Construction Litigation Law Blog

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.

In a recent unpublished decision under New Jersey’s Consumer Fraud Act, the Appellate Division in D. Wyatt Stone and Stone Foundation, LLC v. Kahr Properties, LLC, December 2008 App. Div. 09-2-2471), decided the appeal of a judgment in the Plaintiff’s favor for damages, attorneys' fees and costs arising from a home improvement project. The Plaintiff was a limited liability company engaged in the business of buying, renovating and reselling residential properties. The Defendant was a family-owned company whom the Plaintiff contracted with to renovate a residential property. The project met with delays, shoddy workmanship and overcharges, which prompted suit by the Plaintiff under the Consumer Fraud Act. The Defendant appealed the judgment in Plaintiff’s favor by arguing that the Consumer Fraud Act was not intended to apply to a corporate entity such as the Plaintiff that is engaged in the business of buying, renovating and reselling residential properties. The Appellate Division disagreed, finding that the Consumer Fraud Act applied to the transaction between the parties, based upon testimony from the Defendants that established they were involved in the sale or advertisement of home improvement services, either directly or indirectly to the public, and finding that the Act was meant to protect both business entities like the Plaintiff as well as individual consumers.

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.

The New Jersey Appellate Division ruled this month in two companion cases, New Jersey Shore Builders Association v. Township of Jackson, A-5805-06 (June 23, 2008) and Builders’ League of South Jersey v. Egg Harbor Township, A-1563-07 (June 23, 2008), that municipalities cannot require as a condition of approval that builders and developers provide on-site recreation areas or facilities, or common open space, outside the context of planned unit developments. The Court also held that municipalities cannot require payment of monies to built such facilities off-site in lieu of providing them on-site. The Court found that ordinances requiring such conditions of development approvals were not authorized under the Municipal Land Use Law (MLUL). Through this ruling, the Court has ended a longstanding practice of municipalities to exact these types of conditions from developers, and, for developers who have in the past been made to remit payments in lieu of providing on-site recreation areas, facilities, or common open space, the decision may open a floodgate of demands for reimbursement of those payments.

Ordinances in two municipalities, Egg Harbor Township, Atlantic County and Jackson Township, Ocean County, were the subject of the attack. Both ordinances compelled developers seeking approvals to set aside a certain amount of acreage on-site for use as public open space and/or recreational facilities such as tot lots, tennis and basketball courts, and baseball, soccer and football playing fields. Both townships’ ordinances also provided for payments in lieu of providing those facilities on-site for use in constructing such facilities off-site.

The Appellate Division found that both ordinances were not permitted under the MLUL did not permit the recreational open space exactions required by the ordinances. The Court rejected the Townships’ arguments that the MLUL should be read expansively to implicitly authorize the imposition of open space and recreation exactions. The Court held instead that the MLUL contains explicit language specifically limiting municipalities’ powers in that regard. The Appellate Court held that while providing public open space and recreation facilities is an important goal of New Jersey land use law under the MLUL, it is a goal that can only be accomplished within the strict and specific limits of the MLUL. Municipalities cannot require developers to provide common open space and recreation facilities on-site as a condition of development approval, or require payments in lieu thereof, outside the context of planned unit developments.

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.

The New Jersey Supreme Court Appellate Division recently upheld a judgment against a stucco/masonry contractor under the New Jersey Consumer Fraud Act in Briggs v. Luisi, et al.. The case involved allegations by the owners of a single family home that the stucco/masonry contractor negligently performed repair work on the exterior of the house and on cracks in the home's foundation, and that the contractor violated the Consumer Fraud Act through affirmative misrepresentations and knowing omissions in connection with a five year warranty issued covering the work.

After performing only a portion of the scope of work he was retained to complete, the contractor gave the homeowner a guarantee on the exterior stucco surface and the foundation of the entire house against cracks and defects for a period of five years. In discovery, however, the contractor admitted that he did not complete all of the work that was described in the warranty. He also acknowledged that the plaintiff and the plaintiff's lending institution relied on the warranty. Based on this evidence, the Appellate Court affirmed the $89,485 judgment against the contractor and in favor of plaintiff, as well as affirming the jury verdict apportioning twenty percent of the total damages against the contractor as attributable to the contractor's violation of the Consumer Fraud Act, which portion was then trebled by the Court and was the basis for an award of counsel fees.

