- The legal name and business address of the seller, including the legal name and business address of the sales representative or agent who solicited or negotiated the contract for the seller;
- The contractor’s Division of Consumer Affairs registration number and the DCA’s toll free telephone number must be prominently displayed on the first page of the contract;
- A copy of the Certificate of Commercial General Liability Insurance required of a contractor under the Act and the telephone number of the insurance company issuing the Certificate;
- A description of the work to be done and the principal products and materials to be used or installed in performance of the contract;
- The total price, including all finance charges and, where applicable, the hourly rate for labor;
- The start date and completion date;
- A description of any mortgage or security interest to be taken in connection with the financing or sale of the home improvement;
- A statement of any guarantee or warranty with respect to any products, materials, labor or services made by the contractor; and
- A precise and conspicuous notice of cancellation provision informing the customer of his or her right to cancel the contract by the end of the third business day after having received a copy of the contract.
Gene Markin, member of Stark & Stark’s Construction Litigation Group, authored the article, Buyer Beware of Defects in New Construction, for the January 30, 2012 edition of the New Jersey Law Journal. The article discusses why the remedy under the homeowner warranty program, may not be a remedy at all.
In the article, Mr. Markin states, “Since its inception, the New Jersey Home Warranty and Builders’ Registration Act, N.J.S.A. 46:3B-1 to -20, has proven to be more of a trap for new homeowners than the safety net it was purported to be. The purpose of the act is to establish a program requir¬ing that newly constructed homes con¬form to certain construction and quality standards, as well as to provide buyers of new homes with insurance-backed warranty protection in the event such standards are not met. While the intent of the act is to provide homeowners with a prompt, convenient and cost-saving means of resolving disputes con¬cerning construction defects, in reality, its effect has been, in many cases, to strip homeowners of any meaningful means of recovery for discovered con¬struction defects.”
Often times, a subcontractor or general contractor may be left with no other option after attempting to collect funds from a general contractor or owner then to file a Construction Lien to collect these funds at some future time. The party filing the Construction Lien, however, should be careful to ensure that the Lien is not overstated and it is accurate in its entirety. While Construction Lien Law allows a contractor to file a Lien against a property, it is also favorable to the property owner if the Construction Lien is improperly filed, overstated, or contains incorrect information. As a reference point, the process for filing a Construction Lien with regard to a residential property is entirely different than commercial Liens.
As to non-residential properties, a contractor must first be able to demonstrate the existence of a Construction Agreement. In the absence of a signed Contract, a party may not file a Construction Lien. The individual must then make sure that the Lien has been timely filed, which is within ninety days of the last date services or materials were provided. This period excludes any relevant warranty work which may be performed. Thereafter, a party must be careful not to overstate the value of the Construction Lien. An overstated Construction Lien may be removed due to its invalidity. A contractor must be aware of the statute which provides that if a Lien holder fails to file suit within thirty days of a demand by the property owner, or within one year of the filing of the Lien, then in that event, the Lien becomes invalid.
Once the Construction Lien has been properly filed, the contractor should be careful to ensure that the Lien has satisfied the above requirements and that a lawsuit has been timely instituted. If the contractor fails to follow the above requirements, then a property owner may seek to have the Lien removed and they would be entitled to any counsel fees and costs incurred in removing an overstated or invalid Construction Lien. If a lawsuit is not commenced within one year of the date of the filing of a Construction Lien, the Lien must be removed upon request by the property owner. If not, the owner can move forward to have the Lien removed and be awarded counsel fees and costs associated with doing so. These are just a few simple rules which a party must follow when filing a Construction Lien. While it is a good process to help to preserve and protect a contractor’s right, it can end up becoming something that an adverse party can use to subject you to sanctions, counsel fees, and costs. Therefore, it is always suggested that you consult with an attorney prior to filing a Construction Lien.
In many construction contracts, the general contractor or the owner will often insert a “Paid When Paid” provision within the Contract which dictates when payment will be due to the general contractor or subcontractor. In the past, the Court’s had construed many of these “Paid When Paid” provisions as only controlling the timing of the payment to be made pursuant to the contract and not an absolute bar to payment being tendered.
Recently, however, the Court’s have begun to strictly enforce the “Paid When Paid” provisions provided they are clearly worded and all parties had prior notice of the provision. In general, the Court has stated that where the condition precedent of upstream payment prior to payments being tendered to the subcontractor or contractor was clear and unambiguous and there is no room for interpretation, the Court must strictly construe the “Paid When Paid” provision of the contract. In order to properly fashion one of these clauses, it should be clear and the terms should be clearly worded that the “Paid When Paid” provision is not to be construed as a time of payment clause, but instead, as a condition precedent which must be satisfied before a contractor is entitled to payment pursuant to the terms of the agreement.
It is likewise advisable to include language that the subcontractor understands and agrees that it assumes the risk of non-payment by the owner for work and materials for which the subcontractor seeks payment. In the absence of clear and unambiguous language that the subcontractor would never be entitled to payment under any circumstances unless and until funds are received by the general contractor, it is probable that the Court would construe the “Paid When Paid” provision against the general contractor and find it to be only a timing of the payment clause. In such an event, the general contractor would have to pay the subcontractor even if was not directly paid by the owner.
As such, if you are a subcontractor you should carefully review the “Paid When Paid” provision to determine whether payment from the owner to the general contractor is an absolute condition precedent prior to you being entitled to payment. If this is the case, you can either attempt to renegotiate the clause, or you can understand that you are taking a risk in receiving payment. On the other hand, if you are the general contractor, it behooves you to carefully draft a “Paid When Paid” provision which might protect you from payment to subcontractors should you not be paid by the owner. The wording of these clauses can be somewhat technical, and therefore, it is suggested that you seek the advice of an attorney.
Under the New Jersey Tort Claims Act (the “Act” or “TCA”), N.J.S.A. 59:1-1 et seq., public entities are liable for their negligence only as set forth in the Act and in accordance with the fair and uniform principles contained therein. The TCA seeks to provide compensation to tort victims without unduly interfering with governmental functions and without imposing an excessive burden on taxpayers. The Act establishes sovereign immunity for public entities, but does not similarly shield public employees. Thus, with respect to public entities, immunity is the rule, and liability the exception. The analysis for determining public-employee liability under the Act differs from the analysis for determining public-entity liability.
Accordingly, when public employees are involved in activities that require discretionary decisions regarding the allocation of resources, they are liable only when their actions have been palpably unreasonable. See N.J.S.A. 59:3-2(d) (providing qualified immunity for discretionary decision-making). On the other hand, when qualified immunity for discretionary decision-making does not apply, public employees are liable in tort under common-law principles of ordinary negligence.
Nevertheless, the Act grants an absolute immunity to both public entities and their employees from liability for injuries caused by a failure to enforce the law. See N.J.S.A. 59:2-4 (“A public entity is not liable for an injury caused by adopting or failing to adopt a law or by failing to enforce any law"); see also N.J.S.A. 59:3-5 ("A public employee is not liable for an injury caused by his adoption of or failure to adopt any law or by his failure to enforce any law"). Under these sections, public entities and their employees are not liable for their failure to enforce safety ordinances, regulations or the law generally.
This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will discuss important considerations for new homebuyers. You can access previous installments of this series online here.
Considering the stringent ramifications of proceeding under the warranty program, the take-away is BUYER BEWARE. While the Act is in place to protect buyers of newly built homes, in practice, it actually greatly limits a buyer’s potential for recovery for damages arising out of construction defects. The real world application of the Act serves to exacerbate the divide between homeowners and builders when there is a dispute over defects. The remedy it offers – mediation and arbitration – is no remedy at all because once invoked it becomes the sole and exclusive remedy available to the homeowner. The homeowner has lost the option to bring a lawsuit and the best result that can be achieved through the warranty program is a determination that the defects claimed are covered under the warranty. However, in such a case, the builder, who supposedly created the defects, is then required to come back and make the appropriate fixes. Thus, a successful outcome through the warranty program does not appear to be as attractive as a successful lawsuit where the homeowner is awarded money damages.
In light of the onerous and prohibitive consequences of proceeding under the warranty program, there are a number of practical tips that homeowners should be aware of:
(1) Document and record all discovered defects and suspected defects (photographs & video);
(2) Provide prompt and detailed notice to your builder and/or warranty service representative of your builder;
(3) Engage in meaningful discussions with your builder regarding discovered and suspected defects as well as the remediation process;
(4) DO NOT be hostile, combative or adversarial;
(5) Be amenable, cooperative and amicable in all communications with the builder;
(6) Maintain a file of all written communications with the builder and/or warranty company;
(7) When necessary, consult with independent engineers, architects, construction professionals and/or attorneys in order to evaluate extent of defects, adequacy of proposed fixes and potential legal claims;
(8) DO NOT perform any repair, replacement or other corrective work yourself, unless absolutely necessary, and in that case, make sure to provide notice to your builder and/or warranty service administrator;
(9) CAREFULLY CONSIDER all options before deciding to avail yourself of the dispute resolution procedures afforded by the warranty program.
This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will discuss when the election of remedies provision is triggered. You can access previous installments of this series online here.
Recently, the Appellate Division had the occasion to decide whether simply submitting a claim to the DCA, in accordance with the Act, barred plaintiffs from pursing a lawsuit against the builder. The Appellate Division found that it did, stating that by submitting their claim to the DCA, plaintiffs made an election of remedies that precluded them from pursuing a lawsuit for defects to their newly-constructed home. See Maloney, et al. v. Ali, et al., A-0950-10T4 (October 17, 2011).
In Maloney, the plaintiffs contracted with the defendants for the construction and purchase of a single-family home. After living in the home for about a year, plaintiffs submitted a claim to the DCA under their new home warranty. Plaintiffs included a copy of a home inspection report as well as identified certain defects that had not been addressed by the builder. Thereafter, the DCA informed plaintiffs that their claim had been closed because they had not submitted a concise list of the defects they were complaining about. Moreover, the DCA stated that because the warranty was in its second year many of the defects listed were only covered in the first year of the warranty.
Plaintiffs did not proceed any further with the DCA and instead filed an action in Superior Court two years later. Plaintiffs asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, negligence, promissory estoppel, unjust enrichment and consumer fraud. Soon after, defendants filed a motion for summary judgment, arguing that plaintiffs’ lawsuit was barred by the election of remedies provision in the Act. The trial court granted defendants’ motion. The Appellate Division affirmed finding that the act of submitting a claim to the DCA under their new home warranty triggered the election of remedies provision. Thus, because the filing of a claim against the warranty constituted the election of a remedy, plaintiffs were statutorily precluded from pursuing any other remedies, such as a lawsuit.
This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will provide an overview remedy preclusion under the New Jersey Home Warranty and Builder’s Registration Act. You can access previous installments of this series online here.
