Contributory negligence is the common-law construct whereby any negligence by a plaintiff acts as a total bar to recovery against a negligent tortfeasor. The contributory negligence doctrine has been uniformly criticized as overly harsh, allowing culpable parties to avoid the consequences of their actions, and leaving relatively innocent plaintiffs without recourse. 57A AmJur2d 752, Negligence, § 856. In response, the vast majority of states, including New Jersey, have replaced the contributory negligence doctrine with some form of comparative negligence, whereby the fault of a plaintiff is compared with the negligence of the defendant and may serve to reduce the plaintiff’s recovery of damages instead of completely barring the plaintiff’s action. Id. See, e.g., Muldovan v. McEachern, 271 Ga. 805, 810 (Ga.,1999). In this way, states have modified the doctrine to achieve results more consistent with modern notions of fairness. The 1973 enactment of New Jersey’s Comparative Negligence Act (the “Act”), N.J.S.A. 2A:15-5.1 to -5.8, adopted this construct, providing that the fault of a plaintiff may be considered in allocating liability among the parties, but may only act as a total bar to recovery if it exceeds the fault of the defendants. Subsequent decisional law has construed the Act broadly, applying it not only to negligence claims, but also to claims sounding in strict liability. See, e.g. Cruz-Mendez v. ISU/Insurance Services of San Francisco, 156 N.J. 556, (N.J.,1999)

Notwithstanding the clear legislative and judicial repudiation of contributory negligence, a recent Appellate Division decision appears to revive that antiquated notion as applied to homeowner claims against manufacturers of defective building components. In Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), the Appellate Division upheld the application of the “economic loss rule” to shield manufacturers of defective building materials from liability to the purchasers of pre-owned houses that incorporate the materials and sustain physical damage as a result. The economic loss rule, as codified by the New Jersey Product Liability Act, limits the availability of tort remedies to plaintiffs who have suffered personal injury or “physical damage to property other than the product itself.” N.J.S.A. 2A:58C-1(b)(2). (For a more extensive critique of the rule see The Economic Loss Doctrine: A license to sell defective building products?).

Even though the concurring majority in Dean, led by Judge Sabatino, acknowledged that the defective component, in that case-a synthetic stucco product known as Exterior Insulation and Finish System (“EIFS”)-had caused injury to property beyond “the product itself,” the court nevertheless barred plaintiffs’ tort remedies, finding that the unique circumstances of the underlying transaction weighed in favor of a restrictive application of the economic loss rule. Critical to the concurring majority’s analysis was the fact that plaintiffs received a home inspection report, prior to their purchase of the home, disclosing the potential defects in the EIFS:

In my view, [an] innocent home purchaser should be able to recover, under the Product Liability Act, N.J.S.A. 2A:58C-1 to -11 (“PLA”), reasonable compensation from the manufacturer of that defective component for the physical harm the component caused to other portions of the home and to any other property owned by the plaintiff.

In the present case, however, we are not dealing with [an] entirely latent defect, but one that was pointed out to the Deans, both orally and in writing, by their astute home inspector before they purchased the house. I agree with Judge Carchman that, whatever the proper scope of the economic loss doctrine may be, tort principles should not cover those losses in the particular setting of this transaction. Once alerted to the potential risks of the sheathing, the Deans could have insisted on a warranty from the builder to guard against future consequential harms, or demanded that the sheathing be replaced, or walked away from the purchase altogether. They did none of those things. The defect in the EIFS was no longer, with respect to the Deans, latent. Given this particular transactional context, I have no problem in confining plaintiffs to other remedies that are not based in tort or under the PLA.

Dean, supra, at 475, 483 (Sabatino, J., concurring) (emphasis added).

While differing on the issue of whether consequential damage to collateral components of the home constitutes damage to “other property,” Judge Carchman, writing for the court, agreed with the concurring majority that plaintiffs’ opportunity to avoid the loss asserted, and failure to take reasonable precautions to protect their own interests warranted foreclosure of their tort remedies:

We recognize the thoughtful and well-articulated concerns expressed by our concurring colleagues regarding the application of the economic loss rule as a bar to innocent purchasers recovering under the PLA from a manufacturer of a defective component of the home, where that component causes physical damage to other portions of the home; however, that is not the case we have before us on this appeal. As our concurring colleagues observe, plaintiffs, here, had appropriate opportunities to protect themselves from the potential of loss caused by the defective component.

