Construction law info blog

Are New York Property Owners Entitled to Common Law Indemnification for a Third Party’s Injury by a General Contractor if That General Contractor Did Not Control or Supervise the Worksite?

In McCarthy v. Turner Construction, Inc., 17 N.Y. 3d. 369 (2011), Boston Properties, Inc. and Time Square Tower Associates, LLC (collectively “Property Owners”) leased a retail storefront to Ann Taylor, Inc. (“Ann Taylor”). Subsequently, by agreement (the “Agreement”), Ann Taylor engaged a general contractor, John Gallin & Son, Inc. (“Gallin”) to perform construction on its storefront.  The Agreement stated that Gallin was solely responsible for and in control of the construction and was required to take reasonable safety precautions to protect the workers from injury. Id. at 372. 

However, Gallin did not perform the construction itself; Gallin engaged Linear Technologies Inc. (“Linear”) as its subcontractor.  Shortly thereafter, Linear hired Samuels Datacom, LLC (Samuels) as its sub-subcontractor. An electrician employed by Samuels (“Plaintiff”) was injured when he fell from a ladder while working on the project site. Subsequently, he brought an action in the Supreme Court of New York (“Lower Court”) for his injuries against Gallin and the Property Owners. Id. The Property Owners asserted a cross claim against Gallin for common law indemnification. Id. at 373. Indemnification is a legal concept that enables a defendant the right to be reimbursed for some or all costs associated with the suit by another person or entity.

The Lower Court held that the Property Owners and Gallin were vicariously liable for Plaintiff’s injuries. Vicarious liability is a legal concept that holds a third party responsible for the acts of another solely because of his or her relation to the actual wrongdoer. For example, under certain circumstances an employer could be held vicariously liable for his or her employee’s unlawful conduct.  

Property Owners and Gallin  reached a settlement under which they each paid the Plaintiff $800.000.00. The settlement itself was not in dispute. Instead, the question  before the Court was whether the Property Owners could recoup some or all of that money from Gallin.

The Lower Court rejected the Property Owners’ cross claim for common law indemnification because Gallin was not actively at fault in bringing about the injury. Id. at 373. Thus, the Lower Court held that Gallin was not required to reimburse the Property Owners for some or all of the $800,000.00 they paid to Plaintiff.

The Property Owners appealed to the Supreme Court of New York, Appellate Division (“Appellate Court”). The Appellate Court affirmed the Lower Court’s holding.

The Property Owners appealed to the Court of Appeals of New York (the “Court of Appeals”). In their appeal, they argued that they were entitled to common law indemnification by Gallin, whether or not Gallin directly supervised and controlled Plaintiff’s work, based upon the Agreement. Id. at 374. That was the central issue before the Court of Appeals: whether a person or entity that does not supervise or control another can be liable to indemnify for the damages that party causes.

First, the Court of Appeals considered Labor Law §240(1) which imposes upon owners and general contractors and their agents a nondelegable duty to provide safety devices necessary to protect workers from the risks inherent in elevated work sites. Further, the Court of Appeals noted that  §240(1) holds owners and general contractors absolutely liable for any breach of the statute, even if the job was performed by an independent contractor whom they did not supervise nor control.

Having said all of that, the Court of Appeals nevertheless held that a general contractor’s authority to supervise the work and implement safety procedures was not a sufficient basis for requiring common law indemnification. It explained that liability for indemnification may only be imposed against parties who exercised actual supervision. Thus, the Court asserted that a common law indemnification claim did not lie against a party who had contractual authority to direct and supervise the work at a job site but never exercised that authority because it subcontracted its contractual duties to another.  Id. at 378.

The Court of Appeals also noted that an owner or general contractor, who was not at fault for the misconduct, still has the right to seek full indemnification from the party who was actually responsible for the accident.  Id.  A party’s right to indemnification may not only arise from a contract but may have also be based upon equity (what is fair and proper between the parties). Common law indemnification is generally available in favor of an innocent party who was held vicariously liable for the wrongdoing of another.  Id. at 375.

