Construction Litigation Law Blog

After a condominium association president declined a contractor’s request to execute a written change order and directed the contractor to proceed with the additional work, the association was barred from seeking relief under the Consumer Fraud Act (“CFA”) (N.J.S.A. 56:8-1 to -167) provisions requiring that all modifications to contracts for home improvements be in writing. B & H Securities, Inc., v. CKC Condominium Ass’n, Inc., 2008 WL 508082 (App. Div., February 27, 2008).

Defendant Association hired Plaintiff contractor to complete installation of a fire alarm system in its building that had been begun, but not completed, by a prior contractor. After Plaintiff inspected the premises, its engineer, Charles Hamburger, briefly inspected a portion of the building and estimated the time and expense necessary to complete the project. The parties entered into a time-and-materials contract for completion of the fire alarm system , which was necessary for the building to pass a municipal fire inspection.

Upon beginning its work, Plaintiff discovered that the existing installation was the wrong size and violated applicable building and fire protection codes. Accordingly, Hamburger informed the Association’s president, Robert Lyon, of the existing substandard work, informed him that additional time and materials would be necessary to make the system compliant, and suggested that the parties prepare and execute a change order. Defendant’s president declined, protesting insufficient time and the pressure to complete the installation. Plaintiff then completed the work, including making the existing portions code compliant.

Defendant paid only a portion of Plaintiff’s invoices, and Plaintiff sued to collect the balance due. The trial court found Hamburger’s testimony more credible than that of Lyons, and questioned whether a change order was even necessary when the contract clearly contemplated that Plaintiff was to complete the job to allow Defendant’s building to pass municipal inspections, and did not specify a date or time certain for completion nor set the cost. The judge found that Plaintiff had performed the contract by installing a system that satisfied the municipal inspectors and that Defendant had breached by failing to pay the full amount due.

The trial court rejected Defendant’s contention that Plaintiff had violated the CFA by failing to provide a written modification to the contract. He judge concluded that Defendant was equitably estopped from seeking sanctions under the CFA, based on Lyon’s response to Plaintiff’s request for a written change order.

The Appellate Division affirmed, holding that, even if a change order were required, Defendant was equitably estopped from asserting a CFA defense where its conduct led the Plaintiff to change its position to its detriment. In reaching its opinion, the appellate court relied on Joe D’Egidio Landscaping, Inc., v. Apicella, 337 N.J. Super. 252, 256-57 (App. Div. 2001), in which the court held that a homeowner who declined a written contract for driveway paving, based on his personal relationship with the contractor, was equitably estopped from invoking the CFA to render his agreement with the contractor unenforceable. “[O]ne who induces the alleged wrongdoing should not benefit as a result of it.” Id. at 257.

Rejecting the condominium association’s arguments, the appellate judges found no meaningful distinction between B & H Securities and Joe D’Egidio Landscaping.

In an unpublished decision, the Appellate Division recently enforced an insurer’s duty to indemnify and defend a condominium association for damages resulting from an occurrence during the policy period even though they were not discovered until after the policy had expired. Steinbauer v. East Coast Acquisitions, LLC, 2007 WL 2593007 (App. Div. September 11, 2007).

In March 2003, Ramapo Ridge Condominium Association Phase II (“the association”) discovered that a pipe had burst and flooded an abandoned unit. After the municipality declared the unit unsafe, Sirius American Insurance Co. (“Sirius”), which insured the association under a property damage and general liability policy effective from July 2002 through July 2003, undertook to repair and remediate the damaged unit, which was thereafter acquired by East Coast Acquisitions (“East Coast”) at a foreclosure sale. After additional repairs and upgrades, East Coast conveyed the unit to the plaintiff in July 2004. When plaintiff’s plumber entered a common area crawl space to install a dryer vent line, he discovered mold. Ultimately, in November 2004, plaintiff sued East Coast and the association, among others.

The association demanded defense and indemnification from Sirius. All parties agreed that the damages were caused by the 2003 flooding. Nonetheless, Sirius declined coverage, arguing that its indemnification was only triggered if the property damage occurred during the policy term and the third party sued during the policy term. It relied on the following policy language:

COVERAGE E [-] LIABILITY TO OTHERS
A. We pay for the benefit of the insureds, up to the applicable limit(s) of liability (See Part II D) shown in the Declarations, those sums that insureds become legally liable to pay as damages because of bodily injury or property damage insured here.
Such bodily injury or property damage must:
• Occur during the policy term, and
• Be caused by an occurrence that takes place within the applicable coverage territory: See General Conditions 6.

