Generally, the obligations of parties involved in a construction project are defined by and limited to the provisions of the contracts.  An owner can usually expect to face payment claims from only the general contractor or construction manager with whom the owner has a direct contract.  Conversely, subcontractors, sub-subcontractors and material suppliers should not be exposed to claims by the owner for defective work or materials supplied on the project.  Thus, a party involved in a project is generally prohibited from “leapfrogging” over the party with whom it contracted to assert a claim further up or down the contracting chain.

New Jersey courts have embraced this approach.  Over 45 years ago the New Jersey Supreme Court declared that the law should recognize the sequential contracting chain on construction projects in order to maintain stability and predictability in construction claims.  More recently, a New Jersey Appellate Court emphasized this point, stating that to do otherwise would “create havoc in the construction industry.”

Based on this principle, New Jersey courts have rejected attempts by subcontractors to make direct claims against owners.  Subcontractors have unsuccessfully argued that the owner should be liable to make direct payment to them because the owner was the intended beneficiary of the subcontractor’s work.  By the same principle, New Jersey courts have generally refused to permit an owner to sue subcontractors, sub-subcontractors or material suppliers for defective construction or materials.

The seemingly clear and straightforward principle is, however, not absolute.  For example, subcontractors, sub-subcontractors and material suppliers within the first three tiers of contracting may file a construction lien against the owner’s property.  No contractual provision can deprive such a potential lien claimant this lien right.  Subcontractors and other parties down the contracting chain are also exposed to claims for personal injuries arising from an accident at a construction site that resulted from their defective work or materials.  The maintenance of comprehensive general liability insurance by subcontractors and those down the contracting chain should cover the financial consequences of such defective construction or materials.

Many claims, although not initiated by the party with whom one has a contract, will be passed through.  An owner’s delay claim against the general contractor may result in the general contractor filing a claim against the specific subcontractor who allegedly delayed the project.  A claim by a third-tier material supplier against a surety on the general contractor’s payment bond will, if paid by the surety, prompt the surety to seek reimbursement from the general contractor under the surety’s indemnity agreement with the general contractor.

More troubling, however, have been attempts to do a complete end run around the rule that prevents a party from leapfrogging the party with whom it has contracted and filing suit up or down the contracting chain.  Some subcontractors, for example, have brought suit against an owner alleging that the owner “tortiously interfered” with the subcontractor’s contract with the general contractor.  Owners can avoid such claims by restricting their interactions during the course of the project to the general contractor and refrain from getting involved in disputes between a general contractor and its subcontractors.  In addition, at least one New Jersey court has permitted an owner to sue a subcontractor for negligent construction, even where there was no accident or personal injury involved.  The judge in that case predicted that the rule that prevented such a negligence claim would be abandoned by future New Jersey courts.  Thus far, however, subsequent New Jersey cases have not adopted this court’s reasoning and, for the time being, seem to be upholding the rule that an owner cannot sue a subcontractor for negligent construction where no accident or personal injury is involved.

The bottom line is that a little mud is seeping into an area of construction law that was crystal clear, creating opportunities for creative lawyers and their clients.  With the downturn in the economy and the probability of more insolvencies and bankruptcies, parties on New Jersey construction projects will be motivated to seek recovery from any available deep pocket, increasing attempts to leapfrog the party with whom they have a contract and assert claims up and down the contracting chain.