New Zealand: Leaky Buildings Back In The Spotlight

Last Updated: 9 April 2007
Article by Ashley Cornor

Take one seriously deficient building, add a significant High Court award, an insolvent and recalcitrant builder, tension between a Mayor and local authority insurers, and a dose of Michael Laws for good measure, and you have the main ingredients for the most recent leaky building tremor to shake the local government sector. With the threat of appeal now gone, the High Court’s decision in Dicks v Hobson Swan Construction and Waitakere City Council (CIV 2004-404- 1065, 22 December 2006, Baragwanath J) has placed the effectiveness of central government’s response to the leaky building crisis back in the media limelight.

The case concerned a dwelling house built in the mid 1990s. The main defect affecting the building was the absence of properly finished mechanical flashings, or any form of alternative weatherproofing (such as a proprietary seal system), around window openings. This allowed water into the building to such a degree that demolition and reconstruction (at a cost of $206,000) was the most economic way of dealing with the resulting damage. After some minor adjustments to this figure and the addition of further damages for distress and the cost of expert advice, the total sum awarded to the successful plaintiff, Mrs Dicks, was $230,645.43, plus costs.

The Judge found the building company involved, Hobson Swan Construction Limited, its director Robert McDonald, and Waitakere City Council (Council), all to be liable for negligent acts leading to Mrs Dicks’ loss. In the Council’s case, the Judge reasoned that as mechanical flashings were ordinarily regarded as critical to weatherproofing and were a mandatory ‘check’ item for Council inspectors during a final inspection, any substitute for flashings (such as a proprietary seal system) was also critical and needed to be inspected. The absence of any Council system for determining whether seals were in place was found to amount to ‘a simple abdication of responsibility’.

From a legal perspective, the case generally applies concepts that are well accepted in the resolution of defective building claims. That said, the decision does signal an interesting move away from the usual standard of the ‘reasonable building inspector’. That standard is used as a gauge for the actions and omissions of Council building inspectors, as part of determining whether or not they were negligent. It takes into account the general level of knowledge and typical conduct in the industry at the time a building was constructed. In contrast, the Judge preferred a separate threshold of objectively reasonable conduct – determined with reference to the controlling legislation, namely the Building Act 1991 – that must be satisfied in all cases, regardless of what constituted ‘general practice’ at a particular time. It will be interesting to see how this concept is developed in subsequent cases.

Unfortunately for the Council, Hobson Swan Construction Limited is in liquidation and its director, Mr McDonald, is of limited means. Because all three parties were found liable for the same damage, each is technically obliged to pay the full amount to Mrs Dicks, with subsequent rights of recovery against one another. However, due to the inability of its co-defendants to make meaningful payments, the Council is effectively required to fund almost all the damages, notwithstanding that it is legally entitled to recover 80% of that cost from the other defendants.

Following the release of the decision, the media and politicians have also become involved.

On being advised of the award against the Council, Waitakere City Mayor Bob Harvey publicly stated that the Council would pay the appropriate amount. However, the matter was instead in the hands of local government’s insurers – Riskpool – which initially elected to appeal the Judge’s decision to the Court of Appeal but has since changed its position. As a result of these machinations, Mayor Harvey has joined with other mayors in the Auckland region to lobby central government to share some (if not all) of the burden of the increasing costs of fixing leaking houses.

Meanwhile, the builder involved, Mr McDonald, has expressed his view that, despite the High Court’s clear findings to the contrary, Mrs Dicks’ home is not in fact a leaky building. The NZ Herald reports Mr McDonald as saying:

‘I’ve always maintained it is not a leaky home. It is 100 percent right but for two flashings that aren’t working’.

Leaving aside the inherent contradiction in that statement, Mr McDonald’s comment is indicative of the sentiment often expressed by builders and other tradespeople that the problem of leaky buildings turns more on inadequate maintenance by building owners than on sub-standard construction practices.

Mayor of Wanganui, Michael Laws, questioned why Wanganui’s ratepayers should pay both increased Riskpool premiums (which will inevitably rise if the insurer is forced to pay out on substantial awards for this type of claim) and increased taxes if central government responds favourably to the Auckland Mayors’ plea for aid, for what is essentially Waitakere’s problem. To date, there doesn’t appear to have been any backlash from the Auckland region in response to this comment – although Mayor Laws’ public support of Mrs Dicks’ defence in the Court of Appeal (before that appeal was withdrawn) may lead to further comment in the near future.

The media coverage of both the case and its aftermath has highlighted the critical issue facing the country – namely, where the costs of the leaky building problem should appropriately be borne.

As the Dicks case demonstrates, the reality is that the bulk of the cost will inevitably fall on a portion of the general public. The only matter of doubt is whether that portion should comprise the local ratepayers in a particular district (ie if liability is left with local government) or the taxpaying public generally (ie if central government agrees to contribute to leaky building payouts).

It is important to note that the current status quo lies somewhere in the middle. While local councils are directly affected by unfavourable awards, it must be remembered that central government contributes millions of dollars each year to the administration of the Weathertight Homes Resolution Service (WHRS), which facilitates claims by the owners of leaky buildings against those responsible for their construction and inspection (the imminent introduction of the Weathertight Homes Resolution Service Act 2006, which overhauls the claims process, will not affect the basic structure of this system). The Department of Building and Housing’s 2005/2006 Annual Report reveals that $15.7m was spent on the WHRS in the year ended 30 June 2006. Whilst this is significant publicly funded expenditure, it is devoted to the administration of the system and none of this funding is directly applied to the repair of leaky buildings.

It seems inevitable that sooner or later central government will be forced to address the growing chorus of calls for central government funds to be diverted from the present claims resolution process to the direct repair of leaky buildings. While that may be a more efficient response to the problem, change is unlikely to be considered until the effect of the new Weathertight Homes Resolution Service Act 2006, has been felt and its impact assessed.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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