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Residential Warranty Corporation v. Grant Associates

A-1034-00T2 (N.J. Super. App. Div. 2001) (Unpublished)

CONTRACTORS; WARRANTIES—Where the designer was not a party to the initial litigation over a building defect may be barred from commencing later litigation against the designer even though it stands in the shoes of the responsible contractor.

The buyers of a newly constructed home experienced problems with its septic system. When the builder did not remediate the problem, the buyers made a claim under the Home Warranty Program. An arbitrator determined that the septic system was defective due to improper design and gave the builders a period of time to remedy the defect. The defect was not remedied. The buyers sued the builder and the warranty company, seeking damages and confirmation of the arbitration award. The warranty company cross-claimed against the builder for indemnification and contribution. The buyer settled the claim against the warranty company, who agreed to pay a sum of money and immediately remedy the septic system. As part of the settlement, the buyer assigned its rights against the builder to the warranty company. The lower court granted a judgment (for liability) in favor of the warranty company against the builder on the cross claim. The builder then filed a motion seeking leave to amend its pleadings to allow a third-party complaint against the designer of the septic system. The motion was denied, apparently on the grounds that the builder knew of the involvement of the designer in the design of the system for at least five years and that the motion was untimely because the trial was imminent. Judgment was entered in favor of the warranty company against the builder. Then, the builder and the warranty company entered into a settlement. As part of the settlement, the builder executed an assignment to the warranty company of “any and all rights that they may have for the negligent design of the septic system.” The warranty company then sought damages from the designer of the septic system, but the lower court dismissed the action on the grounds of the entire controversy doctrine and judicial estoppel. On appeal, the warranty company argued that the entire controversy doctrine did not apply because the initial litigation did not result in an adjudication on the merits and because the designer was not substantially prejudiced. The warranty company also argued that judicial estoppel should not have barred its claim because it was bringing the claim as a subrogee of the builder and the builder had actually sought joinder of the designer in the initial litigation. The Appellate Division agreed with the lower court, adding that all parties knew that the buyers’ initial complaint alleged defective design. In fact, the warranty company denied that allegation and defended the initial litigation based on that denial. Further, by the time the warranty company commenced litigation against the designer, the original septic system had been replaced. According to the Court, this caused substantial prejudice to the designer, “who was deprived of any opportunity to inspect the original system to evaluate whether there was any defect in the design or, as the [designer] suspected, whether the malfunction resulted from improper installation by the builder[].” Further, no party informed the lower court of the existence of the designer or a potential claim against the designer until the builder’s belated motion to join the designer into the action. Therefore, the warranty company, which successfully opposed that motion, “cannot now rely upon that motion to defeat the applicability of the entire controversy doctrine and judicial estoppel.”

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