Nevertheless, as innocuous as the claims process sounds, the Act contains what can only be described as a death knell for homeowners who choose to proceed through the warranty program. Section 46:3B-9, known as the “election of remedies” provision provides as follows:
Availability of any legal remedy to owner; election of remedy. Nothing herein shall affect the other rights and remedies available to the owner. The owner shall have the opportunity to pursue any remedy legally available to the owner. However, initiation of procedures to enforce a remedy shall constitute an election which shall bar the owner from all other remedies. Nothing herein shall be deemed to limit the owner’s right of appeal as applicable to the remedy elected.The significance of this provision cannot be under-emphasized. Should a homeowner decide to pursue a claim for defects under the warranty, he or she is thereafter statutorily barred and precluded from bringing a lawsuit against the builder. This means that the homeowner must pick at the outset whether to proceed under the Act i.e. mediation and arbitration, or pursue a legal remedy through the court system. It is either or and never both. See Marchak v. Claridge Commons, Inc., 134 N.J. 275, 280 (1993) (a new home buyer may seek recovery through one of two mutually exclusive mechanisms, “either (1) conciliation or arbitration, or (2) filing a lawsuit . . . . but not both”).
As the Appellate Division explained, once a homeowner opts for binding arbitration pursuant to the Act, all of the homeowner’s potential claims for damages against the builder, including common law fraud and alleged violations of the Consumer Fraud Act, are subsumed by the homeowner’s election of remedies under the Act. Konieczny v. Micciche, 305 N.J. Super. 375, 381 (App. Div. 1997). The Appellate Division emphasized that even initiation of the claims process is enough to trigger the election of remedies provision and bar the homeowner from all other remedies.
This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will provide an overview of how to file a claim under the New Jersey Home Warranty and Builder’s Registration Act. You can access previous installments of this series online here.
New Jersey Home Warranty and Builders’ Registration Act (The Act) provides a multi-step process for filing a claim. First, the homeowner has to notify the builder of whatever defects exist and allow the builder a reasonable amount of time, usually 30 days, to make the necessary repairs. If the builder fails to make the requisite repairs, the homeowner may submit claims for defects covered by the warranty to the Commissioner of the Department of Consumer Affairs (the “DCA”) (or through whatever warranty program servicing the homeowner’s warranty). The Commissioner is then required to investigate the claim and determine its validity, after affording the parties an opportunity to be heard at a hearing. Methods of claim resolution include independent third party mediation and legally binding arbitration.
This blog is the first in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will provide an overview of the homeowner warranty program. Be sure to check back for more installments in this blog series.
Since its inception, the New Jersey Home Warranty and Builders’ Registration Act (the “Act”), N.J.S.A. 46:3B-1 to -20, has proven to be more of trap for new homeowners than the safety net it was purported to be. The purpose of the Act is to establish a program requiring that newly constructed homes conform to certain construction and quality standards as well as to provide buyers of new homes with insurance-backed warranty protection in the event such standards are not met. While the intent of the Act is to provide homeowners with a prompt, convenient and cost-saving means of resolving disputes concerning construction defects, in reality, its effect has been, in many cases, to strip homeowners of any meaningful means of recovery for discovered construction defects.
Pursuant to the Act, all builders must be registered with the New Jersey Department of Consumer Affairs in order to engage in the business of constructing and selling new homes. Any builder who fails to register is subject to, inter alia, a statutory penalty of $2,000 for each offense. The Act requires that builders provide owners with a new home warranty by either participating in the New Home Warranty Security Fund or an acceptable alternative program. The builders are then required to provide new home owners with a warranty that affords coverage and protection against defects, falling within three time-sensitive categories:
(1) During the first year after the warranty date, (the first occupation or settlement date, whichever is sooner )warranty coverage extends to defects caused by faulty workmanship and defective materials (this includes plumbing, electrical and mechanical systems, appliances, fixtures and equipment, and major structural defects);
(2) During the first two years after the warranty date, warranty coverage extends to defects caused by faulty installation of plumbing, electrical, heating and cooling delivery systems, however, with respect to appliances, this warranty does not exceed the length and scope of the warranty offered by the manufacturer; and
3) During the first ten years after the warranty date, warranty coverage extends to only major construction defects (any actual damage to the load bearing portion of the home including damage due to subsidence, expansion or lateral movement of the soil (excluding movement caused by flood or earthquake) which affects its load bearing function and which vitally affects or is imminently likely to vitally affect the use of the home for residential purposes).
Simply stated, the warranty covers all ordinary defects in the first year, then faulty installation of systems (plumbing, electrical, heating and cooling) in the second year, and then dwindles down to providing coverage for only major defects in the third through tenth years. Due to the stringent definition of “major construction defects”, the warranty affords no coverage unless the house is practically collapsing and/or is uninhabitable. Common issues such as leaks, cracks, mold, excessive settling, and system malfunctions are not covered. Invariably, the warranties will also contain numerous exclusions that chip away at the actual attainable coverage, such as, but not limited to:
• failure of the home owner to give notice to the builder or its warranty insurer of any defects;
• improper maintenance by the home owner;
• changes of the grading of the ground around the new home by the new home owner or anyone other than the builder;
• failure on the part of the new home owner to take timely action in emergent case to minimize any loss or damage;
• any defect in, or caused by, materials or work supplied by the new home owner or anyone other than the builder;
• normal wear and tear or normal deterioration in accordance with normal industry standards;
• accidental loss or damage from acts of nature (e.g., fire, explosion, radon gas, smoke, water escape, changes which were not reasonably foreseeable in the level of the underground water table, glass breakage, windstorm, hail, lightning, fallen trees, aircraft, vehicles, flood, earthquake, or insect damage);
• any loss or damage which arises while the home is being used primarily for non-residential purposes;
• changes, alterations or additions made to the home by the new home owner or anyone other than the builder after initial occupancy, except for those performed by the builder in accordance with its obligations under the warranty;
• any materials and/or workmanship furnished and installed that does not comply with the specifications in the purchase-sale agreement or contract with the builder which is not defective;
• consequential damages to personal property.
Thus, the homeowner warranties provided by the builder generally contain a labyrinth of exclusions and qualifications that invariably set the stage for disputes and disagreements over what is or is not covered.
The meaning of the term collapse has undergone evolution both as an exclusion and as an insured peril under standard property insurance forms. Courts in the various jurisdictions have taken one of two general approaches in determining what constitutes a collapse. The most longstanding view is that collapse is a plain and unambiguous term susceptible to only a single meaning: "the sudden falling-in, loss of shape, or flattening into a mass of rubble" of a building. While courts taking this view do not always require that a building fall completely to the ground, they generally require a great deal of damage before collapse coverage will be triggered.
In contrast, some courts have found collapse to be ambiguous. Acknowledging that the traditional definition is one valid interpretation of the word, these courts nevertheless have expanded the definition to include "substantial impairment of the structural integrity" of a building. Upon a finding that two reasonable constructions of the word are available, these courts have adopted the broad meaning because that meaning typically is most favorable to the insured.
Unfortunately, the term structural integrity is not explicitly defined in the case law. A certain amount of disparity therefore exists among the "broad view" courts with respect to both the amount and type of damage necessary to trigger coverage. Some of these courts actually require caving or falling in before they will find a building's structural integrity to be impaired. Others require only a danger of collapse, or, in a few cases, an attenuated possibility of collapse. Additionally, they may or may not require that the damage occur or be likely to occur "suddenly."
As discussed above, a number of courts have taken the position that as used in a property insurance policy extending coverage to loss caused by "collapse of building or any part thereof," the term "collapse" denotes a falling or reduction to flattened form. In sharp contrast to this interpretation, a more liberal line of authorities have adopted the view that under such a policy provision, there can be a "collapse" even though there is no falling, tumbling down, or reduction to rubble of the insured building or a part thereof. Under this view it is held that at least if brought about by unusual or extraordinary circumstances which the parties could not normally expect or foresee at the time they entered into the contract, the settling, cracking, bulging, or breaking of the insured building or any part thereof in such a manner as to materially impair its basic structure or substantial integrity constitutes a "collapse" within the purview of the policy. This view, based on the position that "collapse" is an ambiguous term, was adhered to, with slight variations in emphasis and language, by New Jersey courts.
In Ariston Airline & Catering Supply Co. Inc. v. Forbes, 211 N.J. Super. 472 (Law Div. 1986), Plaintiff Ariston was in the catering business, providing in-flight meal service to airlines. It owned and operated a large freezer warehouse facility constructed in 1979. In late 1982 and early 1983, the floor of the warehouse heaved and cracked, causing structural damage. Ariston brought suit to recover its losses from its insurance carriers. The court analyzed an insurance policy that, by its own terms, did not insure against loss or damage caused by or resulting from:
(C) errors of design, errors in processing, faulty workmanship or faulty materials, unless the collapse of the property or a part thereof ensues and then only for the ensuing loss.
The court found that the clear language meant the policy would exclude a loss caused solely by design or construction defect were it not for the exception relating to “collapse.” The court then went on to adopt the plain dictionary meaning of “collapse”. Oxford English Dictionary defines “collapse” as:
The action of collapsing, or of falling or suddenly shrinking together, breaking down, giving way, etc., through external pressure or loss of rigidity or support: originally a term of physiology and medicine.
Therefore, it determined that Ariston's property “collapsed” in this sense and the policy exclusion did not apply.
In Fantis Foods, Inc. v. North River Ins. Co., 332 N.J. Super. 250 (App. Div. 2000), a declaratory action, the court applied New Jersey law to determine whether the condition of the insured’s building was in a state of “collapse” triggering coverage under its insurance policy. With the term “collapse” not explicitly defined in the policy, the court endeavored to determine its meaning. The court first noted the division of authority among the states regarding the definition of “collapse” and then outlined the majority view:
In American Concept Ins. Co. v. Jones, 935 F.Supp. 1220 (D.Utah 1996), the Court summarized several policies underlying the majority view: (1) if the insurer had intended to define collapse as meaning reduced to a flattened form or rubble, it could have done so in the contract; (2) although the policy stated that collapse did not include settling, cracking, shrinking, bulging or expansion, it was difficult to imagine a collapse that would not include some of these attributes; thus, the term could be interpreted as not including mere settling or cracking, but that which results in “substantial impairment of the home's structural integrity”; (3) some dictionary definitions of “collapse” suggest that the term means a substantial impairment of the structure's integrity; (4) to require a building to fall down before allowing coverage would be unreasonable in light of the insured's duty to mitigate damages and would be economically unsound. Id. at 1227-1228.
The court found the majority view persuasive and decided to follow it. It held that under New Jersey law “the collapse peril insured against does not require that structures fall; rather, without any narrowing internal definition, such a policy must be taken to cover any serious impairment of structural integrity that connotes imminent collapse threatening the preservation of the building as a structure or the health and safety of occupants and passers-by”. See also Ercolani v. Excelsior Insurance Company, 830 F.2d 31, 34-35 (3d Cir. 1987) (“New Jersey courts would, and a diversity court must, read the collapse peril as covering a serious impairment of structural integrity making the wall no longer capable of supporting the house's superstructure”).
