In a recent unreported decision, the New Jersey Appellate Division reminded contractors that they ignore the provisions of the Contractors’ Registration Act (which provide a host of disclosure obligations upon contractors) at their peril. Huston v. Lieber, 2015 WL 1737665 (N.J. App. Div., Apr. 17, 2015). While this case broke no new ground, it should nonetheless serve as a reminder to contractors working in New Jersey to take a second (and maybe even third) look at their contracts and operating procedures, lest they run afoul of New Jersey’s powerful Consumer Fraud Act (CFA).
Plaintiff, a New Jersey contractor, agreed to install a new deck and storm doors on Defendants’ residential property, and the homeowners signed a written estimate. After the work was completed, the homeowners refused to pay the remaining balance (as the amount owed was just north of $5,000, the contractor sued the homeowners in the Special Civil Part). After the close of the contractor’s case at trial, the homeowners moved to dismiss on the grounds that the contractor’s failure to sign the contract, include his registration number on the contract, and indicate the required three-day notice of cancellation language on the contract constituted a violation of CFA. The trial court denied the homeowners’ motion, holding that the contractor had not violated the CFA (on the grounds that the homeowners had previously hired the contractor to do other work, the homeowners had solicited the contractor to do the work, and dictated what work they wanted to be done).
The Appellate Division reversed, holding that the contractor had violated the CFA (by failing to sign the contract, failing to include its registration number on the contract, failing to append its certificate of CGL insurance on the contract, and failing to advise the homeowners they had three days to cancel the contract). Citing well-established law, the Appellate Division noted that a party who has violated the CFA may not obtain damages even if the violation was innocent and committed in good faith. Accordingly, the Appellate Division precluded the contractor from enforcing the contract (although it noted that the contractor could still seek damages on a quantum meruit basis). While none of this is Earth-shattering, here is the reminder that should scare New Jersey contractors into taking another look at the contracts they use: the Appellate Division noted that even if the aggrieved homeowner did not have an ascertainable loss, he or she could still recover reasonable attorneys’ fees, filing fees, and costs upon a showing that the contractor committed an unlawful practice under the CFA. To that end, the Appellate Division remanded the matter for a determination of the costs and attorneys’ fees incurred by the homeowner in defending against the contractor’s action. While the contractor may ultimately prevail under a quantum meruit theory, it may end up being a pyrrhic victory; as the homeowner’s costs and attorneys’ fees may well exceed the amount the contractor can recover in damages, the contractor may end up in the red.
We have dealt with the CFA before, most notably with regard to the New Jersey Supreme Court’s 2013 decision in Perez v. Professionally Green, in which the New Jersey Supreme Court did not uphold an award for attorneys fees in the face of a finding of a technical violation of the CFA.
In a recent decision by the Court of Appeals of South Carolina, a contractor’s claim under its CGL policy for defective work was held to be excluded by the “your work” exclusion. Precision Walls, Inc. v. Liberty Mutual Fire Insurance Co.,___S.E.2d ___, 2014 WL 3610895 (S.C.App., July 23, 2014).
Precision Walls was retained by SYS Constructors to provide metal framing and insulation on a building project. During the course of construction, as a masonry contractor began putting up a brick veneer exterior wall, it was observed that adhesive tape installed by Precision over insulation joints within the wall was losing its adhesion and coming loose. SYS directed Precision to repair the joints, which required the masonry subcontractor to remove portions of the brick wall. SYS subsequently deducted $97,500 from precision’s contract, as result of the repairs made necessary by precisions workmanship. Precision filed a claim with Liberty Mutual, its CGL carrier. Liberty Mutual denied Precision’s claim, and Precision filed a declaratory judgment action. The trial court held in favor of Liberty Mutual, holding that Precision’s claimed loss was not “property damage” under the policy, that Precision’s faulty workmanship was not an “occurrence” under the policy, and that even if the losses were covered under the policy, they would have been excluded from coverage under the policy’s “your work” exclusion.
