Alerts and Updates

Recent Developments in New Jersey Construction Law

August 9, 2007

Three recent decisions handed down by New Jersey courts are of significance to the construction industry. Two cases relate to questions of liability arising out of defective work, particularly how the courts determine when the Statute of Repose commences, and the extent to which contractors can be found liable for representations regarding materials incorporated into condominium projects. The third deals with bidding requirements for public projects.

New Jersey's Statute of Repose Begins to Run When the Work Is Done

In Daidone v. Buterick Bulkheading, A-60, 2007 N.J. LEXIS 706 (N.J. June 26, 2007), the New Jersey Supreme Court held that New Jersey's Statute of Repose clock begins to run, as to any given defendant, as of the date on which such defendant last performed services on the project, even if the whole of the project is not complete as of that date.

In Daidone, plaintiffs acted as their own general contractor in constructing their home, but hired an architect to prepare the design. The design, which included a piling system to support the structure, was completed and certified by the architect on February 19, 1993. After the local official approved the architect's plans on June 23, 1993, the architect rendered no further services to plaintiffs. The foundation pilings were thereafter installed by a subcontractor, whose final bill was paid in full by plaintiffs on May 24, 1994. A certificate of occupancy for the home was issued on June 14, 1994, and, thereafter, plaintiffs occupied it.

In 1999, plaintiffs began experiencing problems as a result of soft soils and organic material beneath the basement, which caused the home to settle on its foundations. Plaintiffs first sought expert assistance in late 2001. The expert opined that the pilings "may not" be of sufficient length and recommended repairs, which plaintiffs completed at a cost of approximately $90,000. Plaintiffs, however, did not file suit against the architect and piling subcontractor until June 2, 2004. Such date was within 10 years of the issuance of the certificate of occupancy, but more than 10 years after both the architect and piling subcontractor had performed and completed their services.

The trial court granted motions to dismiss made by the architect and piling subcontractor, on the ground that plaintiffs' complaint was barred by New Jersey's 10-year Statute of Repose, N.J.S.A. 2A:14-1.1, a ruling affirmed by the Appellate Division. The Supreme Court granted plaintiffs' petition for certification.

On appeal to the Supreme Court, plaintiffs argued that the proper commencement date for Statute of Repose computation purposes should be the date on which the certificate of occupancy issues. In a previous decision of the Supreme Court, Russo Farms, Inc. v. Vineland Bd. of Educ., 144 N.J. 84 (1996), the Court held, on the facts of that case, that the Statute of Repose commences upon substantial completion of the improvement at issue. In Russo Farms, the Court held that the Statute of Repose commenced as of the date on which the certificate of occupancy was issued, because such was also the date on which the project at issue was "substantially completed." In Daidone, presumably in an effort to build on the holding in Russo Farms, plaintiffs' urged the adoption of the certificate of occupancy date as a uniform, indisputable, bright-line date from which the Statute of Repose should run as to all aspects of a construction project.

The Supreme Court rejected plaintiffs' arguments and affirmed the lower court rulings, holding that the Statute of Repose commences on the date of issuance of the certificate of occupancy only where the designer's or contractor's services continue up to that date. Where, however, the particular defendant's design or construction services are completed before a certificate of occupancy is issued, and such defendant performs no further functions, then the Statute of Repose commences as of the date the designer or contractor defendant completed his or her portion of the work. The plain language of the Statute of Repose, the Court noted, compels this result because it clearly provides that an action for deficient design or construction of an improvement to real property cannot be brought more than 10 years "after the performance or furnishing of such services and construction."

The Court also emphasized the importance of the parties' contractual arrangements. In Daidone, plaintiffs elected to act as their own general contractor, thereby assuming the responsibility for coordinating trades and obtaining governmental approvals. Because, in this capacity, plaintiffs purchased design and construction services on an individualized, piecemeal basis, the Court found plaintiffs were attempting to "have it both ways," by arguing that the designer and contractor should be liable as if they had performed services throughout the duration of the project. Finally, the Court also noted that plaintiffs were aware of and corrected the defects well within the period of the Statute of Repose, and, therefore, their failure to timely file the complaint undermined their effort to avoid the consequences of the Statute of Repose.

