GREEN WARRANTY PROVISIONS
By Lawrence L. Ostema, Esq., LEED AP
Also published in Green Builder Magazine, April 2008
As an architect, vendor, builder, or developer, you are committed to creating profitable green projects. But you’re aware that new green technologies do not always work or can compromise the performance of other systems and many of the companies producing green solutions are small and not well capitalized.
Know how to anticipate unpleasant surprises before they arise. Attorney Larry Ostema with Horack Talley in Charlotte, N.C., shares strategies on how you can protect yourself with the fictional but representative story of “Acme Development.”
A Green Scenario
After 18 months of internal debate, Acme Development finally embarked on its first sustainable development project, a high-end 300 lot residential development with an environmentally friendly golf course. This plan also called for a green clubhouse and recreational facilities. Research from Acme’s marketing department indicated that the project’s potential active lifestyle buyers would care most about water conservation, indoor air quality, and energy usage for the project as a whole and the custom home built for them.
Acme hired Newly Green Architects, an established architectural firm with experience in two prior LEED-certified office projects, to design the project with the goal of receiving Silver Certification under the US Green Building Council’s LEED for Neighborhood Development pilot rating system. Acme also issued a request for proposals to local premium builders for its Preferred Builder Program with a requirement that the homes meet at least base Certification under LEED for Homes pilot rating system.
Newly Green Architects did some research and identified Experienced Water Products, a manufacturer of a state-of-the-art rainwater recycling and stormwater management system, to provide the irrigation system for the golf course and the stormwater system for the project. Although never before installed in the state, the system had been successfully deployed in many projects in other parts of the country.
At the initial design charette with Acme for the clubhouse, Newly Green Architects proposed an advanced HVAC system with lower electrical demand, increased air flow and sealed duct work for improved indoor air quality by Bigco, a national HVAC manufacturer. To address energy efficiency and daylighting for the clubhouse, they recommended using windows by Newco, a green technology startup company. These large windows with advanced glazing were designed to decrease energy consumption.
Keeping the Project Smooth and Successful
Acme’s project, like most green projects, involves heavy use of new technologies, often from smaller and newer companies. To avoid risk, the developer and builder need to carefully review the warranty provisions that will need to be their liability shield. Hiring an attorney experienced with green issues can be the key to a successful project, both during the development process and through the sale of the assets.
The warranties important for Acme and other green projects are identical to any other development project. Issues (and lawsuits) generally fall into three categories related to breaches of warranties:
* Was the product adequately designed for the project (architect at risk)?
* Was it improperly installed (contractor at risk)?
* Was the product defective (manufacturer at risk)?
The concern in the green context is that not all risks are readily apparent and often go unaddressed in the contract. As with any disputed contractual issue, silence is not golden. Let’s look at what key contracts should include for everyone involved in Acme’s innovative project.
For Architects: What Warranties Are You Including?
Many developers elect to obtain certification of the project’s green attributes under rating programs such as LEED, Green Globes or the new NAHB's Model Green Home Building Guidelines. It may sound obvious, but a key issue when contracting for a green project is to define exactly which third-party rating system (and its version since they are frequently updated) is being used. Note also that LEED certifications expire and need to be updated periodically so warranties need to survive the initial certification period.
Once the green standard is defined, we need to turn to the next threshold question: will the architect’s services include design or performance warranties? That’s the main contractual issue between owner and architect. Clearly, Newly Green Architects will intend to avoid performance warranties, but the obligations to meet certain LEED or other third-party requirements may result in unintended warranties. Newly Green could be liable for performance failures not covered by its errors and omissions insurance policies. Those policies are drafted to cover against defects in design, not performance.
For example, Acme may have asked Newly Green to design a Silver Certified LEED clubhouse. Newly Green carries business insurance with standard language about errors and omissions in performance of architectural duties, not in performance against the LEED standards. If the completed clubhouse doesn’t have lower heating and cooling costs than the baseline for a similar building -- or as low as Acme publicized it would -- Newly Green could be sued. The business insurance carrier might well refuse to pay since hitting the LEED standards was not added to the insurance policy as a specific area of duties for the architecture firm.
