Construction Litigation Law Blog

Donald B. Brenner, Shareholder and Chair of Stark & Stark's Construction Litigation group, authored the article Homeowner's Association Standing To Assert Without Joining the Homeowners for the March 24, 2008 edition of the New Jersey Law Journal.

You can read the full article here.

On March 11, 2008, in the matter of Camelot Condominium Association, Inc v. Dryvit Systems, Inc., pending before the Superior Court of New jersey, Docket No. BER-L-012457-04, a jury entered a verdict in favor of the Plaintiff and against Dryvit Systems, Inc ("Dryvit") for violations of the New Jersey Consumer Fraud Act. Dryvit Systems is the largest manufacturer of Exterior Insulation and Finish Systems for residential and commercial construction in the United States.

With settlements the Plaintiff obtained before and during trial from other defendants, the total irecovery for the Plaintiff following the jury verdict was $5,046,000.

The case involved a joint repair project done in 1998 on what was then a 16 year old high rise building clad with roughly 300 panels coated with Dryvit's EIFS. The jury returned a verdict that charged Dryvit with knowledge that the Dryvit EIFS finish coating on the buildng's exterior panels softened when exposed to substantial water penetration. That softening caused cohesive failures at critical caulk joints, which resulted in openings for water to penetrate inside the building and cause catastrophic damage to the framing and sheathing on the building.

The jury found that Dryvit made knowing omissions and affirmative misrepresentations of material fact in connection with the repair of the Exterior Insulation and Finish System (EIFS) on the building located in Hackensack, New Jersey. This is the first time in New Jersey that an EIFS manufacturer has been subjected to a jury verdict for violations of the New Jersey Consumer Fraud Act. There will be no appeal.

John Randy Sawyer and Donald B. Brenner Shareholders of Stark & Stark’s Construction Litigation group represented the Plaintiff in the case.

In an unpublished case, the Appellate Division recently affirmed the trial court’s decision that defendant property owner did not waive the arbitration clause of its AIA construction contract with plaintiff construction company by participating in plaintiff lawsuit for a year before invoking the arbitration clause. Delam Construction Corp. v. 15 Thornton Road, L.L.C., A-0582-06T1 (App. Div., December 10, 2007. After weighing a variety of factors, including plaintiff’s incurring the expenses of litigation, plaintiff’s bringing a lawsuit although it must have known of the arbitration clause, and defendant’s “playing fast and loose” with the court until invoking the arbitration clause on the eve of trial, the court concluded that plaintiff would not be prejudiced by remitting the case to an arbitrator since the discovery accomplished during the pendency of the lawsuit would be useful in the arbitration.

Neither party disputed that $187,368 plus interest remained unpaid to plaintiff following its completion of construction of defendant’s building. The parties had signed an AIA standard construction contract, which required the parties to submit their disputes to arbitration. Nonetheless, plaintiff sued on the contract in May 2005, amending its complaint in October 2005.

In its answer to the amended complaint, filed in December 2005, defendant counterclaimed for damages attributable to construction deficiencies in plaintiff’s work. Nonetheless, in October 2005, in response to plaintiff’s interrogatories, defendant certified that it had retained no experts to offer opinions on the alleged construction deficiencies. The discovery end date was April 24, 2006.

One month later, plaintiff moved for partial summary judgment, citing defendant’s lack of expert testimony regarding the alleged construction difficulties. On June 6, 2006, defendant responded by amending its interrogatory answers to disclose the names of two experts and providing copies of their reports. Plaintiff moved to bar defendant’s experts since they were named after the discovery end date. The motion’s return date was June 28, 2006, the scheduled trial date.

The trial court’s decision emerged from a blur of motion practice. The court heard oral argument on plaintiff’s summary judgment motion on June 23. On June 27, 2006, the court denied the summary judgment motion pending the outcome of the motion to bar defendant’s experts but granted defendant’s motion to set aside plaintiff’s construction lien. Thereafter, defendant withdrew its supplementary interrogatory answers naming its construction experts.

When the parties appeared for trial on June 28, 2006, plaintiff sought to postpone the trial to allow reconsideration of its summary judgment motion in light of defendant’s withdrawal of its experts. The judge adjourned the trial to allow plaintiff to re-file its summary judgment motion and defendant to file whatever new motions it deemed appropriate.

On June 30, plaintiff moved for partial summary judgment. On July 19, defendant retained new counsel. On July 29, defendant cross-moved to, among other things, dismiss plaintiff’s complaint based on the parties’ contractual duty to arbitrate their differences. Defendant certified that it had been unaware that its prior counsel had missed the deadline for naming its expert witnesses.

