Real Estate & Construction Law Monitor : Real Estate & Construction Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Development & Building

Subcontractor’s bids, when coupled with its backlog of uncompleted contracts, must not cause subcontractor to exceed aggregate rating limit in public school projects.  If so, contractor’s bid will be rejected due to subcontractor exceeding its aggregate rating limit.

On June 20, 2011, the Appellate Division decided Brockwell & Carrington Contractors, Inc. v. Kearny Board of Education, Hall Construction, Inc. and Dobco, Inc., Docket No. A-1806-10T4, (“Brockwell”), which may have a significant impact on bidding on public school contracts.  Brockwell involved a bid for a public school contract in which the contractor’s bid, which included a subcontractor’s bid, was rejected because the subcontractor’s bid exceeded the aggregate rating for the subcontractor for public school projects.  As a result, the contract was awarded to the next lowest bidder.

In Brockwell, defendant Kearny Board of Education (“BOE”) sought bids for the Kearny High School – Aircraft Noise Abatement and Renovations Project (the “Project”).  Bids were opened for the Project on September 15, 2010.  Defendant, Dobco, Inc. (“Dobco”), was the lowest bidder, followed by plaintiff, Brockwell & Carrington Contractors, Inc. (“B&C”).  The BOE awarded the contract to Dobco.  Dobco’s bid identified Environmental Climate Control, Inc. (“ECC”) as the heating, ventilation and air-conditioning (“HVAC”) subcontractor for the Project.  The Division of Property Management and Construction (“DPMC”) classifies contractors by permissible aggregate work volume based upon each contractor’s submissions detailing financial ability.  The purpose of this classification is to prevent contractors from taking on more work than they can handle.  At the time the bid was submitted, ECC’s aggregate limit with the DPMC was $15,000,000.  ECC submitted a proposal for its portion of the HVAC work at the Project of $7,250,000.  ECC also submitted a Form 701, which is required by the DPMC, indicating that it had a backlog of uncompleted contracts totaling $3,500,000.  Thus, the total amount charged against ECC’s aggregate limit was $10,750,000.

B&C challenged Dobco’s bid, claiming that it had received a Form 701 from ECC a month earlier on an unrelated contract in which ECC disclosed a backlog of uncompleted contracts exceeding $9,000,000.  As a result, B&C claimed ECC, with its $7,250,000 bid and $9,000,000 backlog, exceeded its $15,000.00 aggregate limit and could not work on the Project.  After an investigation by the BOE, it was determined that ECC exceeded its aggregate limit. 

B&C then filed a complaint seeking to disqualify Dobco’s bid, as it was based on ECC’s improper bid for the HVAC work.  ECC and Dobco claimed that the aggregate limit did not apply to subcontractors and that, even if it did, much of ECC’s backlog of uncompleted work was subcontracted out to others, which did not count against its aggregate limit.  The trial court rejected Dobco’s arguments and found that ECC was subject to the aggregate rating limit set by N.J.A.C. 17:19-2.13(a).  The trial judge concluded that Dobco’s bid was materially defective and denied Dobco the opportunity to correct its bid.  The trial court also ordered BOE to award the contract to B&C, the next lowest responsible bidder. 

On appeal, the Appellate Division rejected Dobco’s arguments and concluded that both the Public School Contracts Law, N.J.S.A 18A:18A-1 to - 59 (“PSCL”), and prior case law, support the conclusion that any subcontractor’s bid on a school project must not exceed the subcontractor’s aggregate rating limit.  The Appellate Division further found that the Educational Facilities Construction and Financing Act, N.J.S.A. 18A:7G-1 to - 48 (“EFCFA”), provides an independent basis for holding that ECC must meet the aggregate rating limit requirements set by N.J.A.C. 17:19-2.13(c).  Thus, the Appellate Division affirmed that ECC’s non-compliance was a material defect that was fatal to Dobco’s bid.

The Appellate Division concluded that the aggregate rating limit applied to both subcontractors and contractors.  The Court noted that when considering the applicable law, “it is clear that the Legislature intended to ‘ensure that only qualified bidders perform the work.’” To differentiate between subcontractors and contractors would not advance this goal.

The Appellate Division also held that any contractor, including a subcontractor, is entitled to the benefit of the eighty-five percent (85%) reduction provision of N.J.A.C. 17:19 2.13(a) and (c), which allows a contractor to reduce the value counted against its aggregate limit by the backlog of uncompleted contracts, provided that the backlog is limited to single prime contracts in which it subcontracted work to others.  Here, ECC did not certify that its backlog included single prime contracts in which it subcontracted work to others.  Thus, ECC was not entitled to the benefit of the eighty-five percent (85%) reduction.  As it included ECC’s improper bid, Dobco’s bid was defective and “permitting a post-bid cure under these circumstances would afford Dobco an unfair advantage.”  The decision of the trial court to reject the award of the contract to Dobco and award the contract to B&C was affirmed.

This decision may have a significant impact on the bidding process for public school projects as it makes clear that not only contractors, but subcontractors too, must comply with the aggregate rating limit of N.J.A.C. 17:19-2.13 and N.J.S.A. 18A:7G-37.  In addition, contractors have to be clear when submitting Form 701 and any related certifications to disclose if they have prime contracts in which a portion of the work is subcontracted to others, thereby getting the benefit of the eighty-five percent (85%) reduction provided in N.J.A.C. 17.19-2.13 (a) and (c) and reducing the amount counted against their aggregate limit.  Lastly, contractors who are the second or third lowest bidder should consider a challenge to a bid result if they have questions as to the aggregate limit rating of the lowest bidder and/or its subcontractors.

