New Zealand: Director´s Liability, Leaky Homes And The Tortious Duty Of Councils

By Associate Belinda Barclay, and solicitor Grant Slevin, of the Christchurch Lawlink firm of Wynn Williams & Co.

In the recent "Leaky Homes" case of Dicks v Hobson Swan Construction Limted & Ors, Baragwanath J, HC Auckland, CIV 2004-404-1065, 22 December 2006, the High Court awarded Hobsonville homeowner Colleen Dicks a total of $250,900 to meet the cost of repairing her 12 year old house, to compensate her for three years of distress and to meet the costs of her expert witnesses ($29,684.43).

Judgment was entered against the building company, now in liquidation, its director in person and against Waitakere City Council. Because the builder and his company are unable to pay, the Waitakere City Council is left to bear the whole cost. There will be no appeal from the decision – a happy outcome for Mrs Dicks.

Mrs Dicks' case was brought in negligence against all defendants and in contract against the builder and his company for their breach of a settlement agreement. Promised repairs had been started but not finished, leaving the house uninhabitable.

Soon after she took possession, Mrs Dicks encountered water coming down the inside of windows at her front entrance. This problem was apparently fixed by the builder. Despite a series of "floods" it was not until 2003 that Mrs Dicks realised her house might have serious problems. She obtained an expert report and started proceedings the next year.

Mrs Dicks was fortunate to have commenced her action within 10 years of the home being built, after which she would have been barred from taking action by section 393(2) of the Building Act 2004. Because this kind of damage is usually concealed by the internal linings, many owners of similarly leaky homes will not discover their problems in time and so will be left without any remedy.

The problem with Mrs Dicks’ house is that it is a stucco built property. Stucco buildings have been in use for many years in New Zealand. In Auckland, stucco houses of the 1940’s presented no problems of water damage. That is because they were constructed with either metal flashings around the window frames or a cavity between the exterior concrete wall and the interior wooden frame, or both.

Unfortunately, in this case neither flashings nor cavities were either specified in a plan or specification, or required by the Council. The plan showed no detail concerning the sealing of the metal windows when installed in the stucco. In fact the specifications were not directed to a stucco building at all, but had been prepared for a weatherboard house.

The Dicks judgment sets out clearly the responsibilities of councils to inspect and ensure compliance with the building code before issuing a building consent or code compliance certificate. Under the Building Act 2004, for a code compliance certificate to issue, it is sufficient if the work complies with the building consent, except in certain limited circumstances. Councils have tended to argue, as they did in this case, that their limited inspections and acceptance of what builders were doing after the Building Act 1991 was introduced was all they were in fact required to do by law. The Dicks decision has effectively destroyed that argument, the court saying instead:

The judgment indicates that the court would have held the Council liable in negligence at an organisational level, for its overall failure to address its responsibilities under the Act, as well as on the basis of the negligent acts of its employees in the particular case. While councils may argue that central government set them an impossible task when it introduced the Building Act 1991, the argument over which of them should ultimately bear responsibility for the resulting disaster is as much political as legal. Despite this, the Department of Building and Housing is named as a third party defendant in at least one case still before the High Court in Auckland.¹ An earlier action against the Building Industry Authority was rejected by the Court of Appeal.²

Mrs Dicks' case is unfortunately not an isolated one. It was estimated by a Council witness in the case that the number of leaky homes around New Zealand could be as high as 40,000. Of these, only 3,000 have lodged claims with the Weathertight Homes Resolution Service, set up by the government to deal with the problem³. Because development and building companies may have been wound up by the time the problems come to light, it is expected that councils, their insurers and ultimately ratepayers will be forced to bear a disproportionate share of the cost of repairs.

This aspect of the decision has attracted a much criticism in the media, but is based on well established common law rules. Where two or more people negligently cause the same damage to another, each is liable to the injured party for the whole of the damage they have caused. On the other hand if each one has caused different damage, neither will be liable to the plaintiff for damage caused by the other. The situation here is that a number of people have caused the same damage. That being the case, Mrs Dicks was able to sue all or any of the people responsible for the damage and obtain judgment against each for the full amount of the loss.

That does not mean that Mrs Dicks can recover more than the actual loss, as satisfaction of the judgment by one defendant relieves the others of any further obligation to pay. The defendant who has paid up is entitled to recover a contribution from the other wrongdoers, to the extent he or she can prove their contribution to the damage, and may recover close to the full amount if the other party is close to being wholly responsible. In this case the Council claimed an indemnity or contribution from the builder and his company, for which judgment was given at 80%. Given those parties' inability to pay, that is of no value to its insurer.

The rule of concurrent liability may be seen as unfair to defendants and is hard to reconcile with ordinary notions of liability based on individual fault.⁴ Proportionate liability is recognised between defendants for the purposes of contribution and also where a plaintiff has contributed to his own loss by his own negligence, so it is hard to see how it is fair between an innocent plaintiff and a very minor contributor to his loss, whether in terms of their blameworthiness or the actual contribution, that that contributor should have to pay in full. It is simply a matter of luck for the victim, by comparison to many others who are wronged.

His Honour considered that Hobson Swan owed duties to Mrs Dicks in both tort and contract, and was in breach of its duty to exercise reasonable care or achieve a sound building as developer and builder.

One of the more interesting matters that His Honour had to consider in this case was whether or not Mr McDonald was personally liable in his role as director of that company.

His Honour discussed at paragraph 43 of his judgment several competing policies in relation to a claim against a director personally:

1. public interest and separate legal identity of a company expressed in section 50 of the Companies Act 1993;
2. public interest in providing incentives against wrongful conduct and compensating those injured by it;
3. the hierarchy of wrongs from wilful conduct to strict liability;
4. the law’s greater protection of persons than property and property over merely economic interests.

