement.

Negligence

Design professionals are traditionally held to a standard of care in design based on a similarly situated professional addressing a similar project. How this standard will be applied in the context of a green building project (and the extent to which it might be altered by that context) is so far unclear. We have yet to see if a specific standard of care exists for LEED-accredited professionals or on the basis of a design professional’s particular level of experience in designing green buildings, although this seems likely. LEED-accredited professionals or those who hold themselves out as having expertise in green building design would probably be held to a higher standard of care than other design professionals.

Professional standards related to green building projects may be relevant, given that a court would probably assess a design professional’s performance in light of benchmarks set by the person’s own professional body. It is also possible that the standard of care for design professionals might be applied more flexibly where the project involves novel, and therefore untested services, such as energy modelling, in respect of which it may be difficult to determine what a similarly situated design professional would have done on a similar project. For new projects, there will be no existing data against which to measure energy savings, so the design professional will want to establish a baseline to assess efficiencies. It is sometimes possible, especially on larger projects, to negotiate a standard of care, for example, a standard of “leading firms doing similar work in the industry.”

Some Canadian jurisdictions have incorporated green building standards in their building codes, which would also be taken into account in determining the appropriate standard of care. Recent amendments to Ontario’s building code, for example, include requirements similar to LEED certification standards with respect to energy efficiency. To the extent that green standards are given legislative sanction, design professionals may be exposed to damages for regulatory non-compliance.

Products liability

A designer may also be the subject of litigation where the design of the project features materials or other elements which turn out to be problematic: of particular concern is the risk of mould or water damage associated with building envelopes, air circulation systems and green roofs.

Misrepresentation

Design professionals are also exposed to risk arising from advertising and marketing materials for green building projects. A claim for misrepresentation may arise if the project does not deliver the promised green benefits. An example is in Toronto Standard Condominium Corporation No. 1898 v. 743 Queen St. East Toronto Inc., where the developer and architect of a green project were sued for damages arising from construction deficiencies. The developer had marketed the condominium as a “cutting edge green building containing the latest environmentally friendly technology and features…”, including an energy-efficient, geo-thermal HVAC system.

Before advertising or recommending environmentally sustainable products or services, design professionals should be sure they have independent, reliable data that confirms that the products or services are in fact as green as they are said to be. Relying on a manufacturer’s or supplier’s representations alone may prove to be a costly error. As well, a design professional should not suggest that he or she has accreditation or green experience where this is not actually the case.

Insurance

While professional liability policies provide coverage for the errors and omissions of design professionals in providing design services, these policies typically exclude coverage for liability which has been assumed under contract. Where the design professional has entered into a contractual obligation, the test is not whether the professional has met the requisite standard of care but whether the professional has fulfilled the contractual promise (although it is possible to be liable both for breach of contract and for negligence in failing to meet the standard of care). An insurer may well attempt to rely on the contractual exclusion of liability where the claim against the design professional arises from a warranty in relation to LEED or other third-party certification. The prudent course for design professionals is to be careful in making representations and warranties that could trigger the exclusion under their professional liability insurance coverage.

Despite the proliferation of green projects, the extent of the resulting design risks for professionals remains uncertain. It is probably safe to say, however, that new technologies associated with these projects have heightened the risks for design professionals. Appropriate insurance coverage is essential. We will be watching closely to see how assessments of liability play out in U.S. litigation, as developments south of the border are sure to affect design professionals and green projects in Canada. In any event, it is clear that design professionals should take steps to mitigate and allocate the risks associated with green building projects.

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Sharon Vogel is a partner in the Construction Law Group at Borden Ladner Gervais LLP.  She can be contacted at svogel[at]blg.com. The author gratefully acknowledges the assistance of Neil Guthrie, the National Research Director at BLG, and Stephanie Young, an articling student at BLG, in the research and preparation of this article.
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Caption: Sharon Vogel is a partner in the Construction Law Group...

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Borden Ladner Gervais LLP



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