Contents

Chapter 7
The building sector: room for a special case?

The case for a comprehensive building warranty scheme

7.46We have already confirmed our view, which we first expressed in our Issues Paper, that a comprehensive building warranty or guarantee scheme would be a prerequisite for any chance of proportionate liability being introduced in the sector.123 A truly comprehensive scheme would reduce stress on both plaintiffs and defendants, and help facilitate fair outcomes when problems or disputes arise. Having a scheme to back up builders’ resources when claims arise would greatly reduce the risk of plaintiffs not recovering all their losses under proportionate liability. More importantly, a working guarantee or warranty scheme should ensure that plaintiffs are paid and liable defendants pay no more than their appropriate share of responsibility, compared to other liable defendants, regardless of whether proportionate liability or joint and several liability applies. The multiple defendants rule should only need to be applied to a small number of cases, where for some reason a plaintiff could not be covered or chooses not to be covered by the warranty scheme.124

7.47Introducing an effective scheme would be much more likely to deal with perceived unfairness to defendants than a shift to proportionate liability. Plaintiffs could be made whole without the risk of significant uncollected shares to be met by solvent liable defendants.

7.48We expect that a guarantee scheme with wide industry coverage and support and adequate financial strength would shift the focus away from the very protracted debate over joint and several versus proportionate liability, by rendering it unnecessary. We therefore support the development of a comprehensive125 guarantee or warranty scheme to cover building work for residential dwellings, both single and multi-unit. We recognise that the design and implementation of such a scheme is a major enterprise, and well beyond the scope of this Report. We are aware that MBIE has previously investigated and advised Ministers on such schemes and we think this work should move forward as a matter of priority. To assist, we offer further high level comments on some design issues below.

7.49The scheme will require broad participation rates. The full benefits of a warranty scheme will only be achieved with uptake approaching 100 per cent for all new builds. A near-100 per cent participation rate would also help ensure the scheme’s financial viability, reduce litigation and should resolve any remaining argument over joint and several liability. This raises the question of whether cover should be compulsory for all new homes and all renovations above a given value.

7.50Judging from take-up of the presently available commercial products, a voluntary scheme may struggle to achieve and maintain a satisfactory participation level. The two main products available have perhaps 50 per cent coverage of new standalone dwellings but neither product is designed for intending homeowners in multi-unit projects and there is currently no alternative product for this sub-sector. A well-designed comprehensive scheme will hopefully be more attractive to prospective owners of new homes, particularly if an option is also available to unit owners in multi-unit developments. Clearly a scheme will struggle in the longer term if it cannot achieve uptake at or above around 80 per cent and compulsion might have to be considered if that were the situation. Our preference is to avoid compulsion by having comprehensive availability of approved warranty products across all typical housing types.

7.51We suggest that builders should be required to offer a suitable warranty product to each customer, who then decides whether or not to purchase the warranty. While we do not underestimate the challenges of running a long-term, successful scheme or schemes, we consider the benefits are substantial enough to justify further work to develop, and if proved feasible, implement a comprehensive scheme or schemes in New Zealand.

Recommendations

R8 Participants in the building sector should remain subject to the normal application of joint and several liability.

R9 The liability of building consent authorities held liable in tort for acts and omissions relating to building consents and all related work should be capped.
  • The cap should be set initially at: $300,000 for a single dwelling; $150,000 per unit in a multi-unit development; and $3 million per multi-unit development, with such rates reviewed over time against appropriate indices to ensure each cap remains fair to potential plaintiffs and authorities.
  • Any cap should apply only to new claims arising from acts or omissions that occur after 23 July 2016 (which is the date the Financial Assistance Package is due to close to new claims).
R10 The Building Act 2004 should be amended to clarify the responsibility and potential liability of building consent authorities for commercial building consents by enacting a new section, section 52Z, which defines the extent and limits of building consent authority liability for commercial consents, in similar form to sections 52I and 52L (which deal with responsibilities for simple and low risk residential consents, respectively).

​R11 The Ministry of Business, Innovation and Employment should continue to develop, for implementation if proved feasible, a comprehensive residential building guarantee scheme with options suitable for both standalone and multi-unit dwellings.
123Issues Paper, above n 83, at [9.20]. We have used the names “building guarantee scheme” and “building (or builders’) warranty scheme” essentially interchangeably in this Report. We take it that in theory a “warranty” scheme would be provided by builders themselves, although most likely with external financial and administrative support. In contrast, a “guarantee scheme” could be more external to the parties to the building contract, with an insurer or other financial institution providing guarantees subject to scheme terms. Use of the term “warranty” may be confusing, given the increasingly important warranties implied by law in ss 396 to 399 of the Building Act 2004, and soon to be brought within the new consumer protection provisions in new pt 4A. However, if a workable scheme is to be drawn up, we suspect that very little will depend on the name chosen, and this issue can safely be left until detailed design is undertaken.
124For instance because the plaintiff wished to build a house using approved but “risky” techniques, and the scheme excluded cover for such “non-standard” builds. At least in this situation the plaintiff would be on notice that they were accepting a level of risk and could consider whether to seek some assurance of solvency from their builder, or attempt to arrange insurance.
125By “comprehensive” we do not necessarily mean “compulsory”. A scheme in our view should at least be available to the normal range of purchasers of residential dwellings, and comprehensive availability may be enough to reduce the number of cases affected by insolvent or unavailable liable parties. Comprehensive availability could include a compulsion on builders or developers to offer an acceptable warranty product – but without any compulsion on the purchaser to accept.