After hearing oral argument on August 17, the trial judge decided that the matter should be submitted to arbitration even though defendant’s original counsel had pursued the unusual strategy of “neither raising the arbitration clause [nor] presenting any expert reports.” The court order declared that plaintiff’s summary judgment motion was moot, granted defendant’s motion to dismiss plaintiff’s amended complaint, reinstated plaintiff’s construction lien and ordered defendant to file its demand for arbitration by August 31, 2006. Defendant demanded arbitration on August 30, 2006.

Plaintiff appealed, contending that the trial court’s decision caused it undue prejudice. It argued that defendant waived its right to arbitration by participating in the lawsuit, by failing to raise arbitration as an affirmative defense, and by failing to demand arbitration at an earlier date. Defendant responded by citing contractual language requiring the waiver of any right under the contract to be written.

The appellate court acknowledged the trial court’s reliance on Wasserstein v. Guild Contracting Corp., 261 N.J. Super. 277, 290 (App. Div.), certif. denied, 133 N.J. 440 (1993), which recognized a trial judge’s right to refer a case to arbitration at any time before judgment. Nonetheless, the appellate court viewed its task as reconciling two other competing lines of authority. The first line, including cases such as Ohio Casualty Ins. Co. v. Benson, 87 N.J. 191, 199 (1981) and Marchak v. Claridge Commons, Inc., 134 N.J. 275, 281 (1993), favors arbitration as a cheap and speedy alternative to litigation. The other line, including Wein v. Morris, 388 N.J. Super. 640 (App. Div. 2006), certif. granted, 190 N.J. 254 (2007), holds that active and prolonged litigation of disputes will result in the court’s finding that the parties have waived their right to compel arbitration.

The court resolved its dilemma by reference to Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912, 925 (3d Cir. 1992), which recognized prejudice as the relevant factor in determining whether or not the right to arbitration has been waived. Here, said the appellate court, plaintiff was not greatly prejudiced since the knowledge gained during discovery would be useful in the arbitration proceeding. Further, to the extent that any prejudice does result from remitting the parties to arbitration, plaintiff shared the fault by bring the action in derogation of the contract. Accordingly, the appellate court affirmed

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.

After a bench trial, a judge in New Haven, Connecticut ruled that the seller of a house that had obvious, visible mold damage - black mold stains in the utility room and water stained and rotted wood inside - had intentionally concealed the existence of this problem, and was liable to the buyers for the cost to prevent further water intrusion, the cost to repair the damage caused by past water intrusion, and $25,000 for emotional distress. The case is Camerone v. Phillips, 2007 WL 241258, (Conn. Super. Jan. 17, 2007), The award of emotional distress damages was later vacated. Camarone v. Philips, WL 2081330 (Conn. Super. April 17, 2007).

The plaintiffs purchased a home in North Haven, Connecticut from the sellers in 2003. Upon moving in, they immediately noticed severe water seepage in the lower level of the house, and brought suit against the sellers for failing to disclose the problems. Sellers argued that the buyers had hired a home inspector, and relied upon his inspection, and proceeded to closing, despite the fact that the inspection noted several potential trouble spots. The court specifically found that the seller was not truthful, and based its findings largely on discrepancies between the MLS description and the seller’s testimony. For example, the MLS listing described the home as “mint condition” and “like new”. New walls, new carpeting and new paint were highlighted. At trial, however, the seller testified that the items were not all new, in fact some of the items had been installed in 1999. The seller testified that he never saw anything that indicated that the home was subject to water seepage. The court stated in its opinion that it did not believe him.

The court specifically found that the seller could not have been unaware of the serious water problems and resulting mold throughout the house. Carpet which had been installed just before the sale was soaking wet when lifted. There was black mold in the utility closet, obscured by boxes and storage items. Wood support beams were visibly stained and rotted through, in areas where sheet rock was missing from the walls, so the seller could not have missed it. The evidence appears to have been overwhelming that the house was in terrible condition.. The court did not discuss the contents of the home inspector’s report. It appears that the defendant’s deception and untruthfulness was hugely significant and overcame any argument that the home inspector should have noted these deficiencies. The judge specifically found that the seller/defendant’s conduct was “outrageous” and “intentional” and that his actions exceeded “all bounds usually tolerated by decent society.”