. . .

Occurrence
Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

. . .

Property Damage
Property damage means the following, caused by a covered occurrence:
• Direct physical injury to tangible property, including loss of use of such property (the loss of use is deemed to occur at the time of such direct physical injury).
• Loss of use of tangible property that is not physically injured: all such loss of use is deemed to occur at the time of the occurrence causing the loss.

The court rejected Sirius’s argument. Because the occurrence (the flooding) occurred within the policy period, the court held Sirius liable for all resultant damages, even remediation of the crawl space mold that was not discovered until after the end of the policy period.

Another important consideration is whether the association is going to be willing to hire and pay for the qualified experts necessary to win the case. You can have a great case, but if you have the wrong expert, it can quickly turn into a disaster. The best way to avoid this problem is for counsel to give the client a thorough and honest estimate of what the case will cost and what the timing of the case will likely be. What does counsel base this assessment on?

Many lawyers file suit based upon transition engineering reports. These reports are often perfunctory, and were done just to give the association a general idea of what issues might be of concern. Many explicitly state that no invasive testing was done and that additional investigations are needed.

We like to get as much engineering work done as possible before the complaint is filed, so that we have a good understanding of the strengths of the case. For that reason, we prefer to hire experts who we will rely upon at trial to do a thorough investigation of whatever defects have been identified or are suspected. These investigations involve extensive test cuts and as many photos as are needed to properly document conditions. They can take weeks to complete and can result in extensive reports that cost tens of thousands of dollars or more. Counsel has to use good judgment on a case-by-case basis to guide the client as to what level of engineering work is needed or appropriate before the complaint is filed.. Generally, the more complex the issues, the more detailed the investigation will have to be. For example, if the case involves roof claims on 45 buildings, a decision has to be made as to whether you are going to have your experts test all 45 buildings or try to test just a representative sample. If you have issues relating to deficient installation of fire suppression systems because the wrong anti-freeze was put into the CPVC pipes, causing damage from environmental stress cracks, a careful analysis will need to be mdeas to what type of experts you need. Depensding upon your proofs, if you do not havw busrt pipes yet, you may needd to hire an expert who is a chemist and hwo can tetsify about environmental stress cracks and how they can or will cause consequential damage in the near future. The list of possible examples is limitless. The pijnt is that close consultation between the clients, counsel and the experts is obviously needed in making this judgment.

We have all heard Cuba Gooding in Jerry Maguire screaming the phrase "Show me the money!" The developer is often a shell with no assets. It may even be bankrupt. The subcontractors often are unknown or, if known, may operate out of the back of a pick-up truck and have no tangible assets. The design professionals typically have no substantial assets either. The manufacturer of defective building products may be out of business, bankrupt or have liens against its assets in favor of a commercial lender. Faced with such scenarios, plaintiffs are often in despair about how they are going to recover millions of dollars in damages for defective materials or deficient workmanship. They are especially concerned about laying out enormous sums for legal and expert fees and costs, with no idea where the money is going to come from to pay their damages. One of the most important things counsel does is show the client where the money is going to come from. The answer is—insurance.

Builders, their subcontractors and design professionals usually have commercial general liability (“CGL”) insurance policies that pay for property damage when there is an occurrence as defined under the policy. The property damage cannot be damage to the workmanship or materials provided by the particular contractor who did the work in question. Thus, if the roofer was negligent in applying terra cotta roof tiles over sheathing applied by the framing contractor and the tiles get damaged, that is not property damage covered under the roofer's CGL, because it is damage to the materials and workmanship of the roofer.

However, if the deficient installation of the roof tiles allowed water to penetrate the roof tiles and damage the sheathing underneath that was installed by someone else (i.e., the framing contractor), then that is property damage covered under the roofer's CGL. This is known as consequential property damage. It does not matter whether the contractor is still in business, is bankrupt, a dead-beat, or ran off to Fiji and cannot be found. As long as there was a CGL in place when the deficient work was done and the insurance company is still in business, then there is coverage—and a pocket to pay for the damages. In fact, if the contractor cannot be found, the plaintiff can often get the court to allow the plaintiff to serve the carrier for the absent defendant with the complaint and force the carrier to defend, and ultimately pay damages for, the absent contractor. Obviously, this is a gross over-simplification of an extremely complex analysis and the exclusions and other language of the policies will have to be carefully evaluated by experienced counsel before any conclusions about coverage can be reached.. Nevertheless, counsel should be mindful of the availability of insurance coverage as an avenue of recourse for clients who have been badly hurt by deficient workmanship and/or defective building products.

