Law Lessons from Lake Estates Condominium Assoc., Inc. v. Falcon Engineering LLC, N.J. Super. Law Div. (Natali, P.J.Ch.), MIDDLESEX COUNTY, DOCKET NO. L-6171-15, August 31, 2017:
A party’s claims against architects and others involved in the design and construction of building projects generally accrue upon “substantial completion” of the project. However, that general rule remains subject to equitable principles, such as the discovery rule. If applicable, the discovery rule mandates that Plaintiff’s tort and contract claims would not accrue until Plaintiff discovers “… or by an exercise of reasonable diligence and intelligence should have discovered that [it] may have a basis for an actionable claim.” See Lopez v. Swyer, 62 N.J. 267, 272 (1973).
Simply because the discovery rule may be applicable to a claim does not translate into an automatic tolling of the applicable limitation period. Rather, a party seeking to invoke the equitable doctrine of the discovery rule has the burden of proof to establish that it is entitled to the benefit of the rule. In this regard, the Court concludes that the motion record establishes a genuine and material factual question regarding the date of accrual of Plaintiff’s claims and, consistent with Lopez, supra, 62 N.J. 267, the Court shall conduct a plenary hearing to determine when Plaintiff discovered, or should have discovered, it had an actionable claim.
Further, a party who successfully invokes the discovery rule, and who therefore seeks a tolling of the applicable statute of limitations, is ordinarily afforded the entire limitation period after accrual. At a Lopez hearing, the Court should also address whether equity supports deviation from that general rule. See Fox v. Passaic Gen. Hosp., 71 N.J. 122, 126 (1976).
The statute of limitations applicable to claims for tortious injury to real or personal property is six years and is set forth in N.J.S.A. § 2A:14-1:
[E]very action at law for trespass to real property, for any tortious injury to real or personal property, for taking, detaining, or converting personal property, for replevin of goods or chattels, for any tortious injury to the rights of another not stated in sections 2A:14-2 and 2A:14-3 of this Title, or for recovery upon a contractual claim or liability, express or implied, not under seal, or upon an account other than one which concerns the trade or merchandise between merchant and merchant, their factors, agents and servants, shall be commenced within 6 years next after the cause of any such action shall have accrued.
Because the statute does not define when a cause of action accrues, the definition of accrual has been left to judicial interpretation. Rosenau v. City of New Brunswick, 51 N.J. 130, 137 (1968). Traditionally, the accrual of a cause of action occurs on the date when “‘the right to institute and maintain a suit first arises.’” Russo Farms, Inc. v. Vineland Bd. of Ed., 144 N.J. 84, 98 (1996) (citing Rosenau, supra 57 N.J. at 137; quoting Fredericks v. Town of Dover, 125 N.J.L. 288, 291 (E. & A. 1940)). The time at which this right arises “refers to the combination of facts or events which permit maintenance of a lawsuit; the time of occurrence of the last of these requisite facts is thereby made the critical point of inquiry.” Id. (citation and internal quotation omitted).
In the context of construction cases, courts have held that such claims generally accrue, and the statute of limitations triggered, at the time that the project is substantially complete. Russo Farms, Inc. v. Vineland Bd. of Ed., 144 N.J. 84, 92-93 (1996). As stated by the Supreme Court in Russo, the term “substantial completion” has a precise meaning within the construction industry. Id. at 117 (citation omitted). Generally, the term is defined as:
the date when construction is sufficiently complete . . . so the owner can occupy or utilize the building. Substantial completion occurs when the architect certifies such to the owner and a certificate of occupancy is issued attesting to the building’s fitness. At that point, the building is inhabitable, and only touch-up items and disputed items, the ‘punch list,’ remain. The punch list is a final list of small items requiring completion, or finishing, corrective or remedial work.
Ibid. (internal quotations and citations omitted).
When assessing whether a particular project is substantially completed, “the issue is not whether the construction has defects but whether a certificate of occupancy has been issued such that the property can be used for its intended purpose.” Trinity Church v. Lawson-Bell, 394 N.J. Super 159, 176 (App. Div. 2007).