Getting Paid in Difficult Economic Times: What Contractors, Sub-Contractors and Suppliers Need to Know
Whether you are a general contractor, a sub-contractor, or a supplier, those in the construction industry are are uniquely aware of the difficulty of coming by work in these harsh economic times. You are also equally aware that even though work may be available, receiving payment from the owner, the general contractor, or the sub-contractor can be a difficult task. The purpose of this blog is to discuss the best way to ensure that not only does the project proceed properly, but also, that you receive payment for your work and/or materials.
If you are in the position of a general contractor, the most important thing for you to do is to not allow the owner to get too far ahead of you when it comes to payment. Obviously, it is typical that invoices or payment applications require payment within 30 days. A good suggestion, however, would be to request an amendment for the contract to require payment within two weeks. As a general contractor, although a project may be appearing to proceed smoothly, it is suggested that you closely monitor the timing of payment from the project owner. Although you may not wish to disturb the project owner, as long as you are cordial they will understand your concerns about payment.
You can manage this by threatening to stop work if the payments are not timely rendered, as well as memorializing all issues with the timing of payment. As you should be aware, you can only file Construction Liens within 90 days from the last date you provided materials or services. As such, you should always remember that should the project stall or should the project owner claim financial issues that you should timely file the Lien. Although the goal is to complete the project, your principal goal is to get paid for the work that you have completed to date.
If you assume the role of a sub-contractor or supplier, it is important that you not allow the general contractor get too far ahead of you, just as a general contractor cannot allow an owner to get too far ahead of him. Although you may not want to disturb the balance between you and the general contractor, it is suggested that if payment issues arise that you document those issues with a letter to the general contractor, which you can provide a copy to the project owner. This way, if the project owner is unaware of payment issues, Joint Check Agreements can be worked out to ensure payment. Once again, you must be aware of the Construction Lien laws and your right to file a Lien. Your right to file a Lien is dependent upon whether or not you are a first tier sub-contractor or supplier or a second tier. This designation is dictated by the Lien statute. As a practical matter, like a general contractor, one of the best approaches to ensure payment is to not allow the general contractor to get too far ahead of you. Although the goal is to complete the project, like a general contractor your goal is to ensure you get paid for the work you performed.
Hopefully, this short little guide will provide you some guidance in ensuring that you are paid for the work you perform in these difficult economic times, as increasingly project owners and general contractors are finding financing issues while in the midst of a project due to nervous banks or other financial institutions. If you have questions regarding the above blog post, feel free to contact me in my firm’s Lawrenceville, New Jersey office to discuss this matter in more detail.
Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this fourth and final installment, Mr. Brenner and Mr. Wright discuss the common problems associated with roofs. Mr. Brenner and Mr. Wright discuss the different methods used in determining the common problems associated with roofs such as visual investigations, attic ventilation investigations, infrared photography and moisture surveys.
Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this third installment, Mr. Brenner and Mr. Wright discuss the common problems associated with decks and balconies in construction projects. Mr. Brenner and Mr. Wright discuss the most common types of decks used, the most common problems associated with decks including flashing and back-pitching, and a discussion on the structural failures associated with concrete decks which are used in high/mid-rise buildings.
New Jersey Appellate Division Resurrects Deceased Contributory Negligence Doctrine: Consumer’s Pre-Purchase Notice of Product Defect Bars PLA Recovery of “Other Property” Damage Inflicted After Purchase
Contributory negligence is the common-law construct whereby any negligence by a plaintiff acts as a total bar to recovery against a negligent tortfeasor. The contributory negligence doctrine has been uniformly criticized as overly harsh, allowing culpable parties to avoid the consequences of their actions, and leaving relatively innocent plaintiffs without recourse. 57A AmJur2d 752, Negligence, § 856. In response, the vast majority of states, including New Jersey, have replaced the contributory negligence doctrine with some form of comparative negligence, whereby the fault of a plaintiff is compared with the negligence of the defendant and may serve to reduce the plaintiff's recovery of damages instead of completely barring the plaintiff's action. Id. See, e.g., Muldovan v. McEachern, 271 Ga. 805, 810 (Ga.,1999). In this way, states have modified the doctrine to achieve results more consistent with modern notions of fairness. The 1973 enactment of New Jersey’s Comparative Negligence Act (the “Act”), N.J.S.A. 2A:15-5.1 to -5.8, adopted this construct, providing that the fault of a plaintiff may be considered in allocating liability among the parties, but may only act as a total bar to recovery if it exceeds the fault of the defendants. Subsequent decisional law has construed the Act broadly, applying it not only to negligence claims, but also to claims sounding in strict liability. See, e.g. Cruz-Mendez v. ISU/Insurance Services of San Francisco, 156 N.J. 556, (N.J.,1999)
Notwithstanding the clear legislative and judicial repudiation of contributory negligence, a recent Appellate Division decision appears to revive that antiquated notion as applied to homeowner claims against manufacturers of defective building components. In Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), the Appellate Division upheld the application of the “economic loss rule” to shield manufacturers of defective building materials from liability to the purchasers of pre-owned houses that incorporate the materials and sustain physical damage as a result. The economic loss rule, as codified by the New Jersey Product Liability Act, limits the availability of tort remedies to plaintiffs who have suffered personal injury or “physical damage to property other than the product itself.” N.J.S.A. 2A:58C-1(b)(2). (For a more extensive critique of the rule see The Economic Loss Doctrine: A license to sell defective building products?).
Even though the concurring majority in Dean, led by Judge Sabatino, acknowledged that the defective component, in that case—a synthetic stucco product known as Exterior Insulation and Finish System (“EIFS”)—had caused injury to property beyond “the product itself,” the court nevertheless barred plaintiffs’ tort remedies, finding that the unique circumstances of the underlying transaction weighed in favor of a restrictive application of the economic loss rule. Critical to the concurring majority’s analysis was the fact that plaintiffs received a home inspection report, prior to their purchase of the home, disclosing the potential defects in the EIFS:
In my view, [an] innocent home purchaser should be able to recover, under the Product Liability Act, N.J.S.A. 2A:58C-1 to -11 (“PLA”), reasonable compensation from the manufacturer of that defective component for the physical harm the component caused to other portions of the home and to any other property owned by the plaintiff.
In the present case, however, we are not dealing with [an] entirely latent defect, but one that was pointed out to the Deans, both orally and in writing, by their astute home inspector before they purchased the house. I agree with Judge Carchman that, whatever the proper scope of the economic loss doctrine may be, tort principles should not cover those losses in the particular setting of this transaction. Once alerted to the potential risks of the sheathing, the Deans could have insisted on a warranty from the builder to guard against future consequential harms, or demanded that the sheathing be replaced, or walked away from the purchase altogether. They did none of those things. The defect in the EIFS was no longer, with respect to the Deans, latent. Given this particular transactional context, I have no problem in confining plaintiffs to other remedies that are not based in tort or under the PLA.
Dean, supra, at 475, 483 (Sabatino, J., concurring) (emphasis added).
While differing on the issue of whether consequential damage to collateral components of the home constitutes damage to “other property,” Judge Carchman, writing for the court, agreed with the concurring majority that plaintiffs’ opportunity to avoid the loss asserted, and failure to take reasonable precautions to protect their own interests warranted foreclosure of their tort remedies:
We recognize the thoughtful and well-articulated concerns expressed by our concurring colleagues regarding the application of the economic loss rule as a bar to innocent purchasers recovering under the PLA from a manufacturer of a defective component of the home, where that component causes physical damage to other portions of the home; however, that is not the case we have before us on this appeal. As our concurring colleagues observe, plaintiffs, here, had appropriate opportunities to protect themselves from the potential of loss caused by the defective component.
Id. at 472 (emphasis added).
Though couched in terms of the economic loss rule, the effect of the Dean holding is the application of a contributory negligence standard to product liability claims asserted by homeowners against building component manufacturers. Where a homeowner knew or should have known of an injurious product-defect prior to purchase, no recovery may be had in tort for subsequent damage to “other property” caused by the defect. Yet, the New Jersey Legislature and Supreme Court have made clear that a comparative fault standard should govern the analysis of the relative "innocence" and "blameworthiness" of the victim and tortfeasor:
The final issue concerns the effect of plaintiff's comparative negligence on the [defendant's] liability under N.J.S.A. 21:3-5. That issue requires consideration of the Comparative Negligence Act, N.J.S.A. 2A:15-5.1 to -5.8, which provides that a plaintiff's own negligence may be considered in allocating liability among the parties. . . . The Act applies in strict-liability actions. Gennari v. Weichert Co. Realtors, 148 N.J. 582, 608-09, 691 A.2d 350 (1997); see also Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 164 (1979) (holding that Act provides a defense in most strict-liability actions, except in some workplace injury cases in which worker had no meaningful choice whether to encounter risk). A plaintiff's fault is an affirmative defense in a strict-liability action if his or her conduct constitutes an “unreasonable and voluntary exposure to a known risk.” Lewis v. American Cyanamid Co., 155 N.J. 544, 559, 715 A.2d 967 (1998); Cartel Capital Corp. v. Fireco of N.J., 81 N.J. 548, 563, 410 A.2d 674 (1980). To establish an affirmative defense, therefore, the Insurers must prove that plaintiff voluntarily encountered the risk with actual knowledge of the danger. The mere fact that plaintiff was negligent will not suffice.
Id. (emphasis added). See Cepeda v. Cumberland Eng'g Co., Inc., 76 N.J. 152, 185, 386 A.2d 816 (1978) (holding that “contributory negligence in the sense of mere carelessness or inadvertence” is not a defense in strict liability cases), overruled in part on other grounds Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 177, 406 A.2d 140 (1979). Under New Jersey law, even where a manufacturer proves that a consumer failed to take reasonable precautions against a product defect of which he knew or should have known, the result is a mere reduction of the plaintiff's recovery, not a complete bar, unless the jury makes a determination that a majority of fault lies with the plaintiff (a quintessential fact determination). In New Jersey, and in a vast majority of jurisdictions, an injured consumer’s “notice” of a product defect will not foreclose tort remedies unless the manufacturer meets a burden of establishing the consumer’s subjective knowledge of the danger and unreasonable conduct in the face thereof. See Id. See, e.g., Martinez v. Triad Controls, Inc., 593 F.Supp.2d 741 (E.D.Pa.,2009); Anderson v. Four Seasons Equestrian Center, Inc., 852 N.E.2d 576, 582 (Ind.App.,2006); Krajewski v. Enderes Tool Co., Inc., 396 F.Supp.2d 1045, 1052 -1053 (D.Neb.,2005); Warner Fruehauf Trailer Co., Inc. v. Boston, 654 A.2d 1272, 1274 -1275 (D.C.,1995)
Dean’s emphasis on plaintiff homeowners’ “innocence” is particularly problematic given the underlying purpose of the economic loss rule. The rule “defines the boundary between the overlapping theories of tort law and contract law by barring the recovery of purely economic loss in tort, particularly in strict liability and negligence cases.” Dean, supra, at 470 (citation and internal quotation marks omitted). It acts as a shorthand means of determining which duty has been violated by the defendant—that is, was it one that arose solely under contract, or did it also arise incident to the common-law obligation to avoid unreasonable risks of harm to persons or property? See Id. The Dean court essentially looked to the purchaser's fault to determine the source of a manufacturer's breached duty. This seems incongruous. The fact of the Deans’ "notice" does not change the quality of the manufacturer's culpable conduct, which presumably occurred long before plaintiffs purchased their home. The notice issue would have been more appropriately addressed in terms of comparative fault. While the Supreme Court did sanction an examination of unique transactional circumstances in applying the economic loss rule in Alloway v. General Marine Industries, L.P., 149 N.J. 620, 629 (1997), the purpose of that examination is to avoid an overly restrictive application of the rule, not to facilitate it.
