State v. Perini Corp., 2015 N.J. LEXIS 388 (N.J. April 30, 2015)

The Supreme Court of New Jersey held that for an improvement supplying critical utilities to multiple buildings constructed as part of a multi-phase construction project, the ten year statute of repose (N.J.S.A. 2A:14-1.1(a)) begins to run from that time when the final buildings comprising the project are substantially complete and the improvement is hooked up to all of the buildings it is designed to serve.

This case arises out of the failure of a high temperature, hot water (“HTHW”) system installed at the South Woods State Prison (“South Woods”) in New Jersey. The State of New Jersey (the “State”) executed a contract with Perini Corporation (“Perini”) for construction and design of South Woods (the “Project”). The Project consisted of twenty-six buildings to be designed and constructed in three continuous, uninterrupted phases. The Project included the design and installation of the HTHW system, which would provide heat and hot water to all of the buildings. Perini engaged Robert Kimball & Associates, Inc. (“Kimball”) to serve as the architect, to fulfill certain engineering and consulting roles, and to design the HTHW system. Perini also engaged Natkin & Company (“Natkin”) as the HVAC contractor responsible for installation the HTHW system and Jacobs Facilities, Inc. (“Jacobs”) to provide construction oversight services. Perma-Pipe, Inc. (“Perma-Pipe”) manufactured the underground piping used in the HTHW system.

On May 16, 1997, the parties executed certificates of substantial completion for Phase I of the Project, which included housing for roughly 960 inmates. Inmates began occupying the facility shortly thereafter. Between July 15, 1997 and October 27, 1998, the parties executed certificates of substantial completion for the buildings that encompassed Phase IIA. On May 1, 1998, the parties executed certificates of substantial completion for Phase II, which included the minimum security unit of the facility and a garage. The various buildings comprising the Project were hooked up to the HTHW system as they were completed, and there was no separate certificate of substantial completion for the HTHW system. According to the State, the HTHW system failed in March 2000 and then again on several subsequent occasions.

On April 28, 2008, the State filed a complaint against Perini, Kimball, Natkin, Jacobs and Perma-Pipe. The State asserted various breach of contract, negligence and malpractice claims against Perini, Kimball, Natkin, and Jacobs, and a claim under the New Jersey Products Liability Act (“PLA”) against Perma-Pipe, along with additional warranty and tort claims.

The defendants moved for summary judgment on the grounds that the claims were barred by the ten year statute of repose. The defendants pointed out that inmates occupied the facility on or before April 28, 1998 and argued that the HTHW system was substantially complete on or before that date. With the exception of Perma-Pipe, the trial court agreed with the defendants and found that the State’s complaint was barred by the statute of repose. The trial court concluded that Perma-Pipe was a manufacturer and supplier of goods governed by the PLA, and therefore the statute of repose did not apply to the State’s claims against Perma-Pipe. The State appealed the trial court’s decision. The Appellate Division reversed the orders granting summary judgment in favor of Perini, Kimball, Natkin, and Jacobs, finding that the statute of repose does not provide for separate trigger dates for components of a project that do not qualify as discrete improvements to real property and that the record did not support a finding that the HTHW system was a separate improvement. Thus, the Appellate Division concluded that the statute of repose was triggered when defendants substantially completed all of their work, which was no earlier than May 1, 1998. The Appellate Division affirmed the trial court’s decision that the statute of repose did not bar the State’s claims against Perma-Pipe. Consequently, the Appellate Division determined that the State’s complaint was not barred by the statute of repose.

Perini, Kimball and Perma-Pipe appealed. Perini and Kimball argued that the prison could not function without the HTHW system, so the statute of repose was triggered when inmates began moving into South Woods (i.e., when the State took over beneficial use and operation of the HTHW system). Perma-Pipe argued that it was entitled to the protections of the statute of repose because it was involved in the design, planning and installation of the HTHW system, and not merely a manufacturer of pipe.

In deciding the defendants’ appeal, the Supreme Court of New Jersey first noted that the statute applies only to work that constitutes an “improvement to real property.” In the context of the statute of repose, New Jersey courts have interpreted “improvement to real property” to mean something that “permanently increases the property’s value” and is “more than mere repair or replacement.” The Court concluded that the HTHW system was an improvement. Typically, the statute of repose is triggered upon issuance a certificate of substantial completion for the project. However, courts have distinguished contractors that perform limited services from those that perform services or have supervisory roles spanning an entire project. For the former, courts have found that the statute’s purpose is best served by finding that the ten year period begins to run when the defendant completes its discrete task with respect to the property. Whereas, for the latter, the ten year period commences when the entire project is substantially complete.

In this case, the State argued that the Project must be considered a unitary undertaking because construction continued uninterrupted through all three phases, and the defendants were involved continuously from commencement of construction through completion. The defendants emphasized that the Project was constructed in phases and argued that the ten year period should have commenced upon completion of each phase. The Supreme Court agreed with the State. According to the Court, several factors compelled this conclusion.

First, the HTHW system is an improvement to the property “designed to form a unified whole that interacts with and is connected to every structure of the prison complex.” Second, the defendants were involved continuously throughout construction of the Project. Third, while the defendants completed the central plant and boilers for the HTHW system on May 16, 1997, many of the buildings that the HTHW system was designed to serve were not complete by that date. The Court refused to apply the statute of repose in a manner that would permit separate trigger dates for sections of the same system as additional buildings were completed. Fourth, the contract did not require a separate certificate of substantial completion for the HTHW system, which, according to the Court, supports the conclusion that neither party contemplated that the system would be completed on a piecemeal basis. Thus, the Court concluded that the ten year period began to run on the day after the parties executed certificates of substantial completion for the final buildings served by the HTHW system.

The Court also rejected Perma-Pipe’s arguments, concluding that the record did not support Perma-Pipe’s argument that it was involved in design or installation of the HTHW system. Rather, the Court found that Perma-Pipe was a manufacturer of a product used in construction of the HTHW system, and therefore the statute of repose did not apply.

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