One other way that counsel can add value for the client is by helping the association’s board of directors inform the unitowners about the litigation. This takes a lot of pressure off the board and allows the community to see and hear from the attorneys who are handling the case a first-hand report on the progress of the litigation. Counsel must be mindful that these open public meetings may not be covered by the attorney-client privilege. Therefore, considerable care has to be given to making sure that nothing is disclosed in these meetings that could be construed as waiver of the privilege. Handled skillfully, a public meeting at which counsel and /or experts give a top-quality presentation about the case and answer questions can be an opportunity for the board to galvanize public support for the case. This can be particularly important where a special assessment is being contemplated to pay for the litigation.

A lot of careful thought has to be given to what claims are worth fighting about, because the association will likely have scarce resources available to it. Much of the value that counsel brings to this process is counsel's experience and judgment and counsel's relationships with experts who are particularly skilled in disciplines that are responsive to the needs of the association.

Counsel also adds value to the process by making sure that the association does not take unrealistic positions regarding the claims that it makes. This means keeping client expectations within line of what we think we can probably get through litigation or mediation of each claim. It helps to have considerable experience when you are trying to give advice to a client about what their reasonable expectations should be regarding the amount that the association can realistically expect to recover from the litigation. This is one of counsel’s most important responsibilities because the decision of the client regarding how much to spend on the case and what to settle the case for are dependent upon counsel’s advice. Myriad factors need to be considered in making this critically important evaluation. Are there statute of limitations or statute of repose issues? If so, how much of a concern are they? How good are plaintiff’s experts? How strong are plaintiff’s proofs on liability and damages–especially consequential damages as is discussed in detail below? Can the proofs be understood by the jury? Do the defendants have any chance of dismissing all or part of plaintiff’s case on pre-trial motions? How long will trial take and does the client have the money to fund the case through trial? If not, is counsel willing to advance the costs and expert fees and take a piece of the recovery? Do the defendants have any assets? How much insurance coverage is there? What coverage issues are there and how can the plaintiff overcome them?

Counsel has to see and anticipate issues well in advance to prevent a client from spending huge sums of money taking discovery and then having claims unexpectedly dismissed before trial. For example, suppose you have a construction defect case involving a defective exterior cladding that was negligently applied by the applicator. The building was substantially completed in 1993 and the product was applied in 1992. The developer did not immediately sell all of the units. Instead, the developer rented out the majority of the units in the building. Eventually, in 2005, 12 years after substantial completion of the building, the developer sold off the last units needed to trigger transition of control of the association’s board of directors. The unitowner-controlled board hired experts who discovered severe water penetration through the defective cladding caused mold and other massive damage to the structural framing of the building. You sue the developer, all subcontractors, design professionals involved in selecting the material and the manufacturer and distributor of the material.

This case is a mine-field of complex issues. Counsel will have to evaluate how the statutes of repose and limitations will impact the handling of this case. If the defendants can prove that the developer-controlled board of directors of the association knew about the water penetration and failed to file suit beyond the statute of limitations, then it is possible that the unitowner-controlled association could have all of its claims against all subcontractors, design professionals, the manufacturer and distributor dismissed. This would leave the association with a remedy only against the developer and general contractor on the theory that during the period when they were in control of the board of directors of the association, they had a fiduciary duty to bring these claims against all possible defendants. Having failed to do so, they should be stopped from asserting the statutes as a defense.

Counsel have to be sensitive to these kinds of issues because community associations and other kinds of clients are simply not going to be sophisticated enough to understand that they even exist–let alone how to evaluate and deal with how they impact the association’s reasonable expectations for the value of the case, how much the association should be willing to invest in attorney’s fees, expert fees and other costs in order to get a fair return on their money.

Stark & Stark's Construction Litigation Group has a lot of experience dealing with what are known as "transition" issues. This relates to the process by which control over the common elements of a condominium is turned over from the developer to the unit owners. Not all states have the “transition” process and requirements vary among those that do. For example, in New Jersey, the transition process is triggered by the sale of at least 75 percent of the units in the condominium. The transition process is very complex and results in much litigation, because of the divergent interests of the developer on the one hand, and consumers represented by their condominium association on the other. The developer has typically sold out—or is close to selling out—the project and has already gotten its money out of the development. It is looking to wind down, get its bonds released and get out of the project quickly, so it can move on to the next deal. The condominium association has usually just hired its own independent engineers and property manager to do an objective evaluation of the condition of the common elements and finances of the association.

