Hidden Land Mines: Identifying (and Managing) Risk in LEED/Green Building Projects

Anyone in the construction industry, particularly those involved in LEED/green building projects, has probably realized that it not a matter of "if" green building litigation will come, but "when" and "how." To date, green building litigation has been pretty infrequent, but anticipating where litigation will come from will be an important step in avoiding it.

One widespread school of thought has been that green building litigation will arise from projects that simply do not obtain the LEED requirements that are contracted for. Green or LEED-oriented buildings are much more costly to build than conventional buildings, and owners and developers pay a premium for this LEED branding. So they are clearly not going to be happy if a project does not obtain the certification that was expected. As with many construction defect or design defect cases, litigation may arise for breaches of contract or breaches of warranty.

However, this may not be the only theory of liability in the green building arena. A recent case out of Maryland, Shaw Development v. Southern Builders, suggests that the scope of potential liability may be broader.

The Shaw case arose in connection with a condo project in Maryland that included a number of green design features that were intended to support a LEED Silver application. The owner sued the general contractor seeking, among other things, over $600,000 in lost tax credits under a state green building program.

Maryland had provisions that provided tax credits to owners for building eco-friendly buildings. The procedure to receive this credit was to initially apply for a sort of preliminary certification of the project. The project would be built and then, when completed, it would be evaluated for final approval. The preliminary certification, however, contained an expiration date, and the condo project at issue in Shaw was not completed before that project’s preliminary certification expired.

The lawsuit in Shaw did not specify exactly how the general contractor was to be liable, and the case settled prior to trial so there is no precedential value either. However, it is quite possible that the design actually was adequate–the project was just not delivered in time to qualify for the tax credits.

So what is the lesson to be learned from Shaw? Actually, the key in all green building contracts, particularly ones that contemplate LEED certifications and/or green-based tax credits (or even service provider discounts, such as electricity) is to define and clarify risk and set out which party will be liable for certain failures. That means being sure your contract actually fits the project and isn’t just a blanket form (Note: the contract at issue in Shaw was an AIA form but clearly did not address these issues).

Assuming the Shaw facts–that a project failed to receive significant tax credits because it was completed late–who would be liable for those lost tax credits? Would it be the general contractor? The owner? The architect or engineer? What if the project was delayed because of unforeseeably bad weather? What if it was a subcontractor’s mistakes? Or the engineer’s delay in approving modifications to project specs? An electrician who installed bad wiring had no idea his work could result in the loss of a large tax credit–is it fair to hold him responsible?

The shifting of liability should be expressly laid out in the contract documents, including who is liable if a project fails to obtain certain certifications. By clearly defining these items, parties may be able to avoid the litigation that comes with uncertainty in contract provisions. At a minimum, however, parties will put themselves in a better position if litigation does in fact arise.

Chinese Drywall and Statutory Indemnity: The Intersection of Construction Law and Products Liability

Anyone who has paid attention to construction news in the last 6 months knows that one of the hot topics has been Chinese drywall. According to the reports, tainted drywall manufactured in China emits potentially toxic chemicals including carbon disulfide, carbonyl sulfide, and hydrogen sulfide. In larger amounts, these emissions may create a health risk and the defective drywall emits a sulfur-like odor. These toxic materials also may corrode metals within a building, damaging wires, pipes, air conditioners, electronic equipment, etc.

As a result of these defects, Chinese drywall problems have led to a flurry of litigation. If the drywall is in fact defective, the manufacturers may be faced with liability. However, when litigation arises, you can rest assured that the manufacturer will not be the only named defendant. At a minimum, the builder would likely be named as a co-defendant in the lawsuit. Suppliers would probably be included as defendants as well. In fact, more than likely, every party from the painters up the chain to the manufacturers would be named in a lawsuit.

What if your company had no idea it was dealing with defective drywall but still finds itself stuck in the middle of litigation? What if your company didn’t know it was supplying a bad product. What if you just installed the materials your long-time supplier provided? Is there any protection for you in this situation, or does your company simply have to live with a big target on its back?