On appeal, Precision argued that the trial court erred in finding that the “your work” exclusion applied to bar coverage. The Court of Appeal rejected this argument, holding that the “your work” exclusion indeed applied to bar the claim. Notably, the Court of Appeals did not even reach the issues as to whether the alleged damages constituted an “occurrence” under the policy, or whether precisions defective workmanship constituted “property damage” under the policy. Under the Court of Appeals’ analysis, even if the issues with Precision’s workmanship constituted “property damage,” and that those issues constituted an “occurrence,” Precision’s claim of coverage would still be excluded by the “your work” exclusion.
In reaching its decision, the Court of Appeals cited several similar cases from both South Carolina and the Fourth Circuit, holding that the “more work” exclusion operated to bar coverage related to a claim of loss as a result of a contractors defective workmanship. Citing a prior South Carolina case, the Court noted “a CGL policy does not insure the insured’s work itself but consequential risks that stem from the insured’s work.”
New Jersey Appellate Division Holds Continuing Tort Doctrine Applicable to Collapse of Retaining Wall
In a recent published decision, the New Jersey Appellate Division reversed a trial court’s dismissal of a property owner’s complaint against a municipality, on the grounds that the trial court had failed to realize that the owner had alleged a continuing tort. Wredden v. Township of Lafayette, 436 N.J.Super. 117 (App. Div. 2014).
In 2007, the township contracted with an engineer and an excavator to design and construct a retaining wall along a road adjacent to the owners’ property. The owners’ alleged that the retaining wall was designed and constructed so as to discharge water onto their property, and on January 28, 2008, the owners served a Notice of Claim upon the township (under New Jersey law, a notice of claim must be served upon a municipality within ninety days, and a complaint must be filed within two years of accrual of the claim).
Sometime in 2009, the retaining wall collapsed, and on June 28, 2011, the owners commenced an action against the Township, as well as the engineer and excavator. The township moved to dismiss, on the grounds that it the owners had failed to commence their action within the required two years. The trial court granted the Township’s motion, noting that any claims that had accrued against the Township prior to June 28, 2009 (two years prior to the filing of the complaint) were barred. Interestingly, the trial court noted that it made “no determination on whether the actions complained of by the Plaintiffs constitute a continuing tort.” Notably, the trial court held that the collapse of the retaining wall was a new tort, for which the owners were required to have served a new Notice of Claim upon the Township.
The owners’ case against the engineer and excavator continued, and during the course of the litigation, the owners discovered that a portion of the retaining wall had actually been constructed on their property. The owners sought leave to file an amended complaint, and alleged an inverse condemnation claim against the Township. The trial court denied the owners’ motion as to the Township on the grounds of the “entire controversy” doctrine.
On appeal, the owner argued that the trial court had erred on four grounds: (1) their claims constituted a continuing tort, and thus were not time-barred; (2) they were not required to file a new notice of tort claim as a result of the collapse of the retaining wall; (3) the Township was not entitled to plan or design immunity; and (4) their inverse condemnation claim was not barred by the entire controversy doctrine. The Appellate Division reversed, agreeing with the owners on each count.
Significantly, the Appellate Division noted that, as it manifested on a continuing basis, the discharge of water upon the owners’ property (and subsequent collapse of the retaining wall) was a continuing tort. Under the continuing tort doctrine, any limitations period would begin running only when the wrongful conduct ceased. Accordingly, the trial court erred when it failed to consider that the continuing tort doctrine could have operated to toll the owners’ claims. The Appellate Division also held that, as the collapse of the retaining wall was clearly a “continuation” of the tort alleged by the owners in their original Notice of Claim, no new Notice of Claim was required. Finally, the Appellate Division held that the trial court improperly referred to matters outside of the pleadings when deciding the Township’s motion to dismiss, and mistakenly denied the owners’ motion to amend their complaint as against the Township, as at the time the owners’ filed their motion, a final judgment had not yet been entered.
Accordingly, the Appellate Division remanded the matter back to the trial court, for findings of fact and conclusions of law to determine when the owners’ claims accrued, and whether the continuing tort doctrine applied to save their claims against the Township.
In a decision that has generated significant commentary, the Supreme Court of California recently held that an architect owed a duty of care to future homeowners. Beacon Residential Community Assoc. v. Skidmore, Owings & Merrill LLP, 323 P.3d 850 (Ca. 2014). Coming from the California Supreme Court, this case represents a significant expansion in liability on the part of design professionals, which will likely make them a more attractive target in construction defect actions.