In its analysis, the Court explained that although the Agreement required Gallin to supervise and direct the work at the worksite, such a provision was insufficient to establish that Gallin actually supervised or directed Plaintiff’s work. The Court noted that this was especially so considering the following facts:

1.  Gallin had no supervisory authority over Samuels’ (Plaintiff’s employer’s work) work.
2. Gallin would not have directed Plaintiff as to how to perform his work.       and 
3. Gallin did not provide any tools or ladders for the subcontractors that worked at the site.

Id.

Therefore, the Court affirmed the dismissal of Plaintiff’s cross claim for common law indemnification, holding that Gallin did not actually supervise, nor direct, Plaintiff’s work. Id. Thus, Gallin did not have to compensate the Property Owner for any of the $800,000.00 they paid to Plaintiff in order to settle his personal injury claim. 

May a Spoilation of Evidence Claim Protect a Contractor From a Suit for Construction Defects?

Under certain circumstances, a contractor who defectively completed a construction project may protect himself from a lawsuit by alleging that the plaintiff spoiled evidence of that defect.

An example of this proposition is New Jersey Municipal Environment Risk Management v. Killam Associates Consulting Engineers, et. al., in which the Appellate Division of the Superior Court of New Jersey considered a spoilation of evidence claim with respect to a construction project. A spoilation claim arises when a party in a civil action has “hidden, destroyed or lost relevant evidence and thereby impaired another party’s ability to prosecute or defend the action.” Id. at 5. To avoid a spoilation claim, a prospective party who is aware of the probability of a law suit has an obligation to preserve evidence related to that claim. If a party was not diligent in seeking to prevent spoliation, he may be subject to sanctions. Id.

In Killam Associates, the Plaintiff hired a contractor (“Defendant”) to design and construct a piping system to transport fuel from an above-ground storage tank to a generator. After six years, the Plaintiff found a defect in the system. Id. at 1. Three years later, the New Jersey Department of Environmental Protection demanded that the Plaintiff provide compensation for the environmental damage caused by the system’s defective condition. In turn, Plaintiff filed the action against the Defendant for negligent installation and design to recover damages for the defects found in the piping system. Id. at 2.

Though the Plaintiff contemplated suing the Defendant when the defect was initially found, the Plaintiff instead proceeded with repairs to the piping system and did not inform the Defendant of any damage. Because the Plaintiff commenced repair, replacement, maintenance and/or disposal of the underground transfer pipes that proved defective and did not notify the defendants of its conduct, the Defendants alleged that Plaintiff wrongfully spoliated the evidence of what caused the leak. The Defendants alleged that the Plaintiff compounded this spoliation of evidence by not notifying the Defendants of the defect to provide them with an opportunity to inspect the faulty piping system before it was removed.

In assessing the Defendants’ Spoilation of Evidence claim, the Court found that the Plaintiff did violate its legal duty to preserve the lost evidence by its failure to:

1. alert the defendants and thereby deprive them of any opportunity to observe the conditions as they existed and take appropriate measures to avoid prejudicial loss of evidence and
2. direct their own agents to preserve the components of the dismantled pipeline. Id. at 6.

However, the Court also noted that with respect to commercial construction projects, the parties may consider a “vast array of alternate sources of information that such projects generally provide.” Id. at 7. Therefore, the potential spoliation claim might be mitigated if the information were available from some other source. Id.

Ultimately, the Court held that the Plaintiff did violate its duty to preserve the evidence of the faulty piping material. However, the Court remanded the case to the trial court to rule on the Defendants’ spoliation of evidence claim only after a thorough review of other sources of relevant information regarding the piping system’s defect.

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At What Stage Of An Incomplete Construction Project Is the Statute of Repose Triggered In New Jersey?

The Statute of Repose is a law that provides a ten year bar for claims related to construction-related lawsuits for “any deficiency in the design, planning, survey, supervision or construction of an improvement to real property.” The ten years begins to run at the stage of “substantial completion”. For construction projects, the stage of “substantial completion,” occurs when most of the project is complete even if certain “punch list” tasks remain. However, the issue remaining is whether there can be different dates of completion for different contractors, based upon when their work was finished.

