Chapter 6
The Australian experience and Closer Economic Relations

CER considerations

6.16The Australian decision to shift to proportionate liability for economic loss has particular significance for New Zealand, not simply because Australia has a similar legal system and is our neighbouring jurisdiction, but also because of CER. The initial agreement in 1982 established a free trade area, particularly in goods, between the two nations. The full completion of free trade in goods was accelerated in 1988, so that by 1990 tariffs and quotas between the two markets had been eliminated. CER was always intended to go beyond trade in goods and services, and cover the full range of economic activity. In particular, competition law has been harmonised, which has facilitated the establishment of firms that can readily operate across both jurisdictions. This has been especially noticeable in certain market sectors, such as the manufacture, distribution and sale of foodstuffs, and a wide range of manufactured goods.

6.17Over the three decades since the signing of the agreement there has been a greatly increased integration of the two economies. In some market areas the two economies act almost as one, and the law mirrors and facilitates this process. In other areas this process is much less noticeable, and the two jurisdictions operate independently. This is particularly the case in the small and medium enterprise (SME) sector, where goods and services are consumed in local markets.

6.18In determining whether or not CER should be a key factor in assessing the case for change, it is necessary to examine the characteristics of the market in these sectors that would be most affected by such a change. The two areas that are most frequently cited as most likely to be affected by a shift to proportionate liability are the construction industry and the finance and professional services industries.

6.19The major impetus in New Zealand for a reconsideration of the joint and several liability regime has been the construction industry, as a result of the leaky home crisis. In Australia, in the states of Victoria and New South Wales, a shift to proportionate liability in the building industry occurred some years before the general shift to proportionate liability. The building and construction industry in New Zealand has some specific features that differ from Australia. The small scale of building firms in New Zealand is a particular feature of the industry. Most of the firms, especially in the residential sector, are entirely focussed on the domestic market, usually within their own region. Nearly 80% of building contractors are small firms employing no more than 5 staff. Firms build as few as one or two houses per year, and only 23% of houses are built by “large” firms who build more than 30 houses a year.96  Similarly the architectural and design sector has many small firms. However, building products supply firms are larger, and often operate on a trans-Tasman basis.

6.20Different sectors of the construction industry will have different incentives to take into account CER considerations. The desire for proportionate liability largely has its origins in the perceived unfairness that building construction and design firms will incur liability for losses caused by other parties from whom they cannot recover. Typically they have in mind the absent or insolvent developer. In these cases the liability regime in Australia has been cited as a more desirable model for New Zealand because it is seen as a fairer solution by the industry, irrespective of CER considerations.

6.21Firms operating on both sides of the Tasman currently have to operate under two different legal regimes for liability. Larger firms, whether in construction of the buildings or in manufacturing of building supplies, could benefit from a common liability regime in the two jurisdictions. This could be expected to lower legal and administrative costs for such firms, since they would be able to incorporate the advantages of a single liability regime common to both markets into their costing models. However, this benefit may be hard to quantify in practice, and in any case it will not be available until Australia achieves harmonisation of the various proportionate liability regimes.

6.22The professional services sector is the second major industry category that would be affected. This sector includes accounting, finance, legal service, and other professional services. Parts of this sector are increasingly dominated by multinational firms with a strong presence on both sides of the Tasman. The banking system in New Zealand is particularly dominated by firms that are predominantly Australian owned and domiciled, although New Zealand subsidiaries may operate more or less autonomously. In Australia, the professional services sector was seen as the principal beneficiary of a shift to proportionate liability across all Australian states. The move to proportionate liability was accompanied by a limit or capping of liability for auditors and other professional advisers. The combined effect of proportionate liability and a maximum limit of liability were intended to provide greater certainty for professionals, especially for the availability and cost of indemnity insurance.

6.23A common trans-Tasman liability regime could bring further benefits for the sector. In theory the trans-Tasman market for liability insurance could further reduce or help hold costs down since insurance companies would not have to account for different liability regimes in their pricing models. Transaction costs should reduce as a result of the efficiency gains derived from only having to factor in a single pricing model on both sides of the Tasman. This last point assumes that New Zealand and Australia can operate efficiently as a single market or insurance pool for professional indemnity and/or public liability insurance. This may not be the case: it may be that the two markets are sufficiently distinct due to characteristics unrelated to the liability regime, and it may therefore be difficult to derive any saving from a common liability rule.

6.24Thus far there has not been a significant amount of work done in this area by government officials charged with developing trans-Tasman outcomes. In August 2009 Prime Ministers Rudd and Key announced the trans-Tasman Outcomes Framework. This included a commitment to outcomes in a range of areas of business law. The area covers insolvency law, financial reporting policy, financial services policy, competition policy, business reporting, corporation law, personal property securities law, intellectual property law and consumer policy. Since then additional elements have been added, including a single patent examination process, announced in February 2011 by Prime Ministers Key and Gillard. Whilst these areas could include consideration of liability regimes affecting them, this does not appear to have been the subject of specific consideration by officials as part of the development of CER.

6.25Harmonisation of business law between Australia and New Zealand is generally regarded as desirable, unless there are clear reasons within either jurisdiction that it is not an appropriate solution. The arguments for or against proportionate liability have not previously taken into account CER objectives. Instead, the advantages and disadvantages of different liability regimes have been analysed purely from a domestic standpoint,97 without determining whether CER considerations should lead to harmonisation of the law. In Australia at least, differences in legislation and policy still persist between states as well.

6.26In our view, CER is a relevant consideration for this review, and we welcome submissions that address the desirability of harmonising the law on liability among multiple defendants. Harmonisation would mean that New Zealand would shift to a proportionate liability regime, given that Australia, both in the Commonwealth and the states, made the shift to proportionate liability in 2003, and are working to further harmonise the law to remove inconsistencies between states. In the event that it was considered desirable to shift to a proportionate liability regime, it would be sensible that the New Zealand law be as close as possible to the Australian law, including the reforms that have been recently proposed.

Q22 How relevant is the Australian experience for reform of liability rules in New Zealand? To what extent do the reasons and conditions that led to this change in Australia in 2003 also apply in New Zealand?
Q23 How important is it that there be one liability regime applying across Australia and New Zealand?
Q24 What weight should the Commission give CER when considering whether to recommend changes to New Zealand’s liability rules?
Q25 Given that the different Australian states have not yet harmonised their liability regimes, if New Zealand decides to adopt proportionate liability, how should we draw on the Australian experience?
96I C Page and J Fung “Cost efficiencies of standardised new housing” (Building Research Association of New Zealand Study Report 247, 2011) at 6.
97The Sapere Report refers to the Australian position, but does not consider the issues from a CER perspective.