New Zealand: Leaky Buildings – Sue The Building Company, The Director Or Both?

Who is legally responsible if your home is found to be a "leaky building"? In this article, Belinda Barclay, an associate with the Christchurch Lawlink firm of Wynn Williams & Co who specialises in insurance litigation, considers the question.

In the last 15 years in New Zealand there is increasing concern about the number of homes built that have signs of water damage. There has accordingly been an increase in the number of claims made against builders and developers for that damage.

More people are looking to make not only the building and/or development companies, but the directors behind them, legally responsible for their economic loss including remedial works, building consultants’ fees, accommodation costs, travelling costs and other consequential costs of the remedial works.

When considering bringing action against a builder/developer in relation to a leaky home there are a number of preliminary steps required, which include:

  • identifying the cause of the damage;
  • determining the responsibility for the building defect;
  • determining the responsible party and identifying that person.

The latter point is the one that can be quite tricky. Many builders conduct their work through companies and at the moment, there appears to be a perception by many that individual developers and builders are able to hide behind shell companies they establish in order to avoid legal liability in relation to being sued for leaky homes.

There are currently two lines of authority in relation to pursuing the directors of building and development companies.

One line of authority is that even though an individual builder is a corporate agent for the company the individual builder enjoys immunity from all claims when acting on behalf of a company. On the rare occasion that a plaintiff was to succeed in establishing personal liability against a director, the plaintiff would need to establish the particular director specifically assumed responsibility to the plaintiff. This is otherwise known as the "personal assumption of responsibility test".

The second line of authority is that the individual builder cannot shelter behind the company because, even though the individual builder is a corporate agent, it is necessary to adopt an objective test in determining whether or not the builder is individually liable. That objective test may or may not allow a finding of negligence against the director. In other words, based on the objective facts, a court may deem a director to have assumed responsibility but does not first make it a prerequisite that the director has done so before liability is established.

It is the latter doctrine that seems to find increasing favour with a number of academics but is being applied in a limited fashion by the New Zealand courts. In fact, at the moment there does not seem to be a uniform approach by the New Zealand courts as to how to determine a director’s personal liability to a third party in latent defect cases which makes it a minefield for would-be litigants.

To illustrate this point it is useful to examine each line of authority more closely applying what can be gleaned from them as a practical guide for would-be plaintiffs contemplating pursuing building/development companies and also the directors behind them.

Trevor Ivory Limited v Anderson [1992] 2 NZLR 517 ("Trevor Ivory") – The First Line of Authority
The alleged immunity of directors can be traced back to a judgment in the New Zealand Court of Appeal in Trevor Ivory Limited.

Trevor Ivory Limited had contracted to provide horticultural advice to the Andersons who were orchardists. The advice was provided by Mr Trevor Ivory, the sole director and shareholder of Trevor Ivory Limited. The advice was negligent and caused the loss of the Andersons’ raspberry crop. The Andersons sought damage not only from the company but from Mr Ivory, suing him in the tort of negligent misstatement.

The Court unanimously dismissed the claim against Mr Ivory. The rationale, of all three judgments in the Court of Appeal, was that Mr Ivory was not liable because he had not assumed personal responsibility to the Andersons – an essential ingredient in the tort of negligent misstatement.

A recent High Court case focused on latent defects in buildings and director’s personal liability in Drillien v Tubberty, Chand and Auckland City Council (High Court, Auckland, 15 February 2005). That was a successful strike out application by the director of a building company that had contracted with the plaintiffs to construct their home.

In that case, Kenview Homes Limited constructed two town houses in Auckland and one of the directors of that company, Mr Tubberty, was actively on site and engaged in a number of the construction works.

The Drilliens claimed that a number of defects in the cladding of the building, external joinery, the roof and the structural timbers meant water had entered the building causing damage. They claimed that Mr Tubberty, the director of Kenview Homes, was involved in those works directly and therefore personally responsible to them and therefore liable.

