No more “last man standing” in building cases

The change – proportionate liability

Currently, where several parties are responsible for the same loss arising from defective building work, each is liable for the whole of the loss. A claimant can pursue whichever party it chooses and recover in full from that party alone, however small that party's contribution to the defect.

The party that pays can in principle recover proportionate contributions from the others. In practice that right can be worth little where other parties involved are insolvent or unavailable, leaving whoever remains solvent and/or insured to bear a much larger share of the liability than their conduct warrants.

This has led to parties with deep pockets, often local councils, becoming insurers of last resort – bearing a disproportionate burden even where their contribution to the loss was modest. The Ministry of Business, Innovation and Employment (MBIE) puts the additional cost to building consent authorities of covering absent parties at approximately $332m between 2008 and 2018.

That exposure has made building consent authorities unduly risk averse, slowing the consent process and increasing compliance costs.

Under the Bill, each party would become liable only for the share of the loss the decision-maker determines can be justly and equitably attributed to them. This applies whether or not all concurrent wrongdoers are parties to the proceeding, so a decision-maker can fix a share against an absent party.

An insolvent or unavailable defendant’s share would no longer move on to those defendants left standing but would be borne by the claimant. For the claimant to recover in full, all parties who contributed to the loss or damage would need to be available and able to pay their share.

Australian states have operated proportionate liability regimes since the early 1990s, though these have not been without controversy and have been subject to amendment over time. But it is a new step for New Zealand, and a profound change.

Proportionate liability would not take effect until one year after the Bill passes into law and would apply only to work which is consented on or after that date. Because the Building Act’s 10-year longstop allows claims to be brought up to a decade after the act or omission complained of, the two regimes would run in parallel for as much as 10 years – and parties to projects now in the planning stages may want to weigh the delay involved in timing a consent application to fall under the new regime.

The reform does not directly reduce the likelihood or cost of defective building work. It moves the risk of a missing or insolvent party off the defendants who remain, and onto the claimant – typically the building owner.

The Bill aims to better align liability with actual responsibility thereby also reducing risk-averse behaviour (particularly in the consenting process). In theory, this should improve efficiency, bring down costs, and facilitate innovation. The reform pairs the change to liability settings with mandatory insurance and warranty requirements to mitigate some of the risk to building owners, particularly of residential property.

Contracting out and liability caps

There will be a prohibition on limiting or excluding liability for defined residential building work, being restricted building work, on a house or a small apartment building under 10 metres high. This will require changes to industry practices around limitations of liability for residential building work, particularly by designers and engineers. 

The Explanatory Note to the Bill confirms that current contracting practices are intended to continue for all non-residential buildings and buildings over 10 metres. Negotiated liability caps would survive on non-residential work, but the Bill is not explicit about the relationship between liability caps and a party’s apportioned share.

Logically, apportionment would fix a defendant’s share, and its contractual cap would then limit what is recoverable from that share. Although the Bill does not specify that, in assessing co-defendants’ respective shares, the Court or arbitrator can take into account a limitation of liability as a reason to increase another defendant’s share, new section 393D(1)(a) does tie a defendant’s share to the extent of its responsibility for the loss, not to what is recoverable from it.

So the risk of a limitation of liability leaving a “gap” in recovery would remain with the owner/plaintiff.

Nor is the Bill particularly clear on whether, and to what extent, contracting out of the regime is permitted more generally. For example, the Bill provides that claims for contribution and indemnity between concurrent wrongdoers are no longer available, at least in Court proceedings. This leaves unclear how far a contractual indemnity between, say, a head contractor and a subcontractor, would work.

In Australia, contractual indemnities of this kind are seen as indicating an intention to contract out of the regime. But that is in the context of legislation conferring an explicit right to contract out. 

Indemnities benefiting the owner appear to be unaffected, because the owner is not a concurrent wrongdoer.

Finally, to the extent that a sub-contractor is directly liable to an owner (whether in contract or tort), the proposed legislation would appear to undercut the typical provision in a building contract making the head contractor liable for the defaults of its subcontractors. 

Under the current approach, this clause makes the head contractor and subcontractor jointly and severally liable for the consequences of the sub-contractor’s default. In practice, many owners will rely on their head contractor’s liability (and financial standing) and leave it to the head contractor to manage any downstream claim against its subcontractors.

