The Court of Appeal has emphatically rejected an attempt by territorial authorities to limit or reduce their ongoing exposure to leaky building claims.  In 2008, the North Shore City Council was held liable in two High Court decisions (BC 188529 v North Shore City Council [2008] 3 NZLR 479 and BC 189855 v North Shore City Council HC Auckland CIV-2005-404-005561, 25 July 2008) for breaching its duties to homeowners in carrying out its statutory functions pursuant to the Building Act 1991 (“the Act”) in respect of two multi-unit apartment complexes on the North Shore of Auckland City.

In its appeals against these decisions, the Council sought to persuade the Court to overturn the finding in those cases that it owed a duty of care, by arguing that it should only owe a duty of care to owner/occupiers of modest stand-alone properties, not to investors, nor in respect of a complex high rise development.

The Court, in its decisions in Sunset Terraces [2010] NZCA 64 (PDF) and Byron Avenue [2010] NZCA 65 (PDF), delivered together in March, rejected that argument, which centred on a submission that losses associated with such a complex development were claims for economic loss, and so unrecoverable in the law of that torts.  Essentially, the Court confirmed that Invercargill City Council v Hamlin [1996] 1 NZLR 513 was a “sui generis” exception to the rule that economic loss was unrecoverable, and that there was little distinction between the owner of a leaky apartment and the owner of a standalone leaky home.

The Court adopted the analysis of Heath J in the High Court, at first instance, and held that a territorial authority would owe a duty of care where the intended use of the building was stated as residential in plans and specifications submitted with the building consent application, or was otherwise known by the Council to be for that end purpose.  This test avoided the difficulties associated with using occupation of the property by an owner as a benchmark for determining when the Council would owe a duty of care, as discussed by Williams J in Te Mata Properties v Hastings District Council HC Napier CIV-2004-441-151, CIV-2004-441-569, 17 August 2007.

As I pointed out when I spoke at the LexisNexis building and construction law conference in 2009, the logic of the “bright line” adopted by Heath J seems hard to fault, and for this reason, the Court’s decision was, perhaps, predictable; even more so, as the Court being bound by the Privy Council’s decision in Hamlin, it could, at best, only be persuaded to depart from it.  No doubt, territorial authorities and their indemnifiers see the next round of the fight before the Supreme Court as their best (and final) chance of persuading the Supreme Court that the Court of Appeal’s duty of care analysis in Hamlin in 1996, dealing as it did with events which occurred in a vastly different New Zealand, in 1972, should not apply at the beginning of the 21st century.

Duty of Care

The Council acknowledged that the court was bound by the Privy Council decision in Hamlin.  But it sought to persuade the court to construe Hamlin narrowly and effectively confine it to its own facts.  It did so by way of a primary submission that no duty of care ought to be owed for a substantial development such as Sunset Terraces, compared to the modest, stand-alone dwelling with which Hamlin was concerned.  It supported this with an analysis of the Act and common law principles, also pointing to the widespread changes in New Zealand society in relation to homeownership between the 1970’s (when the dwelling in Hamlin was constructed) and currently.

In considering this submission, the Court carried out a detailed review of the Act, the Building Industry Commission’s Reform of Building Controls report on which the Act was largely based, and made the point that New Zealand courts had in earlier decisions (Bowen v Paramount Builders [1977] 1 NZLR 394 (CA), and Mt Albert Council v Johnson [1979] 2 NZLR 234 (CA)), elected to depart from English jurisprudence, which was moving away from finding that local authorities owed duties of care to homeowners.

The Court concluded that when looking at the individual apartment owners in the case before it, and in Byron Avenue, the policy behind Hamlin applied even more so to such owners, compared to stand-alone house owners, so that they ought to be covered by the same principle.  Owners of leaky apartments were more likely to have fewer resources than owners of stand-alone homes.

In relation to the argument that owner/occupiers should not be owed a duty, Baragwanath J said at para 69:

Those who own but do not occupy are not precisely covered by Hamlin but having considered a board spectrum of cases I am satisfied that it would be wholly impracticable to have the duty come and go as the owner moves in and out of the apartment for shorter and longer periods.  I can see no principled basis not to adopt the bright line selected by Heath J and permit claims by owners, whether or not they are in occupation, provided the intended use of the building was stated as residential in the plans and specifications submitted with the building consent application or was known to the Council to be for that end purpose.

