Example of application of last man standing rule.

A owns a leaky building which costs $500,000 to repair.  She brings proceedings in the High Court to recover her losses.  She brings a claim against the builder, the developer and the Council.  Judgment is entered as against builder (20%), developer (40%) and Council (40%).  The developer is in liquidation and is nowhere to be found, the builder is still trading and is locatable, the Council continues to operate as a territorial authority.  A (on advice from her solicitor) pursues Council and Council alone for the $500,000 judgment amount.  Council meets the payment but then seeks from the builder his 20% contribution which he meets.

The key objective of the Law Commission paper was to consider whether the last man standing rule ought to be retained or instead replaced or amended, either generally, or in relation to particular professions or industries, including the building and construction industry, auditors and accountants.

Territorial authorities have wanted changes to this rule which leaves them as the party regularly meeting the full liability to leaky building owners, as the other construction defendants are no longer available for pursuit. 

Law Commission Recommendations. 

1. The ultimate policy choice the legislature has to make is whether the liable defendant or the innocent plaintiff has to bear the risk of the insolvency of some of the culpable parties.  The Law Commission’s first recommendation is that the last man standing rule remains where more than one party is in breach of obligations imposed through tort, equity or contract, and these breaches together cause the same loss.  However the Law Commission also made these further recommendations.

2. In response to the criticism that the last man standing rule makes parties with only minor responsibility disproportionately responsible where there are insolvent parties, it recommends that the Courts/Tribunals be empowered to grant relied to a minor party.  In a case where a Court decides that relief is warranted, the court must balance the interests of the plaintiff and minor liable defendant, and ensure that the plaintiff will still receive an effective remedy.

3. In situations where there is available more than one solvent defendant, under the last man standing rule a plaintiff was free to collect against his most financially robust defendant (typically the Council in leaky building litigation), and the Council was left with the prospect of only being able to collect from the other solvent party the Court allocated portion.  Using the example above, Council is limited to collecting the 20% portion of liability allocated as against the builder yet pays the remaining 80%.  The Law Commission recommends that available/solvent defendants ought to share the make up of the uncollected portions of allocated liability, on a proportionate basis based upon the apportionment of the awards previously made.  Using the example above, this change would mean that the builder would still have to meet 20% of the missing contribution from the insolvent developer.

4. The Law Commission noted that the residential construction industry particularly local authority participants, were specifically at risk from injustices occurring as a result of the direct application of the joint and several liability principles.  The Law Commission recommended the introduction of caps on liability for building consent authorities, for new liabilities arising after leaky home claims have been dealt with.  The proposal went so far to suggest that the liability of local authorities ought to be capped at $300,000 for single dwellings, and $150,000 per unit for multi-unit complexes, although these numbers were to be regularly reviewed so that market forces on price were applied.

Conclusion.

The last man standing rule remains firmly in place at this juncture.  The proposed changes do go some way to easing the one off disproportionate meeting of liability by some of the more minor parties involved in construction liability scenarios, but it will be interesting to see whether the recommendations are brought to life by a parliament now entering the build up to an election.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Overview

In 1993 the Montgomerys purchased land at Beachlands which, at the time, had one commercial building on it which was occupied by a Post Office that the Montgomerys owned and operated.  In 1999, the Montgomerys decided to build a house on the land so that they could live near where they worked and to that end they engaged a company (Simpson Builders Limited (“SBL”)) to build the house.  The building contract with SBL was a build and supervise contract with SBL being responsible for contracting the majority of the subcontractors.  The Montgomerys were neither involved with the building work nor the supervision of the building work, other than making the choices usually made by owners, such as design and aesthetic matters. 

The house was duly constructed and, in September 2000, the Code Compliance Certificate was issued.  The Montgomerys lived in the house from 2000 until it was sold to Keven Investments Limited (“KI”) in 2007.  In 2009, the house was found to be leaking and a full reclad over cavity was recommended.  KI duly carried out the repair work and then sought to recover the cost ($360,780) from the Montgomerys and the director of SBL in the Weathertight Homes Tribunal.

The relevant claim against the Montgomerys for present purposes was in negligence on the basis that the Montgomerys were “developers”.  The claim against the director of SBL was also in negligence.  The Tribunal dismissed all claims against the Montgomerys and the director of SBL and KI appealed that decision to the High Court.

For the purposes of this month’s topic, the area of interest was the consideration given by Justice Woodhouse to the issue of whether the Montgomerys could be considered “developers” and hence owed a non-delegable duty of care to KI.  Ultimately, if that was answered in the affirmative, the admitted facts meant that Montgomerys’ liability for negligence in connection with the construction would follow.  Accordingly, the Montgomerys’ position was heavily dependent on whether or not the Court considered them “developers”.

Were the Montgomerys developers?

After a useful review of the Tribunal’s decision, Justice Woodhouse went on to consider the legal principles of determining who a “developer” is.  At paragraph 14, his Honour stated that the word “developer” is not a legal term.  Rather, it is a word which has been used as a label for a person, or other legal entity, whose involvement in connection with construction of buildings (or in the subdivision of land, or both) was such that the person is held by the Court to have a duty of care to people who purchase one of the buildings (whether from the person described as the developer or subsequently), even though the physical construction of the building was carried out by an independent contractor.  Justice Woodhouse noted that the duty of care in such circumstances is said to be non-delegable i.e. the person labelled “developer” is not able to delegate the duty of care to the builder.

