New Jersey's Highest Court Scrutinizes Statutes of Limitation and the Discovery Rule in Construction Defect Cases

by Wilson Elser
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Wilson Elser

The typical construction defect case presents an up-front analytical challenge: the defense attorney is presented with boxes of project materials, perhaps an extensive case history and prior discovery, and likely an unhappy (but these days, resigned) client. So you start with the basics: a review of the complaint to assess the allegations; a review of the contract documents, particularly the scope of work, for an understanding of the client’s role in the project; and a conference with the client to review the project and the expected course of the litigation.

At the same time, you speak with the carrier involved for an understanding of the terms of the applicable policy, and whether that may affect your strategy. Is there an ability to spread the risk, perhaps through a contractual indemnification provision? Or might your client be on the hook to defend and indemnify another party?

There is so much to do that sometimes a statute of limitations or statute of repose evaluation might take a back seat, unless it’s obvious. After all, particularly if your client was brought into the suit late, aren’t these cases typically subject to the discovery rule? And aren’t there often multiple owners, such that this new owner bringing suit wouldn’t have had prior knowledge of any defects?

Well, yes and yes. But a new case in New Jersey illustrates the importance of reviewing this potential affirmative defense and the related statute of repose defense, and making the review part of every initial analysis. Most importantly, the case gives defendants the ability to defend against the assertion that the statute of limitations was tolled until the most recent owner (and plaintiff) discovered the cause of action.

Background
In Palisades at Fort Lee Condo. Ass’n v. 100 Old Palisade, LLC, 2017 N.J. Lexis 845, 169 A.3d 473 (Supreme Court of New Jersey, September 14, 2017), Palisades at Fort Lee Condominium Association, Inc. (plaintiff) sued the general contractor and three subcontractors, alleging various defects in a commercial/residential high-rise under plaintiff’s control at the time suit was filed. However, the complex had gone through two ownership changes prior to suit being filed, and the building had been completed more than six years earlier.

The relevant timeline was as follows: in December 1999, Palisades A/V Acquisitions Co., LLC (A/V) retained defendant general contractor AJD Construction Co., Inc. (AJD) to build the complex. The project architect certified that the project was “substantially complete” as of May 1, 2002. A/V then rented units in the project for two years, after which, in June 2004, it sold the complex to 100 Old Palisade, LLC (Old Palisade), which converted the units into condominiums. On October 1, 2004, an engineer retained by Old Palisade found the complex to be in good condition.

In July 2006, the unit owners took control of the Condominium Association and retained another engineer to inspect the complex. That engineer issued a June 13, 2007, report detailing construction-related defects, and the Association eventually sued various defendants in 2009 and 2010. The allegations were the typical breach of warranty and negligent workmanship allegations found in most construction defect complaints.

Rulings
In New Jersey, the statute of limitations to file such a suit is six years, as set forth in N.J.S.A. 2A:14-1. Ruling on a motion to dismiss for violation of the statute of limitations, the trial court found that the statute began to run on May 1, 2002, when the complex was “substantially complete.” Because suit had been filed after May 2008, the court granted the motion and dismissed the case.

The Appellate Division disagreed, concluding that the Association’s claims accrued when it assumed control of the complex and became “reasonably aware” of the claims of construction defect based on its June 2007 engineer’s report. The Supreme Court granted certification, but did not completely agree with either the trial or appellate courts, illustrating the difficulties inherent in the application of the statute of limitations and the discovery rule in construction defect litigation.

First, the Supreme Court disagreed that it is simply a matter of determining when a project is “substantially complete” when setting the accrual date. The discovery rule applies, it noted. So if an owner does not reasonably first discover a cause of action until after the project is substantially complete, then the full six-year statute does not begin to run until the date that the cause of action is discovered.

The Supreme Court therefore rejected the trial court’s opinion that, because damages and an at-fault party were discovered within the initial six-year period commencing with the substantial completion of the project, the plaintiff had to file the action within the initial six-year period. “We therefore reject defendants’ argument that, so long as plaintiff discovered the basis for an actionable claim within six years from the date of substantial completion, plaintiff had to file within the time remaining in the limitations period.”

Instead, the Supreme Court determined the statute of limitations does not begin to run until “the date that the plaintiff knows or reasonably should know of an actionable claim against an identifiable defendant” if that date is after the date of substantial completion. While defendants lost that argument, they won another, perhaps less obvious, argument.

The plaintiff in Palisades was the third owner of the project in question, a 41-story high-rise consisting of a 30-story residential tower atop an 11-story parking garage, including mid-rise apartments, townhomes and recreation facilities. A/V owned it in 1999, Old Palisade took ownership in 2004, and the plaintiff, the Condominium Association, owned it in July 2006 when 75 percent of the unit owners took control of the Condominium Association.

Plaintiff attempted to argue that the statute of limitations did not begin to run until the Condominium Association received its expert report in June 2007, notifying it of the defects. In fact, that is how the Appellate Division ruled. It made no difference to the Appellate Division that the prior owners had known of defects in the project. Instead, the Supreme Court held that a current owner stands in the shoes of a prior owner for statute of limitations purposes, and has no right to revive what may have been a lapsed claim simply because of a change in ownership:

“The statute of limitations clock is not reset every time property changes hands… A cause of action, for purposes of N.J.S.A. 2A:14-1, accrues when someone in the chain of ownership first knows or reasonably should know of an actionable claim against an identifiable party.”

Rejecting plaintiff’s argument and that of its amicus curiae supporters, the Supreme Court explicitly held that a condominium association is not exempt from that rule: “Old Palisade took title subject to the rights of A/V Acquisitions, and the plaintiff Condominium Association took title subject to any limitation on the rights of the two predecessor owners.”

As a final point, the Supreme Court noted that its holding does not abrogate the effect of the statute of repose, which in New Jersey is 10 years. Repose statutes are specifically enacted to save architects, planners, designers, builders and contractors from indefinite liability through operation of the discovery rule. Thus, the 10-year period begins to run on the date of substantial completion and cannot be extended.

At the end of the day, the Supreme Court found in Palisades that it could not determine the accrual date of the statute of limitations, and that a hearing would have to be held with respect to when each of the three owners knew or should have known of a cause of action as against each defendant. It remanded the case for that purpose.

Analysis
Back to the beginning: a statute of limitations analysis must be conducted at the start of each case. In Palisades, the motions to dismiss based on the statute of limitations were filed at the conclusion of all discovery. While an initial analysis might yield the conclusion that certain discovery will be needed to ascertain the appropriate accrual date (or dates, in the case of multiple defendants), counsel will then know what discovery to seek during the discovery period.

In addition, as a practical matter − and if the managing judge or counsel are in agreement − discovery limited to the statute of limitations can be conducted in the beginning of the case, early motions can be filed, and an early hearing held, potentially obviating the need for a lengthy full-discovery period.

…And potentially winning the case on an affirmative defense short of trial for one of those resigned, but now pleasantly surprised, clients.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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