Consumer Fraud Act Counterclaim Against General Contractor Denied to Homeowner Who Used Architect as Intermediary to Manage Construction Project

more+
less-

In a recent unpublished opinion, Gemini Restoration Inc. v. Leone, et al., Docket No. A-6171-09T4 (August 3, 2012), New Jersey’s Appellate Division, among other things, affirmed a summary judgment order that dismissed a Consumer Fraud Act (“CFA”) counterclaim against a general contractor where the homeowner used an architect as an intermediary to deal directly with that general contractor.  Where the architect proposed and approved additional work and approved the labor rates to be charged, the Court found that the contractor complied with the essential purpose, if not the precise terms, of the CFA regulations.  This decision is consistent with prior decisions in New Jersey finding that the CFA (and its regulations) are designed to protect homeowners who deal directly with contractors.  Here, as the homeowner did not primarily deal directly with the contractor relating to the additional work, the Court was not inclined to give the CFA its usual liberal construction to protect the homeowner.

Gemini Restoration Inc. (“Gemini”) was a contractor who was hired by the homeowner, Joseph Leone (“Leone”), to perform extensive renovations to Leone’s house in Spring Lake, New Jersey.  Leone also hired Christine Miseo (“Miseo”), an architect with whom Leone had previously worked, to assist with and supervise the renovation work done on the project.  The original contract was for a lump sum of $221,738.55, but substantial additional work followed.  The additional work was to be done on a time and material basis, plus overhead and profit.  Gemini did not prepare any subsequent contract or change orders for the extra work as Leone persistently declined to discuss it and instead referred Gemini to Miseo.

Gemini then completed the major renovations and submitted invoices to Leone and Miseo.  Leone paid for all of the invoices, which were approved by Miseo, except the last invoice, claiming that Gemini had charged excessive labor rates.  Gemini filed a complaint seeking, among other things, the balance due pursuant to its contract.  Leone filed a counterclaim against the general contractor alleging that the contract violated the CFA for its failure to specifically set forth the labor rates to be charged. 

At the trial level, the Court dismissed Leone’s CFA counterclaim against the general contractor and the matter proceeded to a jury trial.  At the close of Gemini’s case, the trial judge, despite dismissing the CFA counterclaim, allowed Leone’s affirmative defense based on the CFA and dismissed Gemini’s breach of contract claim because the contract violated the CFA regulations governing home improvement contracts.  The Court did, however, allow Gemini to recover for the reasonable value of its services.  The jury then returned a verdict in the amount of $313,026.80 (which included interest and attorneys’ fees resulting from an offer of judgment) in Gemini’s favor. 

Leone appealed, among other things, the dismissal of his CFA counterclaim.  The Appellate Division affirmed the underlying decisions.  In upholding the dismissal of the CFA counterclaim, the Appellate Division cited prior cases that found the owner to be precluded from asserting violations of the CFA because his actions either caused, contributed or induced the CFA violations.  The Court noted that where Leone placed the architect between himself and Gemini, and the architect proposed and approved the additional work and approved the labor rates, Gemini substantially complied with the CFA regulations.  While recognizing the remedial purpose of the CFA and the usual rule of liberal construction applied to CFA claims, the Court concluded that allowing Leone to invoke the CFA here would be inconsistent with the purpose of the CFA.

The take-away of this decision is a caution to owners that, although hiring an architect or other construction expert to oversee the project may help during the construction phase, that decision comes at a cost as it may negatively impact or preclude any potential CFA claims for the failure of the general contractor to comply with the regulations promulgated pursuant to the CFA.