Government to rewrite building liability laws

Government to rewrite building liability laws – our view

To insulate councils from leaky building liability, the Government (Chris Penk) yesterday proposed to scrap joint and several liability and replace it with a system of “proportionate liability” whereby builders and councils will be liable only for their share of the work. It is also proposed to allow councils to voluntarily form their own groupings for consenting purposes (a la ‘Local Water Done Well’ which passed it third reading yesterday…). The stated aim of these changes is to reduce the number of different approaches around the motu, improve efficiency and lower costs.

We have some thoughts.

It’s best to start near the end.

Questions about proportionate liability arise when loss or damage is caused by multiple wrongdoers. Proportionate liability provides a way in which liability can be shared amongst those wrongdoers – according to their level of fault.

Sounds good? But what if, as is not uncommon, especially when it comes to leaky buildings, one of the wrongdoers – perhaps the most blameworthy one, e.g. the developer or builder who did the bad work – has gone bust, or, more cynically, has been ‘phoenixed’. Phoenixing is where assets are stripped out of a company and transferred to a new entity leaving the old company to face insolvency laws. The directors can face liability, but usually only if they were ‘on the tools’.

The answer, under proportionate liability, is the plaintiff carries the cost for the absent defendant’s/s’ share.

Not so good. That is why traditionally the common law rules of ‘solidary’ or ‘joint and several’ liability meant that a party could recover its entire loss from any one concurrent wrongdoer. Councils have long complained this is unfair on them, as the one player who cannot exit the market and who has ‘deep pockets’. They have a point, but it’s fairer than making councils’ problem the homeowner’s problem.

Mr Penk says councils have been like a deer in headlights and are too risk averse – too slow – to sign off building consents and inspections, and this is driving up building costs. The evidence for this appears largely anecdotal. There are other factors driving cost. Like knowledge gaps on the worksite which are the root cause (to borrow a phrase). Moreover, what some call “risk aversion” others call exercising proper caution. The government is right to want improved efficiency but not at the expense of quality outcomes and or homeowners.

The elephant in the room is the leaky building crisis of the 1990s and 2000s. Indeed, there is talk of a leaky building crisis 2.0 on or just over the horizon. To be fair, Mr Penk has recognised this but the proposed changes have a sense of ‘de ja vu’ about them. The Law Commission rejected proportionate liability in 2014 citing a lack of evidence of a widespread problem. It appears the Government has now decided to scrap traditional liability rules anyway.

Proportionate liability has been implemented in all Australian jurisdictions to replace the common law doctrines of joint and several liability in relation to claims for economic loss or damage to property. But the devil, as they say, is in the detail. So is litigation. Liability is limited to the proportion of the relevant loss or damage that the Court considers just, having regard to the extent of the wrongdoers’ respective responsibility for the loss or damage. This is ripe for litigation. What about ‘contracting out’, or where one wrongdoer has contracted with another for an indemnity, but that ‘another’ is insolvent? There is no uniformity in Australia.

That brings us to insurance, which will clearly be needed if consumers are not going to be left holding the bag.

The Government’s proposals in this regard, however, are skimpy to put it generously.

Insurers have already said there will be ‘challenges’.

This lack of detail is somewhat surprising. The Law Commission referred to the availability of insurance products as a necessary (but not sufficient) precondition of any rewrite of council liability laws back in 2014. Moreover, we understand the government has been talking to insurers for some time. This is not encouraging.

However, the Government says it is “exploring” the insurance position. Our view is that this is possible but unlikely given the ‘insurance retreat’ in this area since the leaky building crisis. We shall have to wait and see but we need to be confident insurance will be available, robust (rather than shot full of loopholes and exclusions) and affordable.

It’s not all bad news. Allowing BCAs (councils) to voluntarily form their own groupings for consenting purposes has possible upside. However, if the aim is to reduce the variability between councils, why is it also proposed to open the market us to non-council BCAs, i.e. private certifiers? That seems illogical.

Also, the lesson from the 1990s was that where consenting is a free-for-all, there is a rush to the bottom. We seem to have forgotten how the brave new world of private certifiers collapsed for lack of insurance. And how that left consumers in places like Tauranga with a lack of viable defendants.

Private certifiers aside, is there any evidence of efficiency gains in places like Auckland which have seen such mergers before. Or is this just Wellington Water again?

We’re not being ‘negative-nancys’. This country is still paying the cost of shoddy leaky buildings.

We’re just saying there are a lot of questions unanswered. It’s a wait and see, as DW partner James Wollerman said to RNZ yesterday. The Government is right that the building industry holds enormous potential. Our concern is that it also holds enormous potential to do harm and that owners should not be left holding the can.

By Partner Stuart Dalzell