The building sector: room for a special case?
Proportionate liability for the building sector?
The case for a separate scheme
7.4The strongest argument for a proportionate scheme for the building sector is that it is the only sector in which there is convincing evidence of joint and several liability forcing some sector defendants (namely local authorities) to meet uncollected shares. While we have not found or received evidence of significant numbers of non-local authority defendants regularly having to meet such shares, we have had anecdotal evidence from some building professional groups. The leaky homes crisis has demonstrated that major liability events can occur and may have large impacts on some solvent defendants when they do. No one can reliably predict whether the sector will face an equivalent event to leaky homes in the future but we accept that such a possibility cannot be discounted, even after allowing for the major structural changes that have been and are being made to building regulations.
7.5The lead taken by Australia in the 1990s is instructive. Between 1993 and 1995 three states and both federal territories introduced proportionate liability for building certifiers and building practitioners. The relevant statutes compelled practitioners to take out suitable insurance, the requirements for which could be prescribed by regulation. These initiatives were attempts to stem the perceived rising costs of insurance, and minimise cost increases in a sector subject to fluctuating demand and occasional shocks.
7.6The replacement of these sector schemes by jurisdiction-wide proportionate liability from 2002 makes it impossible to tell what effects or success building sector proportionality actually had. However, proportionality was attempted first in the building sector in Australia, and a trans-Tasman harmonisation argument suggests that a similar approach could be taken in New Zealand.
7.7The Australian approaches to building sector schemes tend to confirm that proportionate liability should not be introduced without appropriate protection for plaintiffs. In Australia this came from compulsory insurance and state-mandated building guarantee or warranty schemes. We recognised in our Issues Paper that we could not recommend proportionate liability for the sector unless it was accompanied by a suitable compulsory warranty or guarantee system. We considered that the two changes would have to be introduced as a package, and that remains our view. We noted that a warranty or guarantee scheme could require express government backing and possibly management. If owners and plaintiffs were made to accept the lowered protection offered by proportionate liability they could be expected to demand the best possible assurance they can get, from any warranty scheme. The inherent difficulty in establishing and maintaining a suitable warranty scheme is therefore another factor in the balance, when considering the potential problems with an industry proportionate liability scheme.
The case against a separate schemeTop
7.8It is not clear that missing or insolvent liable defendants are so disruptive across the building sector that they justify the introduction of proportionate liability. There is no evidence that solvent liable defendants being required to meet part or all of uncollectable shares is a systemic problem, beyond local authority participants. The additional costs borne by local authorities are likely to have had material effects on larger local authority finances, and on ratepayers. These costs have come from one major liability crisis and have fallen mainly on local authorities and their ratepayers, and the impact does not justify altering the liability rule for all building industry participants.
7.9Calls for proportionate liability have remained strong from other sector participants, despite the lack of concrete evidence of costs from joint and several liability. We suspect that this is because joint and several liability is often blamed for results it does not necessarily cause, and proportionate liability is expected to bring changes that it would not. Participants may expect proportionate liability to take away a liability that they think is not “really” theirs, when the participants’ real issue is with a primary liability rule that holds them liable for the plaintiff’s damage in the first place.
7.10The allocation of liability and costs between head contractor-builders and subcontractors demonstrates this point. A traditional head contractor-builder is likely to be liable in contract, with or without statutory warranties, to the purchaser and subsequent owners for any relevant damage they have caused. This liability should normally include damage caused by subcontractors they engaged and controlled. Their primary liability arises from a breach of contract or of a statutory warranty, not from being held jointly and severally liable with negligent subcontractors. A liable subcontractor may be jointly and severally liable for the same damage if it is impossible to divide responsibility for the damage. However, if a subcontractor’s misconduct was limited and the effects can be differentiated, the subcontractor may not be jointly and severally liable for all damage but only for the divisible damage to the relevant place or part where they caused damage.
7.11Introducing proportionate liability would not help the builder. A proportionate liability regime would not enable the builder to automatically pass on portions of liability to a variety of subcontractors. The builder would remain liable for what they have contracted to deliver and what the statutory warranties require – a building that is built with reasonable care and skill and is fit for its identified purpose, for example. Such liability forms part of the builder’s primary liability and would not be overridden by a secondary rule of proportionate liability.
7.12Not every residential building contract involves a head contractor who takes on responsibility for all work, including that done by subcontractors. Situations do occur where, for example, an owner takes on a labour-only carpenter and the owner then selects, engages and supervises subcontractors. A court or tribunal dealing with such contracts would have to determine on the facts what each party was responsible for and on what terms, before it could determine the primary liability, if any, of each party. We expect that in the great majority of cases where building contractors are held to bear substantial liability, this will be because of their primary obligations arising in contract, from statute or both. Compared to local authorities, head contractor-builders have a relatively low likelihood of having to meet an uncollected share, and if they do it will usually be for a much smaller additional share. We conclude that there is no need to adjust the secondary liability rule to ensure that results are just for non-local authority parties.
7.13We are therefore not convinced that there is a case for proportionate liability across the building sector. Even if the case were stronger, it would still depend on establishing an effective building warranty scheme. In contrast, we do consider that an effective warranty or guarantee scheme is highly desirable whether or not proportionate liability is introduced. We discuss this point at paragraph [7.46] below.