On June 26, 2007, the Supreme Court of New Jersey held that the statute of repose begins to run on the date upon which the contractor or design professional has completed his or her portion of the work, In Daidone v. Nuterick Bulkheading, et al., Docket No. A-60, 2007 N.J Lexis 706, the plaintiffs had hired an architect to design their new home. The plans were completed in June 1993 and the architect had no further involvement in the project.

Beginning in 1999, settlement of the home caused problems with several pipes and an electrical panel. The plaintiffs nevertheless waited until mid-July 2002 to complete repairs and until June 2004 before suing the architect. Thus, although they were within 10 years from completion of the home and the date of issuance of a c/o, they were more than 10 years past the date when the architect had completed its work. The Supreme Court of New Jersey held that "this led to but one conclusion: as a matter of law, plaintiffs causes of action against [the architects] relating to design and construction defects are deemed never to have arisen. " the court rejected the plaintiffs' argument that it was against public policy to require plaintiffs to make individualized determinations as to when a designer or contractor has completed performance because such a requirement is unduly burdensome.

In a unanimous vote of 26-0, Oregon State Senators, led by Senator Jackie Winters (R-Salem), voted to ban the use of synthetic stucco on Oregon homes. This decision came after Senator Winters told the story of an 11-year old Salem resident, Whitney McClain, who is currently being treated for multiple brain tumors after a mold outbreak in her home. The girl is Senator Winters’ granddaughter, and just one of many sufferers of several diseases (including brain tumors, pneumonia and bronchitis) caused by mold infestations in their homes.

After the unanimous vote by the Senate, the bill was sent to the House of Representatives. Representative Paul Holvey (D-Eugene), led an initiative to deny the bill, until it also includes banning stucco on commercial buildings. While this would increase the safety for the residents of Oregon, many feel the ban on commercial properties is not necessary. A conference committee was assigned to reconcile House and Senate approaches in HB 2112-B.

While the bill is still awaiting final approval, the Oregon senators hope this vote will ensure that other families will not have to endure the devastating side effects of insufficient Exterior Insulation and Finish Systems (EFIS), like the McClain family had to.

You can read more on the bill, and the McClain's story here.

The New Jersey Legislature has recently enacted a new Act called the “Prompt Payment Act.” The Act entitles all contractors, subcontractors, sub-subcontractors and product suppliers to prompt payment on all public and private projects. By its terms, the Act is only applicable to contracts entered into after September 1, 2006.

The Act requires a project owner to pay a contractor not later than thirty (30) days from the date the contractor’s bill is received. The Act applies only when the bill has been “approved and certified.” However, the Act states that a bill will be deemed “approved and certified” if twenty (20) days after the owner receives it, the owner has not objected to the bill, in writing, and specified the amount objected to and the reasons for the objection. The Act has different procedures, however, for certain public entities that have approval mechanisms for payment of contractors on public projects. Subcontractors, sub-subcontractors, and suppliers are entitled to receive payment from contractors they are under contract with or supplied material to within ten (10) days of the contractor’s or subcontractor’s receipt of periodic payments from the owner, unless otherwise agreed to in writing.

The Act also provides for payment of interest on unpaid amounts at prime plus one (1%) percent in the event payment is not made within the time period provided by the Act. In addition, the Act allows a contractor, subcontractor and sub-subcontractor to suspend work upon seven (7) days written notice if; a) the unpaid party is not provided a statement of the amount withheld and the reason for the withholding, and b) the payor is not engaged in a good faith effort to resolve the reason for the withholding of payment.

The Act provides that a party who sues under the Act and wins is entitled to an award of statutory costs and attorneys fees for bringing the action.

If you have any questions about how the Prompt Payment Act may affect your contracts or work, please contact John Randy Sawyer, Esquire.

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.

Contract purchasers of homes in the six Kara Homes developments auctioned recently reportedly have lost hundreds of thousands of dollars in deposit monies, according to reports in yesterday’s and today’s Asbury Park Press. The federal bankruptcy court’s approval of the sale of the six developments recently auctioned to other developers cancelled the contracts of those purchasers who had not closed on uncompleted homes when Kara went under. These purchasers must now stand in line as unsecured creditors who are entitled to repayment only if any funds remain after Kara’s secured creditors have been paid. Their hope of recovery is slim.

Apparently, Kara’s sales contracts provided that purchasers could bond their deposits for an additional fee but many purchasers failed to purchase such extra protection. One purchaser quoted in the Press’s report lost a deposit of $135,000. If this is a typical amount lost, the purchasers’ apparently large-scale failure to bond their deposits is remarkable.

