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Developer Not Entitled to Indemnity for Own “Broken Promises”

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Developer Not Entitled to Indemnity for Own “Broken Promises”

In the summer of 2017, Becker secured a landmark $9 million-plus jury verdict against the subsidiary of a national developer on behalf of a condominium association located along the Hudson River. The award included punitive (treble) damages for violation of the New Jersey Consumer Fraud Act, which also entitled the association to seek attorney’s fees, costs, and prejudgment interest. Recently, defendant K. Hovnanian at Port Imperial Urban Renewal II, LLC (“Hovnanian”), appealed the denial of a post-trial motion seeking indemnity from its architect, RTKL New Jersey Architects P.A. (“Architects”), for the jury verdict against Hovnanian. The Appellate Division found that the parties did not contract for Architects to indemnify Hovnanian for Hovnanian’s own conduct and because the jury assigned damages, it found they were based “singularly on Hovnanian’s own fault,” affirmed the trial Court’s opinion.

The following is the summary the Appellate Division issued of the Plaintiff’s case against Hovnanian and Architects:

  • Hovnanian acquired a residential development project, Grandview at Riverwalk Port Imperial, in West New York from the original developer in June 2003.
  • Architects had worked for the original developer, and Hovnanian contracted with the Architects to complete the design of the 132-unit building and provide construction contract administration services.
  • Hovnanian issued a public offering statement to purchasers of units at Grandview, providing that “the Common Elements are fit for their intended use.”
  • The plans Hovnanian submitted to, and obtained approval from, the Town of West New York called for a “Type 2B” building, requiring use of fire-retardant-treated wood.
  • In May 2004, a consultant that Hovnanian hired to review Architect’s plans for insurance purposes questioned whether the building had the necessary fire rating to meet the requirements of a Type 2B building.
  • In February 2005, Architects advised Hovnanian that the existing plans called for untreated plywood in the floor assemblies, contrary to Type 2B requirements.
  • Architects raised the possibility of applying fire-retardant chemicals to the plywood already installed, but was not sure whether the “local authority” would accept this solution, as it did not involve treating the wood with a “pressure process” at the manufacturer.
  • Architects noted that “[t]his could be a very sensitive topic” that “may require a review and approval by both the building department and the fire marshal.”
  • Hovnanian and Architects met in April 2005 to discuss the problem, by which time more than half the plywood had already been installed and Hovnanian was not willing to consider solutions that would disrupt the construction schedule.
  • The parties discussed “several solutions” that “centered on converting the assembly” from a Type 2B building classification to a “Type 3A” classification by either adding an additional sprinkler system or “filling the void space” in the floor assemblies with a non-combustible material to satisfy Type 3A requirements.
  • Hovnanian summarized the meeting and next steps in an email noting “[t]iming is critical,” and the matter “must be handled properly.”
  • The email stated the modification “needs to be presented to the town building department, either as a request or in the form of an advisory that we are changing from a 2B to a 3A,” and that Architects was to “produce a detail of their official, professional recommendation for the revised assembly, bearing in mind the costing issues discussed in the selection of materials.”
  • Architects responded by email, stating:

    We believe that the use of plywood (untreated or treated) at the deck assembly in [Grandview] should require that it be classified as Type 3A (non-combustible/combustible) construction type under BOCA 96. It was my understanding that the strategy was that we would raise this as a concern and make this recommendation to the local authority along with describing the action necessary to accomplish that change and allow them to react. We believe they will see the situation the same way but until they do so we have not presumed anything.

  • An internal Hovnanian email a few days later, principally concerning permits for another building, noted:

    This all further complicated by the expected fire assembly changes for the floors being developed by [Architects] for both buildings [including Grandview]. As I said in that action plan, we need to be extremely thoughtful on how all of that is presented. I am expecting draft materials from [Architects] this weekend and will need to review and approve by the first of the week. This may be another situation where we may need to use some political capital to expedite approvals of the changes.

