What has happened
5.6The leaky homes crisis developed rapidly at the end of the 1990s and had become a major liability crisis by the start of the new century. It is still today a major legal, community and public policy issue. Successive governments have put in place special legislative apparatus to deal with the sheer volume of cases and litigants. This has required several amendments to try to improve its performance. More recently the Government introduced settlement and assistance options through which central and local government and homeowners would each bear portions of the rectification costs to fix leaky homes.
5.7The “leaky homes crisis” or “leaky home syndrome” describe the emergence from the late 1990s of significant weathertightness problems in recently constructed buildings, on a scale not seen before. The majority of affected buildings were constructed in the decade from 1994 to 2004. From about the start of this period there was a rapid move to new building styles and techniques, particularly widespread use of so-called “Mediterranean” styles with flat roofs and/or no overhanging eaves; use of monolithic cladding on residential and commercial buildings; and the use of kiln-dried but otherwise untreated timber for framing and other structural work. The combination of leaks and untreated timber meant that structures rotted and failed in large numbers. Necessary remedial work could range from fixing of isolated leaks in lightly affected buildings, to targeted replacement of rotten or failing sections, to full re-cladding of buildings plus rectification of most or all underlying structures. The damage for individual homeowner plaintiffs faced with a full recladding can exceed $300,000. Multi-unit residential buildings also failed in significant numbers. Although repair costs per unit in such developments are typically somewhat lower than for standalone homes, the complications of multiple plaintiffs and the combined potential liability have made multi-unit cases very difficult and expensive for all parties.
The leaky homes crisis is a pertinent example of problems or “wrongs” having multiple contributing causes. The phenomenon of buildings developing weathertightness and related problems in such large numbers results from a basket of contributing factors. Not all factors will be relevant for each leaky building, but any or all of the following may
be involved (this list is not exhaustive):
- Builders being permitted and increasingly using untreated timber for framing; and some uses for which it was never intended or permitted, for example, balconies extending beyond the building profile;
- Increased compartmentalisation of building processes, with greater reliance on less experienced or lower skilled labour-only contractors for key tasks, for instance roofing;
- Introduction of new products and building systems, especially various brands and systems of monolithic cladding;
- Possible issues with fitness for purpose of some products, especially but not solely when used inconsistently with manufacturers’ specifications or sound building practice;
- Variable or questionable skill levels, especially with new products requiring correct design and/or use to achieve weathertightness;
- Transitional problems while industry and regulators adapted to a new performance-based building code and approach;
- Unevenness in standards of inspection and inspection practice, whether by territorial authorities or by private certifiers who were permitted under the Building Industry Act 1991.
Leaky homes and joint and several liability
5.9The complexity of even a single residential home build means that for every damage and potential plaintiff there can be multiple potential defendants, all of whom may be proved to have contributed to or caused a latent defect that has led to a weathertightness failure.
5.10Defendants in leaky homes claims will not necessarily all be equally responsible for all the loss suffered by the homeowner. For instance sub-contractors who have carried out only a single or limited task on only one part of a building may be able to show that they have contributed to or caused an isolated and distinct item of damage, not the overall weathertightness problem. However, if a defendant is held liable for causing overall indivisible weathertightness damage and structural failure, joint and several liability exposes them to meeting the full cost of the damages awarded if other defendants are unavailable. Given the protracted nature of the crisis, significant numbers of defendants are insolvent and cannot or do not pay. Industry participants and bodies argue that this makes joint and several liability unfair to solvent defendants and that proportionate liability is the necessary remedy. The leaky homes crisis did not create this argued unfairness to solvent defendants, but it has served to cast the issue in strong relief due to the numbers of plaintiffs and defendants affected.
5.11Different categories of building industry participants may be more or less affected by exposure to joint and several liability. Builders, building sub-trades, architects, engineers, and territorial authorities have all argued that they are unfairly exposed to disproportionate liability. In particular, some argue that joint and several liability is unfair because it does not reflect the fact that in any given case, some defendants may be more blameworthy and others may have a lesser degree of responsibility for the damage caused. Our consultations with industry participants confirm similar views.