Associate Judge Faire considered the case of Trevor Ivory and its subsequent application in New Zealand.

He made two points in relation to the personal assumption of responsibility requirement:

"First, where the liability of directors for breach of a personal duty of care in negligence is at issue, whether there has been a personal assumption of responsibility has particular prominence as the focus of the enquiry…..
Secondly, the case law subsequent to Trevor Ivory …. has affirmed personal assumption of responsibility as a requirement of directors’ personal liability in respect of a variety of duties of care."

In other words the requirement of personal assumption of liability by a director applies to all tort causes of action against directors, not just negligent misstatement.

Having thoroughly considered the specific facts, Associate Judge Faire found that the matters complained of by the plaintiffs were not matters the director assumed responsibility for because on the evidence he did not engage in or was not responsible for the works that attributed to the alleged loss. Therefore he could not be found liable.

In this case, it is difficult to see how the director could have had any liability on the facts, even with an assumption of responsibility for his actions. The Court would have to find some sort of vicarious liability for the acts of the company.

Morton v Douglas Homes Limited [1984] 2 NZLR 548 ("Morton Douglas") - The Second Line of Authority
Contrary to the above position, there is much academic and some judicial support for the view that a personal assumption of risk is not required in all negligence cases against builders/developers. Generally the proponents of the second doctrine find the Trevor Ivory decision unsatisfactory.

They say the Court in Trevor Ivory appears to have upheld or accepted the idea that the conduct of a person acting for a company ought in some circumstances to be regarded as the act of the company alone. This company liability divorced from personal responsibility on the part of anyone, is not easy to understand. Rather, it is necessary to start with the liable human and move from there to the liable company, not vice versa. Courts give no convincing reason as to why identification with a company is presumptively inconsistent with concurrent personal liability. On the contrary, liability of the individual would seem to be the basic premise.

Applying this to the potential tort liabilities of developers and builders for creating latent defects in buildings, it is well established that a builder owes a duty of care to the immediate and any subsequent purchaser to take reasonable care to ensure that the building work was undertaken in accordance with good workmanlike practices and in accordance with the requirements of the New Zealand Building Code. The fact that a developer delegates the task of building to others does not relieve the developer of this duty (Mount Albert Borough Council v Johnson [1979] 2 NZLR 234, 240-241).

Neil Campbell1, an academic who supports this view, provides a useful illustration of this point. He says:

" liability for defect buildings is no different from liability of a careless user of a motor vehicle. A director, employee, or other agent of a carrying company cannot receive immunity from liability for a motor vehicle accident by saying that ‘my careless driving was on company business’. Likewise, the individuals behind the building and development companies receive no immunity by saying ‘I built that shoddy house on behalf of my company’".

This reasoning has been adopted by a number of cases, including Morton v Douglas Homes Limited [1984] 2 NZLR 548.

In the case of Morton v Douglas Justice Hardie-Boys said that liability depended on the control the individuals exercised over the building work, and emphasised there were no special rules for directors:

"It is not the fact that he is a director that creates the control, but rather that the fact of control, however derived, may create the duty. There is therefore no essential difference in respect between a director and a general manager or indeed a more humble employee of the company".

The more recent case of Carter v Auckland City Council & Ors (High Court, Auckland, 14 October 2004) would tend to suggest that this approach is gaining support amongst the judiciary.

In that case Associate Judge Christiansen denied a strike out application by the individual builder because the director could and may attract liability to the extent of his involvement in the building project such that it caused loss. He said that the proper enquiry was the extent to which the builder did, or partly did or refrained from doing things that ultimately lead to defects of the dwelling.

He points out that it would be incorrect to assume liability could not attach simply because a director discharged his duties on behalf of a company which has a past reputation for good faith dealings. He notes that a case will require an analysis of the director’s action vis-à-vis his company to determine if a breach of duty arises and if it does whether it is attributed to his actions. This enquiry will involve an objective assessment on the facts.