The issue was considered in a recent case considered by the Appellate Division of the State of New Jersey.  New Jersey v. Perini Corp., 425 N.J. Super. 62 (App. Div. 2012). In that case, the State of New Jersey utilized Perini Corp. to construct the South Woods State Prison (“prison”) with a centralized underground hot water distribution system (“distribution system”). (Id. at 66) The State’s contract with Perini Corp. specified that the project would be completed in three phases, each with its own completion deadline. (Id. at 68) Perini Corp. subcontracted with several vendors that contributed in various capacities to the project. (Id.)

The Perma-Pipe Corporation was one such subcontractor, and it designed the layout of the distribution system and manufactured its materials. The distribution system exhibited defects from 2000, just a few years after construction of the prison. On April 28, 2008, the State sued five (5) companies responsible for the design, construction, and materials used in the distribution system. That date was ten (10) years after the prison began operating but three (3) days before ten (10) years from the date that the State issued the final certificates of substantial completion of the project. (Id.)   The State admitted that the distribution system was completed and in operation by April, 27, 1998, when the prison was in operation. Id. at 67-71.

The relevant issues considered were:

1) does the ten-year period of the Statute of Repose run from the substantial completion of a phase or component of a construction project or from completion of the entire project; and

2) what is the relevance of multiple and successive certificates of substantial completion in determining the date from which the ten-year period runs.

 Id. at 71.

The decision hinged on the interpretation of N.J.S.A. 2A:14-1.1a., which barred claims regarding an improvement to real property from being brought “‘more than 10 years after the performance or furnishing of such services and construction.’”  Id. at 72  Particularly, the Court considered the statutory interpretation of the words, “‘improvement to real property.’” Id. at 75.

After reviewing various state precedents, the Court decided that, “the trigger date is the date of substantial completion, not completion of every last task…, [that] separate trigger dates apply to subcontractors that have substantially completed their work, even if improvement as a whole is not completed…and [that] the trigger date for any single contractor runs from completion of that contractor’s entire work on the ‘improvement,’ not from discrete tasks.” Id. at 74.

The Court stated that components of construction may be substantially completed before completion of the entire project and that subcontractors who work on those components with no further duties may expect the Statute of Repose to run when their work is completed. Id. at 77. However, for the Statute of Repose to run under those circumstances, components of a project must have been documented as distinguishable components in the contract for the construction work. Id. at 78. In this case, the Court decided that the water distribution system was a component of an improvement, not a separate improvement to real property. Id. at 76.

The distribution system was not identified in the State’s contract with Perini Corp., as a separate improvement that was substantially completed before the completion of the entire project. Id. at 79. Accordingly, the Statute of Repose did not run independently for substantial completion of the distribution system alone. Because the State filed its complaint three (3) days before ten (10) years of the official certification for substantial completion of the entire project, the Statute of Repose did not bar the claim. 

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What Constitutes Home Improvement Under The Administrative Code of City of New York?

In Great Am. Restoration Services, Inc. v. Patricia Lenti, et al., 2012 NY Slip Op 03140 (N.Y.A.D. 2 Dept., April 24, 2012), the Supreme Court of New York, Appellate Division (Second Judicial Department), addressed whether, under New York City’s Administrative Code, a contractor is required to possess a license to perform work on a house.

The facts were straightforward. After a fire at the defendants’ house, they hired Plaintiff to temporarily “cover holes in the roof, remove water from the premises, remove both salvageable and unsalvageable personal property, store such property, and remove debris.” Id. at 2.  One of the issues was whether the Plaintiff needed to be licensed under the NY Administrative Code.

In that case, the Supreme Court (Nassau County) had granted the Contractor’s (“Plaintiff”) motion for summary judgment on the issue of liability in an action to recover damages for breach of contract.  The lower Court also denied defendants’ cross motion to dismiss the complaint pursuant to CPLR 3211(a)(7).  The Plaintiff appealed.

The Appellate Division upheld the lower Court’s decision because the Appellate Division felt Plaintiff established its prima facie entitlement to judgment as a matter of law. Id.  Plaintiff submitted the contract between the parties that laid out the work that Plaintiff was to perform.  The contract clearly stated that defendants would be responsible for any charges not covered by the defendants’ insurance policy.  Plaintiff also submitted proof that it satisfactorily completed the work and never got paid for that work pursuant to the contract.  Id. 