Stark & Stark Construction Litigation Shareholder, John Randy Sawyer, and Associate, Joseph D. Gumina, authored the article, The Economic Loss Doctrine: A license to sell defective building products? for the May 11, 2009 edition of the New Jersey Law Journal. The article is available below, or online here. (PDF)
Underlying the entire complex of laws governing the construction and sale of residential property in New Jersey is a clear recognition that, “for most people, the purchase of a house will be the most important investment of a lifetime.” Gennari v. Weichert Co. Realtors, 148 N.J. 582, 607 (1997). That understanding is reflected in forty years of judicial and legislative advances against archaic common-law notions, such as caveat emptor, merger, and privity, that unfairly obstruct homebuyer remedies for material defects in construction. See, e.g. McDonald v. Mianecki, 79 N.J. 275, 294 (1979). Two recent Appellate Division decisions move the law in a seemingly contrary direction. In Marrone v. Greer & Polman Constr. Inc., 405 N.J.Super. 288 (App.Div. 2009) and Dean v. Barrett Homes, Inc., 2009 WL 1025565 (App. Div. 2009), the Appellate Division upheld the application of the economic loss rule to shield manufacturers of defective building materials from liability to the purchasers of pre-owned houses that incorporate the materials and sustaine physical damage as a result. The economic loss rule, as codified by the New Jersey Product Liability Act, limits the availability of tort remedies to plaintiffs who have suffered personal injury or “physical damage to property other than the product itself.” N.J.S.A. 2A:58C-1(b)(2).
The critical issue addressed in Dean and Marrone is whether “the product itself,” as applied to plaintiff homeowners, encompasses the entire house (disallowing tort claims for damage to other parts of the residence) or is limited to the defective building component supplied by the defendant manufacturer (allowing such claims). That question was previously answered in DiIorio v. Structural Stone & Brick Co., Inc., 368 N.J. Super. 134 (App. Div. 2004). In DiIorio, plaintiff homeowner filed suit against the manufacturer of defective stone siding that damaged the rest of the house in which it was integrated. The action was commenced outside the four-year statute of limitations of the U.C.C., but within the six-year statute applicable to claims for tortious injury to property. Concluding that “this [was] a product liability case[,]” the trial court permitted plaintiff to take advantage of the longer statute. On appeal, the manufacturer argued that the four-year statute should apply because “recovery of economic losses caused by goods that damage only the goods themselves are recoverable only in accordance with the comprehensive provisions of the U.C.C and not pursuant to theories of tort.” In rejecting this argument, the court noted that the asserted damages were “not limited to the value of the stones themselves.” Viewing the stones, not the damaged house, as the relevant “product,” the court determined that plaintiff had sustained “other property” damage, recoverable in tort, outside the limitations of the U.C.C.
In Marrone, the Appellate Division revisited the issue of what constitutes “the product itself,” as applied to pre-owned residential construction. Plaintiffs sued the manufacturer and distributor of an exterior siding product known as Exterior Insulation and Finish System (EIFS). They alleged that defects in the EIFS had allowed water to infiltrate and injure the underlying structure of their home. In dismissing plaintiffs’ tort claims, the trial judge viewed the home as the relevant “product,” concluding that plaintiffs had not alleged “personal injury or loss of personal property other than the damage to the home itself.” The Marrones argued on appeal that this ruling was inconsistent with DiIorio. The Appellate Division disagreed. Unlike the plaintiff in DiIorio, the Marrones “were not the original owners of the house. They bought the house. . . from the original owners. . . who in turn had contracted for its construction[.]” The court determined that, as subsequent purchasers, plaintiffs could not circumvent the economic loss rule by “attempting to break the house down . . . into its component parts[.]” To conclude otherwise would, in the court’s judgment, carry the realm of tort liability too far, potentially allowing “a buyer who purchased plaintiffs' house fifty years from now . . . [to] sue the [manufacturer and distributor of a defective building product] for water damage to the house.” The policy of shielding manufacturers against “potentially unlimited liability” was deemed sufficient reason to foreclose plaintiffs’ PLA remedies.
The combined result of Marrone and DiIorio is that, where a defective component causes damage to residential construction in which it is integrated, the manufacturer’s liability in tort will run to the injured homeowner who has “contracted directly with a builder to construct a house[,]” but not to the subsequent purchaser who, though suffering the same injury, stands further “downstream in the chain of distribution.” By limiting DiIorio in this manner, Marrone reanimates the notion of “privity” that was put to rest nearly a half century ago in Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 (1960).
The authors submit that Marrone was wrongly decided, as it conflicts with the prevailing rule that a manufacturer’s liability to an end user of its product turns, not on privity, but on foreseeability. The key inquiry, which receives short shrift in Marrone, is whether a manufacturer who places a component in the stream of commerce for use in residential construction could reasonably envision anything but a class of end users that includes remote homebuyers. See N.J.S.A. 2A:58C-2. The answer to the court’s concern of “potentially unlimited liability” is “not the judicial obstruction of a fairly grounded claim for redress[, but] a more sedulous application of traditional concepts of duty and proximate causation to the facts of each case.” People Exp. Airlines, Inc. v. Consolidated Rail Corp., 100 N.J. 246, 254 (1985).
On facts strikingly similar to Marrone, the Appellate Division in Dean v. Barret Homes, 2009 WL 1025565 (App. Div. 2009) again affirmed dismissal of PLA claims asserted by subsequent homeowners against the manufacturer of EIFS, where consequential damage had extended to other parts of the house. The panel issued two opinions: one by Judge Carchman delivering the judgment of the court; and the other by Judge Sabatino, concurring in the judgment but differing on the “critical issue” of what constitutes the relevant “product.” Rejecting DiIorio’s analysis of that issue as dicta, Judge Carchman embraced the view of the Marrone court—that the house constitutes “the product itself”—and concluded that the damage to the home’s underlying structure was not damage to “other property.” This conclusion notwithstanding, DiIorio’s discussion of the economic loss rule cannot be relegated to the category of dictum where it was demonstrably on point with the issues presented by the appellants in that case. Indeed, Judge Sabatino, joined by Judge Simonelli, characterized Carchman’s departure from DiIorio as “troublesome,” and his resolution of the “critical issue” as inconsistent with “the dominant view of other states” that a defective component “incorporated into an improvement to realty does not lose its identity as a product[.]” Looking to the PLA, Sabatino expressed “considerable doubt that the Legislature intended to treat a single family house as a ‘product’[.]” Despite their differences on the issue of what constitutes “the product itself,” Carchman and Sabatino agreed that examination of unique transactional circumstances, particularly the relative ability of the parties in that case to avoid the loss asserted, weighed in favor of confining the Deans to their non-tort remedies.
In the authors’ view, Judge Carchman’s analysis is problematic, both for its interpretation of the PLA and for its potential impact on homeowner protections. The PLA expressly excludes “seller[s] of real property” from the definition of “product seller.” N.J.S.A. 2A:58C-8(1). This begs the question—if a seller of real property is not a “product seller” under the PLA, how then is a house, an improvement to the real property, considered “the product itself”? That view of the house would, under a literal reading of the PLA, confine homeowners to their warranty remedies whenever a defective component failed to spread devastation beyond the house itself. Consider defective wiring that starts a fire, resulting in nothing less (and nothing more) than the house’s total destruction. Is this a mere disappointment of economic expectations for which the law affords no recourse outside of warranty? The ability of a homeowner to “recover down an unbroken chain of warranties to the original source of the defect is greatly impeded in construction cases by the high number of insolvencies, bankruptcies, and business failures in the industry.” Cheezem, "Economic Loss in Construction Setting: Toward Appropriate Definition of ‘Other Property’”, 12-Apr Conslaw 21, 23 (1992). Even where all parties remain subject to service of process, common experience in the “volatile world of contractors, subcontractors, and material suppliers” confirms the impracticality of supposing a sequence of breach of warranty claims, transferring loss from the afflicted homebuyer to the component manufacturer bearing ultimate responsibility. It seems unlikely the Legislature intended to shield manufacturers and deprive homeowners of a practical recourse under these circumstances.
At the end of the trail from DiIorio to Marrone and Dean, it is unclear whether homeowners have any remedy against manufacturers of building components that damage pre-owned residential construction. Marrone’s conclusion that the PLA offers no such recourse conflicts with the view of the concurring majority in Dean. Because Judge Carchman’s endorsement of Marrone failed to attract a majority of the Dean panel, no new legal authority for that position was granted. The authors submit that DiIorio’s view of the component as the relevant “product,” as endorsed by Judge Sabatino, cleaves more closely to the PLA’s plain language and is in line with New Jersey’s sound policy of protecting residential consumers. And, as to original homeowners, that view remains the settled law.
Reprinted with permission from the May 11, 2009 issue of the New Jersey Law Journal, © 2009 Incisive Media US Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
The New Jersey Supreme Court announced a sweeping expansion of the NJ Consumer Fraud Act, N.J.S.A. 56:8-2 ("CFA"), to include work done by contractors performing interior work on new construction. In Czar Inc. Heath, A-114-07, decided 3/13/09, the Supreme Court ruled 6-1 that new homeowners who act as their own general contractors for interior finish work have a right to assert claims under the CFA against the Czar, Inc ("Czar"), the subcontractor responsible for doing installation of kitchen cabinets, doors, chair railing and other interior finishes.
The owners of the home were unhappy with the subcontractor's work and withheld $80,000 from the bill. When they were sued by the subcontractor, the owners counterclaimed based on, among other things, violations of the CFA. Czar moved to dismiss the CFA claim arguing that HOW and its implementing regulations specifically exclude application of the CFA because this case involved "construction of a new residence" . The trial court agreed and dismissed the CFA claim.
The Appellate Division reversed the trial court holding that the exemption for construction of a new residence in the home improvement regulations under HOW did not apply to the work of the subcontractor. The Appellate Division panel reviewed the Contractor's Registration Act ("CRA") and noted that it regulates contractors who are involved in the home improvement business. The CRA exempts from its reach any person who is required to register under the New Home Warranty and Builder's Registration Act ("HOW") and who were already subject to a registration requirement. The Appellate Division reconciled the regulatory schemes set forth in the CRA and HOW, noting that HOW created a warranty program and an election of remedies by the homeowner. By contrast, instead of requiring warranties, CRA requires insurance and disclosures and, through its implementing regulations, defines unlawful practices which are punishable under the CFA.