  • Architects drafted a formal letter to Hovnanian dated April 18, 2005, (1) outlining the issue with having plywood in Type 2B construction, (2) stating the classification of Grandview “may need to be changed to a Type 3A,” (3) recommending “that this situation be reviewed with the local code authority as soon as possible,” (4) detailing the alterations that would be implemented if the change to Type 3A was accepted, and (5) offering assistance to Hovnanian in resolving the issue with the local authority.
  • Hovnanian forwarded Architect’s letter to the construction code official in West New York, noting that “some of the details may warrant a revision from the current Type 2B Construction Classification to a Type 3,” and advising it would prepare “formal submissions of the revised plans” and forward them to the code official within two weeks.
  • Architects prepared plans for the revised building classification in May, which Hovnanian hand-delivered to West New York. Hovnanian’s representative admitted at trial that he never saw any documentation approving the Type 3A plans and could not recall whether the local authority ever responded to the requested change in classification.
  • Architects requested an “updated status of the resubmittals” from Hovnanian on June 29, 2005. Hovnanian responded that it had met with officials the day before about changes to a different building, but “[b]eyond that, they have made no further comments or requests as a result of the changes” relating to Grandview.
  • There is nothing in the record to show that Hovnanian took any steps to obtain approval of the classification change beyond hand-delivering the plans, nor anything to show that West New York ever approved it. The town issued a certificate of occupancy for the 132 residential units in Grandview in November 2006.
  • Although Hovnanian several times amended its public offering statement, it never disclosed that West New York had not approved the plans changing the building’s classification from Type 2B to Type 3A.
  • Plaintiff’s architectural expert, Chris Ling of ARCHforensic, testified that the conversion from Type 2B construction to Type 3A was a “major change,” and that when Architects discovered Grandview did not meet the requirements of Type 2B construction, it should have told Hovnanian to stop all work and ensured West New York approved the classification change before proceeding.
  • The expert further opined that Grandview, as constructed, would not meet the Type 3A requirements.
  • The expert testified Grandview was constructed with “western deck framing,” meaning that “you build a wall, then you build the floor, and then build a wall on top of that floor, then you build a floor.”
  • He explained that a Type 3A building should have “a solid masonry wall” on the exterior where the floor “wouldn’t interrupt the structure load path of the exterior wall.”
  • According to the expert, the exterior walls of Grandview could collapse in a fire, which would not occur had they been built properly in accordance with the requirements of a Type 3A building.
  • Plaintiff’s expert concluded that the exterior walls of Grandview, as constructed, were not fit for their intended purpose.
  • The expert acknowledged that West New York could have permitted Hovnanian to deviate from the BOCA code, thus allowing the walls as constructed, but opined a waiver after construction would be inappropriate because it would not render the building safer in a fire.
  • According to the expert, a waiver “won’t slow the fire down. Fire doesn’t know you have a waiver.”
  • Responding to questions posed by a specifically detailed verdict sheet, the jury found plaintiff proved Architects was negligent in the design of Grandview, and that Hovnanian failed to meet an express promise that the common elements would be fit for their intended purpose.
  • The jury found plaintiff suffered damages of $4 million, for which Hovnanian was responsible for $3 million and Architects responsible for $1 million.
  • As to consumer fraud, the jury found plaintiff proved Hovnanian “omitted an important and significant fact . . . with the intent that others would rely” thereon in connection with the sale of the units by stating the common elements “would be fit for their intended use,” and that plaintiff had proved an ascertainable loss of $3 million, trebled to $9 million.
  • The indemnification clause at issue provides as follows:

    Architect hereby agrees to assume the entire responsibility and liability for any and all injuries or death of any and all persons and any and all losses or damages to property caused by or resulting from or arising out of any negligent act, error or omission on the part of the Architect, its agents, officers, employees, subcontractors or servants in connection with this Agreement or with the prosecution of the work hereunder, whether covered by the insurance specified herein or not.  Architect shall indemnify, and save harmless Owner, its agents, officers, employees, affiliated entities from any and all claims. losses, damages, fines or penalties, legal suits or actions including reasonable attorney’s fees, expenses and costs which may arise out of any and all such claims, losses, damages, legal suits or actions for the injuries, deaths, losses and/or damages to persons or property.