Id. at 472 (emphasis added).

Though couched in terms of the economic loss rule, the effect of the Dean holding is the application of a contributory negligence standard to product liability claims asserted by homeowners against building component manufacturers. Where a homeowner knew or should have known of an injurious product-defect prior to purchase, no recovery may be had in tort for subsequent damage to “other property” caused by the defect. Yet, the New Jersey Legislature and Supreme Court have made clear that a comparative fault standard should govern the analysis of the relative “innocence” and “blameworthiness” of the victim and tortfeasor:

The final issue concerns the effect of plaintiff’s comparative negligence on the [defendant’s] liability under N.J.S.A. 21:3-5. That issue requires consideration of the Comparative Negligence Act, N.J.S.A. 2A:15-5.1 to -5.8, which provides that a plaintiff’s own negligence may be considered in allocating liability among the parties. . . . The Act applies in strict-liability actions. Gennari v. Weichert Co. Realtors, 148 N.J. 582, 608-09, 691 A.2d 350 (1997); see also Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 164 (1979) (holding that Act provides a defense in most strict-liability actions, except in some workplace injury cases in which worker had no meaningful choice whether to encounter risk). A plaintiff’s fault is an affirmative defense in a strict-liability action if his or her conduct constitutes an “unreasonable and voluntary exposure to a known risk.Lewis v. American Cyanamid Co., 155 N.J. 544, 559, 715 A.2d 967 (1998); Cartel Capital Corp. v. Fireco of N.J., 81 N.J. 548, 563, 410 A.2d 674 (1980). To establish an affirmative defense, therefore, the Insurers must prove that plaintiff voluntarily encountered the risk with actual knowledge of the danger. The mere fact that plaintiff was negligent will not suffice.

Id. (emphasis added). See Cepeda v. Cumberland Eng’g Co., Inc., 76 N.J. 152, 185, 386 A.2d 816 (1978) (holding that “contributory negligence in the sense of mere carelessness or inadvertence” is not a defense in strict liability cases), overruled in part on other grounds Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 177, 406 A.2d 140 (1979). Under New Jersey law, even where a manufacturer proves that a consumer failed to take reasonable precautions against a product defect of which he knew or should have known, the result is a mere reduction of the plaintiff’s recovery, not a complete bar, unless the jury makes a determination that a majority of fault lies with the plaintiff (a quintessential fact determination). In New Jersey, and in a vast majority of jurisdictions, an injured consumer’s “notice” of a product defect will not foreclose tort remedies unless the manufacturer meets a burden of establishing the consumer’s subjective knowledge of the danger and unreasonable conduct in the face thereof. See Id. See, e.g., Martinez v. Triad Controls, Inc., 593 F.Supp.2d 741 (E.D.Pa.,2009); Anderson v. Four Seasons Equestrian Center, Inc., 852 N.E.2d 576, 582 (Ind.App.,2006); Krajewski v. Enderes Tool Co., Inc., 396 F.Supp.2d 1045, 1052 -1053 (D.Neb.,2005); Warner Fruehauf Trailer Co., Inc. v. Boston, 654 A.2d 1272, 1274 -1275 (D.C.,1995)

Dean’s emphasis on plaintiff homeowners’ “innocence” is particularly problematic given the underlying purpose of the economic loss rule. The rule “defines the boundary between the overlapping theories of tort law and contract law by barring the recovery of purely economic loss in tort, particularly in strict liability and negligence cases.” Dean, supra, at 470 (citation and internal quotation marks omitted). It acts as a shorthand means of determining which duty has been violated by the defendant-that is, was it one that arose solely under contract, or did it also arise incident to the common-law obligation to avoid unreasonable risks of harm to persons or property? See Id. The Dean court essentially looked to the purchaser’s fault to determine the source of a manufacturer’s breached duty. This seems incongruous. The fact of the Deans’ “notice” does not change the quality of the manufacturer’s culpable conduct, which presumably occurred long before plaintiffs purchased their home. The notice issue would have been more appropriately addressed in terms of comparative fault. While the Supreme Court did sanction an examination of unique transactional circumstances in applying the economic loss rule in Alloway v. General Marine Industries, L.P., 149 N.J. 620, 629 (1997), the purpose of that examination is to avoid an overly restrictive application of the rule, not to facilitate it.