The Appellate Court stated that since the defendants failed to “raise a triable issue of fact in response [to the evidence Plaintiff submitted for review], the Supreme Court properly granted the plaintiff’s motion for summary judgment on the issue of liability.” Id.   The Appellate Division also stated that the lower Court properly determined that the work Plaintiff performed on the defendants’ home did not constitute “home improvement” as defined in Administrative Code of City of New York (“Code”) § 20-386(2).  Under § 20-386(2), “home improvement” is defined as

The construction, repair, replacement, remodeling, alteration, conversion, rehabilitation, renovation, modernization, improvement, or addition to any land or building, or that portion thereof which is used or designed to be used as a residence or dwelling place and shall include but not be limited to the construction, erection, replacement, or improvement of driveways, swimming pools, terraces, patios, landscaping, fences, porches, garages, fallout shelters, basements and other improvements to structures or upon land which is adjacent to a dwelling house.  “Home improvement” shall not include (i) the construction of a new home or building or work done by a contractor in compliance with a guarantee of completion of a new building project, (ii) the sale of goods or materials by a seller who neither arranges to perform no performs directly or indirectly any work or labor in connection with the installation of or application of the goods or materials, (iii) residences owned by or controlled by the state or any municipal subdivision thereof, or (iv) painting or decorating of a building, residence, home or apartment, when not incidental or related to home improvement work as herein defined.  Without regard to the extent of affixation, “home improvement” shall also include the installation of central heating or air conditioning systems, central vacuum cleaning systems, storm windows, awnings or communication systems.

Administrative Code of City of New York § 20-386 (2).

As determined by the lower Court, since Plaintiff did not perform work that rose to the level of that constituting home improvement, it was not required to possess a license pursuant to the Code § 20-387(a).  Consequently, Plaintiff was not required to plead that it was duly licensed by the Department of Consumer Affairs of the City of New York as a home improvement contractor.  This finding justified the lower Court’s denial of defendants’ cross motion to dismiss the complaint “pursuant to CPLR 3211 (a)(7) for failure to plead that it was so licensed.”  Great Am. Restoration Services, Inc. v. Patricia Lenti, et al.,  2012 NY Slip Op 03140 (N.Y.A.D. 2 Dept., April 24, 2012).

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How May a Party Establish that a Court Has Proper Jurisdiction When None of the Parties to the Suit are Domiciled in the State Where the Suit is Brought?

In Frontier Ins. Co. v. Nat’l Signal Corp. et. al., Civ. Action No. 98-4265 (E.D. Penn. November  9, 1998), the Federal District Court for the Eastern District of Pennsylvania addressed the circumstances under which  a party who is not domiciled in the forum state may overcome a motion to dismiss for lack of personal jurisdiction.

In that case, Frontier Ins. Co (“Plaintiff”) brought a diversity action seeking to recover monies paid and expended under the terms of a Performance and Payment Bond (“Bond”). It was filed after judgment was rendered against Plaintiff in a prior suit.  The prior suit was filed against Plaintiff by a supplier of National Signal Corp. (“National”) seeking payment for equipment sold to National.  National contracted with another company for “design, refurbishment, and construction work on several railroad grade crossing signals in Pennsylvania” Id. at 1, and Plaintiff issued a Bond as security for that work.  Plaintiff had a General Agreement of Indemnity (“Agreement”) with National, Joseph S. Banasiak and Kimberly A. Banasiak (collectively “Defendants,” individually “Defendant”). The Defendants were the owners, officers, and directors of National. The Agreement held National and the Defendants liable for indemnifying Plaintiff from any claims, payments or judgments that Plaintiff may incur because of the Bond.  Id. at 2.   As a result, Plaintiff initiated a lawsuit and Defendants filed a motion to dismiss, for among other things, lack of personal jurisdiction. 

The motion was denied for the following reasons. The Court noted that when a defendant raises the defense of the court’s lack of personal jurisdiction, the plaintiff bears the burden of showing that there are sufficient contacts between the defendants and the forum to justify proper jurisdiction. See id. at 3.  Under Pennsylvania law, “a court exercises jurisdiction to the fullest extent permitted by the Due Process Clause of the Fourteenth Amendment to the Constitution of the United States.” Id. at 3; 42 Pa. Con. Stat. Ann. § 5322(b). Pursuant to the Due Process Clause, the Defendants were responsible for establishing minimum contacts with Pennsylvania, the forum state, to establish that allowing the suit to continue forward in Pennsylvania would not “offend traditional notions of fair play and substantial justice.” Id. at 3. 

