Let me start with “I’m not a lawyer”. I just know some stuff, read more stuff and asked ChatGPT about this stuff as well. So, the comments below are speculation, based on experience and a bit of “what-iffing”.
It starts with the announcement by the Government this week that they intend to switch from our traditional joint and several liability regime to a proportional one when it comes to construction. Under a proportional liability arrangement, each party is only responsible for their share of the problem. There is no “last man standing” to pick up the whole bill if the other parties have gone bust or done a runner. Currently, it is left to Council to pick up that bill when the developers and builders aren’t around to share the burden of their failures.
The current system is great for homeowners, as they are assured that their loss will be compensated fully, even if only one party is left to pick up the tab. Especially when that party is the Council, who will always be able to pay. But it’s not that great for councils, who end up paying way more than they should. The Government’s argument is that this causes councils to be much more risk averse, increasing the time, cost and complexity of the consenting process, since they know they may ultimately have to carry the full cost of mistakes made by anybody on the project.
A shift to proportional liability is much better for councils, since they will only ever have to pay their share. However, it significantly increases the risk that homeowners will lose out if the other responsible parties are no longer around to meet their share of the cost. This is why the Government has suggested that builders warranties need to be made mandatory alongside this change, so that insurers fill the gap left by insolvent builders.
However, the recent Pafburn decision in Australia raises questions about what proportion of the liability builders will end up bearing if losses are caused by their subcontractors or other parties to the build.
In the Pafburn decision, the Australian High Court ruled that a developer and the head building contractor cannot reduce their liability by pointing the finger at their subcontractors. This decision highlighted the interaction between the law that allows a proportionate liability regime to operate and another one that says builders can’t delegate their duty of care when carrying out construction work.
In New Zealand, the Implied Warranties in Section 362 of the Building Act similarly establish that builders are responsible for the work their subcontractors perform, and this responsibility can’t be delegated. So, even in a proportional liability environment, the builder would still be responsible for negligent work conducted by their subcontractors. In essence, the Council will be able to limit their liability to just the loss they were responsible for, as would subcontractors (if they are still around and joined to the case), but the builder would not, as they are deemed to be responsible for all the work their subcontractors also perform.
The Pafburn Decision conflicted somewhat with another court case in New South Wales, which also related to whether a main contractor is liable for negligent actions by their subcontractors. In the Omaya Holdings case, the Court held that the statutory duty of care that was imposed on the builder under legislation did not make them liable for the actions of subcontractors. In particular, this was in circumstances where the builder did not have substantive control over the carrying out of the work and the subcontractors were wholly relied upon as professionals with the expertise to perform their works or services.
I have also had experience in an insurance claim context, where an insurer attempted to decline a claim on the basis that the builder was only contractually liable for their subcontractor’s work but not legally liable. Under liability insurance, you are not insured for liability you take on in a contract, unless that same liability would also exist in law anyway. In this particular claim, the builder was being held liable for damage caused by a leaking fitting installed by their plumber, and the insurer suggested that there was no cover, since the builder was not legally liable for their subbie’s actions. I had to point out that legally under the Building Act builders have a non-delegable duty of care for the works performed by their subbies.
In that case it was a good thing that the builder was legally responsible for the actions of their subbies, as it meant their liability insurance covered the claim. However, if it was a legal dispute rather than an insurance one (or if they had no insurance), the Courts would likely have found the builder liable for the damage caused by their subbie and required them to cover the cost.
While there are probably good things that will come from a move to proportional liability, the benefit is likely to mostly go to councils in the form of reduced exposure to defective building claims. I am sceptical if we will see much of a reduction in the cost and time involved in the consenting process as a result, simply because councils will still have a duty of care to their ratepayers when issuing consents and conducting inspections.
The introduction of compulsory builders guarantees can also have benefits, as the process for a homeowner to make a claim under their guarantee is likely to be significantly easier and cheaper than having to take the responsible parties to court. That’s assuming the providers of those guarantees don’t put too many hurdles in the way of course.
Regardless of how these changes eventually shake out, it’s hard to see where builders will benefit. In fact, it seems likely even more admin and compliance obligations will be piled on them yet again.