Introduction

Civil litigators, in the Auckland High Court at least, will know of many leaky building cases dealing with multi-unit developments, a fact attested to by the frequent appearance of such proceedings in the daily Court list.  Such proceedings are a natural by-product of the leaky building phenomenon and, like most litigation, usually settle before trial.

Two such proceedings have gone to trial, and resulted in judgments: Body Corporate 188529 & Ors v North Shore City Council & Ors HC Auckland CIV 2004-404-3230, 30 April 2008 (“Sunset”), per Heath J (PDF), and Body Corporate 189855 & Ors v North Shore City Council & Ors HC Auckland CIV 2005-404-005561, 25 July 2008 (“Byron”) per Venning J (PDF).

The Sunset trial was lengthy, taking nearly 6 weeks of Court time.  Issues of quantum and costs were determined in a later judgement.  The Body Corporate and 4 of the 17 individual home owners were successful.  Issues of costs were determined in a generally positive way for the owners who succeeded.  While the case was not a “win” overall for all of the home owners, it was a good outcome for other leaky home owners

The result in Byron was much more emphatic.  The Body Corporate, and all of the individual owners succeeded; some had their claims reduced as a result of affirmative defences successfully pleaded by the Council.  Issues of costs have yet to be determined, although the burden of costs seems likely to fall squarely on the Council’s shoulders.

Both decisions have been appealed by the Council.

Sunset

The owners sued the North Shore City Council, the developers and the architect.  In broad terms, the successful owners succeeded against the North Shore City Council and the developers (who took no part in the trial) but not the architect.

The facts

The units were built between 1997 and 1998.  The developers were Robert & Kay Barton.  The architect, RF Coughlan & Associates, prepared plans and specifications to enable the development to obtain a building consent from the North Shore City Council (“Council”).

The Council carried out numerous inspections during construction, and issued a Code Compliance Certificate on 11 September 1998.

Only 4 of the 17 unit owners succeeded against the developers and the Council.  The owners of 12 units had entered into an arrangement with a Blue Chip-associated company ("Blue Sky"), involving a complicated leasing arrangement, whereby the individual owners leased units to Blue Sky, who subleased them to tenants.  Blue Sky also “managed” the units.  Those owners who assigned their rights in the litigation to Blue Sky succeeded against the developers, but are unlikely to recover from them, as they seem to be insolvent.  They did not recover from the Council, because the Court held that territorial authorities owe no duty to a lessee.  The claim based on the assignment of their rights failed, because of a lack of proof that the Council had caused them any loss.

Council’s duty of care

The aspect of the case perhaps of most interest to leaky home owners suing territorial authorities is Heath J’s finding that territorial authorities owe a duty of care to owners of residential properties who may own or use them for commercial purposes.  Some recent decisions (Three Meade Street Ltd v Rotorua District Council [2005] 1 NZLR 504; Te Mata Properties Ltd v Hastings District Council HC Napier CIV-2004-441-151, CIV 2004-441-569, 17 August 2007; and R v Mike Barns & Associates Ltd HC Rotorua CIV-2005-463-323, 1 September 2006) created confusion as to whether or not Councils owe a duty of care to owners of residential properties, who own or use them for commercial purposes (such as owners of investment properties, or where all, or part of a house, is utilised to carry on a business).  Heath J, after carefully considering the nature of the duty established in Invercargill City Council v Hamlin [1994] 3 NZLR 213 ("Hamlin"), held that it was not the actual purpose for which a residential property was used that was critical in determining whether the Council would owe a duty.  Rather, a territorial authority owes a duty of care to "anyone who acquires a unit, the intended use of which has been disclosed as residential on the plans and specifications submitted with the building consent application or is known to the Council to be for that end purpose” (para 220).  This pragmatic approach avoids the difficulties highlighted by Williams J in Te Mata Properties Limited & Ors v Hastings District Council CA 450/207, 28 October 2008 ("Te Mata Properties"), of looking at the actual use of the building as the determining factor in whether a territorial authority owes a duty of care.

Heath J held that the duty is to take reasonable care to perform the Council’s three regulatory functions: issuing a building consent; inspecting houses to ensure compliance with the consent; and certification of compliance with the Building Code.

It should be noted that Heath J’s decision was issued before looking at the decision of the Court of Appeal in Te Mata Properties.  In Te Mata Properties, Baragwanath J, giving the leading judgment, referred to Heath J in Sunset, specifically his ‘test’ of looking at whether the purpose of the building stated in the application for a building permit was residential, in determining whether Council owes a duty of care (page 6).

Only Body Corporate can sue for damage to common property

Heath J has also clarified the standing of a Body Corporate to sue.  Confusion often arises in multi-unit claims when the extent of the property owned by individual owners, as opposed to the Body Corporate, is unclear.  In such cases, defendants often argue that it is only the owners, not the Body Corporate, who suffer loss, so that the Body Corporate cannot be a plaintiff.

His Honour held that a Body Corporate has standing to sue but only to recover loss due to damage to common property.

Individual claims

Heath J made a number of findings in relation to the individual owners’ claims.  The most noteworthy of these were that the Council’s affirmative pleas of contributory negligence all failed.  Importantly, he re-affirmed the position of the Court of Appeal in Hamlin, that a purchaser of residential property in New Zealand owes no duty to obtain a pre-purchase report before buying a property.

Findings of negligence

Developer

The developer did not defend the case.  Perhaps unsurprisingly, Heath J held that all of the owners, including the Blue Sky properties, could recover from the developers.