To do this, the Defendants needed to first show that they acted in Pennsylvania thereby purposefully availing themselves of the benefits and protections of Pennsylvania law.  See id.  The Court mentioned that establishment of minimum contacts came when the connection and conduct within the forum state was such that the Defendants could reasonably anticipate being brought into court there.  The court found that the Defendants had minimum contacts with Pennsylvania because the Defendants entered into the Agreement in their individual capacities thereby “stepp[ing] into [Plaintiff’s] shoes and themselves guaranteed the Pennsylvania construction work performed by National.  Serving as a guarantor may amount to minimum contacts where, as in the instant case, the guarantor has a financial interest in the business or person whose obligation it guarantees.”  Id. at 5.  The Court noted that “[t]he Agreement itself is a contact by both of [the Defendants] individually with the construction work and therefore with Pennsylvania, and is sufficient to establish specific jurisdiction on a lawsuit arising out of the Agreement.” Id. at 6.  Further, because performance of the Agreement was centered in Pennsylvania, the very purpose of the Agreement focused on Pennsylvania, and the Bond that was issued to support the transaction between National and the other construction company came as a result of that transaction being for work to be performed in Pennsylvania, the Court found that it was reasonable for the Defendants to have anticipated being haled into court in Pennsylvania in a “dispute over the indemnity Agreement.” Id. at 7.

Once minimum contacts were established, the Court needed to address whether assertion of personal jurisdiction comported with “fair play and substantial justice.” Id. at 7.  To do this, the Court evaluated the “burden on the defendants, the forum’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the states in furthering fundamental substantive social policies.” Id. at 7.  The burden was on the Defendants to evince that rendering jurisdiction in the forum state would be unreasonable. It was found that the Defendants did not carry their burden and did not offer any reason why being subjected to jurisdiction in Pennsylvania would be “so burdensome or so offensive to the interstate judicial system as to offend fair play and substantial justice.” Id. at 7.  Ultimately, the Court concluded that Pennsylvania had personal jurisdiction over the Defendants and dismissed the motion on that ground.

The contacts a defendant establishes with a state in which a plaintiff seeks to file a complaint is important when assessing that states jurisdictional right over that defendant.  If a defendant purposefully conducts business in a state and avails himself of the benefits of that state’s laws, he may have difficulty later contesting that state’s jurisdictional power.  

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What is the Standard Under the Pennsylvania Unfair Trade Practices and Consumer Protection Law for Assessing Personal Liability?

Recently, a Pennsylvania court was asked to determine the standard for finding personal liability against individuals under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“UTPCPL”).  Greg and Sandra, et al., v. A.T. Masterpiece Homes at Broadsprings, LLC, No. 1302 MDA 2011 (Pa. Super. Ct. 2012).

In that case, the court held that there would be personal liability because the jury found “misleading conduct.”  The underlying facts involved a contractor who had constructed a home through his company.  The assertion was that he had performed a substandard job which rose to the level of violation of the UTPCPL. The question was whether he would be personally liable for the acts of his company. 

One of the bases for the Court’s ruling was that the individual principal of the contractor reassured the homeowners repeatedly that the work would be performed correctly and that he would take care of any of their concerns.  This was critical to the determination that personal liability would be appropriate.

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What is a “Pay if Paid” Contract Clause and Can it Apply to a Construction Subcontractor?

What constitutes a “pay-if-paid” construction contract clause? The United States Court of Appeals for the Third Circuit recently addressed this question in Sloan v. Liberty Mutual Insurance Company, 653 F.3d 175 (3d Cir. 2011). 