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In two recent decisions, the New Jersey Appellate Division made clear that purchasers of homes from the original owners cannot sue the manufacturer of an exterior siding product for the home under the New Jersey Products Liability Act, N.J.S.A. 2A:58C-1 to -11 (“NJPLA”) if they suffer only economic losses. In addition, the purchasers also cannot assert a claim under the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -184 without some evidence of representations or concealments from the manufacturer made to them regarding the product. These two decisions should cause home buyers to be especially diligent when reviewing their home inspection reports, as they now may be precluded from asserting tort claims against the manufacturer of faulty or defective products or systems, and will have to rely primarily on contract claims against sellers for relief.

In Marrone v. Greer & Polman Construction, Inc., 405 N.J. Super. 288 (App. Div. 2009) and Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), the Appellate Division addressed similar claims by homeowners regarding the Exterior Insulation Finish System, or EIFS, siding that was applied to each of their houses. EIFS is a system that incorporates foam insulation panels, reinforced mesh and a textured finished coating to the siding of the house. The finished product resembles a stucco finish. In both cases, the Marrones and the Deans purchased their homes from the original homeowner.

Both houses were built in 1995. The Marrones purchased their home in 2003 and the Deans purchased their home in 2002. Each homeowner later developed problems with the EIFS siding. Each party then sued, among others, the EIFS manufacturer, the subcontractor who applied the EIFS, and the general contractor who built the house. Neither the Marrones nor the Deans sued either of the sellers of the homes. The buyers each settled with the general contractor and subcontractor, leaving only the tort claims against the manufacturer of the EIFS product for disposition by the Court.

The Marrones and Deans each ultimately discovered that the EIFS siding on their homes was defective and had caused damage to the EIFS itself, as well as damage to the roof, soffits, sheathing, framing, substrate of the house, windows and doors. Although it is not stated how much the Marrones spent to repair the EIFS on their home, the Deans spent approximately $150,000 replacing the siding and other work to the exterior and interior of the house. Neither the Marrones nor the Deans alleged that the EIFS caused any personal injury or damage to anything other than their homes.

The Appellate Division affirmed the granting of summary judgment on each of the NJPLA claims based on the ‘economic loss’ doctrine. The Court in Marrone defined economic loss as “the diminution in value of the product because it is inferior in quality and does not work for the general purpose for which it was manufactured and sold.” The Appellate Division concluded that actions where a purchaser is claiming damage to the product itself, rather than any personal injury or damage to other property, are better suited for contract claims, rather than tort claims, such as a claim under the NJPLA.

The Appellate Division emphasized the policy decisions underlying tort and contract principles and concluded that “the policy behind contract law ‘operated on the premise that the contracting parties, in the course of bargaining of the terms of the sale, are able to allocate risks and costs of the potential nonperformance.’” The Appellate Division determined that rather than pursue the tort claim under the NJPLA, the Marrones and the Deans had the opportunity to negotiate with each of the sellers over the EIFS siding, by either walking away from the deal or insisting that the sellers remediate the EIFS defect. Each of the sellers did not take that action and they were not then permitted to pursue a claim against the manufacturer in tort.

Each of the Marrones and the Deans argued that the EIFS siding did cause damage to “other property” far beyond just the EIFS itself. They each claimed damage to other parts of their houses, including the roof and soffits, windows, doors, sheathing and wood framing. The Appellate Division in both Marrone and Dean found that these other parts of the house were all component parts of the house and not separate from the EIFS. The Appellate Division concluded that the buyers purchased a house, not the components parts separately, and any damage to the other component parts of the house were still damage to the “product” itself. As a result, those claims did not take the cases outside of the economic loss doctrine and summary judgment was still appropriate.

A consequence of these two decisions is that it is incumbent upon buyers to negotiate with sellers over problems that may arise from EIFS, or any other potential system or product of a house, at the time of the sale, rather than waiting and asserting a tort claim if something later goes wrong.
 

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Under current law a tenant’s contractor cannot file a construction lien against the landlord’s property for amounts unpaid by the tenant unless the landlord provided written authorization of the specific construction contract between the contractor and the tenant. Even where the lease specifically provided for the work in question and the landlord was notified of the commencement of the work as required by the lease, current law prohibits a tenant’s contractor from filing a construction lien against the landlord’s property.

This will all change if a proposed revision to the New Jersey Construction Lien Law is enacted this spring. According to the proposed revision to the law, a tenant’s contractor will be able to file a lien against the landlord’s property for amounts unpaid by the tenant if the landlord has paid or agreed in writing to pay for the majority of the tenant improvement or if the lease provides the property is subject to a lien for the improvement. Accordingly, landlords should review current leases and keep this proposed change in mind for future leases in order to minimize the chances of unwittingly exposing the property to construction liens filed by contractors who have not been paid by the tenant for improvements to the property. 

If and when the revision to the law is enacted, in appropriate circumstances a landlord may wish to consider requiring all tenant improvement work be done by the landlord instead of reimbursing the tenant for the tenant’s cost to perform the work. This alternative will allow the landlord to control the work and pay contractors directly.  Another possibility to consider is for a landlord to provide the tenant with a rent concession, not tied to tenant improvements, while simultaneously providing in the lease all tenant improvements shall be done by the tenant at its sole cost and expense.  This latter approach, however, is not foolproof.  A court may interpret the latter provision as the substantial equivalent of a landlord paying for the improvements, thereby subjecting it to a potential lien against its interest in the property.

Watch this blog for updates on the proposed revisions to the Construction Lien Law.

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