The buyer was awarded compensatory damages of $96,282 to compensate for the cost of waterproofing the house, repairing the damage and remediating the mold problem. The court initially awarded $25,000 in damages for emotional distress, but vacated that order four months later when it was pointed out that the Plaintiff had not introduced any evidence of her emotional distress. The court found that it was “unduly swayed” by the photographic evidence, and by the Plaintiffs emotional state when she testified.

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.

On April 26, 2007, the Appellate Division of the Superior Court of New Jersey rendered its decision in the matter of Golomb v. Warwick Condominium Association, Inc., 2007 WL 1215083 (App. Div. 2007) which is instructive for condominium associations. The Warwick Condominium is a 9-story building consisting of 275 units located in Atlantic City. The 50-year-old building suffered severe damage in a storm. As a result, the Board of Trustees of the Condominium Association authorized three special assessments totaling in excess of $2,200,000. Most of this money was used to fix storm damage. The insurance carrier for the Condominium Association disclaimed coverage, arguing that the damages claimed were not caused by the storm.

The Condominium Association filed suit against the insurance company and ultimately obtained an award in excess of $400,000. By the time the Condominium Association received the money in January, 2003, the plaintiffs had already sold their units. Plaintiffs demanded that they be reimbursed from the insurance proceeds for their pro rata share of the special assessments that they had paid in order that the building could be repaired. Plaintiffs relied upon N.J.S.A. 46:8B-24(a), which provides:

Damage to or destruction to any improvements on the condominium property or any part thereof or to a common element or elements or any part thereof covered by insurance required to be maintained by the association shall be repaired and restored by the association using the proceeds of any such insurance. The unit owners directly affected shall be assessed on an equitable basis for any deficiency and shall share in any excess.

The trial judge found that the statute was unambiguous. Based upon the plain meaning of the statute, the By-Laws of the Association and the Master Deed, the court found that the insurance proceeds were “solely the cost of damage caused by the storm, and since costs for that damage [were] fully covered by the assessments, the monies awarded in the underlying trial are properly identified as excess.” That being the case, the trial judge found that the plaintiffs were entitled to be reimbursed for their pro rata share of the special assessments they had paid prior to selling their units.

On appeal, the Condominium Association challenged the claim of the plaintiffs that they were “unit owners directly affected” within the meaning of N.J.S.A. 46:8B-24(a). The Appellate Division reasoned that:

It is hard to understand how the unit owners actually paying, by way of assessment, for repairs to the building that were ultimately found to be the responsibility of an insurer could not be considered “directly affected.” Those owners paid for the repairs; they are surely directly affected by the damage to the condominium property for which insurance is in place.

Having reached that conclusion, the Appellate Division next stated that it could not imagine
“how the proceeds, no longer needed to repair the damage by virtue of the previous assessment, cannot be ‘excess’ proceeds.”

In explaining its reasoning, the Appellate Division stated as follows:

Owners paying for repairs should not be prejudiced because an insurance carrier wrongfully denies coverage. Had the proceeds been paid promptly, plaintiffs would not have paid at least some of the assessment. They should not be in a worse position because of the delay in receipt of those insurance proceeds. Indeed, if the assessment is viewed as a loan pending receipt of the insurance proceeds, the obligation of [the Association] is clear.

The Condominium Association further argued that its fiduciary duty to unit owners did not extend to those unit owners who had already sold their units at the time the insurance proceeds were collected. The Appellate Division rejected this argument noting that “the sale of the plaintiffs’ units, under these circumstances, does not discharge that duty with respect to the insurance proceeds.”

In short, the Appellate Division felt that it would be unfair to the owners of condominium units who had sold their units before the insurance proceeds had been received, but who had paid their pro rata share of special assessments, for the current owners of those condominium units to receive the benefit of those insurance proceeds. In the opinion of the Appellate Division, this would “allow a windfall to those [current] owners because they would receive both the benefit of repairs funded by others and funds intended to pay for those repairs that may now be used for other purposes.”

Interestingly, the Appellate Division noted that if the Condominium Association had provided in its Master Deed or By-Laws that insurance proceeds need not be used to repair a covered loss, it might have ruled otherwise. In the absence of such a provision, the Appellate Division affirmed the judgment of the trial court in determining that the Condominium Association “could not appropriate the insurance proceeds for purposes other than reimbursing those who had funded the repair of the covered losses by way of assessment.”

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.

John Randy Sawyer, Shareholder and member of Stark & Stark's Construction Litigation group, was quoted in the artilce Alert: Contractors on hook to condo boards, in the June 11, 2007 edition of the New Jersey Lawyer.