Daidone dispels the notion that the Statute of Repose commences, in all cases and for all involved contractors and design professionals, on the date of issuance of the certificate of occupancy. Instead, Daidone compels a reviewing court to examine the facts and contractual relationships present in each case. Notably, the Supreme Court did not overrule Russo Farms, which, as noted above, held that the Statute of Repose commences upon substantial completion. Read together, these cases stand for the proposition that the Statute of Repose commences on the earlier of the date of substantial completion of the improvement at issue, or the last date on which the particular defendant rendered a service on the project.

Condominium Associations May Sue Subcontractors for Claims Arising from Conduct Occurring Prior to the Associations' Formation

In Port Liberte Homeowners Assoc., Inc. v. Sordoni Const. Co., A-2138-04T1, 2007 N.J. Super. LEXIS 168 (App. Div. June 4, 2007), the New Jersey Superior Court's Appellate Division recently held that a condominium association may bring claims under the Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. ("CFA"), and for common law fraud, directly against subcontractors and materialmen who entered into subcontracts or supplied products for use in construction of a condominium's common elements, even where the alleged conduct on which such claims are based occurred before the condominium association existed.

The case arose from the construction, in the 1980s, of a large condominium complex in Jersey City. In May 1986, the developer registered the project with the Department of Community Affairs ("DCA"). In July 1986, the developer decided to clad the buildings with an Exterior Insulation and Finish System ("EIFS") manufactured by defendant Dryvit, and a subcontract for the installation of the EIFS was executed on July 17, 1986. Installation of the EIFS occurred between November 1986 and November 1987. The plaintiff condominium associations (the "Associations") were created in March 1987, when the developer filed the Master Deed and Declaration of Covenants with the DCA and recorded those documents. The developer controlled the Associations up to the time it filed for bankruptcy in January 1991.

The unit owners first assumed control of the Associations upon the bankruptcy filing, and, shortly thereafter, defects were discovered in the EIFS, which had allegedly caused significant water and structural damage. The Associations filed suit in June 1992 against the contractor and others who participated in the construction of the common elements. After 11 years of litigation, including eight years of mediation, the Associations had settled with all parties except Dryvit. The Associations then sought and received permission to file a seventh amended complaint, in which they asserted common law fraud and CFA claims against Dryvit. The Associations alleged that Dryvit had falsely advertised and represented to the developer and/or the EIFS subcontractor that Dryvit's product would act as an effective water barrier, when, in fact, Dryvit knew its products would not remain water impermeable when installed over the buildings' non-masonry substrate.

The trial court dismissed the Associations' fraud claims, finding there was no evidence that Dryvit intended that anyone other than the developer and contractor rely upon its representations regarding the EIFS products, and, because the Associations did not exist at the time the representations were made, there was no evidence that the Associations reasonably relied on such representations or sustained damages as a result of their reliance.

The Appellate Division reversed, holding that a condominium association has standing to assert claims for common law and consumer fraud against contractors and materialmen for defects in the common elements, regardless of whether the association existed at the time of the representations. The representations and/or omissions made to or concealed from the developer, the Court noted, were made after the project had been registered with the DCA as a condominium development, which placed Dryvit on notice that the Associations were the intended end-users of Dryvit's products and the entities that would eventually assume control over the common elements.

The Court also noted that the relationship between association and developer, under the statutory scheme governing condominium development, allows an association to step into the developer's shoes when control of the development is passed to the association, and bring suit for damage to the common elements. The Court distinguished prior holdings that subsequent purchasers of homes and condominium units, unlike initial purchasers, could not pursue CFA claims because they had not relied on the developer's representations. Here, the Court noted, the Associations were not subsequent purchasers of the property, but rather occupied the same role as the developer and had the same right to assert fraud claims that the developer would have had if the developer had discovered the defects while it controlled the Associations.

The Port Liberte decision marks a considerable expansion of the potential liability faced by subcontractors and materialmen, considering not only that it recognizes that parties pitching their products and services owe a duty to entities that, at the time of the pitch, have not yet come into existence, but also because such parties can be subjected, many years removed from the alleged conduct, to claims for treble damages and attorneys' fees under the CFA. A considerable period of time elapses, usually several years, between the point at which a developer registers a condominium project with the DCA and the point at which the developer turns over control of the association to the unit owners (i.e., by statute, when 75% of the units have been sold). During such period, the developer is attempting to sell the units and has little or no incentive to highlight and pursue claims for defects.

