Architectural, Engineering & Construction Defect Law Alert

By Sunny Sparano, Esq. (973.618.4105 or smsparano@mdwcg.com)

Regulatory violations of the Consumer Fraud Act can result in individual liability.
Allen v. V & A Brothers, Inc., et. al., 208 N.J. 114 (Jul. 2011)

The New Jersey Supreme Court further clarified when an individual owner or employee of a company may be liable under the Consumer Fraud Act ("CFA"). In Allen, the Court first held that it was "clear" that an individual who commits an affirmative act or knowing omission in violation of the CFA is subject to personal liability. In addition, the Court stated, "Individual liability for regulatory violations ultimately must rest on the language of the particular regulation in issue and the nature of the actions undertaken by the individual defendant. When considering whether there can be individual liability for regulatory violations, ... principals may be broadly liable, as they are the ones who set the policies that the employees may be merely carrying out. Therefore, if the principals have adopted a course of conduct in which written contracts are never used, in clear violation of the regulation, there may be little basis on which to extend personal liability to the employee who complies with that corporate policy. However, if the employee unilaterally concludes that an inferior product should be used in place of one specified in a contract and does so without the knowledge of the homeowner, there is little reason to construe the CFA to limit liability to the corporate employer and permit that employee to escape bearing some individual liability."

Lawsuit dismissed after election of new home warranty arbitration remedy.
Maloney, et. al. v. Ali, et. al., 2011 N.J. Super. Unpub. LEXIS 2604 (Oct. 17, 2011)

The court dismissed a homeowner's suit after the homeowner initially filed a warranty claim. While the homeowner never proceeded to the available arbitration process under the New Jersey New Home Warranty and Builders' Registration Act, the fact that a warranty claim under the Act was initiated by the homeowner was found to be enough proof for the court to determine that the homeowner elected for recourse under the warranty. The trial court dismissed the lawsuit and held that, regardless of whether or not the matter actually proceeded to an arbitration hearing, the homeowner had submitted the matter to the warranty program and therefore had initiated the procedure to enforce the warranty remedy.

Regulatory violations under the Consumer Fraud Act resulted in award of attorney fees.
Elias Kort, et. al. v. Creative Solutions and Services, LLC, et. al., 2011 N.J. Super. Unpub. LEXIS 2746 (Nov. 1, 2011)

The Appellate Division reversed a trial court's decision to not impose personal liability on the owner of a residential construction company under the Consumer Fraud Act. In imposing personal liability, the court found that the owner participated directly in the regulatory violations by executing a home improvement contract that omitted required provisions and inferred to the plaintiffs that he would be personally responsible for the contents of the contract. While the Appellate Division affirmed that there was no ascertainable loss as a result of the regulatory violations and that the amount in damages was limited to the terms of the contract, the plaintiffs' were nevertheless awarded attorney fees as the court held that the "failure to prove an ascertainable loss caused by the Consumer Fraud Violation is not a bar to their recovery of attorneys' fees and costs under the Act."

Pennsylvania
By Gregory Kelley, Esq. (610.354.8273 or gjkelley@mdwcg.com)

Waiver of subrogation clause in construction contract may be applied to a subsequent property owner as a third-party beneficiary.
Community Association Underwriters of America v. Rhodes Development Group, 2011 U.S. Dist. LEXIS 83403 (Jul. 29, 2011)

A developer transferred ownership of a condominium association ("CA") while construction continued. Construction activities caused a fire and damages to the CA, which its insurer paid. The insurer filed a subrogation claim against the contractor, who asserted that the claim was barred by the waiver of subrogation clause ("Waiver") in the general conditions incorporated into the standard AIA contract between the developer and the contractor because the CA was a third-party beneficiary and bound to the contract terms. The waiver stated in part, "Owner and Contractor waive all rights against (1) each other and any of their subcontractors ... for damages caused by fire or other perils ... to the extent covered by property insurance ... applicable to the Work." (Article 11, § 11.3.7.)." The court applied the waiver to the CA because the loss arose from the work and because "the contract operates to shift to the owner the ultimate risk of loss, ... leaving the insurer no right to proceed by subrogation against a subcontractor ... To prevent such litigation, an owner may waive its rights ... to the extent covered by the owner's property insurance ... the policy underlying [subrogation] clauses is to avoid disruption and disputes among the parties to the project. The need for lawsuits between the parties is eliminated because all contracting parties are protected under the owner's property insurance." When faced with such claims, contractors and design professionals must ascertain the facts regarding the parties' status and whether the cause of the damage arose from the work defined in the contract.

A contract for construction with an owner is a prerequisite under Pennsylvania's Contractor and Subcontractor Payment Act, and design professionals may qualify as "contractors" under certain circumstances.
Apostolou Associates, Inc. v. Dipardo, 2011 Pa. Dist. & Cnty. Dec. LEXIS 76 (Mar. 31, 2011)

An architectural firm entered into an oral contract for services to help determine the feasibility of a project. The architectural firm entered into a second oral contract for behind-the-scenes assistance to the owner for planning and zoning. The services were performed before there were any construction contracts for the project. Section 515 of the Contractor and Subcontractor Payment Act, 73 P.S.A. § 501 et seq. ("CASPA") applies to a "construction contract,, which is "an agreement, whether written or oral to perform work on any real property ..." Real property is "Real estate that is improved ..." "Improve" is "to design, effect, alter, provide professional or skilled services, repair or demolish any improvements upon ... real property, ..." The court held that the second contract was not for construction as the architectural firm had no intention of entering into a construction contract, the architectural firm did not want to be the architect of record, and the architectural firm was not hired to do detailed work needed for actual construction, rather, his drawings were only for business planning purposes. The architectural firm has appealed this decision. For now, it is an open question whether a design professional may be considered a subcontractor under CASPA such that, if a design professional could prove under the CASPA definitions that it was a subcontractor who entered into a construction contract with an owner or a person who is authorized or engaged by an owner to improve real property, then CASPA remedies may apply to non-payment.