In New Jersey, the deposits of purchasers of units in common interest communities subject to the Planned Real Estate Development Full Disclosure Act (“PREDFDA”) (N.J.S.A. 45:22A-21 to 56) are entitled to the protection of a separate escrow account or bonding as a condition of registration. The regulations provide that the Public Offering Statement must include:

A statement that all monies paid to the developer prior to closing will be held in a separate trust account and the name and location of the institution where the trust account is maintained and the name and address of any trust or escrow agent, until closing or termination of the contract or until a bond or other guarantee acceptable to the Agency [the Department of Community Affairs] is provided.

N.J.A.C. 5:26-4.2(a) 14.

Accordingly, in New Jersey, the deposits for home purchases in common interest developments should be protected through escrow or bonding.

The web is burning with posts demonizing Kara Homes and its lenders. No one appears to be focusing on the cautionary lesson for new home buyers, especially those purchasing new construction outside of common interest communities. Real estate is a cyclical business, and developers can and do encounter financial difficulties. Home buyers, and their financial and legal advisors, should be certain that the contract of sale provides protection for the buyer’s deposit.

Construction Code Officials are generally hard working individuals who protect the safety of the residents of the State of New Jersey. However, there are some officials who are unable or unwilling to do their job properly and to ensure compliance with the building code by builders and contractors across the state. Part of the problem stems from fragmentation of the employment process of these individuals. The Department of Community Affairs is in charge of licensing, evaluating and hiring construction officials and subcode officials, but has very little contact with those officials after they are employed. On the other hand, the Municipalities in which the code officials work can only regulate the number of weekly hours an official must work. Despite the fact that the Municipalities work closely with the officials and are better situated to judge a code official=s performance, they are presently unable to discipline or terminate the code official.

However, Assemblymen Peter Biondi, Vincent Prieto and Jerry Green have proposed an amendment to the "State Uniform Construction Code Act" which would give the municipality the power to supervise individual code enforcement officials, and to take disciplinary actions against officials when they fail to carry out their official duties, including terminating the code enforcement official. Senate Bill, No. 149 (2006). The proposed legislation allows a municipality to institute disciplinary action when the code official=s conduct violates any municipal ordinance, when the code official violates conflict of interest rules or when the code official exhibits misconduct in the performance of his or her duties. This may provide residents of New Jersey with a more qualified, better equipped group of code officials who are more likely to observe and correct code violations, which may lead to better construction practices overall.

This is part 5 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1, 2, 3 & 4 here.

Section 87, subsection (e)

Subsection (e) of UCIOA’s Section 87 is further evidence of the vague wording throughout the bill and the hastened procedure created to attempt to deal with what are ordinarily complex issues. Subsection (e) provides:

§87(e) - Within 30 days of receipt of the settlement offer, the association shall notify the declarant of two business dates during the 45-day period following the date of the association's notice, the first of which will not be earlier than 10 days following the date of the association's notice, on which a majority of the executive board will be prepared to meet with the declarant to discuss the association's claims and the settlement offer. The association and the declarant may be represented at the meeting by attorneys and independent consultants.

The first sentence of subsection subsection (e) is poorly worded. This language appears to require the Association to provide two meeting dates within 45 days of its original notice to the developer of the defect claim, which would of course be absurd because by the time the developer’s settlement offer comes, those 45 days would likely have passed.

Also worth noting is that, by the time subsection (e) comes into play, the 180 day tolling period for the applicable statutes of limitation provided under subsection (b) will have run. The timing in subsection (e) above when added to time periods in other subsections will erase the 180 day tolling period. That means that the statutes of limitations on the Associations’ claims will begin to run before the arbitration process required in Section 87 makes any real headway.

In addition, the timing of the procedure up to this point in Section 87 makes no practical sense. Those experienced in construction defect litigation in community properties know that many if not most construction deficiencies in a condominium project develop slowly over a few years and do not become visible until several freeze/thaw cycles have occurred from the changing seasons have taken place. UCIOA’s procedure do not allow sufficient time for the Association to identify all of its claims before requiring negotiation between the Association and the Sponsor/Developer.

This is part 4 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1, 2 and 3 here.

Section 87, subsection (d)

Subsection (d) of UCIOA’s Section 87 is quite troubling. This section requires the developer to submit a written statement setting forth its proposed settlement of the Association’s construction defect claim to the Association within 60 days of the completion of its investigation into the Association’s claims as provided under subsection (c):

§87(d) - Within 60 days after completion of its inspections and testing, the declarant shall submit a written statement to the association setting forth declarant's proposed settlement of the claim, which shall be referred to as the "settlement offer." If the declarant does not deliver the settlement offer within the 60-day period, the association may institute an action without satisfying any other condition of this section.