Thus, to the extent Port Liberte confirms that the association steps into the developer's shoes with respect to the developer's claims arising from conduct occurring prior to the turnover of control, and given the high concentration of condominium developments in New Jersey, condominium unit owners appear to have gained rights that have the potential to significantly impact construction defect claims and litigation in New Jersey.

New Jersey's Bid-Naming Statute Bars Substitution for the Subcontractors Named in the Bid

In O'Shea v. New Jersey School Construction Corp., 388 N.J. Super. 312 (App. Div. 2006), the Appellate Division held that New Jersey's bid-naming statutes absolutely bar substitution for the bid-named subcontractors prior to the execution of subcontracts.

New Jersey's public bidding statutes require each bidder to name the major trade subcontractors (i.e., plumbing, HVAC, electrical and steel/iron) with whom the bidder will subcontract, on all projects to be awarded to a single prime contractor. In O'Shea, an association of New Jersey-based mechanical contractors and its executive director sought mandamus-type relief to compel the defendant, the New Jersey School Construction Corporation ("SCC"), to end its practice of permitting general contractors to substitute major trade subcontractors for those the general contractors named in their bids. The SCC is a subsidiary of the New Jersey Economic Development Authority and is the agency responsible for implementing New Jersey's unprecedented commitment to spend $8.6 billion to build new schools and overhaul the infrastructure of hundreds of existing schools in the state's poorest school districts. The SCC's bid forms state the prime contractor is not permitted to substitute subcontractors, but also state that substitution is permissible with the SCC's written approval. Plaintiffs apparently contended in the trial court that substitutions and bid-shopping were common on SCC projects.

Before the trial court, the SCC acknowledged that it was permitting prime contractors to substitute subcontractors for those named in their bids, but contended it had discretion to do so. In fact, during the litigation, the SCC created, officially implemented and produced in discovery, a written substitution policy that stated that subcontractor substitutions are allowed where the subcontractor identified in the bid was going out of business, refused to perform, refused to adhere to the contract requirements, stated in writing that it was overextended or overcommitted and provided a reasonable explanation for same, or under any other circumstance where the SCC deemed there to be a rational basis for the substitution. Plaintiffs' moved to transfer the case to the Appellate Division on the ground that mid-litigation adoption of the policy was procedurally and substantively improper rulemaking on the part of a state agency, a claim over which the Appellate Division has jurisdiction. The trial court denied the motion and, instead, dismissed the complaint, holding there was no justiciable controversy between the parties because no particular bidder's rights had been impacted by the SCC's adoption of the policy.

The Appellate Division reversed, finding not only a justiciable controversy, but also that the SCC does not have discretion to permit substitution of subcontractors after a contract has been awarded. Citing cases interpreting the Local Public Contract Law, N.J.S.A. 40A:11-1 et seq., a statutory scheme similar to the one under which the SCC operates, the Court noted that public bidding statutes have been strictly construed to require the prime contractor to adhere to all statutory requirements. Although neither the statutes nor the prior case law address the precise issue before the Court in O'Shea, i.e., whether a state agency has discretion to allow substitutions, the Court held that requiring the prime contractor to use the subcontractors listed in the bid gives meaning to the statutory language requiring the contractor to contract with the subcontractors named in its bid, fosters competition and decreases bid shopping.

The Court also cited its observation in Stano v. Soldo Constr. Co., 187 N.J. Super. 524 (App. Div. 1983), that the purpose of the bidding statutes is to secure the benefits of competition for the taxpayers. Allowing the prime contractor to substitute unlisted subcontractors, usually for a lower price than that quoted by the listed subcontractor, benefits only the prime contractor and not the public. Thus, even though the statutes do not expressly prohibit substitutions, allowing "bid shopping" after the contract is awarded is contrary to the statutory purpose and the plain language of the statute's requirement that the bidder list the subcontractors with whom it "will" subcontract.

Thus, as a result of O'Shea, it seems that substitutions are barred, under all of New Jersey's various public bidding statutes, during the period between bid submission and execution of subcontracts. A footnote in the opinion confirms the Court's holding is not intended to affect a prime contractor's remedies if a named subcontractor breaches after the subcontract is signed. Nevertheless, O'Shea appears to be a major victory for subcontractors in that the prime contractor must contract with all named subcontractors, upon pain of losing the award. The prime contractor's inability to shop the bid will ensure a measure of price protection for named subcontractors. Also, if named, a subcontractor would seem to have unprecedented leverage in its contract negotiations with the prime contractor.

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