The Court noted that Czar had not registered as a new home builder under HOW and had not provided the required warranties. The Court refused to allow Czar to simultaneously escape the requirements for the warranty under HOW while also escaping from the registration requirements of the CRA and the remedies afforded to consumers protected by the CRA. Essentially, the Court declined to allow Czar to have its cake and eat it too. Since Czar did not register as a builder of new homes under HOW, the Court rejected its argument that it was involved in building new homes. Czar therefore did not fall within the ambit of HOW, was not entitled to the safe harbor of the exclusion for new home builders and was subject to the CFA.
Fourth and Fifth Circuits Reign in “Business Risk” Doctrine: Rulings in Favor of Coverage Under General Contractors’ CGL Insurance Policies Add Clarity, Signal Return to “Plain Language”
The "business risk" doctrine has become a fixture of insurance coverage law, with profound implications for insured contractors and plaintiff property owners involved in construction-defect litigation. Concisely stated, the doctrine holds that “faulty workmanship standing alone, resulting in damage only to the work product itself. . .” falls outside the ambit of coverage provided by a CGL policy. Firemen's Ins. Co. of Newark v. National Union Fire Ins. Co., 387 N.J.Super. 434, 449 (App. Div. 2006) (citations and internal quotation marks omitted). See also 4 Bruner & O'Connor Construction Law § 11:37.
A review of the decisional law advancing this principle reveals a lack of consensus with respect to its rationale and application. A particularly uneven treatment of the “business risk” distinction is found in cases where damages are confined to an insured contractor’s work product but extend, qualitatively, beyond mere faulty workmanship. Consider the following example:
A residential developer undertakes the construction of a wood-framed apartment building. The exterior of the building is clad in a synthetic stucco system, which, due to faulty workmanship, allows water infiltration into the building’s main walls. This water infiltration, in turn, causes damage to contiguous building materials (stud framing, sheathing, interior finishes, etc.), which are otherwise defect-free. No damage is sustained beyond the building itself.
Purchasers of the building file suit against the developer seeking recovery for (1) the cost of replacing the defective synthetic stucco system; and (2) the cost of repairing the consequential damages to the underlying building materials.
The developer submits to its insurer a claim for defense and indemnity under a CGL policy covering “property damage” caused by an “occurrence” and featuring the standard “business risk” exclusions.
A reoccurring controversy in insurance coverage law is whether the damages in item 2—the cost of repairing consequential loss stemming from a defective component in the insured’s work product—are covered under a CGL policy. To the extent such damages affect only the “work product itself,” they would seem, at least facially, to come within the preclusive ambit of the “business risk” doctrine—they are not damage to “other” or “third-party” property. However, a more thoroughgoing analysis, as presented in two recent Federal Circuit opinions—Stanley Martin Companies, Inc. v. Ohio Cas. Group, 2009 WL 367589 (4th Cir. Feb. 12, 2009) and Mid-Continent Casualty Co., v. JHP Development, Inc., --- F.3d ----, 2009 WL 189886 (5th Cir. Jan. 28, 2009)—leads to a different conclusion. These cases shed new light on the contours and limitations of the “business risk” doctrine, distinguishing between the defects in an insured’s work product, which generally are excluded from coverage, and the consequential injuries stemming from those defects to other parts of the same work product. According to the recent decisions, the latter category of damages is not necessarily excluded.
In Stanley Martin, decided February 12, 2009, the Fourth Circuit Court of Appeals determined that damages caused by defective trusses supplied by a subcontractor and used in the construction of new townhouses constituted a covered “occurrence” within the meaning of the general contractor’s CGL policy. In keeping with the standard coverage form, the policy at issue defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Stanley Martin, supra, at 1. The underlying litigation stemmed from mold damage, originating from the defective trusses, and spreading to other, non-defective, components of the buildings. No damage was sustained beyond the building itself.
Applying Virginia law, the lower court had determined that the alleged damages did not come within the scope of the relevant policy because the general contractor’s “remediation costs arose out of damage to [its] own ‘work’ caused by the faulty workmanship of its subcontractor[.]” Id. at 2. This exigency, in the court’s view, “was not ‘unexpected’ or an ‘accident.’” Id. It was an anticipated, and therefore uninsured, risk of doing business.
In the decision reversing the lower court’s ruling, the Court of Appeals confronted a divergence of opinion in the Fourth Circuit with respect to the proper application of the “business risk” principle to such circumstances. Four years prior, the Fourth Circuit had addressed a similar set of facts in Travelers Indemnity Co. of America v. Miller Building Corp., 142 F. App’x 147 (4th Cir. 2005). Apparently relying on the “business risk” distinction, the Miller court held that the consequential injuries to the building, which “allegedly [were] a result of the subcontractor’s defective performance,” were confined to the building itself and, therefore, “not considered to be ‘unexpected’ or caused by an ‘occurrence.’” Stanley Martin, supra, at 2 (quoting Miller, supra, at 149) (internal quotation marks omitted). Because, in the court’s view, the damage to the general contractor’s work did not constitute an “occurrence,” it did not trigger the insurers duty to indemnify.
The Fourth Circuit reached the opposite conclusion a year later in French v. Assurance Co. of America, 448 F.3d 693 (4th Cir. 2006). In that case, the court distinguished between the subcontractor’s defective work and the damage caused to the surrounding components, which were, in themselves, defect-free. The coverage dispute stemmed from the circumstances presented in the introductory fact pattern—a residential developer hired a subcontractor to clad the exterior of a new home with synthetic stucco system known as “Exterior Insulation Finishing System” (“EIFS”). Defects in the EIFS allowed moisture intrusion that caused damage to the home’s underlying structure. While acknowledging that the subcontractor’s defective work was, in and of itself, an excluded business risk, the court determined that the damage caused by that defective work to the surrounding non-defective components did constitute “an accident, and therefore a [covered] occurrence under the initial grant of coverage of the [CGL policy].” Stanley Martin, supra, at 2 (quoting French, supra, at 704-05) (internal quotation marks omitted). In reaching this conclusion, the court reasoned that, “[a]s delivered per the construction contract,” the surrounding components were “defect-free,” such that their subsequent damage was unexpected. Id.
Faced with these diverging opinions, the Stanley Martin court rejected Miller and endorsed French as the controlling iteration of the “business risk” distinction. The bifurcation of the insured’s work between defective and non-defective components was, in the court’s view, well “grounded in the plain language of the policy and the interplay between the policy’s broad definition of an ‘occurrence’ and the policy’s ‘your work’ exclusion” which excepted subcontractor work. See Stanley Martin, supra, at 2 (quoting French, supra, at 703 (internal quotation marks omitted). At oral argument, the insurer in Stanley Martin tried to distinguish French on the basis that the moisture intrusion that damaged the home’s non-defective structure was a separate event that could constitute an occurrence. The mold at issue in Stanley Martin, on the other hand, was present in the townhouses as soon as the trusses were installed. The court found this argument unpersuasive, characterizing it as a “labored distinction [that] places more weight on the policy language than it can bear.” Id. at 2. Because there was “no allegation that the general contractor either expected or intended that its subcontractor would perform defective work or that the spread of mold beyond the defective trusses was expected or intended,” the court determined that these events were “occurrences” capable of triggering coverage under CGL policy. Id. at 3 (internal quotation marks and citations omitted).
The Fifth Circuit’s January 28, 2009 decision in Mid-Continent also addressed the application of the “business risk” principle in the context of a construction defect case. Mid-Continent focused, not on the meaning of the word “occurrence,” but rather on the scope of the standard “business risk” exclusion for damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Id. at 3. Like the Stanley Martin court, the Fifth Circuit emphasized a distinction between the defective and non-defective components of the insured’s work product. Factually, the coverage dispute stemmed from an insured developer’s construction of a four-story, wood-framed residential building with inadequate water-sealants and retaining walls. As a consequence of these deficiencies, large quantities of water penetrated the interior of the structure through the ceilings and walls, under doors, and at other points, damaging contiguous building materials, which were, in themselves, defect-free. After receiving a demand for defense and indemnity, the developer’s CGL insurer filed a declaratory judgment action seeking, among other things, a declaration that coverage was barred by the above-quoted “business risk” exclusion. Id. at 3. The Fifth Circuit Court of Appeals framed the issue in the following manner:
Whether the exclusion bars recovery for damage to any part of a property worked on by a contractor that is caused by the contractor’s defective work, including damage to parts of he property that were the subject of only non-defective work, or whether the exclusion only applies to property damage to parts of the property that were themselves the subject of the defective work.
Id. at 6. Examining the plain language of the exclusion, the court determined that only property damage “to parts of the property that were themselves the subjects of the defective work [was] excluded.” Id. at 6 (emphasis added). The court rejected as unpersuasive the approach taken in another jurisdiction in which consequential damages to non-defective components were necessarily deemed an excluded “business risk.” Id. at 7 (declining to follow Century Indemnity Co. v. Golden Hills Builders, Inc., 384 S.C. 559 (2002)). Such an approach, the court reasoned, improperly subordinates analysis of the policy’s language to a presumption about the underlying purpose of CGL coverage. Id. at 7. “The mere fact that a policy is designated as a ‘commerical general liability’ insurance policy is not grounds for overlooking the actual language of that policy.” Id. The court therefore cabined its discussion to the terms of the policy before it and determined that the consequential losses in question went beyond the “particular part of the [the contractor’s] work” containing defects. Thus, the “business risk” exclusion was inapplicable and coverage obtained.
Stanley Martin and Mid-Continent continue a discernable trend in favor of coverage where an insured contractor’s faulty workmanship results in damage to otherwise non-defective work product. While it can generally be said the faulty workmanship is, itself, an anticipated risk of doing business, the consequences flowing from such workmanship are not so easily categorized. The Fourth and Fifth Circuit decisions reflect a growing recognition across jurisdictions that broad-stroked applications of the “business risk” rule—which is essentially an insurance industry trade concept—must not supercede analysis of the plain language of insurance contracts. See Zacarias v. Allstate Ins. Co. 168 N.J. 590, 595 (2001) (“In the first instance, the words of an insurance policy are to be given their plain, ordinary meaning.”) See also 4 Bruner & O'Connor Construction Law § 11:37. Absent a particular policy exclusion, the logical basis for differentiating between consequential loss to an insured’s work product and consequential loss to other property remains tenuous, and all but a shrinking minority of jurisdictions have either abandoned or qualified the distinction.
Last Thursday the Nevada Supreme Court denied attempts from Del Webb (a national builder of active adult communities) and their contractors seeking to limit the number of homeowners within a community from pursuing construction defect claims. The court stated that subsequent buyers of a home (in addition to the original owners) which had been deemed defective have the right to sue under the Nevada State defect law.
The ruling, also referred to as the “Stucco Case,” found in favor of 700 homeowners who had been involved in litigation since the original complaint was filed in June 2003. Defects in the stucco installation resulted in the formation of mold, which caused the homes to be deemed dangerous and hazardous to residents.
According to several of the homeowners’ attorneys, not including attorney’s fees and interest accrued over the past five years, the estimated cost to repair the damage to the homes was nearly $90 million. Though the case is expected to be appealed to the United States Supreme Court the outcome is sure to have in impact on similar cases across the country.