Skidmore, Owings & Merrill were hired to provide architectural and consulting services related to a project in San Francisco. Skidmore was the principal architect on the project, although it claimed that its role was limited to making design recommendations, which the owner had the authority to accept or reject.
The project, which started out as 595 rental units, were eventually converted to condominium ownership. After the conversion, the homeowners association filed an action against the original owner and developer, as well as the Skidmore, alleging a host of design defects, including issues with extensive water infiltration, structural cracking, and excessive solar heat gain, which allegedly made the units uninhabitable due to high temperatures.
The trial court dismissed the homeowners’ complaint against the architect, holding that the architect owed no duty to future condominium owners. An appellate court disagreed, reversing the trial court, and holding that the architect did indeed owe a duty of care to the homeowners association, as California’s “Right to Repair Act” was dispositive on the issue, and made it clear that Skidmore owed a duty. Skidmore appealed to the California Supreme Court, which affirmed, stating:
[W]e hold that an architect owes a duty of care to future homeowners in the design of a residential building where, as here, the architect is a principal architect on the project—that is, the architect, in providing professional design services, is not subordinate to other design professionals. The duty of care extends to such architects even when they do not actually build the project or exercise ultimate control over construction.
The Supreme Court’s holding rested on the issue of whether such a duty could exist in the absence of privity (a contractual relationship between the architect and the future condominium owners). At common-law, a lack of privity between these Skidmore and future homeowners would have almost certainly resulted in a holding that Skidmore owed no duty of care and was thus in the clear. As the Supreme Court explained, however, modern jurisprudence has steadily eroded the requirement of privity, and courts have often found ways to extend a duty of care on the part of defendants (including architects) even in the absence of a contractual relationship.
The Court reviewed several California cases which had extended duties of care even in the absence of privity, such as Sabella v. Wisler, where a contractor was held to have owed a duty of care to a future homeowner (unknown at the time of the original construction), on the grounds that any harm to a prospective owner by the contractor’s alleged negligence would have been foreseeable by the contractor at the time of construction. The Court also noted the case of Montijo v. Swift, a personal injury case where an architect was held to owe a duty of care to a plaintiff who fell on a stairway due to an allegedly inadequate handrail. In both cases, the architect was held to owe a duty of care to a party whom it did not contract with, nor did it even know existed at the time of construction.
In its opinion, the Supreme Court held that it had no need to discuss whether California’s “Right to Repair Act” implied the presence of a duty, because based on the facts of the case, a common-law duty of care was present. Under California law, the issue of whether to a duty of care exists in the absence of privity rests on six factors:
- The extent to which the transaction was intended to affect the plaintiff;
- The foreseeability of harm;
- The degree of certainty that the plaintiff suffered an injury;
- The closeness of the connection between the defendant’s conduct and the plaintiff’s injury;
- The moral blame attached to the defendant’s conduct; and
- The public policy in preventing future harm.
Distinguishing the case of Bily v. Arthur Young & Co. (in which the California Supreme Court had declined to find a duty of care on the part of an auditor in favor of its client’s investors), the Court held that common-law principles favored extending the duty to Skidmore, even in the absence of privity with future homeowners, highlighting the following facts that supported its conclusion:
- Skidmore’s work was intended to benefit the homeowners;
- It was foreseeable that the homeowners would be among the limited class of persons harmed by Skidmore’s negligence;
- The unit owners’ alleged injuries;
- There was a close connection between Skidmore’s role as the project’s architect and the injuries suffered by the homeowners;
- There was “significant moral blame” attached to Skidmore’s negligence, by virtue of its “unique and well-compensated role in the Project as well as their awareness that future homeowners would rely on their specialized expertise in designing safe and habitable homes;” and
- The public policy of preventing future harm supported extending a duty of care.
Accordingly, the Court held that Skidmore, as the principal architect, owed a duty of care in favor of the future homeowners.
What is the takeaway here? The California Supreme Court has made it clear that design professionals may properly be in the cross-hairs of future homeowners, and should likely expect to become targets. While design professionals may find themselves parties to more construction defect actions, proper risk allocation via contracting and insurance will likely be a step in the right direction.