While there has certainly been an increase in tainted Chinese drywall litigation, the good news for builders and those in the construction industry is that there may be statutory indemnity available to pass along the costs of litigation to the manufacturers. In Texas, builders have Chapter 82 of the Texas Civil Practice & Remedies Code to lean on. In short, Chapter 82 (more specifically Section 82.002) requires a manufacturer to indemnify and hold harmless a seller against a loss arising out of a "products liability action," except for any loss caused by the seller’s own negligence, intentional misconduct, or negligently modifying or altering the product.

For purposes of this provision, a "seller" is a person who is engaged in the business of distributing or otherwise placing into the stream of commerce a product or any component part. The term "seller" is not limited to the traditional role of wholesale distributor or retailer that you would typically associate with the term. A "products liability action" is any action against a manufacturer or seller for recovery of damages arising out of personal injury, death, or property damage allegedly caused by a defective product.

The statutory indemnity required by Chapter 82 of the Texas Civil Practice & Remedies Code applies regardless of the way in which the action is concluded and is in addition to any other duties to indemnity (such as a contractual duty). This indemnity also includes attorney’s fees and court costs.

"Indemnity is great, but I still don’t want a judgment against my company," you say. You may still be in luck. Generally speaking, a seller that did not manufacture a product is not liable for damages related to that product unless the claimant proves:

1) that the seller participated in the design of the product;

2) that the seller altered or modified the product and the claimant’s harm resulted from that alteration or modification;

3) that the seller installed the product, or had the product installed, on another product and the claimant’s harm resulted from the product’s installation onto the assembled product;

4) that:
a) the seller actually knew of a defect to the product at the time the seller supplied the product; and
b) the claimant’s harm resulted from the defect;

or

5) that the manufacturer of the product is:
a) insolvent; or
b) not subject to the jurisdiction of the court

So how do these statutory provisions actually translate into indemnity or liability avoidance for tainted Chinese drywall claims?

If you’re the builder and you’ve been sued because tainted drywall caused damage to a structure (or its components) or personal injury, you can probably seek indemnity from the drywall manufacturer (assuming the builder was not involved in the design or warnings on the product). Similarly, if you’re a painter or sheetrocker who simply installed the materials without any material alteration, then you too would probably be able to seek indemnity from the manufacturer. In either situation, there's a decent chance your company would probably not be liable if it did not know about the allegedly defective product (indemnity notwithstanding).

Product liability law takes into consideration the innocent seller and carves out protections for them so they are not liable for defective products they had no real hand in creating or warning about. But this indemnity is not automatic–it should be formally requested of the manufacturer within a reasonable time after the claim. Even then, the would-be indemnitor can deny the request, forcing the innocent seller to seek enforcement through litigation. The good news, however, is that attorneys’ fees are typically recoverable when enforcing an indemnity request (if successful).

Even though products liability and construction law aren’t typically thought of together, the current Chinese drywall situation shows that there can be an overlap of these two areas of law. It is important to know your rights and obligations so you are not left liable for someone else’s mistake.

FINALLY, Some Positive Construction Economics News!

Ok, we all know the construction industry has taken it on the chin for while now, from the balance sheet to the evening news and everywhere in between. Well, the AIA finally gives us some positive news.

After a series of historic lows, the Architecture Billings Index ("ABI") was up more than eight points in March. As a leading economic indicator, the ABI is supposed to reflect the approximate 9-12 month lag time between architecture billings and construction spending. The March ABI reflected a decrease in overall demand for design services, but the score was nonetheless the highest it has been since September 2008. This news should probably be taken with cautious optimism, but any optimism represents an improvement for many builders.

Mixed design practices fared the best, followed by institutional, multi-family residential, and commercial/industrial.

So what is the legal take on this? Increased work equals new contracts. And with new contract formation comes the potential for contractual pitfalls–indemnity clauses, limitations of liability, pay-when-paid provisions, etc. As I’ve discussed in previous articles, many of these provisions are not quite as cut and dry as they would appear. The key is to get things right on the front end in preparing the contracts that govern the relationship (and obligations) of the parties. You negotiate hard for certain terms–be sure they are enforceable. On the flip side, be sure you’re not stuck with responsibilities (and liabilities) you didn’t think you had.