Most of the time, the unit owners who now control the Board of Directors of the association have no experience with construction and are just getting familiar with the construction issues at the same time that the developer is heading for the door. Normally, by the time the association finds out about design and construction deficiencies and defects, the developer is long gone and there are no more units left to be sold. The developer is typically a shell company set up as a corporation or limited liability company that has no assets and no real interest in doing repairs. Sometimes the developer entity is owned by a reputable builder that may have some interest in protecting its name and reputation, and therefore may be willing to at least discuss doing some repairs. Unfortunately, for practical business reasons addressed below, the developer is almost never willing to spend what is required to fix what is wrong to the satisfaction of the association. That means that the association has no choice other than to litigate or special assess the unit owners hundreds of thousands or millions of dollars to effectuate repairs. We counsel associations on how to deal with these issues.

The association is usually in a big hole. It has neither the money nor the experienced leadership to handle the complex process of hiring qualified experts to advise it on the technical construction and financial issues it is confronted with. Counsel therefore has to assist the Board of Directors of the association by recommending competent engineers and/or architects who can give the association reliable, unbiased reports on the condition of the common elements. Counsel also has to recommend to the association accounting experts who can advise the association on various financial issues including, but not limited to, how much money the developer may owe the association for: (a) unpaid monthly maintenance fees that the developer should have paid for developer-owned units prior to their sale; or (b) for benefits derived by the developer-owned units from common elements that the association had to pay to maintain.

The front page of Sunday's New York Times Real Estate section headlined the dubious proposition that, if a builder chooses to live in one of his own condominiums, the condo would "most likely work for the buyer" since "the developer's eye is on every detail." (Vivian S. Toy, "If It Seduces the Builder . . ., New York Times, Real Estate, Section 11, p. 1 (October 29, 2006).) Our experience suggests that there are better ways to evaluate the quality of a potential condominium purchase than the builder's decision to buy a unit himself.

Attention to detail has not been apparent in an ocean-front community that we represent, even though approximately one in three initial sales was to a principal of the developer, a subcontractor, or a party with financial connections to the developer. From our point of view, another factor that Toy identified is much more important to a developer's decision to purchase a unit in a condominium he or she has built: the opportunity to "get first choice, sometimes at a substantial discount." Speculating that his unit might sell for $6 million, one developer reflected to Toy that he paid "more than it cost to build and less than market value." Often a developer's purchase price is less than the unit cost to build, with the difference made up by skimping on construction and materials elsewhere in the development.

The advantage of first choice is especially apparent when certain units boast extraordinary advantages, such as ocean frontage or a magnificent view. The developers that Toy profiled selected such units as a "penthouse with sweeping city views" and a Brooklyn waterfront unit with "views of eight different bridges." Non-developer unit owners in one of our client communities were surprised to discover that what had appeared to be common green space above the beach in the plans and models was actually the back yards of the beach front units, which were, for the most part, owned by the developer and his associates. Prospective condo buyers need to look carefully at both the prospectus and what is actually being built to ensure that apparent amenities are not disproportionately allocated to the builder and his cronies, with other unit owners footing the bill through inflated purchase prices or maintenance fees.

Builder's options are enhanced by early choice and limited only by constraints imposed by one's business partners, reported Toy. The profiled developers incorporated into their units additional space and custom features, such lap pools, rooftop party spaces, and casitas for the grandchildren, without the necessity of approval from condo associations that were not yet formed. Toy does not acknowledge that condo associations might reasonably frown on upgrades that have the capacity to increase the association's insurance or maintenance costs, to pose a threat of water leakage, or to overtax the building's structure.

Focusing on the congenial developers interviewed for her story, Toy extolls the advantages of unit owner/developers who can "hurry the contractor[s] along," resolve plumbing and electricity issues as they occur, and make sure "the lobby's going to be clean." The author seems not to have encountered the overextended builders and developers that we construction litigators too often see: cutting corners on construction, rushing closings in hopes of quieting the creditors, and ignoring unanticipated (and unbudgeted) defects and deficiencies because adequate funding simply isn't there. The importance of keeping the lobby clean fades when the builder is desperately trying to pay the dry wall contractor enough to keep him on the job until the last units are finished. As the real estate market cools, more builders and developers will find themselves shortchanging construction quality and customer service in order to satisfy unanticipated carrying charges.