Stark & Stark Shareholder and Construction Litigation group Chair, Donald B. Brenner, will serve as the moderator and as a presenter at the New Jersey Institute for Continuing Legal Education’s seminar, Tackling Construction Law Issues. The seminar will take place Wednesday, July 29, 2009 from 9:00 AM to 4:00 PM at the New Jersey Law Center, New Brunswick, New Jersey.

The seminar will focus on the wide range of issues Construction Lawyers need to be aware of when representing clients, including public contracting, development, and insurance concerns to OSHA compliance, subcontracting and mediation issues.

Mr. Brenner will present a discussion on the recent Chinese drywall crisis occurring throughout the United State. Mr. Brenner will answer frequently asked questions relating to the defective drywall, including: What is it? What is the nature of the defect in Chinese Drywall? How does it damage property? What is the status of class actions involving Chinese drywall? What are the prospects for litigation in New Jersey relating to Chinese drywall?

John Randy Sawyer, Stark & Stark Construction Litigation group Shareholder, will also present a seminar as part of the Tackling Construction Law Issues seminar discussing the New Jersey Products Liability Act and the Economic Loss Rule, focusing on the very important recent Appellate Division decisions in Marrone v. Greer & Polman Construction and in Dean v. Barrett Homes.

Stark & Stark Construction Litigation Shareholder, John Randy Sawyer co-authored the article, The Economic Loss Doctrine: A license to sell defective building products? for the May 11, 2009 edition of the New Jersey Law Journal. The article is available below, or online here. (PDF)

Underlying the entire complex of laws governing the construction and sale of residential property in New Jersey is a clear recognition that, “for most people, the purchase of a house will be the most important investment of a lifetime.” Gennari v. Weichert Co. Realtors, 148 N.J. 582, 607 (1997). That understanding is reflected in forty years of judicial and legislative advances against archaic common-law notions, such as caveat emptor, merger, and privity, that unfairly obstruct homebuyer remedies for material defects in construction. See, e.g. McDonald v. Mianecki, 79 N.J. 275, 294 (1979). Two recent Appellate Division decisions move the law in a seemingly contrary direction. In Marrone v. Greer & Polman Constr. Inc., 405 N.J.Super. 288 (App.Div. 2009) and Dean v. Barrett Homes, Inc., 2009 WL 1025565 (App. Div. 2009), the Appellate Division upheld the application of the economic loss rule to shield manufacturers of defective building materials from liability to the purchasers of pre-owned houses that incorporate the materials and sustaine physical damage as a result. The economic loss rule, as codified by the New Jersey Product Liability Act, limits the availability of tort remedies to plaintiffs who have suffered personal injury or “physical damage to property other than the product itself.” N.J.S.A. 2A:58C-1(b)(2).

The critical issue addressed in Dean and Marrone is whether “the product itself,” as applied to plaintiff homeowners, encompasses the entire house (disallowing tort claims for damage to other parts of the residence) or is limited to the defective building component supplied by the defendant manufacturer (allowing such claims). That question was previously answered in DiIorio v. Structural Stone & Brick Co., Inc., 368 N.J. Super. 134 (App. Div. 2004). In DiIorio, plaintiff homeowner filed suit against the manufacturer of defective stone siding that damaged the rest of the house in which it was integrated. The action was commenced outside the four-year statute of limitations of the U.C.C., but within the six-year statute applicable to claims for tortious injury to property. Concluding that “this [was] a product liability case[,]” the trial court permitted plaintiff to take advantage of the longer statute. On appeal, the manufacturer argued that the four-year statute should apply because “recovery of economic losses caused by goods that damage only the goods themselves are recoverable only in accordance with the comprehensive provisions of the U.C.C and not pursuant to theories of tort.” In rejecting this argument, the court noted that the asserted damages were “not limited to the value of the stones themselves.” Viewing the stones, not the damaged house, as the relevant “product,” the court determined that plaintiff had sustained “other property” damage, recoverable in tort, outside the limitations of the U.C.C. Continue Reading The Economic Loss Doctrine: A license to sell defective building products?

The “business risk” doctrine has become a fixture of insurance coverage law, with profound implications for insured contractors and plaintiff property owners involved in construction-defect litigation. Concisely stated, the doctrine holds that “faulty workmanship standing alone, resulting in damage only to the work product itself. . .” falls outside the ambit of coverage provided by a CGL policy. Firemen’s Ins. Co. of Newark v. National Union Fire Ins. Co., 387 N.J.Super. 434, 449 (App. Div. 2006) (citations and internal quotation marks omitted). See also 4 Bruner & O’Connor Construction Law § 11:37.