Every builder operating in New Jersey is most likely aware that our state has plaintiff-friendly laws in the context of construction defect litigation. Even so, the gravity of claims made against builders for alleged defects typically has a direct correlation to relatively known and controllable factors, i.e. their contract performance and quality of product. However, there is another category of claims being made with increasing success in defect cases made under New Jersey’s Consumer Fraud Act (CFA).
The CFA is aimed at unlawful sales and advertising practices designed to induce consumers to purchase merchandise or real estate. Intended to give New Jersey one of the strongest consumer protection laws in the nation, it receives liberal interpretation from the Courts in favor of consumers. The CFA declares as an unlawful practice “[t]he act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission”. Affirmative misrepresentations under the Act do not require proof that the alleged violator actually intended to deceive the consumer. Concealment or omission claims require only that the alleged violator knowingly concealed a material fact with the intent that the omission be relied upon by consumers.
The scope of the CFA’s consumer protections can be seen in its language that “any person who suffers any ascertainable loss of moneys or property, real or personal, as a result of the use or employment by another person of any method, act, or practice declared unlawful under this act…may bring an action”. Courts have interpreted that, an “ascertainable loss” occurs simply when a consumer receives less than promised.
Additionally, no proof is required under the CFA that a consumer actually relied upon any alleged statement or conduct by a defendant to make a claim. Rather, the Act specifically provides that consumers are protected “whether or not any person has been misled, deceived, or damaged thereby”. There is also no requirement that consumers have a contract with the alleged violator, or be in direct contact with a party who has allegedly violated the CFA, in order to assert claims. How these principles have been applied in defect cases shows how broad the potential scope of liability can be for builders and contractors.
In Chattin v. Cape May Greene, a developer had distributed a brochure to homeowners that indicated the homes would contain “insulated aluminum windows”. The windows actually used in the homes had a double pane of glass, which provided insulation. The aluminum frames of the windows, however, had no insulating features. Homeowners claimed the frames of the windows allowed air infiltration and caused condensation damage to the sills and woodwork. Homeowners who received the brochure won at trial because the Court agreed that the representation about the windows in the brochure was misleading under the CFA. On appeal, the Appellate Court sent the case back for a new trial, but only because it wanted the jury to determine whether the average consumer would understand the term “insulated aluminum windows” to refer only to the glass or to the entire window unit.
Recently in Matera et. al. v. M.G.C.C. Group, Inc. et. al., a defendant bank concealed information from a local planning board regarding drainage problems connected to land it was selling to a developer, in order to gain approval from the planning board for construction of homes. Homeowners in an adjoining property all began experiencing flooding after the developer bought the land from the bank and built the homes. Despite the homeowners having no direct contact with the bank, and despite the facts that the homeowners never heard any of the bank’s misrepresentations and were never directly exposed to any of its omissions, the Court found the homeowners could still maintain CFA claims against the bank.
With cases like Chattin and Matera, which involved liability to homeowners under the CFA for statements in a brochure and statements to a planning board, it may seem difficult for a builder to avoid claims under the CFA. However, builders and contractors can take steps to protect themselves by having an understanding of the broad scope of potential liability under the CFA and using that knowledge to serve as a filter for all statements and advertisements made in developing and marketing a project.
The Appellate Division recently denied a landscaping contractor’s suit to collect amounts due for extra work in addition to that called for in his contract for complete landscaping of the defendants’ home. Online Contracting, Inc. v. Tripucka, No. A-2622-06 (App. Div., December 6, 2007). The defendants counterclaimed for treble damages and attorneys’ fees under the Consumer Fraud Act (N.J.S.A. 56:8-1 to 116). The court concluded that the contractor’s failure to secure a written agreement for extras totaling $32,994 violated N.J.A.C. 13:45A-16.2(a)(12), which requires all home improvement contracts exceeding $500 to be memorialized by a writing signed by the parties, specifying the work to be performed and the materials to be used, and identifying the start and end date.
The contractor argued that the following language, included within the underlying agreement for landscaping purposes, authorized verbal change orders:
Any alteration or deviation from the description of the work listed above will be executed upon a written change order issued by the contractor and signed by the owner. The change order, whether it be verbal or in writing, will become an extra and will be billed to the owner at the daily rate provided in the [attached] equipment and labor price list.
Because the work was performed pursuant to the equipment and materials price list attached to the underlying contract, the contractor maintained that the contract clause did not violate the Consumer Fraud Act. Further, argued the contractor, the defendants should be estopped by their own conduct in verbally requesting the extras (a putting green and associated structures).
The court disagreed. Citing Scibek v. Longette, 339 N.J. Super. 72 (App. Div. 2001), an auto repair case, it pointed out that since the defendants had not induced the contractor to proceed with the extras without a writing, estoppel did not apply. “Defendants’ verbal directions to [plaintiff] to get the extras ‘done’ cannot be fairly characterized as ‘the intentional relinquishment of a known right,’ or a clear unequivocal ‘act from which an intention to relinquish’ a right can be drawn.” Online Contracting, Inc., supra, No. A-2622-06 at 4, citing Scibek, supra, 339 N.J. Super. at 82. In the absence of the required written agreement for the extras, the defendants could not be said to have intentionally relinquished their right to a written contract by a clear, unequivocal and decisive act.
The court added that the contractor could have preserved its right to collect for the extras simply by providing a written estimate and securing the defendants’ written authorizations. Accordingly, it affirmed the trial court’s grant of attorneys’ fees in accordance with the Consumer Fraud Act ( N.J.S.A. 56:8-19).
World famous architect Frank Gehry, and his firm Gehry Partners is a defendant in a recent lawsuit brought by the Massachusetts Institute of Technology alleging design and construction defects in a $300 Million building on the Cambridge, Massachusetts campus. MIT also sued the contractors who built the building, alleging that design and construction defects caused leaking, cracking, and poor drainage, and that MIT will have to pay millions to fix the problems.
Gehry, when interviewed about the lawsuit, said that construction problems in complex buildings are inevitable, and “The chances of it getting done ever without something colliding or some misstep are small.” Gehry, like most architects surely believes that his design is fine, and that the builder made mistakes in execution.
The builder, a the New Jersey arm of a Swedish firm called Skanska AB, when asked for comment, stated “This is not a construction issue, has never been.” So, the builder believes, of course, that the design is faulty, and he did nothing wrong.
As is typical, both the architect and the builder also fault the owner, in this case MIT, for making changes during construction that they say led to problems. Gehry also commented that he thought that “value engineering” was also responsible for some of the problems.
It is disconcerting to see that a superstar architect, a global construction company and a world-class institute of higher learning, with $300 Million to spend cannot seem to create a water-tight building. Mr. Gehry seems to think that construction defects are par for the course. In that context, it comes as no surprise that we find problems with much simpler, mass-produced homes and condominiums.
You can read the New York Times article discussing the case here.
Plaintiff WHP9, the developer of a multi-building residential project in North Bergen, secured a builder’s risk policy from defendant Centennial Insurance and liability insurance from another carrier before beginning construction. WHP 9, Inc. v. Centennial Ins. Company, A-1454-06T1 (App. Div. October 23, 2007). Plaintiff’s application for the builder’s risk coverage stated the development’s value when complete as $6 million, without reporting the municipality’s sewer pipe or its cost in any way.
While driving piles for footings, a subcontractor punctured a 36-inch cast iron sewer line that ran beneath the property. The damage was discovered in 2002, and the municipality issued a stop work order in March 2003. Plaintiff’s liability insurer defended plaintiff in the municipality’s damage suit, ultimately settling with the municipality.
Asa a result of the stoppage, Plaintiff incurred lost rental income and other expenses exceeding $3 million. Defendant denied coverage under the builder’s risk policy, maintaining that the sewer pipe was not covered property within the policy’s terms:
Covered property means your property or the property of others for which you are liable, consisting of
a. Buildings or structures as described in this Coverage Form Declarations while under construction, erection, or fabrication, including the cost of foundations and underground property such as pipes, flues, drains, electrical wires, piers, and pilings; and excavation, grading, and filling; if such costs are included in the completed value of the project.
But this does not include existing buildings or structures to which improvements, alterations, repairs or additions are being made.
Plaintiff contended that the sewer pipe was covered as “property of others for which you are liable.” The trial court disagreed, and the Appellate Division affirmed, noting that the sewer pipe was not declared as property under construction, erection or fabrication and that the policy explicitly excluded coverage for “existing . . . structures to which . . . alterations, repairs or additions are being made . . . . “ Finding the policy language to be clear and unambiguous, and within an insured’s reasonable expectations, the appellate court confirmed the trial court’s denial of coverage.
Judge Noel L. Hillman of the United States District Court for the District of New Jersey, sitting in Trenton, recently dismissed a case before her on the grounds that the New Jersey court was an inappropriate place to hear the dispute. The case is First Colonial Insurance Co., et. al, v. Custom Flooring, Inc., et. al., 2007 WL 1651155 (D.N.J. June 4, 2007). The claims in the case involved a flooring project in a building in Minnesota. The general contractor on the job was a New Jersey Corporation named Stone Cor. There was a suit filed in Minnesota over defects in the flooring installation against Stone Cor and its subcontractor Custom Flooring, Inc. This suit was eventually settled, with participation from one of Custom Flooring’s insurance companies, First Colonial. Stone Cor was also an additional insured on a policy issued by Farmer’s Insurance Exchange, which denied coverage in the Minnesota case and declined to provide a defense. The New Jersey action was filed by First Colonial and Stone Cor against Farmers, seeking a declaratory judgment on coverage, e.g. that Farmer’s was obligated to provide a defense to Stone Cor in the Minnesota action, and that it owed a share of the settlement. There was also pending litigation in Illinois, which Stone Cor and First Colonial were parties to, which involved many of the same claims.
In examining the case under the doctrine of forum non conveniens, Judge Hillman saw a case about construction in Minnesota, governed by Illinois law, against Farmers, a California corporation, and where the majority of evidence was located outside New Jersey. Farmers argued that the New Jersey case should be dismissed, because the concurrent Illinois action involved the same parties, the subject matter of the claims and the evidence are all outside New Jersey, and it would be easier for all involved to resolve all the issues in a single alternate forum, in Illinois.
Stone Cor argued that the alternate forum was not an adequate forum, since its claims would be subject to a Statute of Limitations defense there. In fact, Stone Cor had filed a claim against Farmers in Illinois, and had voluntarily withdrawn it, rather than face a motion to dismiss on Statute of Limitations grounds. The New Jersey action was begun shortly thereafter. The Judge found that, other than the fact that Stone Cor was located in New Jersey, nothing else about the case had any connection at all with the state. None of the other parties were citizens fof New Jersey, and none of the events underlying the lawsuit took place in New Jersey. The fact that Stone Cor may not be able to recover on its claims in Illinois was insufficient to avoid dismissal. Stone Cor’s withdrawal of its claims in Illinois suggested forum shopping, and the court was not inclined to reward that behavior. The case was dismissed in favor of the still-pending action in Illinois.