5.12It is difficult to obtain reliable data on how liability and costs for leaky homes are borne by affected parties in practice, because many or even the majority of cases are settled out of court or are dealt with privately. However, costings carried out by Price Waterhouse Coopers for the Department of Building and Housing in 2009 tend to confirm that actual costs are not being borne in proportion to adjudicated allocations. In particular, the high proportion of defendants or potential defendants who are insolvent or no longer exist has meant that territorial authorities face an increasing and disproportionate share of costs compared to their relative level of fault.
5.13These costings point out another major issue. The analysis confirms that over two thirds of all costs continue to fall on homeowners. This is because it is thought that the majority of weathertightness problems remain unknown, unrecognised or at least untreated. Unrecognised weathertightness issues may eventually lead to structural failure, which is likely to be far more expensive to repair and to be borne by the owner because the 10 year limitation period for claims will have expired.
5.14Homeowners who do seek redress are unlikely to agree that the system is actually delivering the common law goal of full compensation for the harm suffered. The unavailability of costs in the specialist Weathertight Homes Tribunal and the expense of the alternative High Court route means that plaintiffs will typically suffer significant unrecoverable losses even if their claim is successful. In addition, plaintiffs who settle will commonly bear a portion of the loss.
5.15Insofar as the cost burden on homeowners arises from unrecognised and untreated weathertightness failures that fall outside the adjudication system, these costs cannot inform the assessment of the relative fairness of the joint and several system of liability. These costs do not bear directly on whether joint and several liability for damages awarded in Court are efficient or “fair” to defendants, especially solvent defendants. Equally, any changes to the liability rule are unlikely to have any significant effect on who bears the costs for unrecognised weathertightness issues and plaintiffs’ unrecoverable costs. The fairness of the liability regime to homeowner plaintiffs nevertheless remains a key issue. As pointed out by our previous reports, if joint and several liability were replaced by proportionate liability the risk and cost of absent or insolvent defendants would be borne by the plaintiff, and the common law objective of fully compensating the plaintiff would be lost. Proportionate liability would mean that defendants would not be required to pay more than their “fair share” (i.e. their proportionate share of the total loss), but at the cost of significant unfairness or injustice to plaintiffs. This is a key consideration that must be addressed before any conclusions can be reached about the desirability of keeping or changing the present liability regime.
Alternative protection for plaintiffs: a warranty system?
5.16In 2011, the Department of Building and Housing commissioned the Sapere Report. This report considered the issue of relative fairness between defendants, and overall fairness for the plaintiff homeowners. The report noted that changing from joint and several liability to proportionate liability transfers the “cost and unfairness of uncollectable shares” (from defendants to the plaintiff) without addressing the issue. The authors concluded that proportionate liability could not be considered as a viable option without mandatory home warranty insurance. They also concluded that even if such a scheme were in place consumers/homeowners would be worse off because of the additional burdens of having to join defendants, prove a case against each and later pursue payment. The Report recommended against a change to proportionate liability in the building sector for these reasons. It also doubted if proportionate liability was feasible given the difficulty and cost with establishing a satisfactory warranty scheme.
5.17The Australian experience tends to confirm that achieving a satisfactory warranty scheme will be difficult and most likely impossible without strong government support. Australian states have had state-mandated builders’ warranty insurance schemes of various types since the 1970s. Such schemes have moved from industry-provided and market-based schemes to state-provided and run schemes, particularly since 2000. The principal driver for the change has been insurers abandoning the market because it is perceived as unprofitable or too risky. From a plaintiff’s perspective the schemes often remain unattractive because of a high hurdle for eligibility. All but one of the state schemes is now “last resort”, with cover only if the builder is dead, insolvent or missing. Homeowners therefore have to pursue the defendant and incur possibly unrecoverable costs before being able to claim under the warranty.