I’ve seen it countless times–the ounce of prevention really does beat the pound of cure.

Deadline to Implement Federal E-Verify Requirement Pushed Back

On November 14, 2008, a Federal Acquisition Regulation ("FAR") rule was changed to require that certain federal agency contracts (and some subcontracts) include a provision mandating the use of the E-Verify program. But exactly what is E-Verify? In a nutshell, the E-Verify program is an online program, jointly administered by the Department of Homeland Security and the Social Security Administration, to verify employees’ information, including immigration status. This new rule would be in addition to the current Form I-9 requirements.

The E-Verify rule would require all federal solicitations and contracts over $100,000, lasting for a period of 120 days or more, to include a provision that contractors:

1. Enroll in E-Verify;
2. Use E-Verify for all new hires in the US;
3. Use E-Verify for all workers assigned to the contract; and
4. Include a provision in certain subcontracts for services and construction that are over $3,000.

There are some exceptions to the E-Verify requirement–namely, contracts for items that are commercially available off-the-shelf.

This rule was supposed to go into effect on January 15, 2009; however, this date was recently pushed back for a second time and now it will not be implemented until at least June 30, 2009.

The reason for this most recent delay is the pending litigation Chamber of Commerce v. Chertoff, et al., in U.S. District Court for the District of Maryland. In December 2008, the U.S. Chamber of Commerce, among other groups, sued the Department of Homeland Security to have the mandatory E-Verify rule deemed illegal and to enjoin its enforcement. The plaintiffs in that case have filed for summary judgment, while the DHS and other defendants have asked the court for additional time to respond so that the Obama Administration can first complete its review of the federal contractor E-Verify requirement.

The political aspects of this issue notwithstanding, the E-Verify program is of particular significance to the construction industry because the time and cost-intensive nature of the program would add another layer of expense and burden to companies that enter into federal contracts. While the ideas behind E-Verify might be on the right track, the execution of the program would likely add to the strain of a construction industry that is already reeling from the current economic climate.

Whatever the courts decide about the E-Verify program, it is likely that some change in employee verification will be on the horizon–either the full blown E-Verify, a scaled-back version, or some other yet-to-written legislation. In the meantime, the best practice is to stay on top of employee I-9s for now and be mindful of potential changes in the future.

Give 'Em A Brake

Most of us drive through highway or road construction zones regularly, if not daily. I personally drive through two each day in my daily commute. We do it so often that we frequently give little thought to the workers who are actually out there improving our roadways. So I was surprised to hear that for the past decade, there have been an average of 1,000 fatalities per year in highway work zones, with another 60,000 people injured, according to the Associated General Contractors (AGC). As a result, this week has been named National Work Zone Awareness Week.

The AGC has set a goal for federal and state governments to reduce the number of highway work zone fatalities by 50% within the next two years. Many states (including Texas) have already doubled the fines for moving violations in these areas in an effort to increase safety. Still, we drivers need to do our part too.

So in honor of National Work Zone Awareness Week and, more importantly, in honor of the contractors improving our roadways, slow down and pay attention when you see roadwork being done. It shouldn’t cost a life to repair a road or bride.

The Texas Residential Construction Commission Isn’t Dead Yet

As noted in my March 2, 2009 post, the Texas Residential Construction Commission is set to expire in September 2009 by operation of the very laws that created it, absent the legislature passing legislation that would save it. The Sunset Commission, which reviews state agencies, recommended the termination of the TRCC, and Representative Todd Smith proposed legislation that would actively eliminate the agency.

However, the TRCC may not be dead quite yet. State Senator Glenn Hegar recently introduced SB 1015 which would continue the TRCC’s existence. Under this bill, the Commission would be allowed to continue for another four years until 2013. The bill would modify the procedure for the administration of the inspection and dispute resolution process (including when litigation could be brought) and make the TRCC process generally more accessible to the general public.