That case involved a waterfront condominium in Philadelphia.  Isla of Capri Associates LP, the developer of the condominiums (“IOC”), contracted with Shoemaker Construction Co. (“Shoemaker”) to be the contractor for the project (“Contractor Contract”).  Subsequently, Shoemaker hired subcontractor Sloan & Co. (“Sloan”) to perform construction involving drywall and carpentry (“Subcontract”).  Liberty Mutual Insurance Co. (“Liberty”) issued a surety bond guaranteeing payment for the subcontractors work.  After the work was completed, IOC refused to pay Shoemaker for monies owed under the contractor contract because IOC was unhappy with some of the subcontractors’ work.  As a result, Shoemaker withheld the remaining balance due to Sloan.

Sloan filed a claim against Liberty for payment pursuant to the surety bond. Id. at 177.  Liberty denied any payment obligation under the premise that Paragraph 6.f of the subcontract contained a provision that conditioned Sloan’s right to payment on IOC’s payment to Shoemaker (a pay-if-paid clause). See id.  Therefore, Sloan was not entitled to payment since Shoemaker never received payment from IOC. Id.  The United States District Court for the Eastern District of Pennsylvania entered partial summary judgment for Sloan, rejecting Liberty’s view of the contract. Id. at 178.

The dispute here centered on the interpretation of Paragraph 6.f of the subcontract, which dealt with final payment.  The first subparagraph provided: ‘Final payment shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment . . .’ Id. at 179.  There were seven (7) conditions precedent, one of which was that ‘[IOC] shall have accepted the Work and made final payment thereunder to [Shoemaker].’ Id.  Another provided that Shoemaker “shall have received final payment from [IOC] for [Sloan’s] work.’ Id. 

Paragraph 20’s liquidating provision in the subcontract further clarified the extent of Shoemaker’s responsibility for payment to Sloan:

In the event [Sloan] asserts a claim for payment of the Subcontract Sum or a portion therof . . . and in the event that [Shoemaker] in its sole, exclusive and arbitrary discretion submits said . . . Claim to [IOC] . . . for a decision or determination, then all decisions and determinations made by [IOC] or its representative shall be binding upon [Sloan] even though [Sloan] may not be a party thereto.

Id. at 182.

When Liberty appealed the United States District Court for the Eastern District of Pennsylvania’s judgment, the Third Circuit was satisfied that the contract stipulated a pay-if-paid compensation policy for Sloan. See id. at 184.  The Third Circuit concluded that “Paragraphs 20 and 6.f create a mechanism for passing through Sloan’s remaining claims for final payment and peg Sloan’s recovery to the amount that Shoemaker receives from IOC for Sloan’s work.” Id.   Sloan, therefore, received a proportional/pro rata share of the recovery Shoemaker gained from its separate lawsuit against IOC rather than receiving the full balance it was owed under the contract. See id. 

The lesson here for subcontractors is to be aware of the pay-if-paid issue when drafting the subcontractor agreement. 

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What Is The Statute Of Limitations For Undisclosed Defects In A Real Estate Sale?

The common law doctrine of nullum tempus occurrit regi roughly translates to “no time run against the king.” In the past, that doctrine was enforced when courts determined whether government agencies were barred by the same statutes of limitations as private citizens when bringing claims for undisclosed defects in a real estate sale. However, this principle has since been limited by the statute of limitations for governmental bodies to bring claims.

N.J.S.A. 2A: 14-1.1 (“the statute”) was enacted in the 1960s to limit the potential liability to which architects and building contractors, among others, were increasingly subject. Rosenberg v. North Bergen, 61 N.J. 190, 194 (1972). Its purpose was to define substantive rights for these professionals, such as the right not to have to have to defend ancient claims or obligations. Cyktor v. Aspen Manor Condominium Ass’n¸359 N.J. Super. 459 (App. Div. 2003). The statute was designed so as to provide “repose” for such professionals from all claims arising out of construction or design defects of a hazardous nature ten years after the work was completed.

In 1995, the court found that the nullum tepus doctrine did not apply to the state or its agencies. State v. Cruz Constr. Co, 279 N.J. Super. 241 (App. Div. 1995). Cruz, as well as other similar decisions, prompted the state legislature to amend the statute in order to clarify that it was meant to apply to claims by both private citizens as well as government agencies.

