Potential damages arising from the failure to achieve statutory or contractual requirements concerning Leadership in Energy and Environmental Design (LEED) or other green building standards are far ranging and may include: fines, loss of financing or tax incentives, loss of tenants, decreased building value, decreased worker productivity, and increased utility costs.
Direct v. Consequential Damages
Damages are often characterized as direct or consequential. Generally speaking, direct damages are foreseeable and naturally and ordinarily follow the breach, whereas consequential damages are unforeseeable to the breaching party and result from special circumstances. For example, if you were in a car accident, the damage to your car and medical expenses to treat whiplash would be direct damages. If you were on your way to a job interview and lost the job because you missed the interview due to the accident, the lost wages would likely be consequential damages. In our context, a fine arising from the failure to achieve a statutory LEED requirement, such as Silver certification, is probably a direct damage. However, the loss of revenue due to tenants who back out of leases because the building is not LEED certified may be a consequential damage.
Why the Characterization of the Damages Matters
Contracts often contain a mutual waiver of consequential damages provision. For example, AIA® Document A201™ – 2017, which contains general conditions used for certain AIA construction contracts, states as follows in Section 15.1.7:
§15.1.7 Waiver of Claims for Consequential Damages
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit, except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.7 shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.
To the extent “LEED” damages constitute consequential damages, this language likely waives the right to recover those damages.
How you view the waiver of consequential damages provision depends upon who you are. Contractors benefit from the waiver and will not want to change it with respect to LEED damages. On the other hand, developers and owners are the ones who may be unable to recover certain LEED damages due to the waiver, so they may want to change it. The most beneficial change for the developer and owner might be to state LEED damages are excluded from the scope of the waiver. However, the increased risk placed on the contractor may drive a higher fee. A middle ground is to exclude LEED damages from the scope of the waiver, but cap the contractor’s liability for such damages. A more subtle approach a developer or owner may consider is to identify the various types of LEED damages in a section of the contract and state they are foreseeable. This would be used to later argue those damages are not consequential damages because it was agreed they are foreseeable, and therefore they are not within the scope of the waiver of consequential damages clause.
Damages are only relevant if there is liability. Achieving a required level of LEED certification or other green building standard typically involves the duties and responsibilities of several parties, such as owner, designer and contractor. As a result, usually it is not appropriate to state in a contract that the contractor will be liable if the project does not achieve the specified green standard any more than it would be appropriate to state up front that the contractor will be liable if the project is late, because there could be excusable delay. A better approach is to identify the parties’ respective responsibilities for achieving a green building standard and provide that they will only be liable to the extent the standard is not achieved due to their failure to meet their obligations.