"Having a developer living on site should also assure buyers that the typical problems that come up as any development is being completed will be dealt with quickly," Toy gushes. The unacknowledged assumption underlying Toy's premise is its dependence on the builder/developer's self-interest being concurrent with that of other unit owners. Conflicts of interest between the developer and other unit owners quickly emerge when construction goes bad or the money runs out. In short, the fact that the builder has been "seduced" by his latest project offers no assurance that purchasing a unit will work for an unrelated buyer.

This is part 2 of Randy Sawyer's 16 Part series on UCIOA. You can read Part1 here.

Section 87, subsection (b)

Subsection (b) of UCIOA’s Section 87 contains the initial process of the “alternative dispute” procedure imposed upon Associations by the bill. The language is as follows:

§87(b) - Within 30 days of the receipt of the notice from the association, the declarant or its agent may send a written request to investigate the association's claim, which shall be referred to as the "declarant's reply." The declarant's reply shall include a stipulation by the declarant that all statutes of limitation applicable to any claim by the association against the declarant shall be tolled for 180 days or such shorter period of time as set forth in the cancellation notice delivered pursuant to subsection c. of this section. The tolling of the statutes of limitation shall be effective as of the date of the declarant's reply. If the declarant fails to send the declarant's reply within 30 days or fails to stipulate to the required tolling of all applicable statutes of limitation, then the association may institute an action without satisfying any other condition of this section.

Under this subsection, once the developer, called the “declarant,” has received the Association’s notice of a claim for some construction defect in the community, it has the ability to force the Association into the alternative dispute procedures outlined in Section 87 simply by sending a written request to investigate the Association’s claims (called the “declarant’s reply”), so long as the reply includes a stipulation that all applicable statutes of limitations are tolled for 180 days from the date of the reply. The tolling of applicable statutes of limitation was obviously included to create the impression that participation in the process would not jeopardize the Association’s ability to file a lawsuit in the event the process failed. The 180 day time period, however, is wholly inadequate. Anyone who is involved on a regular basis in construction defect claims arising in a community property setting knows that 180 days is far too short a time period to accomplish anything of substance. The statute should have been written to toll the applicable statutes of limitation for the entire life of the alternative dispute procedures that an Association must follow under Section 87.

The 180 time period is one of many examples in the statute that (apparently intentionally) force things to happen quickly before an Association can get its ducks in a row. The old adage “haste makes waste” comes to mind.

Moreover, the tolling provided in the statute only applies to claims against the developer. It does not apply to subcontractors, design professionals, product manufacturers and other potential defendants against whom the Association may have claims. The applicable statute of limitations for these claims would continue to run and could easily run out as to those parties while the Association waits for the alternative dispute procedures required under UCIOA to conclude. Since UCIOA does not require the Sponsor/Developer to disclose to the Association the identities of the various subcontractors, manufacturers, product distributors, design professionals and others involved in the construction of the project who may be liable for defects, the process required by UCIOA is actually very prejudicial to the Association because there is nothing stopping the Sponsor from refusing to disclose the identities of these various parties while the precious time the Association has to pursue those claims runs out during the time it takes for the mandatory procedures under UCIOA to run their course.

If you are interested in more information on this topic or have any questions, please call John Randy Sawyer, Esq. at (609) 895-7349, or email him at jsawyer@stark-stark.com

Your home inspector probably advised you that it's good sense to prevent possible water damage by turning off the water to your second home when you're not in residence. But if you neglect to do so and your defective toilet floods the condominium unit downstairs, New Jersey courts may not hold you liable for the damage to your neighbor's home. In an unpublished decision, the Appellate Division declined to find that residents of multiple dwelling units had a legal duty to turn off the water when they were going to be away for more than a day. Coyne v. Price, A-3291-05T5 (App. Div. September 14, 2006).

Mr. and Mrs. Coyne lived downstairs from Mr. and Mrs. Price in a condominium "down the shore." While the Prices were at their primary home, their condo's toilet failed, flooding the Coyne's home. Although the Prices had typically turned off the water to their washing machine, they had never considered the possibility that other leakage might occur and had never turned off the water to the unit as a whole, although a turn-off valve was located in the ceiling of their unit.