Neil Campbell condones the approach of Justice Hardie-Boys (and arguably Associate Judge Christiansen) and says their judgments are admirable in their clarity. And he may have a point.

Campbell illustrates the unnecessary complexity and flaw in the Trevor Ivory reasoning by reviewing two cases against directors, one for the equitable wrong of dishonest assistance and the other, a claim in conversion. He notes in both the "personal assumption of responsibility" test of Trevor Ivory was applied, and in both instances, successfully allowed the directors to avoid liability. Both courts found the directors not liable because they had not assumed a personal assumption of risk to the relevant plaintiff. But as Campbell points out, when has personal assumption of responsibility ever been an element of either the equitable wrong of dishonest assistance or a claim in conversion?

Counsel purportedly answered that question in the Drillien case, where Campbell’s analysis was reviewed in the judgment. Counsel for the director, Mr Fardell, says Campbell’s analysis goes too far to try to restrict the relevance of the "assumption of responsibility" test because the phrase is used in more than one sense. He says it is relevant to the broader proximity enquiry in the wider class of negligence cases where a duty of care is asserted against some party other than the party with whom the plaintiff had primarily been dealing with.

This then begs the question, are these differences in opinion merely a case of confusion of nomenclature? Is the "assumption of responsibility test" really the proximity test already in existence in some negligence cases?

If that is the case, it seems judges are artificially imposing the "assumption of personal responsibility test" in instances where the proximity test would suffice. Is it not simply a matter of looking at what the director did or said and determining as a result whether his or her relationship with the relevant third party was sufficient to establish a duty of care in the circumstances? Putting it another way, is there sufficient evidence to show that the third party is too far removed from the director to establish the proximity required for a duty of care to exist?

Some academics may support this view. Todd, editor of the text "The Law of Torts in New Zealand" (second edition) says that the reasoning of Trevor Ivory is unnecessarily confusing and "to avoid the confusion and the points raised in cases like Trevor Ivory it is better to ask whether the Defendant has excluded liability rather than relying upon uncertain or unhelpful pointers to a supposed "assumption of responsibility". The onus ought to lie on the Defendant to establish this defence, not on the Plaintiff to show an intended liability". In light of the above he may well have a valid point.

In conclusion, what seems to be required at the moment is a clear decision by the New Zealand courts involving analysis or an account of the sort of involvement that triggers the duty of care to avoid latent defects, particularly where the building company and builder are one and the same. A judgment needs to specify that if a duty is imposed on a builder of a house, who in the sense of that legal rule as spelt out in Trevor Ivory is a "builder"? Arguably in the current state of law it could be an employer who affixes the cladding, the person who supervises the affixing of the cladding or the manager who chooses the cladding material and system. And what is the test to be applied, is it the "assumption of personal responsibility test" or is it merely the proximity test? If it is the former how far does that test extend or should it extend?

Practical Application

In light of the above, guiding prospective plaintiffs hoping to pursue a building/development company or their directors for latent defects is not easy. However, the following, although not exhaustive, are some suggestions that may assist whether you are taking a WHRS adjudication claim or pursuing court proceedings:

1. If you have discovered defects in your house, retain a building consultant or expert to assist you in identifying them.

2. Make sure you adequately identify the cause of the defect. In other words what was done or what was not done that caused it. A building consultant should assist.

3. Importantly ask the following questions:
Is there any evidence of a personal assumption of responsibility of the director? In order to answer this question certain facts need to be established such as:

  • what was the individual director responsible for?
  • what was the director partly responsible for?
  • was the director responsible for supervising the work?
  • was the director involved in choosing the relevant materials?

If the answer to any of the questions above is yes, then it would seem that some level of personal involvement or assumption of risk has been assumed by the director.

4. Try to obtain written or other evidence of the director’s involvement or responsibility for either the materials used or work carried out in relation to the defect which can be used to satisfy the objective test supported by the second line of authority

Footnote

1. See Neil Campbell “Leaking Homes, Leaking Companies?” [2002] Company & Securities Law Bulletin, 101

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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