As the real estate market contracts, contractors, subcontractors and suppliers with unpaid balances will need to protect their interests by, among other things, taking advantage of applicable lien laws. In construing New Jersey’s lien laws, definitions of “residential” and “commercial” construction have long been considered by many to be a gray area.
The Bankruptcy Court for the District of New Jersey recently addressed the distinction. It held that agreements with general contractors or developers in which contractors, subcontractors, and suppliers agree to provide work, services, material or equipment to large-scale residential developments are residential construction contracts. In re: Kara Homes, ____ F.Supp. _____ (D.N.J. August 29, 2007).This means that such contractors, subcontractors and suppliers must follow the more complex provisions applicable to residential construction contracts when they wish to secure an unpaid balance with a construction lien.
In New Jersey, the Construction Lien Law (“CLL”) (N.J.S.A. 2A:44A-1 et seq.) distinguishes residential construction contracts from construction contracts that are commercial in nature. The CLL defines a residential construction contract as
any written contract for the construction or improvement to a one- or two-family dwelling, or any portion of a dwelling, which shall include any residential unit in a condominium subject to the provisions of P.L.1969, c. 257 (C.46:8B-1 et seq.), any residential unit in a housing cooperative , any residential unit included in a fee simple townhouse development, any residential unit contained in a horizontal property regime as defined in section 2 of P.L.1963, c. 168 (C. 46:8A-2), and any residential unit contained in a planned unit development as defined in section 3.3 of P.L.1975, c.291 (C. 40:55D-6).
No lien shall attach for work, services, material or equipment provided as part of a residential construction contract unless the provider strictly complies with the requirements of N.J.S.A. 2A:44A-20 and 21, which impose additional requirements for liens filed on residential construction. N.J.S.A. 2A:44A-5c. The Legislature premised the additional requirements for perfecting liens on residential construction on the need to preserve and enhance the State’s economy, promote a stable marketplace in which families can purchase homes with expedience and certainty, allow lending institutions to conduct their business in a stable environment. N.J.S.A. 2A:44A-21a.
The defendants in Kara Homes, which were various contractors and subcontractors of Kara Homes and/or one or more of its affiliated entities, contended that contracts relating to construction of numerous homes within Kara’s developments were not residential construction contracts in that Kara’s construction of homes for resale was commercial in nature and in that the scope of Kara’s developments exceeded the “one- or two-family dwelling” that was the target of the additional lien-filing requirements. Kara Homes and its affiliates argued that, because the developments were residential, their contractors and subcontractors needed to have strictly followed the provisions of N.J.S.A. 2A:44A-20 and 21 for a valid lien claim to have been filed and perfected.
After observing of the few available unpublished cases considering the question “that the issue of whether a large scale construction project is residential or commercial in nature is unsettled and the analysis arbitrary,” the Bankruptcy Court concluded that the literal language of the statute was not dispositive of its intended scope. In light of the legislative purpose articulated in N.J.S.A. 2A:44A-21a, said the court, large scale residential projects must be included among residential construction contracts. Accordingly, contractors, subcontractors and supplier should be careful to observe the additional requirements applicable to residential construction contracts when working on large scale developments.
There are often instances during construction projects where someone, a field superintendent, a manufacturer’s representative, a salesman, a consultant, etc. will “stop by” a job site and “inspect” work that is being done. Sometimes the inspection is needed before the manufacturer issues a warranty, or it may be done by the product distributor as a favor to the installer. These inspections usually do not result in changes or repairs, and often the inspector assures everyone that the installation is just fine. If the inspection is done because it is required by a contract, or otherwise, then obviously a duty to act reasonably is implied. Even in the absence of an obligation to perform such inspections, the law will impose a duty to act reasonably, if one who relies upon the work is harmed. Even if you are doing someone a favor, if you represent that the work was done properly, you could be liable if it turns out you were wrong.
New Jersey law holds that one who gratuitously undertakes to render services to another is bound to act in a reasonable manner, and he can be liable for damages, if he fails to do so. Restatement (Second) of Torts § 323; Velasquez v. Jiminez, 172 N.J. 240 (2002). (Doctor who, although under no obligation to do so, assisted another doctor’s patient, was found liable for his negligence in providing that assistance.) See also Dawson v. Bunker Hill Plaza Associates, 289 N.J. Super 309 at 327 (App. Div. 1996). Additionally, the claimant must have reasonably relied upon the information or services provided. See Viducich v. Greater New York Mutual Insurance Co., 80 N.J. Super. 15, at 24 (1963).
So, for example, if a shingle manufacturer’s representative visits a job site where an authorized roofing contractor is installing his product, he may inspect the installation and verify that the installation is correct. There may even be a document memorializing his conclusion, such as a checklist with his signature. If the homeowner or his representative was aware of the representations of quality (perhaps by the issuance of a warranty) and if the inspections were done improperly, there is a negligence claim against the manufacturer. Where a contractor or a vendor performs a service, whether that is an estimate, an inspection, an evaluation or review of plans, if the job is done negligently, it does not matter if there was a contractual obligation to do the work, or if the defendant even got paid for the service, if damages result, then liability may be found.
A component product’s failure to perform as represented by its manufacturer is a frequent claim in a construction defect cases. Often, defendants of such claims attempt to hide behind general disclaimers and limitations of warranty. Addressing the failure of a component product of yachts, the Federal Court for the New Jersey District recently denied a manufacturer’s summary judgment motion, having concluded that a general disclaimer of warranty will not automatically defeat an express warranty created by representations, descriptions and affirmations set forth in a product bulletin. Viking Yacht Co. v. Composites One LLC, ___ F. Supp.2d ___, 2007 WL 2153243 (D.N.J. July 26, 2007).
Defendant’s distributor sold the plaintiffs, two New Jersey yacht manufacturers, the gel coat used as the outermost surface of the yachts. Gel coat provides an attractive finish while protecting the yacht from water and other materials. Prior to their purchase of gel coat, defendant provided the plaintiffs with its literature for the product, touting its improved flexibility and weather resistance, as compared to a prior gel coat that plaintiffs had purchased from defendant. The literature included a descriptions of the gel coat’s characteristics, a product bulletin, and test data supporting defendant’s claims that the new product was an improvement over the old. Defendant also provided a limited warranty that the gel coat met specifications when shipped as well as a general disclaimer and limitation of warranty, stating that a buyer’s exclusive remedy was replacement of the product or refund of the purchase price.
Plaintiffs conceded that they had not purchased the gel coat based on its improved flexibility. Instead, each tried the new product, hoping that it would demonstrate better “buffback qualities” than the earlier product. Unfortunately, both plaintiffs discovered that the new gel coat cracked extensively on boats that were stored or used in cold weather. Plaintiffs sued defendant, alleging that it new of the gel coat’s inherent problems and failed to disclose them. Defendant replied that it had been unaware that the product was subject to cracking, that the cracking could have been attributable to the plaintiff’s errors in using the gel coat, and that, under the limited warranty, it was not liable for plaintiffs’ damages.
The court disagreed with defendant. Governed by the Uniform Commercial Code, express warranties arise whenever a seller states a fact or makes a promise about the goods becomes part of the basis of the bargain or whenever the seller’s description of the product, specification list, expression of a standard, representation of quality, or provision of a sample or exemplar is a basis of the bargain. A disclaimer of such an express warranty may only be effective if it is “clear and conspicuous,” and written so that “a reasonable person against whom it is to operate ought to have noticed it.” And even if the disclaimer is clear and conspicuous, it will not be found effective to the extent that it is inconsistent with express warranties extended by the seller. Here, the properties of the gel coat were trumpeted on the first page of a flyer while the limitation of warranty was buried within it. Accordingly, the court declined to grant summary judgment to defendant based on its disclaimer and limited warranty.
In an unpublished case addressing a peculiar repair, the Appellate Division recently reiterated one of the basics of common interest ownership: When in doubt, read your documents. Waldstein v. Highview at Hawthorne Ass’n, Inc., A-2281-05T1 (June 12, 2007).
Shortly after purchasing their town home as a resale in 2003, Plaintiffs Jay and Kathleen Waldstein discovered a broken sewer pipe was leaking water and sewage below the concrete slab that formed the lowest floor of their town home. Further investigation revealed that the pipe had ruptured when the slab failed as a result of a construction defect: the interior foundation of the home had never been built. Plaintiffs repaired the sewer pipe and rebuilt the floor slab, then requested reimbursement from the Homeowners’ Association.
After the Association declined payment, the plaintiffs brought a declaratory judgment action, asking the court to determine that the Association was responsible for the cost of the repairs and to award them fees and costs. The trial judge declined to do so, finding that, the Declaration of Covenants and Restrictions applicable to the development included no provision making the Association responsible for such a repair. On appeal, the Appellate Division agreed.
Plaintiffs relied on a provision of the Declaration that reads as follow:
Each townhouse Owner, by acceptance of ownership, agrees and covenants that if his townhouse, including any party walls, shall be fully or partially destroyed by fire or otherwise, the Association shall reconstruct said townhouse expeditiously, pursuant to plans approved by the Board of Trustees. Any such reconstruction shall be subject to all other applicable provisions of this Declaration and applicable governmental regulations.
Plaintiffs also pointed out Declaration provisions requiring the Association and the Owners to carry fire and casualty insurance as well as extended coverage.
The appellate judges rejected Plaintiff’s argument, limiting the Association’s responsibility to reconstruct under the cited provision to situations in which a townhouse is fully or partially destroyed by fire or similar casualty. Because Plaintiff’s repairs were necessitated by defective construction, the Association was not required to repair or reconstruct.
The court also rejected Plaintiff’s alternative argument that the Association was required to reimburse them since it maintained a reserve account for repair, replacement and improvement. Analyzing the Declaration as a whole, the judges concluded that the reserves were explicitly intended to fund repair, replacement and improvement of common property and the exteriors of the townhouses. No provision required the Association to fund the repair and reconstruction of an interior structural flaw in a town home, caused by a construction defect.
Finally, the court rejected Plaintiff’s argument that an easement provision granting the Association the right to enter a town home to repair breaks of leakage in the water, sewer or sprinkler systems that threaten damage to common property obligated the Association to reimburse them, finding that no evidence suggested that the leak below Plaintiff’s town home threatened the common property in any way.
The Waldsteins’ futile attempt to pass their repair bills on the Association is another reminder that no one formula sets forth responsibility for repairs and maintenance in common-interest communities. New Jersey law permits sponsors and developers great flexibility in designing the maintenance provisions of their communities, and the many variations in governing documents reflect factors such as marketing decisions, architectural requirements, and site anomalies, among others. Careful reading and analysis of the governing documents, that is, the Declaration or Master Deed, is always the first step in determining responsibilities for performing and paying for repairs.
In New Jersey, a buyer of a newly constructed home generally can’t move in until the municipality (or other governmental entity) has issued a certificate of occupancy, often referred to as a “C.O.” Issuance of a C.O certifies that the construction to which it relates has been completed in compliance with the construction permit and applicable provisions of the Uniform Construction Code. N.J.S.A. 52:27D-121; N.J.S.A. 52:27D-133. Commentator David Frizell has opined that “[i]t is clear that the Legislature . . . intended the C.O. to be conclusive (except in cases of obvious mistake or fraud) evidence of compliance and the right to occupy.” 36 N.J. Prac., Land Use Law §13.8 (3d ed. 2006-07).