One unique feature of Sen. Hegar’s proposed legislation would be the creation of a Homeowner Recovery Fund. This would be a fund, maintained by the Commission, which would be available to reimburse claimants who obtain a judgment against a builder for a violation of the TRCC Act. A practical effect of this fund would probably be an increase in litigation against "judgment-proof" or insolvent builders, since it would be a source of funding for what might otherwise be uncollectible judgments.

Just as with HB 1635 (which would abolish the TRCC), SB 1015 is in its early phases and still has to work its way through committee. With multiple pending bills that call for both the abolition and the maintenance of the TRCC (but with substantial changes), one thing that is certain is that the landscape of the Texas residential construction industry will look very different at end of this legislative session.

Check back to this blog regularly for the latest updates on significant actions out of the Capitol.

The Limits of Limitation of Liability Clauses

Design professionals, among many others, have used limitation of liability clauses ("LOL") for years to limit the amount of damages they might be potentially liable for. Though they can vary, a typical LOL clause looks something like this:

LIMITATION OF LIABILITY
THE LIMIT OF LIABILITY OF ARCHITECT/ENGINEER TO THE CLIENT FOR ANY CAUSE OR COMBINATION OF CAUSES SHALL BE, IN THE TOTAL AMOUNT, LIMITED TO THE FEES PAID UNDER THIS CONTRACT OR $50,000, WHICHEVER IS GREATER. INITIALLED:____ ARCHITECT/ENGINEER; ____CLIENT

Texas law requires LOLs to comply with the "fair notice" requirement, which means that the clause should be conspicuous. A term is conspicuous if it is written, displayed, or presented such that a reasonable person should notice it. The test for a court is whether attention can reasonably be expected to be called to the provision. Things that make a provision conspicuous include larger type, all capital letters, bold font, and contrasting colors.

Texas courts tend to uphold limitations of liability if they meet the conspicuousness requirement and there is nothing otherwise unconscionable about the contract. When enforced, these clauses are extremely effective at limiting the amount of a party’s liability.

However, while LOLs are an effective may to mitigate risk and liability, they will not limit a party’s damages for every potential claim (even if they are worded to do so).

In 1973, Texas enacted the Deceptive Trade Practices–Consumer Protection Act ("DTPA") in an effort to protect consumers. The Act essentially outlaws anything your mother told you not to do (such as providing misleading information about the character of goods or services, advertising goods and services with no intent to sell them, rolling back the odometer on a car or truck, etc.). It also allows for a separate DTPA cause of action for breach of express and implied warranties (this is in addition to common law breach of warranty claims).

The DTPA contains an explicit "no waiver" provision, which essentially sets out that any waiver by a consumer of their DTPA rights is unenforceable and void (unless it is writing, the parties have equal bargaining power, and the waiving party is represented by legal counsel). This no waiver provision can also apply to limitations of liability.

One of the major cases on the non-applicability of limitation of liability clauses on DTPA claims is Arthur’s Garage, Inc. v. Racal-Chubb Security Systems, Inc. 997 S.W.2d 803 (Tex.App.–Dallas 1999). There, a commercial customer brought an action against an alarm company with which it had contracted for the installation, service, and motoring of an alarm system following a fire. Investigators eventually discovered that the smoke detector was improperly wired. The fire resulted in over $450,000 worth of damage; however, the contract between the parties contained a limitation of liability clause that limited liability to $350.

The plaintiff in that case sued for breach of contract, negligence, breach of implied and express warranties, and violations of the DTPA. The DTPA violations included misrepresentation, breach of express and implied warranties, and unconscionable conduct.

The court stated that the LOL was void as to the plaintiff’s DTPA claims based on misrepresentation and unconscionable conduct. The limitation of liability was applicable to the DTPA breach of express warranty claim, but it was void as to the DTPA implied warranty claim (the implied warranty at issue was the implied warranty to repair or modify existing tangible goods or property in a good and workmanlike manner). The court noted, however, that DTPA rights on some implied warranty claims could be waived, depending on the implied warranty.

What is the lesson to be learned from this? It is that even valid limitation of liability clauses are not invincible. Knowing potential theories of liability to which LOLs do not apply should provide guidance in the drafting of contract documents and at least partially guide the relationship between parties.