You can read the full article here.

The Appellate Division issued a decision today in PORT LIBERTE HOMEOWNERS ASSOCIATION, INC., et. al. v. SORDONI CONSTRUCTION COMPANY, et. al., which has be approved for publication.

The Plaintiffs in the PORT LIBERTE matter, the Port Liberte Homeowners Association, Inc. and the Port Liberte Condominium Association I, Inc., originally filed suit in June of 1992, in connection with various construction deficiencies at the Port Liberte Development located in Jersey City, New Jersey. The construction deficiencies included defects in the Exterior Insulation and Finish System ("EIFS") installed as the exterior cladding on the buildings at Port Liberte. The EIFS products were manufactured by Defendant Dryvit Systems, Inc. (“Dryvit”). After approximately eleven years of litigation and eight years of non-binding arbitration, the Plaintiffs settled with all Defendants except Dryvit.

The Plaintiffs’ claims against Dryvit include allegations that Dryvit committed common law fraud and violations of the New Jersey Consumer Fraud Act through misrepresentations and omissions of material fact about its EIFS products during Dryvit’s interaction with the original Developer of Port Liberte, Port Liberte Partners, when that entity was selecting what EIFS products to use in constructing the Port Liberte Development.

Dryvit was granted summary judgment by the trial court in September of 2003. The trial court dismissed the Plaintiffs’ fraud and consumer fraud claims because it found that the Plaintiff Associations had no standing to assert such claims against Dryvit. The trial court reasoned that since Dryvit’s alleged misrepresentations and omissions about its EIFS products were made to Port Liberte Partners when it was choosing what products to use to construct the development, which was at a point in time when the Associations that would eventually govern the common property of the development had not yet been created as legal entities, then the Associations could not have standing to assert claims based on those misrepresentations and omissions by Dryvit to Port Liberte Partners.

The Plaintiffs appealed the trial court’s decision on January 5, 2005. They were represented by E. Richard Kennedy, Esquire and Dennis Drasco, Esquire. The Community Association Institute (“CAI”) was granted leave to appear as amicus curiae by the Appellate Division on July 6, 2005. The Appellate Court allowed CAI to be heard on the appeal due to the significant effect the trial court’s decision would have on the rights of community associations throughout New Jersey. Stark & Stark Construction Litigation Shareholder John Randy Sawyer, Esquire filed the brief and argued the cause for amicus curiae CAI.

The Appellate Division held that under New Jersey’s legislative scheme for community developments, a condominium association is the intended beneficiary of a developer’s actions in developing a community project. Any subcontractor or product manufacturer, the Court reasoned, that enters into a contract with a developer or supplies it products for use in construction of the common elements of such a project “after the developer registers the condominium with the [Department of Community Affairs], pursuant to the Planned Real Estate Development Full Discosure Act, N.J.S.A. 45:22A- 21 to -56 (PREDFDA), specifically N.J.S.A. 45:22A-26, is on constructive notice that representations made to, and omissions withheld from, the developer will be deemed as if they were made to, or withheld from, the association, once the association assumes control of the condominium.” The Court went on to hold that a condominium association has standing to assert claims for common law fraud and consumer fraud against third-party contractors and material suppliers for defects in the construction of the common elements of the development, “regardless of whether the association formally existed at that particular point in time.”

The Appellate Division adopted the arguments made by Plaintiffs and amicus curiae CAI in its determination that a condominium association essentially “stands in the shoes” of the developer and is the intended beneficiary of all of the developer's actions in connection with the common elements, including all of its interactions with contractors, subcontractors and material suppliers during the construction phase of the development. The Plaintiffs and amicus curiae CAI argued that, under PREDFDA and the New Jersey Condominium Act, a developer of a community project is required to register the project with the Department of Community Affairs and incorporate an Association that will be responsible for the maintenance and control of the development’s common elements. The legislative scheme, however, also requires the developer to control the Association until a certain number of units within the development have been sold, at which time control of the Association is turned over to the independent unit owners who decided to live within the development. That process, called transition, often does not occur until well after construction of the development is under way and all decisions regarding what contractors to use for the work and what material suppliers to purchase from have already been made by the developer. The Appellate Court agreed with Plaintiffs and amicus curiae CAI that preventing community associations from having standing to assert claims against product suppliers like Dryvit, simply because the suppliers only made misrepresentations or omissions to the developer prior to creation of the Association or prior to transition, would produce an “unjust result and is contrary to the legislative scheme permitting a condominium homeowners association to institute suit to recover damages to the common elements. N.J.S.A. 46:8B-14, -15(a), and -16(a).”