In addition, it is extremely troubling that the statute makes no effort to include the Sponsor/Developer’s insurance carriers in the settlement process. Given that most Sponsor/Developers are shell companies with no assets that are set up only to handle the specific project in question, a settlement offer from a Sponsor/Developer without support from its insurance carriers is in our experience often meaningless. UCIOA should mandate the involvement of the insurance carriers at the outset of the alternative dispute procedure, since in our opinion this is the only real way of giving the settlement process any hope of succeeding.

Another problem that becomes more clear here is the 180 day tolling of the statute of limitations under subsection (b) of Section 87, discussed in my previous blog post. Under subsections (c) and (d) combined, the developer has had 60 days from the date of its reply to the Association’s notice of a defect claim to conduct its investigation, and then another 60 days from the completion of its investigation to issue a settlement proposal. That is a total of 120 days of the 180 day tolling period already gone.

This is part 3 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1 and 2 here.

Section 87, subsection (c)

Subsection (c) of Section 87 of UCIOA gives the Sponsor the right to conduct inspections and destructive testing in connection with any claimed construction defect in the community. The language of this subsection, quoted in full below, has a number of glaring problems:

§87(c) - Upon receipt of the declarant's reply, the association shall, to the extent practicable, make available for inspection and testing by declarant or its agents, all common areas, interiors of applicable individual units and the documents identified in the notice. All inspections and testing, including testing that may cause physical damage to the subject property, shall be at declarant's sole cost and expense, shall be performed during the business week unless the association and declarant agree otherwise, and shall be completed within 60 days from the date of the declarant's reply. The declarant may conduct destructive testing if the association has conducted prior destructive testing related to the defects specified in the association's notice or the parties mutually agree to destructive testing. "Destructive testing" shall mean any act causing substantial physical change in the condition of the premises which would necessitate a repair to restore the premises to the condition that existed prior to the testing. The testing shall be performed to determine the existence, type, extent, or cause of a defect in the design or construction of the development. Acts of repair or maintenance by the association shall not constitute destructive testing. Upon completion of any testing, declarant shall restore the property to the condition that existed immediately prior to the testing.

Problem #1 – The language of subsection (c) is vague - “the association shall, to the extent practicable, make available for inspection and testing by declarant or its agents, all common areas, interiors of applicable individual units and the documents identified in the notice.”

This portion of the provision is sure to cause significant litigation as to its meaning. What exactly does the phrase “to the extent practicable” mean? An Association, despite making every possible effort to allow the developer to inspect those parts of the Association’s property that are the subject of its claims, could find itself being dragged into Court by the Developer for allegedly not making the property available “to the extent practicable.” This could result in costs to the Association that will waste valuable resources.

Problem #2 – Subsection (c) potentially allows the destruction of evidence - “The declarant may conduct destructive testing if the association has conducted prior destructive testing related to the defects specified in the association's notice or the parties mutually agree to destructive testing.”

This language discusses “destructive testing.” Subsection (c), however, completely ignores the effects, if any, of the doctrine of spoliation of evidence. The doctrine of spoliation of evidence generally provides that a party seeking to assert claims against another party cannot destroy or alter the evidence supporting the claim before giving all potentially responsible parties an opportunity to inspect the evidence in order to defend themselves against the claims. Here, the developer is given permission to conduct destructive testing, however there is no provision requiring the developer to place the subcontractors, manufacturers and design professionals it used to build the project on notice of the testing. At this stage, the developer would know the identities of those parties and the Association, more likely than not, would not have that information. Under these procedures, the Association runs the risk of a defense being asserted in later litigation by these parties who will argue that the developer destroyed evidence when it conducted invasive testing, but did not place them on notice so that they could preserve evidence in advance of that testing to defend their interests.

Another major problem arising from the “destructive testing” allowed by the statute is that there is no requirement that the developer place its insurance carrier on notice of the testing activities. In fact, there is no requirement anywhere in the statute that the developer place its insurance carrier on notice of the Association’s claims at all. The same holds true of the developer’s subcontractors’, manufacturers’ or design professionals’ insurance carriers - there is no requirement that the developer place them on notice of any claims or testing either. The developer will have likely been named as an additional insured on some of these parties’ insurance policies. The developer, therefore, will know who the applicable insurance carriers are for the project. If these carriers are not given proper notice, they will likely later disclaim coverage under their policy language, arguing that the developer and the named insureds, such as the developer’s subcontractors, violated the notice requirements of the policy, which typically require that the insured put the carrier on notice of any known claims immediately or within a short time period such as 90 days.