Although the Coyne's insurance paid for most of the damage, they brought suit in small claims court, seeking to recover the $1000 deductible that they were forced to pay. After the trial judge ruled in the Coyne's favor, finding that the Prices should have foreseen the possibility of leakage, the Prices appealed the judgment.

Defining negligence as "conduct that creates an undue risk of harm to others," the Appellate Division found that foreseeability alone did not give rise to a legal duty but must be evaluated along with reasonableness, public policy, fairness and common sense. Because the Prices had no reason to believe that their toilet would leak in their absence, held the court, the Prices' failure to turn off the water to their unit was reasonable. Accordingly, the court declined to create a new legal duty.

On February 23, 2006, the Uniform Common Interest Ownership Act (UCIOA) was voted out of the Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. That same day, the bill was received by the Senate and referred to the Senate Community and Urban Affairs Committee. The bill has not yet come out of consideration by the Senate Community and Urban Affairs Committee.

UCIOA has been touted by its supporters as a “first of its kind” that will help protect the rights of homeowners living within a community association, while also helping community associations operate more efficiently. The bill will purportedly consolidate various laws applicable to New Jersey's common interest communities, will provide numerous protections for owners in such communities, and will clarify the powers of community association boards. According to one of the bill’s primary sponsors, Assembly-member Wilfredo Caraballo:

“This bill . . . establishes a consistent set of board powers and limitations that will apply to all associations, thereby ending confusion over the rights of boards. Some of the issues addressed are the ability to borrow money, grant easements over the common property, and adopt rules and regulations governing certain types of negative behavior. Unit owners will benefit from this new-found clarity that addresses the powers and limitations of the homeowner association boards that are elected.

Read more here.

Sounds great, right? So what’s the problem? The problem is that those who live in planned communities, or are considering purchasing a home within such a community in New Jersey, should look past the rhetoric and examine the motivations behind the supporters of the bill. When one considers that organizations such as the New Jersey Association of Home Builders, large developers that build condominium and other community developments in New Jersey, and law firms that represent large developers, are all lining up to sing UCIOA’s praises, a prudent mind should question whether the bill is, in reality, a wolf in sheep’s clothing.

Stark & Stark’s Construction Litigation Department has carefully analyzed UCIOA in light of our experience handling construction litigation cases on behalf of condominium and homeowner associations throughout the State of New Jersey. Contained deep within UCIOA’s pages are two sections, Sections 87 and 88, that greatly restrict a community association’s ability, in fact its very right, to avail itself of the court system of our State to sue the builder of the community for damage caused by construction defects. What follows in this blog and several to come is a line by line analysis of Sections 87 and 88 of UCIOA with our thoughts on the vagaries of the language itself and the overall restrictive effect of these sections of the bill:

Section 87, intro paragraph

The first paragraph of UCIOA’s Section 87 establishes the requirement that the Association go through a lengthy and cumbersome “dispute resolution process,” before filing “any form” of construction defects litigation, with the following language:

§87. (New section) Except for applications for emergent relief, prior to the commencement of any form of construction defects litigation on behalf of an association against a declarant or any members of the executive board appointed by the declarant, the following alternative dispute procedure shall be followed:”

Right out of the gate Section 87 takes away an Association’s choice to file litigation against a developer for “any form of construction defects litigation” without first jumping through the hoop of an alternative dispute procedure. The language used in this intro paragraph, moreover, is apparently intentionally drafted to be as broad as possible. Specifically, the term “any form of construction defects litigation” is not defined and amounts to a significant ambiguity in the statute. Considerable litigation is sure to occur over exactly what types of claims fall within this language. Litigation community associations cannot afford. Obvious cases involving defectively constructed roofs, water penetrating through improperly installed exterior cladding, etc., may clearly fall within the category of “any form of construction defects litigation.” What is not so clear, however, is whether cases involving, for example, a breach of warranty for windows that do not meet required specifications, product liability claims for damage caused by faulty construction components such as defective pipes, roof shingles, etc., or design claims arising from improper structural designs or roof designs, also fall within the category of “any form of construction defects litigation.” Are these types of claims “construction defects” claims, or are they design defect claims, product defect claims, or something else?

If claims such as design defect claims and product defect claims are not “construction defect” claims, what happens in a case that involves both (1) claims that fall within the statute’s category of “any form of construction defects litigation,” and (2) claims that do not fall within that category? Must the Association pay for two separate, ongoing, adversarial procedures – one alternative dispute resolution procedure against the developer under UCIOA and a separate litigation against design professionals and product manufacturers in state court? The statute also makes no reference whatsoever to claims against subcontractors who worked for the developer when the community was built. Would an Association have to file a separate lawsuit against subcontractors while going through the alternative dispute resolution process with the developer outlined in UCIOA?

