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S&T Masonry Associates, L.L.C. v. 206 Belleville Avenue Associates, L.L.C.

A-1917-03T3 (N.J. Super. App. Div. 2005) (Unpublished)

CONTRACTS; ENTIRE CONTROVERSY—A defense raised in a subrogation claim by an insurance company can be revived as a contract claim because it would be unreasonable for a party to affirmatively pursue such a claim in a subrogation action especially where the contract requires resolution by arbitration.

A contractor entered into an agreement with a property owner to perform excavation work. The agreement provided that all disputes were to be resolved by binding arbitration in accordance with the rules of the American Arbitration Association (AAA). As a result of the excavation work, an adjacent building was undermined and damaged. For a period of time, it became uninhabitable. Its owner filed a claim with its insurance company under its business-interruption coverage. The insurer paid the claim and then filed a subrogation action against the excavation contractor and the property owner where the work was being done to recover what it had paid to its insured. The subrogation claim was settled and a stipulation of dismissal with prejudice was filed. In the action, the property owner filed a cross-claim against its contractor for indemnification. Upon the dismissal, the owner then filed and served a demand for arbitration with the AAA.

In response, the contractor sued the property owner, seeking to dismiss the owner’s arbitration claim as being barred by the entire-controversy doctrine because it was not included in the prior subrogation suit even though it arose out of the exact same facts and subject matter. The lower court found for the contractor. On appeal, the Appellate Division held that the owner had not waive its contractual arbitration rights with the contractor by settling a negligence action for property damages instituted by a third party in a subrogation claim. The property owner’s claim was for damages allegedly arising out of the contractor’s deficient performance under the contract. As such, it was a breach of contract and negligence claim. The insurer’s subrogation claim was for indemnification for what it paid to its insured on account of damage to the structure on the adjacent property. It was a tort claim.

Consequently, the Court concluded that it would have been unreasonable to expect the owner to assert its breach of contract and damages claim against the contractor in the subrogation action, given the contractual requirement for binding arbitration to resolve such issues. It added that to apply the entire-controversy doctrine here would essentially be to rule that the owner was required to file its claims in the Law Division subrogation action. This would have resulted in a conflict with the public policy that favors the resolution of disputes through arbitration. For that reason, the Appellate Division reversed the lower court’s decision and remanded the case for arbitration.


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