A review of the decisional law advancing this principle reveals a lack of consensus with respect to its rationale and application. A particularly uneven treatment of the “business risk” distinction is found in cases where damages are confined to an insured contractor’s work product but extend, qualitatively, beyond mere faulty workmanship. Consider the following example:
A residential developer undertakes the construction of a wood-framed apartment building. The exterior of the building is clad in a synthetic stucco system, which, due to faulty workmanship, allows water infiltration into the building’s main walls. This water infiltration, in turn, causes damage to contiguous building materials (stud framing, sheathing, interior finishes, etc.), which are otherwise defect-free. No damage is sustained beyond the building itself.
Purchasers of the building file suit against the developer seeking recovery for (1) the cost of replacing the defective synthetic stucco system; and (2) the cost of repairing the consequential damages to the underlying building materials.
The developer submits to its insurer a claim for defense and indemnity under a CGL policy covering “property damage” caused by an “occurrence” and featuring the standard “business risk” exclusions.


A reoccurring controversy in insurance coverage law is whether the damages in item 2-the cost of repairing consequential loss stemming from a defective component in the insured’s work product-are covered under a CGL policy. To the extent such damages affect only the “work product itself,” they would seem, at least facially, to come within the preclusive ambit of the “business risk” doctrine-they are not damage to “other” or “third-party” property. However, a more thoroughgoing analysis, as presented in two recent Federal Circuit opinions-Stanley Martin Companies, Inc. v. Ohio Cas. Group, 2009 WL 367589 (4th  Cir. Feb. 12, 2009) and Mid-Continent Casualty Co., v. JHP Development, Inc., — F.3d —-, 2009 WL 189886 (5th Cir. Jan. 28, 2009)-leads to a different conclusion. These cases shed new light on the contours and limitations of the “business risk” doctrine, distinguishing between the defects in an insured’s work product, which generally are excluded from coverage, and the consequential injuries stemming from those defects to other parts of the same work product. According to the recent decisions, the latter category of damages is not necessarily excluded.

In Stanley Martin, decided February 12, 2009, the Fourth Circuit Court of Appeals determined that damages caused by defective trusses supplied by a subcontractor and used in the construction of new townhouses constituted a covered “occurrence” within the meaning of the general contractor’s CGL policy. In keeping with the standard coverage form, the policy at issue defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Stanley Martin, supra, at 1. The underlying litigation stemmed from mold damage, originating from the defective trusses, and spreading to other, non-defective, components of the buildings. No damage was sustained beyond the building itself.

Applying Virginia law, the lower court had determined that the alleged damages did not come within the scope of the relevant policy because the general contractor’s “remediation costs arose out of damage to [its] own ‘work’ caused by the faulty workmanship of its subcontractor[.]” Id. at 2. This exigency, in the court’s view, “was not ‘unexpected’ or an ‘accident.'” Id. It was an anticipated, and therefore uninsured, risk of doing business.

In the decision reversing the lower court’s ruling, the Court of Appeals confronted a divergence of opinion in the Fourth Circuit with respect to the proper application of the “business risk” principle to such circumstances. Four years prior, the Fourth Circuit had addressed a similar set of facts in Travelers Indemnity Co. of America v. Miller Building Corp., 142 F. App’x 147 (4th Cir. 2005). Apparently relying on the “business risk” distinction, the Miller court held that the consequential injuries to the building, which “allegedly [were] a result of the subcontractor’s defective performance,” were confined to the building itself and, therefore, “not considered to be ‘unexpected’ or caused by an ‘occurrence.'” Stanley Martin, supra, at 2 (quoting Miller, supra, at 149) (internal quotation marks omitted). Because, in the court’s view, the damage to the general contractor’s work did not constitute an “occurrence,” it did not trigger the insurers duty to indemnify.