The expense of these approaches would likely be prohibitive to most Associations. The question is, was this intentional?

CASE NAME:
“ABC” Condominium Association v. Lookout Builders, LLC, et. al., BER-L-10051-02.*

*In order to preserve our client’s interests in confidentiality, we have used the fictitious designation “ABC” Condominium Association

STARK & STARK’S CLIENT:
ABC Condominium Association

CASE TYPE:
Construction defect litigation

CASE FACTS:
The ABC Condominium is a forty-two unit, six story condominium building located in Hackensack, New Jersey. The exterior of the condominium building was clad with brick facing on the first story with the balance of the structure clad with an Exterior Insulation and Finish System (“EIFS”) manufactured by Senergy. The building has a front plaza finished with brick pavers and planters and a garage/parking area below the building. The roof on the building is a flat style, EPDM roof system.

The ABC Condominium Association is a non-profit corporation comprised of the owners of the condominium units that was established to provide the management, administration and maintenance of the Common Elements of the Association and to promote the health, safety and welfare of the unit owners of the Association.

Construction of the ABC Condominium began in 1988/89 and was completed sometime in late 1991, early 1992. The Sponsor of the condominium was Lookout Builders, LLC. After the construction of the condominium was completed, Lookout Builders controlled the building through majority ownership of units within the building up until approximately May, 2001, when Lookout sold all the remaining units it owned and turned control of the Board of Trustees of the Association over to the independent unit owners via a process known as transition.

The condominium experienced significant water intrusion problems almost from the date of its completion. Unit owners suffered from water leaks through sub-standard windows and in ceiling areas throughout the building. The front plaza area of the condominium, due to improper waterproofing, allowed water to penetrate into the underground garage area, causing significant water damage. Despite multiple complaints from unit owners from 1991 up to 2001, the water intrusion problems were never properly addressed.

After control of the Board of Trustees of the Association was turned over the independent unit owners in 2001, the Board retained Stark & Stark. Shortly thereafter, several engineering firms were brought in to investigate and diagnose the water intrusion problems with the building. Those studies revealed multiple construction defects and damages in the building including improperly installed EIFS cladding, defective windows that were leaking water into the exterior walls, improper waterproofing of the front plaza and associated retaining walls, high levels of water intrusion into and behind the EIFS cladding causing damage to the gypsum sheathing on the building, high levels of mold growth inside the walls of the building, improper installation of aspects of the EPDM roof, as well as other problems.

THE LAWSUIT:
Stark & Stark’s Construction Litigation Department filed suit on behalf of the ABC Condominium Association in December of 2002. The suit was filed to pursue damages against responsible parties for the cost of correcting all damages to the building and all construction defects.

The defendants in the suit included Lookout Builders, LLC, the Sponsor, Impact Realty Associates, a management company, Senergy, the manufacturer of the EIFS, E.Robinson Group, the distributor of the EIFS, Dorwin Manufacturing, the manufacturer of windows used in the building, J.P. Patti Roofing, a roofing contractor, Concrete Construction Company, a contractor that performed caulking and maintenance work on the building, and several individuals who were appointed by the Sponsor to be Trustees for the Association from 1991 to 2000.

THE RESULT:
Stark & Stark’s Construction Litigation Department settled the lawsuit on behalf of the ABC Condominium Association for a total recovery of $1,645,000.00. The recovery will be used by the Association to correct the damage to the building.

If you would like more information, contact John Randy Sawyer, Esq., at (609) 895-7349, or jsawyer@stark-stark.com.

In any civil litigation, the parties are entitled to make their adversaries produce documents upon request, and this can be a huge undertaking for a Condominium or Homeowners Association of any significant size. Your files, and your managing agent's files, may contain a great deal more than meeting minutes. There are contracts with vendors, your Public Offering Statement, Bylaws, Master Deed, insurance policies (sometimes going back many years), correspondence with members, your attorneys, accountants and consultants. There are lots of bills, vendor bills, utility bills, legal bills, cancelled checks, ledgers, budgets, forecasts. Also, the definition of "documents" includes electronic documents, meaning emails, instant messages, and other forms of written communication. In short, there are probably thousands upon thousands of documents you are saving, and all of these will likely need to be numbered, copied and produced in a litigation. Think about your document retention policy, and try to imagine the expense of dealing with all of this paper. Try to think if it is useful to you. Is it potentially harmful to you?

