Auckland Council is calling on the Government to change the law so it doesn’t have to shoulder the financial burden of another leaky buildings type crisis.
In a draft submission on proposed changes to the Building Act it is calling for an end to the use of joint and several liability and is instead calling for a liability cap of 20%.
Under joint and several liability where two or more parties are liable for the same loss or damage to another party, because of separate wrongful acts, the rule holds both or all of the wrongdoers 100% liable for the loss caused.
The party that suffered the loss can claim against one wrongdoer to recover the whole of the loss. The defendant can then seek contribution from any other wrongdoers.
During the leaky buildings crisis in many cases councils were the only party property owners could take legal action against as the builders and developers involved weren’t trading under the same name and were able to avoid legal liability. The council report states:
“The leaky building crisis imposed significant cost on local authorities under the current liability settings because councils are often the ‘last man standing’.
"The objectives of the proposed changes are to provide protections for homeowners and incentives to builders and designers to produce high-quality building work. The view of staff is that the proposals are unlikely to achieve these objectives because the discussion document recommends retaining joint and several liability for building defects instead of changing to proportional liability. This means that councils as Building Consent Authorities (BCAs) will continue to bear a disproportionate liability burden."
The Ministry of Business, Innovation and Employment (MBIE) released a discussion paper last month on the Government’s proposed changes to the Building Act and spells out the risks and liability issues in the construction industry. But it doesn’t recommend getting rid of joint and several liability. It states:
“Based on the evidence currently available to us, MBIE proposes not to make any changes to the liability settings for BCAs.”
However, it does call for feedback from submitters on proportionate liability. But the MBIE paper recognises some of the problems the existing legal framework has created for councils.
“Concern is often raised about BCAs being the only party left to compensate homeowners when building defects arise. This can mean that the total amount paid by BCAs is disproportionate to the role they played in contributing to that defect. Generally, BCAs are seen as having a relatively passive and supervisory role in the building process.
“To be liable to pay some of the costs, BCAs must have contributed in some way to the defect. MBIE has heard mixed views about whether the financial risks that BCAs face in performing their role are significant.”
The Ministry commissioned a review of the building defect disputes between 2008 and 2018 to provide it with an up-to-date picture of the financial risks faced by consent authorities. It says BCAs paid out $1 billion to settle building disputes in the last ten years.
“The research found that BCAs paid out an estimated $1 billion for the period 2008-2018. This includes court-ordered and out of court settlements. About $332 million of the total amount paid covered the costs of defects incurred by other parties who were unavailable to pay their share of the claims (e.g. insolvent). Ratepayers ultimately carry these costs.
“While these are substantial amounts, they need to be considered within the broader context. Over the same 10 year period, BCAs issued consents for new residential and non-residential buildings valued at approximately $75 billion.”
It estimates around 2.5% of residential building consents resulted in disputes settled by court cases or dispute resolution processes. It says court cases relating to leaky buildings have been steadily decreasing since 2012 as they have worked their way through the justice system.
The Auckland Council report also says the Government should make a proposed insurance and guarantee scheme mandatory for all residential and commercial new builds and significant alterations. It also calls on Ministry of Building Innovation and Enterprise (MBIE) to consider changes to company structures to support insurance and guarantee projects (that is, shelf companies that wind up once construction is finished).
The report also calls for expanding the role of the Building Act to include the regulation of building products and methods and their use and to make gaining consent easier for modern methods of construction, including off-site manufacturing.
Under the MBIE proposal homeowners would have to be offered a guarantee and insurance for all new residential homes, or significant alterations by a builder. But homeowners would also retain the right to opt out of it. The guarantee and insurance could be paid for separately, or as part of the total cost of the building work and would provide cover for 10 years after the work has been completed. MBIE says this would provide protection for homeowners and provide an incentive for builders and designers to produce high-quality building work.
Last month New Zealand Certified Builders (NZCB) chief executive Grant Florence in an interview with interest.co.nz said he thought the Government should be taking a harder line.
He said the fact local authorities have often been left to carry the cost of industry failures like the leaky building crisis is at the heart of the issue.
“The liability that sits with the councils, or building consent authorities, is the problem that’s driving the lack of productivity in the industry.”
Florence said he thinks this leads to building consent authorities taking a particularly harder line with builders and developers to ensure they aren’t legally liable.
“I totally understand the councils. But we have to change that and improve things in the industry.”
Submissions on the Government’s proposed changes to the Building Act close on June 16.
12 Comments
If there are good reasons not to hold BCAs jointly and severalably liable this article does not make the case.
2.5% of built value is an enormous amount. Imagine if 2.5% of iPhones were dysfunctional? Think of any major technological product. Any producer with the same failure rate would be out of business with that level of problems.
I understand the differences between a building and a manufactured product and the various industry countervailing forces that drive quality down.
Perhaps a more sophisticated way of defining and allocating risk is required. Just like the weather tightness risk matrix designers use, a risk matrix for building use value and complexity could formalize the consent process and refine liability allocation. That might make low risk development, such as simple low cost single dwellings more efficient while switching focus and resources to how to allocate and ameliorate risk appropriately on large multi-unit developments.
Let me see if I have this right. I recently purchased a new kitchen tap. The manufacturer gave me a 20 years guarantee and the installer gave me a 10 year guarantee. , but when I pay several $100,000 for a house build, it comes with no guarantee, unless I pay for it? And if I do decide to pay for a guarantee, it only lasts 10 years? Ridiculous.
I think the solution is that every builder has to pay into a liability insurance scheme, like ACC. The more claims against the builder, the higher their annual fee. Address the bankruptcy thing by having an inverse relationship between years in business and annual fee. New company? Higher rate.
Consumers also need an easily searchable database so that they can quickly discover the history of a builder - by name and by company.
So you will have shady apartment developers not taking on the insurance to pocket the saving, and then rinsing their $100 company as soon as the last cheque clears. So no change really for that part of the sector that is over represented in the litigation cases.
Councils and ratepayers end up with to much of the cost. Proportionate liability would also mean a more sensible approach to claims. At present the Council is defacto 100% liable and can't run away so the claimants make no bones about targeting them. Other parties get dragged in on the same basis, despite not being at fault or even involved in any way. If the Council is 20% liable, the a $10m claim turns into $2m and that is less inviting and also easier to settle.
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