Problem #3 – More vague language - “Upon completion of any testing, declarant shall restore the property to the condition that existed immediately prior to the testing.”

This language is sure to result in significant litigation. Anyone in the construction defect litigation field will admit, and in fact common sense dictates, that once an existing condition on a condominium structure is disturbed, be it the roof, the windows, the siding, etc., it is impossible to restore that part of the structure “to the condition that existed immediately prior to the testing.” This language does nothing more than give the unit owners in a condominium who are unhappy with the appearance of repairs to test cuts and other invasive testing that is necessary for litigation purposes a weapon to pester the Association with demands and even lawsuits over whether the Association failed to ensure that the developer properly repaired invasive testing “to the condition that existed immediately prior to the testing.”

Problem #4 - The Association has no control over repairs by the developer. The language of Subsection (c) of Section 87 provides that the developer must “repair” any invasive testing it conducts. However, the statute gives no control whatsoever to the Association as to what those repairs should be, whether those repairs are sufficient or, once performed, whether the repairs were adequate. The statute provides the Association with no avenue of redress in the event that the developer’s repair is poorly done, or for that matter not done at all.

Problem #5 – More vague language - “Acts of repair or maintenance by the association shall not constitute destructive testing.”

This language of subsection (c) to the extent it talks about “acts of repair or maintenance by the association” is undefined and unclear. What acts would constitute repair or maintenance under this language? What if repairs were necessary to a roof in a condominium and the Association, to ensure the maintenance was done properly, decided to have an expert present to observe the repairs? Does that convert the repairs to destructive testing? What if the expert happens to observe something during the repair that informs the Association of a claim against the Sponsor for the first time. Is the evidence not usable? It is clear that this language will also engender disputes and considerable litigation to flesh out its meaning, litigation that will result in considerable financial burdens to community associations.

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

Section 87, subsection (b)

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

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

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

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

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

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

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

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

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

Read more here.

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

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

Section 87, intro paragraph

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

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

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

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

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

During the time the developer controls the board, it can force a transition and obtain a release through creation and manipulation of a transition committee. The developer can force that committee to do a construction study within only 120 days at the association's expense. It is our view that a comprehensive transition study cannot be done within 120 days since defects and deficiencies often do not surface until after water has had several years to work its way into or out of walls or substrates and often it takes several freeze and thaw cycles for problems to appear. Nevertheless, a release can actually be signed by this transition committee which is arguably binding on the association, before the association is even controlled by the unitowners. The developer can force this committee into mediation with the AAA, and then arguably force the association into more "non-binding" arbitration as described above. As noted above, if the non- binding arbitration is unsuccessful, the association is back to the owner- approval of litigation again. All of these costs are borne by the non-developer owners.

The proposed Uniform Common Interest Ownership Act (UCIOA) statute contains restrictions on any community association that wants to be able to sue a developer for construction defects and will have a devastating impact on our construction litigation practice.

On February 23, 2006 the Uniform Common Interest Ownership Act (UCIOA) was voted out of The Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. The bill will now go to the Senate for its consideration.

While the Bill was intended, in part, as a measure that would be helpful to owners of units in condominiums, cooperatives and single family home communities governed by a homeowner's association, the Bill imposes preconditions on community associations needing to bring suit for construction and design deficiencies. In pertinent part, before any association can start an action for construction defects, the association has to provide written notice to the developer of its causes of action. The developer has 30 days to investigate, and 60 days to test to see if it agrees with the association's description of the nature and cause of the deficiency. 60 days after the testing, the developer must provide a settlement offer. Within 30 days, the association has to provide at least 2 dates for a meeting. If there is no settlement, either party can demand arbitration; however, the arbitration is "non-binding". Either party can cut off the arbitration at any time or prolong it (even if it intends to reject the results of the arbitration after forcing the other side to spend tens or hundreds of thousands of dollars on expert fees and counsel fees). The Association still cannot sue unless half of its members vote in favor at a meeting, with a 33% quorum-- unless a lower amount is authorized in the by-laws (which is not typically the case) and unless each owner (even in a 500 unit condominium) gets, via mail, at the Association's cost, a copy of: (1) a statement of claims and defects; (2) the developer's settlement offer; (3) the arbitrator's findings (if any); (4) a statement that the suit may not recover enough money; (5) a statement of the estimated litigation costs; (6) a copy of the lawyer's fee agreement; (7) and anything else the Association thinks is important.