It should be noted that in addition to the statute of limitations, construction claims are also subject to the statute of repose, see N.J.S.A. 2A:14-1.1, after which a potential cause of action extinguishes. Trinity Church, supra, 394 N.J. Super. at 175. N.J.S.A. 2A:14-1.1 was enacted with the purpose of “protect[ing] architects and other construction professionals from the potential ‘liability for life’ posed by the discovery rule.” Id. at 176. “The substantial completion clause insulates architects and other construction professionals from the operation of the discovery rule during the four-year gap between the statutes[,]” thereby precluding application of the discovery rule to the statute of repose. Id. at 175-76. With these principles in mind, the Russo court rejected the argument that accrual in construction cases for statute of limitations purposes did not commence until the final “punch list item” was completed, concluding that:
if liability were to be measured from the date the last retainage is released and all disputed and punch list items are completed, a contractor’s exposure to suit might be prolonged unreasonably. Disputes over workmanship and compensation for services can continue for years. Under the Appellate Division’s analysis, a contractor would remain liable and the commencement of the statute of repose could be delayed indefinitely. Such a result is inconsistent with the statutory purpose to provide repose and allow contractors and architects to walk away from liability at a certain point in time; indeed, it would, all too often, provide ‘liability for life.’
Russo Farms, Inc., supra, 144 N.J. at 117-18.
The discovery rule is an equitable doctrine and provides that “in an appropriate case a cause of action will be held not to accrue until the injured party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim.” Lopez v. Swyer, 62 N.J. 267, 272 (1973). The rule was developed to mitigate “the often harsh and unjust results which flow from a rigid and automatic adherence to a strict rule of law.” Id. at 273-74.
As stated in Villalobos v. Fava, 342 N.J. Super. 38, 45-46 (App. Div. 2001):
There is a significant distinction between the two equitable doctrines affording relief from unfair and unnecessarily harsh results. The discovery rule avoids the mechanical application of a statute of limitations by postponing the accrual of a cause of action so long as a party is unaware either that he has been injured or that the injury was due to the fault or neglect of an identifiable person. Equitable tolling assumes the accrual of the action but intercepts and delays the bar of the statute of limitations because the plaintiff lacked vital information, which was withheld by a defendant.
Determining whether the discovery rule is applicable is “center[ed] upon an injured party’s knowledge concerning the origin and existence of his injuries as related to the conduct of another person.” Torcon, Inc. v. Alexian Bros. Hosp., 205 N.J. Super. 428, 435 (Ch. Div. 1985). In some instances, “the fact of the wrong lay hidden until after the prescribed time had passed[,]” while “[i]n other cases damage may be all too apparent, but the injured party may not know that it is attributable to the fault or neglect of another.” Lopez, supra, 62 N.J. at 274.
Thus, the knowledge required is of both injury and fault. Torcon, Inc., supra, 205 N.J. Super. at 435(emphasis supplied). Specifically, “once a party knows it has been injured and the injury is the fault of another it has the requisite knowledge for the applicable period of limitations to commence running.” Ibid. The injured party need not be aware of the exact cause of the injury before the applicable statute of limitations may commence; “[i]t is only the identity of the party causing the injury and the fact of injury that must be known.” Ibid. Further, “[i]t is not necessary that the injured party have knowledge of the extent of the injury before the statute begins to run.” Id. at 436 (citation and internal quotation omitted).
As the above cases make clear, the discovery rule is not boundless. Indeed, it contemplates that it may be “unjust, […], to compel a person to defend a law suit long after the alleged injury has occurred when memories have faded, witnesses have died and evidence has been lost.” Id at 274. Therefore, New Jersey courts have held “that the equitable claims of the parties must be weighed against each other and that not every belated discovery will justify application of the rule.” County of Morris v. Fauver, 153 N.J. 80, 109 (1998). With this in mind, the discovery rule imposes an affirmative duty on plaintiffs “to use reasonable diligence to investigate a potential cause of action, and thus bars from recovery plaintiffs who had reason to know of their injuries.” Ibid.
Where the competing equitable claims of the parties cannot be reconciled, a just resolution must be reached, preferably by the judge, rather than the jury. Lopez, supra, 62 N.J. at 274. Typically, the best approach for the judge is to hold a preliminary hearing outside of the presence of the jury to make the determination of whether equity should preclude the statute of limitation’s bar. Id. at 275. If credibility is an issue, the court should avoid resolving the issue solely on the basis of affidavits. Ibid. However, the manner in which the hearing proceeds remains within the discretion of the trial court. Ibid. The Lopez court instructed that the following factors may appropriately be considered by the judge:
the nature of the alleged injury, the availability of witnesses and written evidence, the length of time that has elapsed since the alleged wrongdoing, whether the delay has been to any extent deliberate or intentional, whether the delay may be said to have peculiarly or unusually prejudiced the defendant. The burden of proof will rest upon the party claiming the indulgence of the rule.
Id. at 276.
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