The Fourth Circuit reached the opposite conclusion a year later in French v. Assurance Co. of America, 448 F.3d 693 (4th Cir. 2006). In that case, the court distinguished between the subcontractor’s defective work and the damage caused to the surrounding components, which were, in themselves, defect-free. The coverage dispute stemmed from the circumstances presented in the introductory fact pattern-a residential developer hired a subcontractor to clad the exterior of a new home with synthetic stucco system known as “Exterior Insulation Finishing System” (“EIFS”). Defects in the EIFS allowed moisture intrusion that caused damage to the home’s underlying structure. While acknowledging that the subcontractor’s defective work was, in and of itself, an excluded business risk, the court determined that the damage caused by that defective work to the surrounding non-defective components did constitute “an accident, and therefore a [covered] occurrence under the initial grant of coverage of the [CGL policy].” Stanley Martin, supra, at 2 (quoting French, supra, at 704-05) (internal quotation marks omitted). In reaching this conclusion, the court reasoned that, “[a]s delivered per the construction contract,” the surrounding components were “defect-free,” such that their subsequent damage was unexpected. Id.

Faced with these diverging opinions, the Stanley Martin court rejected Miller and endorsed French as the controlling iteration of the “business risk” distinction. The bifurcation of the insured’s work between defective and non-defective components was, in the court’s view, well “grounded in the plain language of the policy and the interplay between the policy’s broad definition of an ‘occurrence’ and the policy’s ‘your work’ exclusion” which excepted subcontractor work. See Stanley Martin, supra, at 2 (quoting French, supra, at 703 (internal quotation marks omitted). At oral argument, the insurer in Stanley Martin tried to distinguish French on the basis that the moisture intrusion that damaged the home’s non-defective structure was a separate event that could constitute an occurrence. The mold at issue in Stanley Martin, on the other hand, was present in the townhouses as soon as the trusses were installed. The court found this argument unpersuasive, characterizing it as a “labored distinction [that] places more weight on the policy language than it can bear.” Id. at 2. Because there was “no allegation that the general contractor either expected or intended that its subcontractor would perform defective work or that the spread of mold beyond the defective trusses was expected or intended,” the court determined that these events were “occurrences” capable of triggering coverage under CGL policy. Id. at  3 (internal quotation marks and citations omitted).

The Fifth Circuit’s January 28, 2009 decision in Mid-Continent also addressed the application of the “business risk” principle in the context of a construction defect case. Mid-Continent focused, not on the meaning of the word “occurrence,” but rather on the scope of the standard “business risk” exclusion for damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Id. at 3. Like the Stanley Martin court, the Fifth Circuit emphasized a distinction between the defective and non-defective components of the insured’s work product. Factually, the coverage dispute stemmed from an insured developer’s construction of a four-story, wood-framed residential building with inadequate water-sealants and retaining walls. As a consequence of these deficiencies, large quantities of water penetrated the interior of the structure through the ceilings and walls, under doors, and at other points, damaging contiguous building materials, which were, in themselves, defect-free. After receiving a demand for defense and indemnity, the developer’s CGL insurer filed a declaratory judgment action seeking, among other things, a declaration that coverage was barred by the above-quoted “business risk” exclusion. Id. at 3. The Fifth Circuit Court of Appeals framed the issue in the following manner: 
Whether the exclusion bars recovery for damage to any part of a property worked on by a contractor that is caused by the contractor’s defective work, including damage to parts of he property that were the subject of only non-defective work, or whether the exclusion only applies to property damage to parts of the property that were themselves the subject of the defective work.

Id. at 6. Examining the plain language of the exclusion, the court determined that only property damage “to parts of the property that were themselves the subjects of the defective work [was] excluded.” Id. at  6 (emphasis added). The court rejected as unpersuasive the approach taken in another jurisdiction in which consequential damages to non-defective components were necessarily deemed an excluded “business risk.” Id. at 7 (declining to follow Century Indemnity Co. v. Golden Hills Builders, Inc., 384 S.C. 559 (2002)). Such an approach, the court reasoned, improperly subordinates analysis of the policy’s language to a presumption about the underlying purpose of CGL coverage. Id. at 7. “The mere fact that a policy is designated as a ‘commerical general liability’ insurance policy is not grounds for overlooking the actual language of that policy.” Id. The court therefore cabined its discussion to the terms of the policy before it and determined that the consequential losses in question went beyond the “particular part of the [the contractor’s] work” containing defects. Thus, the “business risk” exclusion was inapplicable and coverage obtained.