The Council also sought, unsuccessfully, to argue that the enactment of s 44A of the Local Government Official Information and Meetings Act 1987 (“LGOIMA”) which enacted the Land Information Memorandum ("LIM") procedure, meant that purchasers made a decision on the merits of a property without any general reliance on the Council.  The Court pointed out that the term “general reliance” referred to general expectations in the community, rather than any individual expectations as to the behaviour of a local authority.  While a failure to obtain a LIM may support a finding of contributory negligence, it could have no impact where due to the Council’s own negligence, the LIM would not have disclosed that an apartment was a leaky building.  In upholding the Heath J “bright line” test the Court also rejected a submission that because a multi unit development is likely to have involved engineers and architects in its construction, this should mean that Council owed no duty of care.

Accrual of cause of action

Council sought to argue that, because Hamlin held that a cause of action accrues when a latent (i.e. hidden) defect is discovered or is reasonably discoverable, once that occurs, the accrual is complete and it cannot recur, for example, in the name of a subsequent owner.

The Court noted that New Zealand law had long since rejected the argument that a cause of action may accrue and a case become statue – barred, although a plaintiff had no reason to know of it.  It was frequently the case that an original owner knew nothing about deficiencies in construction of the house but even if they did, that should not affect the rights of later buyers, who may not have known about defects, until long after they had purchased the property.

Individual owners’ cases

Having rejected the Council’s argument on the duty of care issue, the Court then considered the individual appeals against the decisions in favour of the successful claimants in the High Court.  It dismissed all of the Council’s appeals against the findings in respect of those owners.  It upheld an appeal by the units owned by Blue Sky (a Blue Chip associated company) on the basis that Council owed the Blue Sky company a duty of care.

The Court dismissed an appeal by the owners against the finding by Heath J that the architect was not negligent in preparing plans and specifications for the development, but held the architect liable to one owner for negligently preparing a practical completion certificate which the owner had relied on.

Byron Avenue appeal

The Court’s finding in Sunset as to when the Council would owe a duty of care effectively dealt with the question of liability of the Council in Byron Avenue for careless performance of its duties.  The appeal also raised four other separate questions: whether a Council which had not issued a Code Compliance Certificate could be sued; how should contributory negligence be dealt with; whether the Body Corporate could sue for damage to common property; and whether s 41 of LGOIMA meant that the Council could not be liable in relation to any claim alleging misstatement in a LIM.  The Court also appears to have settled the “tariff” in relation to general damages for leaky homes ($15,000 for owner/non occupiers, $25,000 for owner/occupiers)

Non-issue of Code Compliance Certificate

The Court having analysed the Act, concluded that it contemplated liability on the part of a territorial authority, not only in relation to the issue of building consents and Code Compliance Certificates, but also in relation to inspections.  As the effect of negligent inspections would be to “lock in” a defective condition which could then not be detected by purchasers, they should be able to sue a Council in respect of negligent inspections, even where no Code Compliance Certificate had been issued.

Contributory negligence/attribution of knowledge of an agent

The Court reviewed and upheld the findings of contributory negligence in the High Court.  One owner’s fact situation raised a difficult issue: could the negligence of her solicitor, in failing to advise the owner to obtain a LIM which would have drawn problems to her attention, be attributed to her for the purposes of contributory negligence?

After considering relevant authorities in detail the Court concluded that, unusually, the solicitor’s negligence would be attributed to the owner, leaving the owner free to sue the solicitor separately in respect of any finding of contributory negligence against them in this proceeding.  This may give rise to increased claims against solicitors, particularly in the Weathertight Homes Tribunal.

Claim by the Body Corporate

The Court of Appeal confirmed that a Body Corporate may sue for any damage to common property, subject to a “pro-rata” reduction in any judgment in its favour, in proportion to the amount of any finding of contributory negligence on the part of an individual proprietor.

LGOIMA

The Court did not determine the issue of whether or not s 41 of LGOIMA meant that a Council could have no liability in relation to any claim alleging negligent misstatement in a LIM, as this issue is shortly due to be considered by the Supreme Court.

Conclusion

The Court’s concluding comments confirm its view that a solution to the leaky building crisis must come from government, not the courts.

An earlier article in NZ Lawyer referred to Baragwanath J’s comments that litigation “cannot offer a sufficient solution” to a systemic failure as it will not result in “…legal liability being imposed on all the entities which have had some part to play in the failure, even though they bear some responsibility (in a moral sense) for what has occurred”.  It remains to be seen whether or not the government will heed this advice, and provide a mechanism for these problems to be solved in a non-litigious way.  In the interim, the court’s judgments in these two cases have provided much needed clarity for leaky homeowners and their advisers in bringing claims, at least until the outcome of the forthcoming appeal to the Supreme Court by the Council.  The court’s analysis on the duty of care issue seems sound and well reasoned, so it seems unlikely (though it cannot be ruled out) that the Supreme Court will impose a different view.

Conveyancing lawyers may also need to review their practice in relation advising respective purchasers to obtain a LIM as the court’s view appears to be that failing to do so may be negligent.