By Bethany Kroes, 2L Marquette University

This article is published courtesy of the June 2009 State Bar Construction and Public Contract Law Section newsletter.

Green is the latest buzz word and it is popping up everywhere, including litigation. The case Shaw Development v. Southern Builders anticipates possible upcoming issues as the field of green construction increases in popularity.

This lawsuit grew out of the contract between Shaw Development and Southern Builders. Shaw hired Southern Builders in 2006 as the general contractor for the construction of a $7.5 million, 23-unit condominium project near Chesapeake Bay. The development, Captain’s Galley, included a number of green features intended to qualify the project for a Leadership in Energy and Environmental Design (LEED) Silver rating from the U.S. Green Building Council (USGBC). Achieving this rating would entitle Shaw to participate in Maryland’s Green Building Tax Credit Program. Receiving this tax credit would have potentially qualified Captain’s Galley for $635,000. In addition to building requirements, the program also requires the project to submit a certificate of occupancy and its Final Credit Certificate within a specified time period to the Maryland Energy Administration in order to receive the tax credits. If the project fails to meet these requirements, the funds are made available to other projects and the applicant must reapply.

While the lawsuit was originally presented by Southern Builders in the form of a mechanic’s lien for $54,000, Shaw’s counterclaim made significant arguments regarding liability in green construction. Shaw alleged claims against Southern Builders for negligence, breach of contract, delay, defective workmanship and for failure to “construct an environmentally sound ‘green building’ in conformance with the LEED rating system.” Shaw sought recovery of the $635,000 in lost tax credits because Southern Builders failed to obtain a certificate of occupancy within the required time period; Shaw claimed that the project was incomplete for “nearly nine months after the required completion date.” The total amount of requested damages was $1.3 million.

Shaw offered the contract documents as evidence of the intent of the parties to design the project according to LEED requirements; however, the language did not require any specific action by Southern Builders regarding certification, only that the project was designed to comply with the requirements for LEED Silver rating. The standard form contract only obligated the contractor to build according to the designs and specifications. The tax credits themselves are not mentioned in the contract document or any supporting attachments. This lack of clarity in the contract emphasizes the failure of both parties to adequately define the necessary procedure for LEED Silver ratings and consider the risks and implications involved with green construction projects. The documents are ambiguous and do not explain the roles of the parties in seeking LEED certification and the parties failed to take into account the inherent risks of the construction in the context of Maryland’s regulatory obligations.

This case illustrates the danger of relying on form contracts, the need to contract clearly regarding possible liabilities, and the necessity of a clear understanding of the green building incentives and mandates.

This case never went to trial. Presumably the parties settled out of court, and recently the owner of Captain’s Galley filed for Chapter 11 bankruptcy. In the event this had gone to trial, these effects may have been considered damages as a result of the development’s failure to qualify for the tax credits.

This article is published courtesy of the June 2009 State Bar Construction and Public Contract Law Section newsletter. The State Bar offers its members the opportunity to network with other lawyers who share a common interest through its 26 sections. Section membership includes access to newsletters, email lists to facilitate information sharing, and other resources.

• Related: Green Development Opportunities and Risks (June 2009 Wisconsin Lawyer)