All Contractors Subject to Consumer Fraud Act
When Contracting Directly With Homeowners
By Michael Holzapfel, Esq.

March 27, 2008 – The Appellate Division of the New Jersey Superior Court recently sent a none-too-subtle message to residential contractors engaged in business in the Garden State: contract directly with a homeowner at your own risk.

In its published decision of Czar, Inc. v. Heath, the Court addressed whether the Consumer Fraud Act (CFA) applied in the context of a contractor retained to install kitchen cabinets, doors and moldings in a newly constructed residence, notwithstanding the fact that the Home Improvements Practices Regulations (HIPR) promulgated under the CFA exclude “the construction of a new residence” from their scope.

The facts of Czar were unremarkable. Prior to 2005, homeowners Jo Anne and Thomas Heath engaged a general contractor to construct a new home. The Heaths contracted directly, however, with Czar, Inc. (Czar) for the installation of custom kitchen cabinets, interior doors, a front door, and certain moldings; Czar was not a subcontractor to the general contractor. Eventually, a dispute between Czar and the Heaths arose over payment and timing of work. Czar sued the homeowners for moneys owed, and one month later the homeowners sued Czar for, among other things, consumer fraud.

At the trial, Czar argued that the CFA did not apply because the Heath’s home was a new residence, and the HIPR exclude “the construction of a new residence” from the definition of “home improvement.” The trial judge agreed and dismissed the consumer fraud claim, noting that although Czar was not the general contractor, it was “intimately involved with the construction of the new residence, at least as to the kitchen.” The Heaths appealed.

“New Construction” Protection Denied
Following the obligatory salute to the CFA as an expansively read, liberally interpreted remedial statute, the Appellate Division rejected the trial court’s interpretation, emphasizing not only the fact that Czar was not the general contractor, but also that it was not involved in any of the electrical, plumbing or structural work. Rather, Czar contracted directly with the Heaths to install various custom items. While that installation was obviously incident to the overall construction of a new residence, Czar itself did not “construct a new residence” for purposes of the HIPR.

Czar argued the CFA’s inapplicability from a “nature of the project” standpoint. Drawing upon the Appellate Division’s suggestion in an earlier case, Messeka Sheet Metal Co., Inc. v. Hodder, 368 N.J. Super. 116 (App.Div. 2004), that a complete gutting and rebuilding of an existing residence may qualify as “new construction.” Czar contended that the “new construction” exception to the HIPR rendered the CFA inapplicable.

The Court rejected this logic, reasoning that because the HIPR are designed to protect homeowners who deal directly with the contractors, it would be inefficient and duplicative to apply them to individual subcontractors having no contractual relationship with the homeowner whatsoever.

Key to this finding was the Court’s clarification of its holding in Messeka, which involved the gutting of an existing residence to its shell and foundation, followed by a complete rehabilitation and expansion. In Messeka, the plaintiff entered into a subcontract with a general contractor to install a two-zone air conditioning unit as part of the renovations. With the consent of both the general contractor and the owners, Messeka looked to the owners for a balance due on the subcontract. Messeka sued for the balance due, and the owners counterclaimed for consumer fraud, citing the HIPR.

Although the Court suggested that the gutting and rebuilding of the home was equivalent to a “new construction,” it did not dismiss the owners’ consumer fraud counterclaim on that basis, as Czar subsequently argued. Rather, Messeka prevailed because he did not have privity of contract with the owners. It was the same privity of contract analysis, and not a “nature of the project” analysis, that the Court utilized in Czar to conclude that Czar was subject to both the HIPR and the CFA.

Suing for Unpaid Balances Can Become a Contractor’s Nightmare. What lessons can contractors and tradesmen draw from Czar? First and foremost, any contractor considering filing a lawsuit against a homeowner to collect an unpaid balance due on a contract, particularly on contentious projects, would be well advised to think twice before suing. As Czar and Messeka confirm, many consumer fraud lawsuits originate as counterclaims in cases commenced by the contractor. In the event that a minor technical violation of the regulations is revealed, the contractor’s lawsuit will quickly turn from a straightforward action into a full-blown, protracted and expensive litigation, the cost for which is oftentimes greater than the debt the contractor was seeking to collect. Moreover, due to the CFA’s fee-shifting provision, and the decidedly pro-owner slant courts have given that provision, even if the contractor’s violation is determined to be “harmless,” not resulting in damages to the owner, the CFA requires the contractor to pick up the owner’s legal tab in most cases. Contractors should therefore consult with their attorneys to determine any potential CFA exposure before the contractor files suit against the homeowner.

Second, before committing to a residential project with a homeowner, the contractor should make certain that his contract meets the HIPR, because even a technical deviation constitutes a violation of the CFA. And to those kitchen and bathroom remodeling companies, flooring companies, painters, plumbers, electricians and other tradesmen: Beware. You are not exempt from the HIPR or the CFA simply because your project is part and parcel of a new construction. If you contract directly with a homeowner, you are subject to the statute and its regulations.

Michael Holzapfel, an associate in Becker Meisel’s Shrewsbury, N.J. office, practices in the area of commercial litigation, with emphasis on construction litigation and consumer litigation. Becker Meisel is a full-service law firm with additional offices in Livingston, N.J. and Manhattan.