Late last week the New Jersey Appellate Division issued an unpublished opinion affirming a trial court’s grant of summary judgment in favor of an architect sued for designing
too awesome a house a house not in conformance with the contract documents. Picozzi v. WESketch Architecture, 2014 WL 3510782 (N.J. App. Div., July 17, 2014).
The owner retained WESketch Architecture to design a mansion, replete with double-height foyer, maid’s bedroom, four car garage, wine cellar, and game room. During the conceptual design phase, the owner and architect agreed that the project’s scope would be the design of a house between 13,000 and 15,000 square feet, with a preliminary construction budget of $5 million. Of course, the contract expressly disclaimed any guarantee that the construction costs would meet the budget; rather, it proposed budget would serve as a benchmark to “assist in gauging the scope of initial concept studies.”
The Architect prepared design drawings, and a preliminary analysis of construction costs pegging construction to be between $11.2 and $13.3 million, and with square footage well over 15,000 square feet. The owner (who was experienced in construction, having built several houses himself), expressed disbelief with the estimated costs, going so far as to ask the project manager “What are you guys smoking over there?” The owner, however, never took issue with the size of the house during the design phase, taking only issue with the cost (he believed the numbers were simply inflated). After requesting updated square footage numbers from the project manager (and receiving a response that the total footprint was well over 15,000 square feet), the owner was apparently satisfied, replying only “you’re the man.” All design documents were completed months later, and the owner paid all sums owed under the contract, even paying the architect $15,000 to accelerate preparation for the plans. According to the owner, he failed to realize the house was so big until he was told by municipal officials that the plans they were reviewing were for a 20,000 square-foot house, at which point he told them to stand down.
The owner subsequently filed a complaint for breach of contract, unjust enrichment, and professional negligence. The owner’s professional negligence claim fell away after he failed to obtain an expert to support this claim, and his unjust enrichment claim was dismissed (as it could not survive in the face of an enforceable agreement). The breach of contract claim was, at its core, a dispute over the method of calculating the square footage of the house – the architect argued that under its definition, the plans it prepared were in conformance with the contract documents, while the owner argued that the house, as designed, clearly exceeded the 13,000 to 15,000 square feet agreed in the contract. Ultimately, the architect moved for summary judgment on the breach of contract claim, on the grounds that the owner had failed to serve an expert report, and thus could not support his claims of breach of contract. Despite the owner’s argument that expert support was not required to prove that the architect’s plans did not comply with the contract, the trial court granted the architect’s motion for summary judgment.
The Appellate Division affirmed, but not for the reasons expressed by the trial court. The Appellate Division agreed with the owner, holding that expert testimony was not required on the issue of whether the square footage of the house conformed with the contract documents. Had the owner pursued his professional negligence case, he would have needed expert support to survive summary judgment. As his claim was narrowed to the issue of whether the architect breached the contract by failing to design a house of 15,000 square feet, with a construction cost of $5 million, expert testimony was not needed. The owner’s breach of contract still failed, however, as the contract did not require the architect to prepare plans for a house along those requirements. Rather, the references to square footage and construction costs were preliminary estimates that were subject to change. Further, as the Appellate Division noted, the owner repeatedly approved the architect’s designs (which were never even in the neighborhood of 15,000 square feet, under any method of calculating the footprint). As the Appellate Division noted:
The reference to square footage is made in the context of a description of the “preliminary understanding of the project scope.” The clear import of the contract was that the design of the house would be a collaborative process, and would take shape over the four specified stages. At each state, the design of the house would reflect the client’s desires in consultation with the architect. As a consequence, the size of the project was subject to change.
Plaintiff repeatedly expressed his approval of the design of a house significantly larger than 15,000 square feet. The [Opinion of Probable Construction Cost] in January 2006 reflected a house of over 20,000 square feet – whether one calculates bulk or livable square footage. There is no evidence that plaintiff protested the size of the house as designed.
At no point did the owner reject the architect’s plans and terminate the contract; instead, he directed the architect to forge ahead and complete design drawings in preparation for construction. Hence, while he may not have needed an expert to support his breach of contract claim, that claim failed anyway; viewing the facts in the light most favorable to the owner, there was no evidence in the record by which a jury could believe the architect had breached the contract.