The statute reads: “No action, whether in contract, tort, or otherwise, to recover damages for any deficiency…shall be brought against any person performing or furnishing the design…to real property, more than 10 years after the performance or furnishing of such services and construction. This limitation shall serve as a bar to all such actions, both governmental and private, but shall not apply to actions against any person in actual possession and control as owner, tenant, or otherwise, of the improvement at the time the defective and unsafe condition of such improvement constitutes the proximate cause of the injury or damage for which the action is brought.” N.J.S.A. 2A: 14-1.1

The amendment also enumerates four governmental actions that the statute does not bar. Id. at 14-1.1(b). The statute does not bar an action by a governmental unit:

1)      on a written warranty, guaranty or other contract that expressly provides for a longer effective period;

2)      based on willful misconduct, gross negligence or fraudulent concealment in connection with performing or furnishing the design, planning, supervision or construction of an improvement to real property;

3)      under any environmental remediation law or pursuant to any contract entered into by a governmental unit in carrying out its responsibilities under any environmental remediation law; or

4)      pursuant to any contract for application, enclosure, removal or encapsulation of asbestos.

Id. at 14-1.1(b).

The statute defines “governmental” as “the state, its political subdivisions, any office, department, division, bureau, board, commission or public authority or public agency of the state or one of its political subdivisions, including but not limited to, a county or a municipality and any board, commission, committee, authority or agency which is not a State board, commission, committee, authority or agency.” Id. at 14-1.1(c).

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What Are the Benefits of Drafting An Indemnification Clause In A Construction Contract?

May contractors limit their responsibility for paying another party’s legal fees in situations where that other party’s fault precipitates the cause of action? Recent court decisions suggest that, if the contractor has a narrow indemnification clause in his contract, courts might be less likely to find him liable in situations where the contractor was not at fault.

In a recent case considered by the Appellate Division of the Second Department of the Supreme Court of New York, a plaintiff was allegedly injured when his motorcycle struck a pothole in a Brooklyn street. Sand v. City of New York, 2011 NY Slip Op 3226, 2 (N.Y. App. Div. 2d Dep’t 2011). The plaintiff brought suit against the City of New York. The City had issued a permit to Verizon New York Inc. (“Verizon”) to open the roadway at that location. Accordingly, it commenced a third-party action for indemnification against Verizon. That company then commenced a fourth-party action for contractual indemnification against S. DiFazio and Sons Construction, Inc. (“DiFazio”), the construction company that had performed the work for Verizon under the permit.       

DiFazio claimed that it was not required to pay Verizon’s legal fees or any other costs of defending the action because it was not at fault. However, the Court determined that the agreement did not include any writing that would make DiFazio’s obligation contingent on fault. The Court held that “[p]ursuant to the contract between DiFazio and Verizon, DiFazio agreed to defend and indemnify Verizon for all claims arising out of DiFazio’s ‘actual or alleged acts or omissions.’ The plain and unambiguous terms of the contract do not condition DiFazio’s obligation for attorneys’ fees and costs on a finding of fault.” Id. at 2.      

The Sand Court might have decided differently if the indemnification provision were limited to a more specific and narrow variety of claims. For example, in a recent Second Department case, the Court held the contractor was not liable because the indemnification clause was narrowly tailored. Farrell v. City of New York¸ 2011 NY Slip Op 2839, 1 (N.Y. App. Div. 2d Dep’t 2011). That case stemmed from a 2002 incident on the Gowanus Expressway where a piece of road debris allegedly went through a windshield and struck the plaintiff driver in the face, rendering her unconscious. At the time, defendants Grace Industries, Inc. and Grace Industries Inc./El Sol Contracting & Construction Inc., J.V. (the “defendants”) were performing re-decking and structural steel replacement work on the expressway pursuant to a contract with the State of New York. The plaintiff sought to recover damages for personal injuries. Importantly, the indemnification clause was a narrow one. As the Court observed, “[T]heir contract with the State was limited and did not entirely displace the State's duty to maintain the roadway.” Id.

The defendants submitted a motion for summary judgment, which was granted by the lower court and affirmed by the Appellate Division.        

The Farrell Court held that a party who enters into a contract to render services may be said to have assumed a duty of care (and thus be potentially liable in tort to third persons) only where:  

1) the contracting party, in failing to exercise reasonable care in the performance of its duties, launches a force or instrument of harm,

2) the plaintiff detrimentally relies on the continued performance of the contracting party’s duties, or

3) the contracting party has entirely displaced the other party’s duty to maintain the premises safely.