5.18New Zealand’s insurance market does not necessarily share the same features as Australia’s. However, the recent history of leaky homes in New Zealand must be a factor disinclining insurers from participating in a home warranty scheme in New Zealand. In this environment we suspect that a warranty scheme could only be achieved with at least a government guarantee and most probably direct government provision of the machinery.
5.19At the time of writing, the Supreme Court had just released its decision in the case of Body Corporate 207624 v North Shore City Council (Spencer on Byron). This decision holds that territorial authorities owe a duty of care in their inspection role to owners of premises, both original and subsequent, regardless of the type or intended use of the premises. This means that owners of commercial buildings may sue territorial authorities for alleged breaches of this duty that have caused damage, so long as they commence any action within the 10 year limitation period applying under the Building Act 1991. The Court confirmed that this decision is limited for the time being to events and proceedings under the Building Act 1991, which was the applicable statutory regime in the case. The Court indicated that it is likely that similar considerations and liability will arise for buildings and work covered by the Building Act 2004, but reserved its position on that for a relevant case.
5.20Up until Spencer on Byron the leaky building crisis had essentially been seen as an issue relating to residential homes and apartments, at least so far as territorial authorities providing building inspection services were concerned. The Supreme Court had previously decided in the Sunset Terrraces case that territorial authorities could be liable in negligence even where residences were not necessarily owner-occupied and were in large residential apartment blocks. But decisions at lower levels had held that territorial authorities performing inspections did not owe duties to owners of buildings that were not homes but rather were commercial premises. The Supreme Court has now held that these earlier cases erred when they sought to draw a dividing line for duty of care purposes between commercial and residential buildings.
5.21It can be expected that the liabilities of territorial authorities for leaky buildings will increase as a result of Spencer on Byron. The class of commercial buildings whose owners may sue over allegedly negligent inspection services is not restricted, except by the 10 year limitation period. It may be that the limitation issue will significantly restrict the number of historical claims, but only time will tell. In terms of new claims, territorial authorities will no doubt plan and work on the assumption that the rule now applied to 1991 Act cases will be confirmed for situations governed by the current Act.
5.22Whether the likely increased liability of territorial authorities will have a flow-on effect of increasingly disproportionate liability is an open question. Territorial authorities remain natural deep pockets and it is easy to predict the unavailability of at least some potential defendants in major commercial building cases, whether from use of project-specific corporate structures, insolvency or other reasons. However, larger commercial projects may also involve larger commercial construction companies, so that territorial authorities will not necessarily be the last defendant left standing. We simply do not know at this point what the indirect effects may be on apportionment of liability among defendants in commercial building disputes.
5.23One reaction to Spencer on Byron may be that it provides further justification for proportionate liability due to the risk or likelihood of further disproportionate liability, to be borne by local government and therefore ratepayers. We think that it is too soon to make such predictions. Even if that is what occurs there is still the issue of whether it would be just to transfer the cost of uncollectable shares to owners of commercial buildings? The Supreme Court has expressly chosen not to distinguish between residential and commercial building owners in terms of duty of care. This implies that steps to redress any impact from proportionate liability on plaintiffs, such as a guarantee scheme for residential home owners, would be just as important but probably even more difficult to achieve, for commercial owners.
5.24We will be interested to hear from submitters whether and how they think the liability landscape is affected by Spencer on Byron, and what if anything they think should be done in response.
Summary on leaky buildings
5.25It is clear that a switch to proportionate liability for the building industry, while advocated by some in the industry, remains highly problematic in terms of building owner or plaintiff interests. Our consultations so far with the industry and others nevertheless confirm that such a change is still seen by many as necessary to reduce perceived burdens on the building industry. On the other hand, it could also be argued that a “one off” crisis such as leaky buildings does not provide the best context for analysing or adjusting rules of liability generally, given that even such a major event turns on its own facts including the range of contributing causes referred to in this chapter. In any event, removing or amending the rule of joint and several liability could only occur prospectively and would not affect existing claims.
5.26Some also argue that proportionate liability might lead to more efficient incentives on industry participants. The debate is clearly not over, and the advantages and disadvantages of the competing rules are examined further in Chapter 9.