As to the first, His Honour agrees with the analysis of Professor Watts in his recent article⁵. There is no reason why servants should be personally liable for conduct rendering their employer liable in tort while directors of companies should be exempt in the same circumstances. He adds that equally if it is reasonable to impute to the plaintiff an acceptance that his or her relationship is with the company alone it may be appropriate to exempt the director personally.

As to the second, he considers that public interest in providing incentives against wrongful conduct is significant but needs to be evaluated against the other three policy considerations.

At to the third, His Honour reviewed several of the negligent advice cases including Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA) and Hedley Byrne & Co ltd v Heller & Partners [1964] AC 465.

He conceded that in New Zealand, at least, the concept of "assumption of responsibility" (a tool used by the courts and parties alike to either assert or deny personal liability of directors) is used in more than one sense.

On one hand it can mean an express assumption of legal liability by the defendant, something akin to a contract with offer and acceptance, together creating a relationship between the parties. An express undertaking of legal liability by a potential tortfeasor has to be confirmed by his having embarked upon performance. From the plaintiff, there would need to have been either a request or a reasonable acting in reliance such that it is evident that the plaintiff has reasonably relied on the defendant's "pocket book" or on an "indemnification" from him. An appearance of an acceptance of the defendant's legal responsibility is required from the plaintiff.

On the other hand "assumption of responsibility" can also mean an implied assumption of tort (or civil) liability imposed by the court. The test to be applied is, not unnaturally, an "objective" one. In other words, whether there is an assumption depends not on the subjective intention of the defendant but rather on the inferences that in the court's view, a reasonable person in the position of the plaintiff would draw, having regard to the words and action of the defendant, seen in the light of the surrounding circumstances, so far as they were both known to the parties. It would need to have been reasonable for the plaintiff not just to have relied on the defendant but also to have (if he or she had considered the possibility of a breakdown of the contract) relied on him as a potential indemnifier.

Having considered these two meanings the Judge said the ultimate question is where on the spectrum should he place the conduct of being a party to the creation of a leaking home? The crystallising position is where is the negligence of a director on the spectrum of omission and wilful neglect?

Having the advantage of reviewing a number of decisions and analysing the different meaning of "assumption of responsibility" his Honour felt it was his responsibility to follow the "second sense of assumption of risk".

In support of his decision he cited with approval the case of Morton v Douglas Homes Ltd [1984] 2 NZLR 548 quoting Hardie Boys J at 595 where he said:

On top of weighing up the relevant meaning of "assumption of responsibility" Justice Baragwanath also assessed the pros and cons of lifting the corporate veil and exposing Mr McDonald to personal liability. In doing that he had to weigh up two competing "schools of thought": those who emphasise company law and those who emphasise tort and agency concepts.

Those who emphasise company law give primacy to the idea of corporate personality as the embodiment of the company and the director incurs no liability unless and until he assumes personal responsibility. The attribution of "alter ego" theory is uppermost. The director acts as the company not for the company.

By contrast the second school of thought argues that a director will always be an agent of their company - in the widest sense of acting "for and on behalf of". Hence they will always be personally liable provided the requisite elements of tort are made out against them. Apart from the tort of negligent misstatement, the mere commission of a tort (eg fraud, deceit, conversion) is sufficient to found liability against a director.

It should be noted that in the context of Dicks, the Court was considering negligence. Fraud and deceit are separate torts, and likewise conversion is a separate tort founded on trespass. The tortfeasor will be liable for having procured the wrong. This was commented upon by Baragwanath J at paragraph 38 of the judgment.

(It is apparent there may be a misconception built into the judgment at this point. The corporate veil is for the benefit of shareholders - not directors. Directors' liability is to be determined in accordance with the ordinary principles of tort. It seems, by engaging in this exercise of weighing up these competing principles, Baragwanath J was causing greater confusion rather than clarifying the situation. This does not assist a great deal).

No matter what view is adopted, the director is still a separate legal personality and the courts are at liberty to impose a notional duty of care. This is what Baragwanath J did in this judgment in the end. It is suggested this analysis is the better approach.

There is also some confusion on the judgment between the agency point (Lister v Romford Ice, which has stood for a very long time) and the imposition of a notional duty of care. Hopefully, an appeal court will sort this out eventually.

Ultimately Bargwanath J concluded that Mr McDonald was an agent of the company. This was because of the exclusive level of control which Mr McDonald exercised over the construction project, that is, he was actually the "man on the job", he was an agent of the company and should be personally liable as well as having his negligence attributed to the company.

In recognising a number of factors which hold against the imposition of personal liability, Justice Baragwanath concluded:

That being the case the Court really had no choice but to accept a notional duty of care.

Which then begs the question, what can directors do to avoid findings of personal liability?

A key factor was the level of control and hands-on involvement which Mr McDonald had in the construction project. In most large property developments it will be rare for the director to have such a hands-on role but it would be sensible for any director or officer of a company involved in development to put as much distance as possible between him or herself and the substantive construction, or indeed choices of materials and methods of construction. I refer to Belinda Barclay's earlier Lawlink article (Autumn 2006) entitled "Leaky Buildings: Sue the Building Company, director or both?"' which provides guidelines on this point.

That said, there still must be a living person rather than a corporate entity who does the physical work of construction and makes choices that affect the quality of the work completed at the end of the day. The same personal liability should be sheeted against those persons as Mr McDonald.

This decision represents something of a wake-up call for officers and directors involved in the construction industry and a timely reminder to check their insurance policies.

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.