This may sound very esoteric, but it’s already happened. In early green lawsuits, parties have already argued some cases based on failure to meet a targeted LEED certification level. Attorneys have argued that an architect signing LEED submissions was warranting the equipment would perform up to LEED standards.
Architects and any other third party submitting materials on behalf of the developer would be well advised to add a disclaimer to its agreements that these submissions are made solely on behalf of the project’s owner for purposes of certification – and are without warranty.
The other potential pitfall for the architects could be of their own making. Newly Green probably touted its background and experience when seeking this job. Having completed two prior green projects, Newly Green may be held to a higher standard of care. Depending on the language in the owner/architect contract and the architect’s insurance policy, the failure to meet a specific LEED certification level, even in the design scenario, may lead to a liability for the architect that is not covered fully by insurance.
For the Water System: Changes to a Standard Contact?
In its bid for the water systems, the contract from Experienced Water Products (EWP) almost certainly included very limited express warranties and excluded all implied warranties. It likely featured such critical warranty considerations as the scope of the warranty, the ability of the owner to transfer it with a sale of the property, and the term of coverage. Other areas of concern, however, most likely are not mentioned.
From the developer’s perspective, that’s a mistake. The contract should include performance warranties that match or exceed the results required for the project to obtain LEED points for the project’s stormwater system. If a third-party contractor is installing the system, contracts for both EWP and the contractor will have to address the allocation of responsibility.
There’s more to consider. Certain green construction techniques or procedures by a third party – such as using green or non-toxic adhesives and sealants when connecting the piping -- may void the system’s warranty. Given that this system has never been installed in the state, specific warranties should be added for risks unique to the project’s climate that may negatively affect the system’s performance.
These warranties may already be covered in the specific exclusions from warranty coverage section of the manufacturer’s standard contract. If the developer and its team have significant bargaining power, these risks should be analyzed and dealt with by means of express warranties. If the manufacturer refuses to change its standard form, the developer and its team may be well advised to search for another vendor or another type of product.
For Other Vendors: Do They Have the Capital to Deliver on Their Promises?
All the considerations for the stormwater system apply to the contract with Bigco for the HVAC. Another issue might arise as well. Performance warranties for an HVAC system are likely to be directly affected by the building’s orientation, windows, and other factors and systems controlled or designed by the architect. Bigco is unlikely to agree to specific performance warranties unless an exclusion is included for the impact of these competing systems. For the owner to receive any real protection from the negotiated express warranties, the wording of this exclusion will be critical.
The contract with Newco will likely give the owner and its team the best opportunity to negotiate favorable warranty provisions, since new companies are more likely to be hungry for business and agree to non-standard provisions. But it’s essential to ask: Will Newco have assets to back up its obligations under these warranties if a claim arises? Start-up technology companies typically have extremely limited working capital.
Insurance is one answer to the insolvency risk of dealing with Newco. Other possibilities include seeking a guaranty of the warranty provisions from a corporate parent, an investor (however unlikely), or management individually. These guaranties can provide real financial assurance but the credit worthiness of the guarantor will have to be carefully reviewed.
Some Final Thoughts
Greenwashing, or overly aggressive marketing claims in green projects, can expose developers and builders to liability under fraud theories and can invite scrutiny from the Federal Trade Commission. Less obvious liability can arise from alleged breaches of implied warranties. For example, if Acme or the preferred builders market the homes as having improved air quality, failure to meet that marketed benefit could lead to claims of breach of an implied warranty that could trump the general disclaimers in the purchase contract and survive the closing of the home sale.
Finally, but importantly, some potential claims for warranty breaches could survive the developer’s exit from the community association. The attorney reviewing these contracts will also need to consider applicable state laws and common law about risks inherent in the project. When examining the obligations and warranties of the architect, general contractor, subcontractors, and manufacturers, the developer and builder will need to contract for coverage that includes liabilities of vendors and subcontractors.
With some careful drafting, the green development project can achieve its intended sustainable performance goals without increased legal risk. When green projects fail, well-crafted contracts will provide maximum protection to the parties who have thought through the unique issues in green development.
Attorney Lawrence L. Ostema, a LEED Accredited Professional, heads the Green Initiatives Group at Horack Talley in Charlotte, N.C. Reach him at lostema@horacktalley.com.