  • The trial court judge denied Hovnanian’s motion for indemnification prior to trial, finding the issue would not be ripe until the jury had assessed the negligence of Architects, if any.
  • After trial, when the motion was renewed, the judge denied indemnification based on the language of the clause and the jury’s findings.
  • Specifically, the judge found the language of the clause was clear that Architects had only agreed to indemnify Hovnanian for Architects’ negligence, not for Hovnanian’s own negligence.
  • Further, the judge noted the case did not go to the jury on a negligence theory against Hovnanian; that claim having been dismissed on summary judgment prior to trial. Finding the breach of warranty claim against Hovnanian “completely separate,” the judge concluded Hovnanian was seeking indemnification for its own “broken promises” not permitted by the language of the clause.
  • He further found that affording Hovnanian “this broad indemnity for all fault related to the actions of [Architects]” would offend New Jersey public policy.
  • Although the judge acknowledged “that without the negligence of [Architects], the issues of the breach of warranty” would never have arisen, he concluded

    [i]t is the actions after the notification of the problem and the efforts taken essentially to cover up the problem solely at the hand of [Hovnanian] and without any proof of any involvement in this endeavor by [Architects] that sounded the death knell for any indemnification, even if one were to be found under the terms of the agreement.

Ultimately, Counsel for Hovnanian appealed and argued Architects was contractually obligated to indemnify Hovnanian for the damages awarded against Hovnanian by the jury because they arose out of Architect’s negligent design of the building, which was contrary to code requirements. The Appellate Division disagreed. The Appellate Division did not subscribe to the trial court’s view that the nature of the claim, tort or breach of warranty, is meaningful, nor did they agree that public policy would bar Hovnanian’s indemnification. Notwithstanding, the Appellate Division had no hesitation concluding that the trial court was right, in that the Architects did not owe Hovnanian indemnification under their agreement.

According to the Appellate Division, indemnity provisions are construed in accordance with the general rules for construction of contracts with one important caveat: ambiguities are strictly construed against the indemnitee.  Mantilla v. NC Mall Assocs., 167 N.J. 262, 272 (2001).  In keeping with that principle, “a contract will not be construed to indemnify the indemnitee against losses resulting from its own negligence unless such an intention is expressed in unequivocal terms.” Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103 N.J. 177, 191 (1986).

The Appellate Division held that the plain language of the indemnification clause makes clear beyond any doubt that Architects only agreed “to assume the entire responsibility and liability for . . . any and all losses . . . caused by or resulting from or arising out of any negligent act, error or omission on the part of the Architect . . . in connection with this Agreement or with the prosecution of the work hereunder.” Thus, the Court found that this clause provides only that Architects will indemnify Hovnanian for Architects’ own negligence. The Court concluded that nowhere does the indemnity clause suggest that Architects would bear the responsibility responsible to indemnify Hovnanian for Hovnanian’s own conduct. The Appellate Division surmised that an intent by Architects to indemnify Hovnanian against losses resulting from Hovnanian’s conduct is missing. The Court held that such an intent “is neither expressed in unequivocal terms, nor reasonably implied[.]” Carvalhov. Toll Bros. & Developers, 278 N.J. Super. 451, 466 (App. Div. 1995). Therefore, the agreement could be construed to grant Hovnanian indemnification for its own actions.

The Appellate Division agreed with the Trial Judge and rejected Hovnanian’s Counsel’s claim that: (a) the evidence established Hovnanian liability was merely passive, and (b) it first learned of an issue with Type 2B code compliance at the April 2005 meeting, that Architects provided a solution to the problem on the same day, and that it was unaware that Architects’ revised plans were not compliant with the requirements for a Type 3A. While that was the case presented to the jury, the Appellate Division agreed that “there was certainly other evidence in the record to permit the jury to conclude that Hovnanian was aware with the problem of the untreated plywood as early as May 2004 when its consultant raised questions about the building’s fire rating, that it knew Architects’ proposed solution of reclassifying the building required the town’s approval and certainly knew that it proceeded with construction without ever securing that approval or amending the public offering statement.” For these reasons, the Appellate Division found both Architects and Hovnanian separately responsible for the damages the plaintiff suffered.

In sum, the Appellate Division found that although Hovnanian was undoubtedly correct that its own breach of warranty would not have occurred but for Architects’  negligence, the jury’s verdict conclusively recognized that Architects’ negligence was not the singular cause of Hovnanian’s breach.  See Ramos, 103 N.J. at 191 (“To be entitled to indemnification as one who is secondarily or vicariously liable, a party must be without fault.”). Stated differently, the jury separated Architects’ portion of fault and attributed the entirety of the $3 million in damages for Hovnanian’s breach of warranty to plaintiff’s ascertainable loss under the Consumer Fraud Act. Thus, the jury only assigned those damages to Hovnanian it found were based singularly on Hovnanian’s fault.