As this architect no doubt is well-aware, situations like this can best be avoided (although clearly not entirely) by clear contract documents. In this case, the agreement between the architect and owner, which clearly spelled out that the architect’s preliminary designs and construction estimates were mere estimates, no clearly weighed heavily before the Appellate Division, and protecting the architect from an aggrieved owner.
In a recently reported decision, the United States Court of Appeals for the Fifth Circuit held that an insurer had no duty to indemnify a contractor, based on the contractual liability exclusion. Crownover v. Mid-Continent Cas. Co., ___ F.3d ___ (5th Cir. June 27, 2014). The state of the contractual liability exclusion in the Fifth Circuit has been in a great deal of flux lately, given its decision two years ago (and then subsequent vacatur of its own decision) in Ewing Construction Company v. Amerisure Insurance Company, 684 F.3d 512 (5th Cir. 2012). A post on this blog’s sister blog (Insurance Developments) provides a more comprehensive analysis of this development, but a brief discussion may be helpful.
In 2001, the Crownovers contracted with Arrow to construct a new home. Their contract contained a “warranty to repair” clause, which obligated Arrow to correct any work that failed to conform to the contract documents. After the house began to experience foundation and ventilation problems, the plaintiffs filed for arbitration against Arrow. The arbitrator determined that Arrow had breached the warranty to repair clause, and awarded damages. Notably, the arbitrator’s decision did not rest on any other grounds. After Arrow’s insurer, Mid-Continent Casualty Company (“Mid-Continent”) declined to pay the arbitration award, plaintiffs filed a declaratory judgment action. Mid-Continent moved for summary judgment, arguing that the contractual liability exclusion applied to bar coverage.
Granting Mid-Continent’s motion for summary judgment, the District Court held that the contractual liability exclusion in Mid-Continent’s policy operated to exclude coverage. Under the District Court’s analysis, the fact that the arbitrator’s decision rested on a finding that Mid-Continent’s insured had become legally obligated to pay the arbitration award on the basis of the breach of the warranty to repair clause, as opposed to another ground, operated as a contractually-assumed liability sufficient to make the contractual liability exclusion applicable. The plaintiffs appealed, and the Fifth Circuit, citing the recent Texas Supreme Court decisions of Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.2d 30 (Tex. 2010) and Ewing Construction Co. v. Amerisure Insurance Co., 420 S.W.3d 30 (Tex. 2014), affirmed.
I won’t bore you with the details, or with the tortured recent history of the Fifth Circuit and Texas Supreme Court’s decisions regarding the contractual liability exclusion (feel free to go to today’s post on Insurance Developments for that).
Late yesterday, the Fifth Circuit issued an opinion holding that a insurance company had no duty to defend an architect under a CGL policy. Wisznia Co. v. General Star Indemn. Co., __ F.3d __ (5th Cir. 2014).
A parish in Louisiana hired Wisznia to perform the design and construction administration for the construction of a building, and subsequently commenced an action against Wisznia. General Star (Wisznia’s insurance carrier, which had issued a commercial general liability policy) declined to defend Wisznia in Jefferson’s action, maintaining that coverage was excluded by the policy’s professional liability exclusion. Wisznia argued that as Jefferson’s complaint seemed to allege both professional, as well as ordinary, negligence, General Star was obligated to defend it (under a rule known to insurance coverage attorneys as the “eight corners rule.”)
The Fifth Circuit disagreed, holding that there were no facts alleged in Wisznia’s complaint that could be interpreted as alleging ordinary negligence. The Court distinguished two Louisiana state cases to which Wisznia analogized in favor of coverage. In Gregoire v. AFB Construction, Inc., a Louisiana court held that allegations against a construction company after an employee was electrocuted sounded in ordinary, not professional, negligence, and in CBM Engineers Inc. v. Transcontinental Insurance Co., the court reached the same conclusion. According to the Fifth Circuit, the primary issue in both Gregoire and CBM Engineers was the alleged failure to supervise a construction site (which sounds like ordinary negligence) – a far different allegation than made by the Parish in Wisznia, which made allegations of failing to coordinate the project in a professional manner, failing to design the project with accurate structural details, and failing to provide definite specifications (all allegations which, certainly on their face, sound like they are out of the realm of ordinary negligence). Accordingly, the Fifth Circuit held that as the allegations against Wisznia sounded solely in professional negligence, the professional liability exclusion in General Star’s policy unambiguously operated to exclude coverage.