But under the proposed regime, a Court would be required to allocate separate proportionate shares to each of the head contractor and sub-contractor, if each was liable to the owner. The Bill does not permit those shares to “overlap” or permit an order that the subcontractor’s share can be recovered from the head contractor, unless the head contractor is found to be vicariously liable for its subcontractor’s default.

Notably, recent legislation in New South Wales has imposed a non-delegable statutory duty of care to the owner on all participants in construction work, which the High Court has held leads to vicarious liability for a participant’s delegates. The NSW Supreme Court has more recently stated that breach of the non-delegable duty leads to a non-apportionable liability, effectively reinstating joint and several liability for construction sector participants.

Work still to do

Manufacturers and suppliers omitted?

None of the three categories listed in the definition of building project work captures the manufacture or supply of building products, and, as noted above, the Supreme Court’s approach to “building work” generally puts manufacturers outside the first of them — even though the Building Act separately makes manufacturers responsible for products they state will comply with the Building Code if correctly installed. 

The Bill's own example of a fire caused by combustible cladding apportions responsibility among the fire engineer, consent authority, architect and builder, but allocates no share to the manufacturer. 

This approach would exclude manufacturers from the regime, leaving them potentially exposed to the whole loss in proceedings where every other defendant's liability is apportioned. New section 393G would then prevent them recovering contribution from those defendants. In our view this requires clarification. While manufacturers already sit outside the Building Act long-stop limitation regime, there seems no good policy reason not to include them in the proportionate liability framework.

Level of cover, not just cover.

MBIE puts the proportion of designers and engineers already holding professional indemnity insurance at around 90%, so this requirement may not occasion a significant change in behaviour. But the forthcoming regulatory prescription for that insurance may require changes nonetheless. 

The Bill requires an “adequate level of indemnity” for liability under the new subpart, from a licensed insurer, with the detail to be determined. Cover levels vary widely today.  Architectural Designers New Zealand requires a minimum of $250,000 for its certified professional members, although many hold more than $1m. 

Run-off cover is not addressed in the Bill, and MBIE records that it is currently driven by commercial contracts rather than any formal requirement, which matters where policies renew annually but exposure runs for a decade.

No carve-out for deliberate or dishonest conduct.

The Australian regimes generally deny the benefit of apportionment to a wrongdoer who intended to cause the loss or acted fraudulently. The Bill as drafted contains no equivalent provision. On its face, a party who has caused loss deliberately is entitled to have its liability apportioned in the same way as a party who was merely negligent. This appears to be an omission rather than a deliberate policy choice.

Getting everyone in the room.

Full recovery would depend on identifying and joining every responsible party because a decision-maker can fix a share of liability against a party who is not present. On a project with a long consultant and subcontract chain, that is a substantial front-end investigation cost for the owner. As a result, proceedings may become larger, longer and harder to settle.

A claimant will also be incentivised to commence proceedings against as many parties as possible. It may be that this leads to more speculative claims against participants in the defective projects, as plaintiffs try to ensure they do not miss out contributing parties.  “Join first, assess later” may become a rule of thumb.

We can also envisage issues where claims against some potential defendants are subject to arbitration agreements, and some are not. This may result in multiple proceedings, and in multiple determinations of relative proportions of liability for defendants – with the associated risk of inconsistent findings, particularly on such a fact-intensive question as relative contribution to loss.

Warranty market capacity.

MBIE's assessment is that New Zealand’s current home warranty market and occupational licensing regimes are insufficient to support a full-scale warranty scheme in the short term without government backing. It records that only around 46% of new residential builds are covered by home warranty products, with even lower uptake for renovations.

Home warranty products are a new phenomenon for the New Zealand insurance market, with the exception of one Tauranga-based provider. Current information from the Insurance Council suggests none of the major local insurers are likely to want to step in. MBIE has reported some level of interest from overseas insurers, but it remains to be seen if that will translate into actual available products.

This is significant, given the power to suspend the requirement for home warranties contained in the draft Bill. If that power is exercised, proportionate liability would come into force without the most significant intended protection for consumers. Labour has signalled it will address this at Select Committee, on the basis that insurers have told it they cannot presently supply the products the scheme relies on.²

What next

Those wanting to submit on the Bill should prepare against the possibility that the new submission closure date may be set soon after Parliament reconvenes so it would pay to get started on your submissions now.

We are happy to help.

For more on Proportionate Liability, listen to our podcast episode: Who pays when it goes wrong? Proportionate liability reform returns.

1. Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10, (2013) 247 CLR 613.