The Supreme Court of New Jersey is currently considering two cases which may have significant wide-ranging effects on disputes in the construction industry: State v. Perini Corp., 425 N.J. Super. 62 (App. Div. 2012), certif. granted, 210 N.J. 476 (2012), and Town of Kearny v. Brandt, 2011 WL 2535286 (N.J. Super. A.D. 2011), certif. granted, 209 N.J. 98 (2012).

In both cases, the Appellate Division addressed unsettled issues related to New Jersey’s statute of repose, N.J.S.A. 2A:14-1.1, which forecloses claims based on “deficiency in design, planning, surveying, supervision or construction of an improvement to real property” filed more than 10 years “after the performance or furnishing of such services and construction.”

The resolution of the issues presented in these two cases may alter the length of time for potential liability of contractors and subcontractors, may change the way damages are apportioned and may also lead to changes in construction contract language and negotiations. Practitioners in this area of law should keep a close eye on these two cases and assess their impact on current or anticipated litigation.

In Perini, the State of New Jersey sued its contractor, construction manager and two subcontractors for leaks and other damages caused by faulty pipes and valves in the underground heating and hot water system at the South Woods State Prison. The trial court granted summary judgment to the general contractor, construction manager and subcontractors on the basis that the state’s complaint had not been filed within the 10-year statute of repose. The Appellate Division reversed and found that the state’s complaint was timely filed. Perini posed the novel issue of applying the statute of repose in the context of a multiphase construction project, and the Appellate Division recognized that there are apparently no prior published decisions applying the statute of repose to such projects. Therefore, the Supreme Court’s review of this matter will likely provide useful guidance in the application of the statute of repose in disputes arising out of multiphase projects.

The Appellate Division in Perini held that where there are successive certificates of substantial completion on a multiphase project, the statute of repose does not begin to run with respect to a component part until all phases of the project are complete, if the component part is not specifically referenced in an earlier certificate of completion. The court found that although a significant portion of the prison project was completed and in use more than 10 years before the commencement of the action, the underground heating and hot water system was not substantially completed until completion of all the buildings serviced by the system. The Appellate Division reasoned that because the heating and hot water system was not individually listed in the certificates of substantial completion for the early phases of the project, it was not intended by the parties to be treated as a separate improvement. Therefore, although several buildings in the prison complex were functioning and were being serviced by the system, the Appellate Division concluded that the statute of repose, with respect to claims related to the failure of the heating and hot water system, was not triggered until all buildings in the complex were completed.

The ruling of the Appellate Division in Perini has the potential to greatly expand the liability of general contractors in large projects involving multiple phases. A contractor in a multiphase project may successfully complete several buildings which are in use for many years but may not receive the protection afforded by the statute of repose until some potentially minor portion of the work is concluded. In this scenario, a contractor may finish a building early in a multiphase project and remain liable for components of that building for much longer than 10 years after the completion of the building.

Additionally, in dicta, the court noted that the 10-year statute of repose for subcontractors is triggered at the time of a subcontractor’s substantial completion of its services, irrespective of the date when the contractor or other subcontractors finished their work. Applying this reasoning, the length of time a subcontractor may be held liable for defective performance may be reduced to substantially less than 10 years from the completion of the project when the subcontractor completes its task early in the project. It is conceivable that on large multiphase projects, the liability of a subcontractor will be completely extinguished prior to final completion where final phases of the project are not completed for many years. This may leave owners and contractors with little or no time to seek remedies against a subcontractor whose defective construction may not be apparent until completion of the project. The same would apply with respect to claims against design professionals on design-build projects, where the designer is a retained by the general contractor.

The concerns posed by the holding and dicta in Perini may be addressed with appropriate contract language altering the trigger date for the statute of repose. However, language setting completion dates for phases of a project must be very specific as to the precise building components or services included in light of the Perini court’s nuanced distinction between an “improvement to real property” and a component of the construction project. The Appellate Division stressed that the statute of repose is to be measured from substantial completion of an “improvement to real property” and not from individual tasks or components. Although the court observed that parties to a construction contract could include language in their contract providing different triggers for separate phases of a project, the agreements must clearly identify the precise portions of work deemed to be a completed “improvement.” The court concluded that the parties in the Perini matter had not specifically referred to the heating and hot water system in the contract documents. This omission led the court to conclude that the system was merely a component of the overall project. Therefore, parties seeking to avoid the harsh results of the statute of repose through contract language must do so with specificity.

In Town of Kearny, the town brought suit for damages sustained when its police and fire facility suffered structural damage due to settling of the foundation. The town filed suit against the soils engineer, the architect and the structural engineer. The soils engineer and the architect were retained by the town and the structural engineer was retained by the architect. An action against the contractor was filed separately and settled in 1999. The trial court concluded that the soils engineer and the structural engineer completed their services more than 10 years before the commencement of the action and dismissed them from the action. However, the trial court concluded that the complaint was filed within 10 years of the completion of the architect’s services. The trial court rejected the architect’s request for apportionment of liability between it and the dismissed engineers, ultimately awarding damages solely against the architect.

The Appellate Division determined that apportionment was available despite the dismissal of the engineers on the basis of the statute of repose. The court further concluded that a jury should be permitted to assess the comparative fault of the defendants and hold the architect liable only for the portion of the damages attributed to it. The Appellate Division held that the engineers were nevertheless protected by the statute of repose. This result was reached in an effort to balance the legislative goal of the statute of repose, which is to provide “fairness” to defendants, and the goals of the Joint Tortfeasors Contribution Law and the Comparative Negligence Act, which seek to fairly assign liability based on the fault of the individual defendant.

The Appellate Division’s decision in Town of Kearny indicates that claims against subcontractors or engineers who complete their work early on an extended project must be filed quickly, in some instances in much less than 10 years from substantial completion of the entire project. This has the potential to result in unfairness to owners, who may not be made whole, and general contractors and designers, who may be unable to seek indemnification or contribution from subcontractors who performed the work. The Supreme Court’s review of the interplay between the statute of repose and the apportionment rules in Town of Kearny may provide helpful direction to practitioners in construction disputes.

The Supreme Court will have the opportunity to address important unsettled issues related to the statute of repose in both Perini and Town of Kearny. In Perini, the Supreme Court should clarify the application of the statute of repose in multiphase projects. In Town of Kearny, the Supreme Court will deal with the interaction between apportionment rules and the statute of repose. The forthcoming decisions may have significant impact on construction projects, litigation and contract negotiation. Parties to construction contracts and their counsel should carefully consider these two cases and any impacts the cases may have on contract drafting, negotiation and litigation. •