What does this mean for design professionals? Think long and hard about being covered only by a policy that excludes from coverage any damages arising out of the professional services you perform.
Seventh Circuit Rains on Building Product Manufacturer: Reverses Denial of Class Certification in “Organic” Shingle Matter
Last week, the Seventh Circuit Court of Appeals reversed a District Court’s denial of class certification on behalf of consumers who were aggrieved by purchasing shingles that were (allegedly) falsely marketed as “organic.” In the Matter of IKO Roofing Shingle Products Liability Litigation, ___ F.3d ___, 2014 WL 2958615 (7th Cir., July 2, 2014). As a result, the matter goes back to the District Court for another determination as to whether the claims may be certified as a class.
IKO manufactures organic asphalt roofing shingles (which incorporate a layer of felt or paper, as opposed to fiberglass). The plaintiffs alleged that IKO falsely represented that the shingles met the American Society for Testing and Materials (ASTM) standard D225, and that compliance with the standard had been confirmed by a testing protocol under ASTM D228.
In 2009, numerous cases against IKO were transferred by the Panel on Multidistrict Litigation to the Central District of Illinois. The plaintiffs filed a motion to certify the numerous cases as a class, and earlier this year the District Court declined, holding that under the recent United States Supreme Court cases of Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013) and Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), the “inevitable differences in consumers’ experiences with IKO’s tiles” would preclude certification as a class.
Reversing the District Court, and delving more deeply into Comcast and Wal-Mart v. Dukes, the Seventh Circuit held that certification as a class required no proof “that the plaintiffs will experience a common damage and that their claimed damages are not disparate.” Indeed, the Seventh Circuit held that were that the rule, class actions involving consumer products would be “impossible.” Rather, noted the Seventh Circuit, as long as the proposed remedies match the theory of liability, class certification is possible.
In this case, the Seventh Circuit noted that the plaintiffs had advanced two theories of damages, both of which matched their theory of liability. First, every purchaser of an IKO shingle was injured, by the mere fact that the tile did not meet the represented quality standard. Second, purchasers whose shingles failed as a result of the non-conformity to the marketed standard would also be entitled to damages. Noting the similarities of this scheme to the recent litigation in the Seventh Circuit involving Pella windows, the Court noted that both of the plaintiff’s theories of damages met the standard laid out by the Supreme Court in Comcast, and although the District Court would indeed have discretion to certify the class, the plaintiffs were not required to prove a “commonality of damages” as a threshold for class certification.
As last reported here, late last year both houses of the New Jersey Legislature passed A-3103, a bill that would have provided for priority permitting for green building projects, although the bill eventually died on a pocket veto back in January. Well, the bill is back, having been introduced before the New Jersey Assembly last month as A-2580, and referred to the Environment and Solid Waste Committee. A-2580 incorporates all of the amendments made to A-3103 during its odyssey through the system. A similar bill has yet to be introduced before the Senate.
A-3103, had it been signed into law, would have obligated municipal agencies, the New Jersey Department of Environmental Protection, Department of Transportation, and Department of Community Affairs to give green building projects priority during the permitting process. Any such projects must be: (1) be certified to at least LEED Silver; (2) qualify as Energy Star (or Energy Star Version 3 for residential projects); (3) achieve at least a two globe rating under Green Globes; (4) achieve at least a silver certification under the ICC 700 National Green Building Standard; or (5) “achieve a comparable rating according to a nationally recognized, accepted, and appropriate green development rating system…” All applications for development seeking priority status must be accompanied by a letter from an architect or engineer identifying the rating system being used as the basis of the priority application. The bill would also obligate the Department of Community Affairs to conduct a review every three years to qualify rating systems, and if they no longer represent “contemporaneous, widely accepted green development standards,” the DCA may designate them as inapplicable for the purposes of this program (the DCA can also review new rating systems for qualification every three years).
We will keep track of A-2580’s progress over the coming months and years as it makes its way through the legislature.