Justice Woodhouse considered that there was one essential requirement for a person to have liability as a “developer” in the present context and that was that the person must be “in the business” of having a building or buildings constructed for the primary purpose of sale to other people.  While there may be other factors required in other cases for a defendant to be found to have a non-delegable duty of care, if this business element is lacking, the Court considered that it is unlikely that a defendant will be considered a developer.  His Honour considered that it is this business element which provides the “policy foundation” for imposing the duty of care in the terms that it is imposed – it cannot be avoided by engaging an independent contractor to carry out the physical construction work.  This was, to some extent, reinforced by the definition of a “residential property developer” contained in section 7 of the Building Act 2004 because that section makes clear that liability arises because the person is “in trade”.

The Court was not convinced that the Montgomerys were developers in this instance.  At paragraph 25, Justice Woodhouse stated that the context here did not establish that there was a business of constructing buildings for the primary purpose of sale.  His Honour noted that the focus needed to be on the Montgomerys’ reasons for building the house.  In this instance, their reasons for building the house (including a self-contained flat) were in substance no different from those of large numbers of New Zealanders who build houses, with or without self-contained flats. It was simply built as their home.  Accordingly, the Court held that the Montgomerys did not owe a duty of care to potential future purchasers (including KI).

So, are you a developer?

The decision of the High Court is, in our view, a clear, well reasoned judgment which provides a simple framework within which to consider whether someone fits within the “developer” definition.  While arguably not conclusive, the main assessment comes back to basic principles – was the individual in the business of having a building or buildings constructed for the primary purpose of sale to other people.  The comments of Justice Woodhouse probably also serve as a reminder to those building their own homes.  One should at least query whether their involvement in the build process (even though far removed from the physical construction) might be enough to attract the label “developer”.  Simply engaging a builder to do the construction work may not necessarily be enough to avoid owing a non-delegable duty of care to subsequent purchasers.  Critical to the assessment of whether someone would attract the description of “developer” is whether they were in the business of having buildings constructed for sale.  This decision also shows the risk claimants face where they rely specifically upon terminology like “developer” to establish a duty of care.  A more general inquiry and focus on core construction tasks carried out by an individual/company is likely to result in better prospects of recovery.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

SUNSET TERRACES IS A RESIDENTIAL COMPLEX SITUATED IN SUNSET ROAD, MAIRANGI BAY. IT IS A LINEAR UNIT TITLE DEVELOPMENT COMPRISING 21 TOWNHOUSES, EACH OF TWO STOREYS. THE DWELLINGS WERE BUILT IN 1997 AND 1998 USING UNTREATED TIMBER FRAMING AND MONOLITHIC CLADDING.

The proceedings were brought against the Developers, the Council and the Designer. The Court was asked to decide upon many issues.

Firstly, the Court was asked to rule upon whether the Body Corporate could sue for all damage to the whole complex both common property and unit property, including the damage to the units of the three owners who did not participate in the case. It was ruled, that the Body Corporate could only sue in respect of common property. This was due to the Unit Titles Act 1972. It was however conceded that the position would have been different had it been a proceeding brought under the Weathertight Homes Resolution Services Act 2006.

The Court was asked to consider whether in fact a Council owed a duty of care to owners of residential units in a multi-unit complex, the argument for Council being that it ought not to owe a duty because it is a commercial development. The Court ruled in emphatic terms that the Council owes a duty of care to anyone who acquires a unit, the intended use of which has been disclosed as residential in the plans and specifications. In particular the Court found that the Council owes a duty to take reasonable care in performing the three regulatory functions in issue:-

deciding whether to grant or refuse a building consent application;

inspecting the premises to ensure compliance with the building consent;

certification of compliance with the Code.

Four of the individual unit claims were successful. These were Units Owners which had no knowledge of water ingress issues prior to purchasing. One of these four Unit Owners was only partially successful in that he had transferred his Unit to a company after becoming aware of water ingress issues, and so his damages were likely to be limited to the reduction in value he received for the Unit from the company, ($40,000).

Twelve of the Units were owned by individuals under complicated ?Blue Chip? arrangements. The structure was that a Blue Chip company purchased the Units, sold them to individuals who then leased them back to Blue Sky, which then subleased to tenants and contracted with Owners to manage them. In relation to these Units, the Council argued no duty of care was owed to Blue Sky because it was a commercial entity. This argument failed because the Units were intended to be residences at the time Council carried out its responsibilities (see earlier finding).

But the Court did go onto find that the Council owed no duty to Blue Sky because it was only a lessee, not a homeowner leasing for profit. The individual owners however had assigned their cause of action to Blue Sky in November 2005. The Court held that the Council owed a duty of care to Blue Sky as assignee but that the 12 claims failed because there was a break in the chain of causation. There was no evidence of the 12 individual Unit Owners relying upon the Council in their decision to purchase. Their reliance was on the Blue Chip scheme instead.

Other findings made in this decision were:-

Council argument rejected that because they did not charge much for inspections they did not have a duty to carry out more inspections or do a more thorough inspection. It was held instead that Council had power to set its own fees at a level commensurate with the risks it assumed.

As regards a lack of detail being said to have led to problems with wing and parapet walls of the complex, it was held to be enough that the relevant Harditex technical information was around at the time which filled in the details.

It is generally acceptable for the Council to rely upon producer statements instead of actually inspecting construction work, but not in this case because developer had shown himself to be unpredictable and untrustworthy. In particular the Council should have gone further to check out the waterproofing of the decks.

Developer was found to owe a duty of care to all or most of the Plaintiffs. As regards the 4 successful Unit Owners against Council, the apportionment of liability between Developer and Council was ruled to be 85% Developer, and 15% to Council.

The claims against the designer failed.