Not surprisingly, builders and contractors frequently assert the municipality’s issuance of a C.O. as an iron-clad defense to a property owner’s allegations of negligent construction. The defense is not a sure winner. New Jersey’s courts do not view C.O.’s as the final word on compliance with the Uniform Construction Code (UCC) when code violations are identified after the C.O. has been issued and the property conveyed from the builder to the property owner.
Court holdings rejecting C.O. finality have twice emerged in cases in which governmental bodies sought to enforce UCC provisions. In DKM Residential Properties Corp. v. Montgomery Tp., 182 N.J. 296, 308-09 (2005), the Supreme Court held that the municipal code enforcement entity could issue notices of violations to the builder/developer even after C.O.’s had been issued and the properties conveyed. And, in Cyktor v. Aspen Manor Condo. Ass’n, 359 N.J. Super. 459, 464 (App. Div. 2003), the Appellate Division recognized the propriety of the Department of Community Affairs bringing a post-C.O., post-conveyance enforcement action against a builder/developer so long as the action was initiated within the ten-year period prescribed by the statute of repose.
Long before, the Appellate Division held that issuance of a certificate of compliance for a new septic system did not preclude the property owner’s action against the vendor when usage revealed that the system did not meet code. Andreychak v. Lent, 257 N.J. Super. 69 (App. Div. 1992).
New Jersey has abolished the doctrine of caveat emptor in real estate sales, imposing an implied warranty of habitability and fitness for use. McDonald v. Mianecki, 159 N.J. Super. 1, 14 (App. Div. 1978), aff’d, 79 N.J. 275 (1979). Imbuing the C.O. with finality on questions of compliance would effectively foreclose buyers’ actions against builders and contractors on any construction maters governed by UCC provisions. That result would be contrary to the recourse against negligent builders that the Court gave home buyers when it abolished the doctrine of caveat emptor in McDonald.
Home improvements can cause homeowners as many, and sometimes more, headaches as building a new home. Until recently, home improvement contractors were essentially unregulated, which led to many unskilled and sometimes dishonest contractors preying upon innocent homeowners. In response, the New Jersey Department of Community Affairs ("DCA") required home improvement contractors to register with the State as of December 31, 2005. N.J.A.C. 13:45A-17.1, et seq. The registration includes the registration of the formal name and address of the company, including all trade names, as well as the disclosure of the name and address of the principals of the company and any criminal record of any of those principals.
The DCA also recently created regulations that were specific to home improvement contracts under the New Jersey Consumer Fraud Act. The regulations take into account almost any type of home improvement, from remodeling the kitchen to repairing the driveway to installing wall-to-wall carpeting. Specific actions are prohibited by the regulations including misrepresenting the types of material used in the home improvement, failing to begin or complete work on the date or within the time period specified, failing to give timely written notice to the buyer of reasons beyond the seller's control for any delay in performance, and when the work will begin or be completed and failing to obtain the proper building permits or inspections.
Also, any home improvement contract for a purchase price in excess of $500.00 must be in writing, must be signed by both the buyer and seller and must clearly set forth the terms of the contract. The legal name and business address of the seller, including the legal name and business address of the sales representative or agent who solicited or negotiated the contract for the seller must also be included in the contract. The contract must also include a description of the work to be done and the principal products and materials to be used or installed in performance of the contract, the total price to be paid by the buyer, the dates or time period on or within which the work is to begin and be completed and a statement of any guarantee or warranty to be provided. Violations of these regulations could result in the award of triple damages and reimbursement of counsel fees, if those violations result in damage to the homeowner.
Therefore, in addition to obtaining several bids for the work, asking for and following up with references, it may also be beneficial to homeowners who are thinking about making improvements to their home to obtain the registration information from the DCA and to make sure that the regulations provided by the DCA are followed to protect themselves from future problems.
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.
In Construction Defect cases, the best and most persuasive evidence we have is often photographs. The more pictures we have to look at, the more pictures we can show the jury, and the better presentation we can make. Many of the photographs we use come from our experts, but an increasing number of cases feature large numbers of photographs taken by the homeowner. As a homeowner, we recommend that you take pictures of your house as often as possible. If you have a digital camera, it is very inexpensive, and your pictures could help prove a claim later on.
If you are building a new house, you should photograph the construction process as often as possible. Try to get a shot of the subcontractor's trucks, if they identify the name of the subcontractor. (You would be amazed how often there are no records of which subcontractors did what on a house) You never know what mistakes may be made and there may be errors that you don't notice, so you should try to document each step of the process. Once your home is finished, a comprehensive photographic record can help you get proper attention from the builder during the warranty period, and/or provide persuasive evidence of problems that the builder has refused or failed to remedy. If you start having water intrusion problems, you should photograph everything - drips, puddles, buckets, towels, stains. If the house is settling too much, photograph the cracks on a periodic basis, such as once or twice a month to see if they are getting bigger, or there are more and more of them over time. If you see any water stains in your attic, take some pictures.
Should any repairs be necessary to your home after the expiration of the warranty period, you should still give the builder notice of any repair work, since the repairs may destroy evidence that could prove useful in later litigation. If the builder has notice of the repairs before they happen, the cannot argue that they were denied a chance to inspect the home in it's pre-repair state. You should to this in writing to the builder, and of course save a copy of the letter. The builder is also obligated to notify all potentially responsible subcontractors, design professionals, and material suppliers of the pending repairs as well. When and if you have to make repairs to your home due to construction deficiencies, document that process as well, including what you or your contractors find when they peel back the siding, or the roof. Pictures can provide solid compelling evidence, and they can be invaluable for refreshing your recollection about conditions or events that may have occurred years prior. If there is little or no cost to you, and a potentially huge advantage later on, snap away!
We get a lot of phone calls from people who are having trouble with their homes. Some of them we can help and some we cannot. There are numerous factors that go into determining if a homeowner has a viable claim against a contractor, and ultimately every claim must be analyzed individually. No one situation is the same as any other, but there are certain things that apply all homeowners: we will summarize a few below:
How old is your home?
New Jersey has a Statute of Repose for Construction Cases. Generally speaking, a homeowner has 10 years from the issuance of a Certificate of Occupancy to make a claim against the builder. After 10 years, you will have an uphill battle to convince a judge that your claim should not be dismissed. Since most builders will offer a warranty of one or two years, we recommend that homeowners pay close attention to any and all issues that may be relevant to their home's long-term performance, specifically that any problems you experience from year 2-8 of the home's life should be carefully examined by a qualified professional, preferably a forensic architect or engineer. If there is any workmanship deficiency, you need to know about it quickly, since you need to file suit before your 10 year time period runs out.
Who built your home?
It is often amazing how few documents are kept by contractors after 6-8 years. Some of the smaller contractors (if they are still in business when problems begin to manifest in the home) often have no records of the subcontractors that they hired to perform the work on your house. A successful litigation strategy means bringing everyone who may have liability into the lawsuit, and to do that, you need to know who to sue. Whether you are building a custom home, a semi-custom tract home, or buying a recently constructed home, ask as many questions as you can about who the subcontractors are. Ask for a list of subcontractors from the builder. Many builders will hand these out to their customers, since they will instruct you to deal with the subcontractors for warranty repairs. Ask for a copy of the contracts, if you can, or take a picture of the pickup trucks with the names painted on the door. If you need to file a lawsuit, you are going to want to know who the various subcontractors were, so you can bring them all in at the beginning of the litigation.
Similar to No. 2 above, you should save everything that relates to your home. Save advertising and brochures that led you to the property. Save the back and forth documents when you were negotiating the purchase. Save the paperwork from when you picked out your options. Save the closing documents. Save any documents you received at the closing, including a "homeowner's manual" or "handbook". Save any paperwork relating to warranty repairs. If you have extra tiles, shingles, buckets of EIFS, you should hang on to these as well. Not only will they come in handy for minor repairs, but they can provide valuable information, should you need to go to court to force contractors to stand behind their work.
Be Attentive and Proactive
A new home should not require any substantial maintenance for many years. However, minor maintenance should not be overlooked. You have to act like a reasonable homeowner to safeguard the value of your investment. You cannot treat your new home like an apartment, where someone else owns the property and will suffer the loss if a lack of routine maintenance leads to problems down the road. If you never clean out your gutters, reseal your driveway, re-caulk your windows, or change the air filter on your HVAC. system, you may have a difficult time convincing the jury that your new home's poor performance is related to something the builder did wrong, and not just a lack of normal maintenance. Read manuals and handbooks that the builder gives you, and follow the recommendations. If you are diligent about maintaining your home, and take an active role in upkeep, you will be able to spot issues as they arise, and hopefully before you have massive and expensive damage to repair.
Be Skeptical of Warranty Work
Builders are in business to make money. We all know this. Unfortunately, we often find that this means that builders will skimp on repairs during the warranty period, often doing a "band-aid" repair that will last another 6-12 months, which coincidentally will get them through the end of the warranty period. With any repairs to the building exterior - roofs, siding, doors, windows, you should be skeptical and vigilant. Many times a spot of sealant is an appropriate roof or window repair, but many times in is not. You may want to consider hiring an independent inspector to advise you on appropriate repairs for your problem, and/or to oversee the work of the builder or his contractor, to make sure the repair is appropriate and adequate. We have often seen major issues which arise during the warranty period covered up by builders, and given a "band-aid" repair, simply because the homeowner did not fully consider the issues, or was too trusting of the builder. Don't be afraid to stand out. The builder has hundreds of thousands of dollars of your money. You should have a house that will perform and last for years.
It is common for contractors working on large-scale construction projects to require their subcontractors to provide a “Certificate of Insurance.” These certificates are commonly issued by insurance brokers and are intended to confirm to the prime contractor that the subcontractor maintains insurance.
In Cvetkovic vs. N.J. Water Supply Authority, a New Jersey Appellate Court has decided, as a matter of first impression in New Jersey, that a certificate of insurance which contains a disclaimer that the certificate was issued “as a matter of information only and confers no rights upon the certificate holder” nor does it “amend, extend or alter the coverage afforded by the policies” does not establish insurance coverage for the contractor receiving the certificate.
The Court confirmed the limited weight these commonly issued certificates should be afforded, due to the expansive disclaimers included on most form certificates.
In practice, a party seeking proof of insurance, in the construction context, or otherwise, should not rely merely upon the certificate of insurance as evidence of insurance coverage. Further, if the contractor seeks coverage under the subcontractor’s policy, the contractor must require an endorsement issued by the insurance carrier showing that the certificate holder has been added to the insurance policy as an additional insured. Without this endorsement, the certificate holder is left largely unprotected, and should not draw comfort from the certificate, which alone can be of little or no value.
Thus, if a party seeks confirmation that its subcontractor has insurance coverage, the party should require an actual copy of the policy with confirmation from the insurance carrier that it is in full force and effect. If the party is seeking liability protection as an additional insured, an endorsement which so provides is required.