Chapter 9
The case for change

Issues in the Building Sector

9.15A possible shift to proportionate liability raises the issue of the protection of the consumer interests. In the case of the building sector, the building owners are consumers who are making claims against the suppliers and regulators of building services. Since proportionate liability results in plaintiff homeowners bearing the risk of absent or insolvent defendants, it is necessary to have a system which ensures that defects are remedied in the event that the wrongdoer is absent or insolvent.

9.16The approach in Australia has been to have compulsory builders warranty insurance. These schemes are administered at the state level. Builders are required to be insured, so that in the event that the builder fails to remedy a defect, the homeowner can claim against the policy. When the schemes were first developed in the 1970s there was a wide variety of cover. Over time the schemes have evolved, and the cover has become more similar in most state schemes. Initially most schemes were undertaken by private insurers, but since the financial crisis private companies have exited the market and the schemes are now underwritten or run by state government agencies. The insurers vacated the market because the market was not sufficiently profitable, and arguably because the firms feared or suffered reputational damage in the event of disputes. Since this was a sector where the insured did not choose the insurer, disputes were more common than in other insurance markets. Disputes may also be more likely today than under earlier schemes because all but one of state schemes since the financial crisis now provide only a “last resort” warranty, when the builder is dead, insolvent or unable to be found.141 The same factors that have seen insurers vacate the builders warranty market in Australia are likely to disincline insurers to become involved in a New Zealand warranty scheme. It is also doubtful whether New Zealand consumers would regard “last resort” cover as fair or adequate, given the Australian experience.

9.17It is the view of the Law Commission at this stage that a shift from joint and several liability to proportionate liability can only be justified if there is adequate protection of the plaintiffs’ or the consumer interest.

9.18This has particular significance given the background of the leaky building crisis. The building industry through industry bodies and the territorial local authorities have been the principal proponents for a change from joint and several liability to proportionate liability. They have been of the view that it is unfair that a defendant, who may have only contributed to a minor extent should incur liability for the absent or insolvent co-defendant. There is less direct evidence of the views of building owners, but we infer that they are more likely to consider that anyone who has actually caused their loss should be responsible for compensating them for it. We are interested in receiving submissions and comments about the operation of the joint and several liability rule from persons who have experience as plaintiffs in claims involving multiple defendants, as well as from defendants who have been subject to the rule.

9.19There has been some recognition in discussions about the operation of joint and several liability of the importance of consumer protection. Local Government New Zealand has proposed that there should be a compulsory building warranty scheme. This is seen as one of the necessary elements, along with the new regulatory regime that is being introduced to improve building quality. However, the experience of the Australian states shows that an effective warranty scheme will either have to be provided by government, or have a government guarantee. How or if such a scheme could work in the commercial building sector, after Spencer on Byron, is a further issue that would need to be resolved.

9.20The Law Commission’s present view in respect of at least the residential sector of the building industry is therefore that a shift from joint and several liability to proportionate liability would have to be accompanied by the establishment of a compulsory building warranty scheme that would provide cover in the event that the builder failed to rectify defects. There would need to be a clear indication from Government that a compulsory warranty scheme would be established as an element of any changes to the liability regime that weaken the ability of homeowners to recover fully from defendants. It is likely that the two propositions of a change in liability regime and the introduction of a builders warranty scheme would need to be introduced as a package to ensure continuity of consumer protection. The package should also detail how the interests of commercial building owners would be addressed.

141The Queensland scheme is the exception “first resort” scheme, in that it allows complainants to seek dispute resolution assistance from the relevant state agency, with cover still available if the builder cannot or does not pay for assessed damage.