In New Jersey, as in most states, certain types of documents are subject to privileges, meaning that they need not be produced in litigation, even if they are requested. Generally speaking, any documents that are confidential communications (letters, emails, etc.) between the Association and its attorneys is subject to the Attorney-Client privilege, and should not be disclosed. Of course that privilege is waived if the documents are not kept confidential. If the Board shares a letter from its attorney with a vendor, or the builder, or a municipal official, the privilege is lost. Be careful with these documents. Another privilege which you should be aware of is the Work-Product privilege. This covers documents created by a party or a party's attorney or agent, which are prepared in anticipation of (and during) litigation. Your attorneys will act appropriately to protect their own work product. It is up to the Association to protect its work product. We recommend that, as soon as the Association reasonably anticipates that litigation may occur, all documents that contain discussions of the transition process, negotiations with the builder and otherwise should be kept separate from the Associations regular files. The Association should be careful who sees these documents. You should consider labeling such documents as "Confidential: Work-Product Privileged". You may also want to send carbon copies of everything to your attorneys, in order to bring the documents under the Attorney Client Privilege as well. We can give you more specific advice on how to protect your privileged documents, and how to minimize the burden of dealing with all of your documents if and when you get into litigation with your builder.

Exterior insulation and finish system ("EIFS") has been around since the 1970's. The older systems are known as "barrier" EIFS because they are designed to be face-sealed barriers to water penetration and do not incorporate any secondary drainage mechanism. Thus, any moisture that gets behind the barrier EIFS may be trapped inside the walls and can cause serious damage to sheathing, framing and other building components. In about 1997, EIFS manufacturers introduced drainage EIFS that incorporated a secondary drainage mechanism behind the EIFS. That would allow incidental moisture that gets behind the EIFS to drain out without harming sheathing and framing.

The drainable EIF systems were intended to stem the tide of a significant wave of litigation against EIFS manufacturers seeking recompense for damages caused by barrier EIFS. The manufacturer's installation specifications and details generally have to be strictly complied with. Unfortunately, while the drainable EIF systems should work in theory, in practice, they are exceptionally difficult--if not impossible-- to install. In our experience, drainable EIFS is typically misapplied in the field and winds up functioning as a barrier system. This, in turn, often causes severe damage to sheathing, framing and other building components, including mold.

Stark & Stark is handling many cases for condominium associations involving claims that drainable EIFS was not installed in accordance with manufacturer's installation specifications, details and the building code. Three of these involve claims worth in excess of $6 million. One particular claim demonstrates the severe damages that can occur when the manufacturer's installation specifications and details are not strictly complied with.

We are handling a complex case in which the decks on numerous condominium buildings were designed to be constructed using parallam beams. The beams were not wolmanized because it was assumed that the drainable EIFS would keep water away from the parallam beams. Unfortunately, the EIFS applicator failed to comply with the manufacturer's specifications and details requiring that the deck/wall interface be properly flashed and have a half-inch joint with backer rod and sealant. In addition, there was supposed to be a drainage mechanism in the bottom of the EIFS cladding on the face of the EIFS clad beams that was not installed. As a result, water accumulated inside the EIFS that drenched the non-wolmanized parallam beams, essentially damaging them beyond repair. Moreover, cracks and other openings developed between the decks and the EIFS clad walls further damaging the sheathing and framing of the walls and the non-wolmanized parallam beams.

The Association's engineers issued a warning to the association that no one should use their decks in the affected units. An emergency repair costing over $1 million was done to replace all of the damaged beams, to rebuild the decks and to reclad the decks with a functioning exterior cladding. The buildings have been extensively inspected and massive failures to install the EIFS have been documented in all of the buildings. Additional testing proved that there is an enormous amount of moisture inside most of the walls of all of the buildings. The damages are massive.

The point is that drainable EIFS is a product that has to be very carefully applied in strict compliance with manufacturer's specifications and details if it is to have any chance of working as intended. In our experience, this is almost never done. Applicators are poorly trained and general contractors do not know what the manufacturer's installation specifications and details are. As a result, the general contractors pay the applicators without realizing that the job has been badly done and that they are all going to be open to massive claims a few years later when moisture penetration produces severe damage.