Church v. Callanan Indus., 99 N.Y.2d 104 (N.Y. 2002).

However, the Farrell Court determined that, although the contract between the defendants and the State included an indemnity clause, it did not entirely remove the State’s duty to maintain a safe roadway. In other words, it had not “entirely displaced the other party’s duty to maintain the premises safely.” Additionally, the defendants demonstrated that they did not cause the debris to be on the roadway; they did not know how long it had been there; and that they did not have a duty to remove non-construction roadway debris. Hence, they would not have to pay the State’s legal fees and costs of defending the suit.

These two decisions demonstrate the consequences of having a broad versus narrow construction contract indemnification clause. The second decision also indicates the benefits a construction company may enjoy by including a narrow indemnification clause in its contracts because it might enable a company to avoid the obligation of paying for another party’s attorneys’ fees in situations where they are not at fault.

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© 2012 Nissenbaum Law Group, LLC

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Is a homeowner who retains and manages contractors for his own home improvement project able to enforce his rights under the New Jersey Consumer Fraud Act (CFA) and New Jersey Contractor’s Registration Act?

In a recent case, the Appellate Division of Superior Court of New Jersey determined that even though a homeowner may have acted as a “contractor” for his own project by retaining and managing all the other contractors, nevertheless, he still had the protections of a “homeowner” under the Consumer Fraud Act (“CFA”) and Contractor’s Registration Act (“CRA”).   Murnane v. Finch Landscaping, LLC, 420 N.J. Super. 331. Murnane, a homeowner, contracted with Finch Landscaping, LLC to construct a bluestone patio in the backyard of his home. He also contracted with other building contractors and a patio designer to undertake other parts of the project. He did not engage the services of a general contractor and at one point also referred himself as the “general contractor” for this construction project.

The parties entered into a written contract that also specified the thickness of the bluestone. As the work progressed, various changes were made to the construction specifications but these changes were not reflected in writing. Although, Murnane paid the full contract price of $26,300, Finch Landscaping, LLC sent Murnane invoices for additional costs it incurred due to the various changes made during the construction. Murnane refused to pay the additional charges and brought an action for breach of contract and a violation of the CFA in the Superior Court of New Jersey, Special Civil Part. Finch Landscaping, LLC counterclaimed for the amount incurred for the additional work it performed.

The trial court held that since Murnane held himself out as the “general contractor” for his patio construction project, he was barred from asserting a CFA claim against Finch Landscaping, LLC. The jury ruled in favor of Finch Landscaping, LLC on its counterclaim and returned a verdict of no cause of action on the contract claim but at the same time found Finch Landscaping, LLC liable for damages to Murnane’s property. Murnane appealed from the dismissal of its CFA claim and Finch Landscaping, LLC appealed from the denial of its motion for counsel fees.

Since home improvement contracts are prone to consumer fraud violations, the New Jersey Supreme Court has applied the CFA and the CRA to these transactions. This is significant because, for example, under the CFA, every home improvement contractor is required to register with the Division of Consumer Affairs, N.J.S.A. 56:8-138.

The Court held that even if “a homeowner could be characterized as a general contractor, he is still ‘an owner … of a residential … property’ who has entered into a ‘home improvement contract’ with a contractor.” N.J.S.A. 56:8-137. The Court distinguished this case from the holding in Messeka Sheet Metal Co. v. Hodder, 368 N.J. Super. 116, 845 A. 2d 646 (App. Div. 2004). In Messeka Sheet Metal Co. a homeowner contracted with a general contractor who in turn contracted with a subcontractor to install air conditioning. The subcontractor asserted a direct claim against the homeowner and the homeowner asserted a CFA claim against the subcontractor. The Court dismissed the homeowner’s CFA claim because the homeowner had no direct contractual relationship with the subcontractor. However, in the present case, Murnane had a direct contractual relationship with Finch Landscaping, LLC. Therefore, he was not barred from bringing a claim under CFA in spite of holding out as a general contractor for the construction project.

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© 2011 Nissenbaum Law Group, LLC

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