The dismissal of Plaintiffs' common law fraud and consumer fraud act claims was reversed and remanded to the trial court for further proceedings.

John Randy Sawyer is available to discuss the arguments made to the Court by amicus curiae CAI and the impact the Court's decision will have on community associations pursuing construction defect claims against developers, product manufacturers, contractors and sub-contractors.

He can be reached directly at 609.895.7349 or by email at rsawyer@stark-stark.com.

In a recent case, St. Louis, L.L.C. v. Final Touch Glass and Mirror, Inc., 386 N.J. Super 177, 899 A.2d 1018 (App. Div. 2006), the Appellate Division of the New Jersey Superior Court found that appropriate compensation for defective construction was the disunion in value of the home, and an acceptable way of valuing that disunion is to look at the cost to repair the defects.

A husband and wife bought 48 acres of land in Franklin Township, New Jersey. They hired an architect to design a two-story, 36,000 square foot house with all of the exterior walls made of glass. The house was built on the property at a cost of $8.5 million. Id. at 179. The homeowner served as his own General Contractor, and he hired defendant Final Touch to install the glass panels that would make up the walls. There were numerous roof drains, vent pipes and other utilities, and these were all designed to be contained within vertical steel columns which also supported the house. Id. The glass panels were to be attached to the steel columns with screws. When Final Touch attached the panels, it punctured nearly all of the pipes contained within the columns. Id. at 180. These pipes then leaked water into the house every time it rained. Id. at 183. Due to these defects, the plaintiffs could not live in the house, and ultimately sold it during the litigation. The house was listed at $18 million, but after more than a year, it was ultimately sold for $2.5 million, largely due to the existence of construction defects. Id. at 184-185.

At trial, Final Touch offered expert testimony that the house was only worth $2.8 million, primarily because it was too big, and the local market would not support a more expensive house. Plaintiff obtained a jury verdict it its favor of $737,000. Id. at 191. Final Touch appealed, arguing that Plaintiffs had not established damages.

The Court of Appeals strongly disagreed with Final Touch. The analysis started with the observation that, generally, compensatory damages (in a breach of contract case) are supposed to put the injured party in as good a position as he would have been if performance were rendered as promised. Id. at 188. (citing 525 Main St. Corp. v. Eagle Roofing Co., 34 N.J. 251 (1961)) Specific rules or formulae are subordinate to this broad purpose. The general rule with respect to building contracts is that the owner may recover the costs of completion, or the costs of making necessary repairs. Id. The determination of whether to use cost of repair or diminution in value as a measure of damages depends on “good sense rather than a mechanical application of a single formula.” Id. The Court stated that “generally, either diminution in the value of the property, or the reasonable cost of restoring or repairing the damage may be appropriate. The Court held that Final Touch’s position that the plaintiff could only be compensated if he proved a diminution in value is incorrect. Cost of repair is also an appropriate measure of damages. Id. at 190.

This is a useful decision, since in many cases it is difficult to determine if a home has decreased in value due to construction defects. In a hot real estate market, many buyers simply overlook what they see at the time as “minor” defects, or they negotiate a nominal redaction in the purchase price, which usually has very little to do with the actual cost to repair the defects. Also, many pieces of real property are difficult to value, therefore diminution is difficult to prove. For example, common areas of a condominium project may be the property of the unit owners, but there is no way to do a real estate appraisal on that property, since there is no market for it. Allowing proof of damages to include cost to repair is the only sensible and fair way to ensure that injured parties, be they homeowners or condominium associations, get compensated properly and fairly for their damages.

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.

The New Jersey Appellate Division recently upheld an award of $105,000 by a Burlington County jury against a contractor hired to perform improvements on the Plaintiff's home. in Carboni v. Massimo, BUR-L-0369-04, the jury found in favor of the Plaintiffs on a consumer fraud claim against a contractor they paid almost $35,000 to make improvements to their home. The jury found that the contractor had improperly used metal connectors, had inserted nails that were not engaged in the wood, had impermissibly cut prefabricated framing connectors and that he committed additional building code violations. Moreover, the contractor attempted to deceive the Plaintiffs by covering up the improper work with Sheetrock. The jury awarded the full amount of the damages, which was trebled by the trial court pursuant to the New Jersey Consumer Fraud Act. The Appellate Division rejected the Defendant's argument that the Consumer Fraud Act did not apply because the Plaintiffs acted as their own general contractor and upheld the jury's determination.