Stanley Martin and Mid-Continent continue a discernable trend in favor of coverage where an insured contractor’s faulty workmanship results in damage to otherwise non-defective work product. While it can generally be said the faulty workmanship is, itself, an anticipated risk of doing business, the consequences flowing from such workmanship are not so easily categorized. The Fourth and Fifth Circuit decisions reflect a growing recognition across jurisdictions that broad-stroked applications of the “business risk” rule-which is essentially an insurance industry trade concept-must not supercede analysis of the plain language of insurance contracts. See Zacarias v. Allstate Ins. Co.  168 N.J. 590, 595 (2001) (“In the first instance, the words of an insurance policy are to be given their plain, ordinary meaning.”) See also 4 Bruner & O’Connor Construction Law § 11:37. Absent a particular policy exclusion, the logical basis for differentiating between consequential loss to an insured’s work product and consequential loss to other property remains tenuous, and all but a shrinking minority of jurisdictions have either abandoned or qualified the distinction.

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.

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

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

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

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

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

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

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

In an unpublished 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 Appellate Division recently denied a landscaping contractor’s suit to collect amounts due for extra work in addition to that called for in his contract for complete landscaping of the defendants’ home. Online Contracting, Inc. v. Tripucka, No. A-2622-06 (App. Div., December 6, 2007). The defendants counterclaimed for treble damages and attorneys’ fees under the Consumer Fraud Act (N.J.S.A. 56:8-1 to 116). The court concluded that the contractor’s failure to secure a written agreement for extras totaling $32,994 violated N.J.A.C. 13:45A-16.2(a)(12), which requires all home improvement contracts exceeding $500 to be memorialized by a writing signed by the parties, specifying the work to be performed and the materials to be used, and identifying the start and end date.

The contractor argued that the following language, included within the underlying agreement for landscaping purposes, authorized verbal change orders:

Any alteration or deviation from the description of the work listed above will be executed upon a written change order issued by the contractor and signed by the owner. The change order, whether it be verbal or in writing, will become an extra and will be billed to the owner at the daily rate provided in the [attached] equipment and labor price list.

Because the work was performed pursuant to the equipment and materials price list attached to the underlying contract, the contractor maintained that the contract clause did not violate the Consumer Fraud Act. Further, argued the contractor, the defendants should be estopped by their own conduct in verbally requesting the extras (a putting green and associated structures).

The court disagreed. Citing Scibek v. Longette, 339 N.J. Super. 72 (App. Div. 2001), an auto repair case, it pointed out that since the defendants had not induced the contractor to proceed with the extras without a writing, estoppel did not apply. “Defendants’ verbal directions to [plaintiff] to get the extras ‘done’ cannot be fairly characterized as ‘the intentional relinquishment of a known right,’ or a clear unequivocal ‘act from which an intention to relinquish’ a right can be drawn.” Online Contracting, Inc., supra, No. A-2622-06 at 4, citing Scibek, supra, 339 N.J. Super. at 82. In the absence of the required written agreement for the extras, the defendants could not be said to have intentionally relinquished their right to a written contract by a clear, unequivocal and decisive act.

The court added that the contractor could have preserved its right to collect for the extras simply by providing a written estimate and securing the defendants’ written authorizations. Accordingly, it affirmed the trial court’s grant of attorneys’ fees in accordance with the Consumer Fraud Act ( N.J.S.A. 56:8-19).

World famous architect Frank Gehry, and his firm Gehry Partners is a defendant in a recent lawsuit brought by the Massachusetts Institute of Technology alleging design and construction defects in a $300 Million building on the Cambridge, Massachusetts campus. MIT also sued the contractors who built the building, alleging that design and construction defects caused leaking, cracking, and poor drainage, and that MIT will have to pay millions to fix the problems.

Gehry, when interviewed about the lawsuit, said that construction problems in complex buildings are inevitable, and “The chances of it getting done ever without something colliding or some misstep are small.” Gehry, like most architects surely believes that his design is fine, and that the builder made mistakes in execution.

The builder, a the New Jersey arm of a Swedish firm called Skanska AB, when asked for comment, stated “This is not a construction issue, has never been.” So, the builder believes, of course, that the design is faulty, and he did nothing wrong.

As is typical, both the architect and the builder also fault the owner, in this case MIT, for making changes during construction that they say led to problems. Gehry also commented that he thought that “value engineering” was also responsible for some of the problems.

It is disconcerting to see that a superstar architect, a global construction company and a world-class institute of higher learning, with $300 Million to spend cannot seem to create a water-tight building. Mr. Gehry seems to think that construction defects are par for the course. In that context, it comes as no surprise that we find problems with much simpler, mass-produced homes and condominiums.

You can read the New York Times article discussing the case here.