Council

Heath J found the Council liable not in respect of issuing the building consent, but during the inspection process, and in issuing the Code Compliance certificate.  The Council’s liability was based on omissions and negligent acts.  Following the approach of Baragwanath J in Dicks v Hobson Swan Construction Ltd (in liquidation) HC Auckland CIV-2004-404-1065, 22 December 2006 ("Dicks"), Heath J held that the Council should have had appropriate systems of inspection in place to ensure it could conclude that construction of the units complied with the Building Code.  The Council failed to detect leaks on decks and parapet walls during its inspections.

Architect

Heath J held that the architect owed a duty of care, but was not liable.  The developer and the architect had worked together on a number of occasions.  It was the architect’s practice to prepare only a very basic set of plans and specifications sufficient for the developer to obtain a building consent.  His Honour observed that the architect had discharged his contractual obligation to the developer and that any defects in the plans had not been the cause of any loss to the owners, as the development could have been built without leaks according to the plans.

The architect was also sued for having negligently provided practical completion certificates (certificates often issued by architects as a condition of the ongoing funding of a development, or to enable settlement to be effected).  None of the owners could prove that they had relied on such certificates when purchasing their units, so these claims failed.

Quantum Findings/Result

Heath J decided issues of quantum and costs in two later judgments dated 30 September 2008 and 2 October 2008.  Four of the owners were successful against the Council; all of the plaintiffs succeeded against the developers although they are unlikely to recover any judgment from them.

The claim for failed mitigation in relation to the remedial repairs was successful.

Heath J held he was bound by the Court of Appeal in Mouat v Clarke Boyes [1992] 2 NZLR 559, where an award of general damages in the amount of $25,000 was made to a plaintiff who "had suffered great stress through being confronted by the threat of losing her home, with the consequence that her enjoyment of life had been most seriously impaired.”  He was satisfied that each of the successful plaintiffs had suffered similarly and awarded them each general damages of $25,000.

Costs

His Honour held that the case raised “complex issues not readily capable of being fitted into the cost framework of the High Court Rules.”  He said that the proceeding had a number of unusual aspects which made it extraordinary and necessitated him to exercise his Rule 46 discretion as to costs.  These included the complex nature of the litigation, the mix of successful and unsuccessful plaintiffs and the nature of the legal issues.

While he was at pains to ensure that the Council did receive a contribution to costs of aspects of the case on which it unsuccessful, he made it clear that the individual owners who were successful would not penalised through the inability of other plaintiffs to succeed.  In respect of two unsuccessful claims and the successful claim by the Body Corporate costs were to lie where they fell.

Conclusion

The decision is a significant and positive result for multi-unit leaky building home owners, largely because of the confirmation of Council’s duty of care; the clarification that Body Corporates have standing to sue for damage to common property; and the finding that Councils ought to have inspection regimes in place to determine compliance with the Building Code.  The Court has slightly upped the Dicks award of general damages from $22,500 to $25,000 (although this did not occur in Byron where a ‘tariff’ was applied according to individual circumstances – see below).  The writer understands that this decision (as well as Byron), has been appealed, principally on the issue of whether the Court was correct to hold that the Council owed a duty in non-Hamlin type cases, e.g. where units were not occupied by their owners and were owned for investment purposes.  But this thorough and well-reasoned decision has, for now, provided much needed clarification on those points, as well as guidance for how Courts approach the issues of causation and proof of negligence in leaky building cases.

Byron result

By contrast with Sunset, Byron represented an emphatic victory for the homeowners.  They obtained judgment against virtually all of the parties sued (except for Stack NZ Limited and its sole director, Mr Walden, who had provided what could broadly be described as project management services to the developer).  Critically to their prospects of recovery they obtained judgment against the Council.  The impecuniosity of any defendant will not penalise the owners who will be able to recover fully from the Council.  The decision on costs in particular, shows that the Court will take great care to ensure that justice is done in what is legally and factually complex, and often lengthy litigation.

Facts

The property situated at Byron Avenue consisted of 14 residential units.  The experts generally agreed that it was built with numerous defects in breach of the Building Code.

The property was developed by Mr Stephen Smythe through a company, Couldrey Properties Limited.  Mr Smythe was also the architect through his company Smythe and Grant Limited.  Bracewell Construction Limited was the builder, Andrew Plastering Co (1994) was the plasterer and Mr Walden and Stack NZ Limited were the architectural representatives and the project managers.

After discovering weathertightness defects, the Body Corporate instructed O’Hagan Industries Limited, whose sole director was Pat O’Hagan, to advise on remedial works.  It was accepted by the experts that the remedial works failed to remedy the defects.  The cost of repairing the defects was agreed to be over $2.1 million.  The cost of the failed remedial works was $176,508.00.

The issues broadly were these:

• what was the nature and extent of the Body Corporate’s claim;
• did the Council owe a duty and if so, had it been negligent.  In particular, did it “approve” the work even though it had not issued a Code Compliance Certificate;
• was there a claim in negligent misstatement against the Council;
• were Mr Smythe, as a director of the developer and the architect, and Mr O’Hagan, as a director of O’Hagan Industries Limited, personally liable; and
• what were the claims of the individual owners; were there any affirmative defences available to the defendants; and was the failed remedial work recoverable?

The Council’s Duty of Care

The Council (again) failed in its submission that it ought not to owe a duty of care to plaintiffs who bought their units for investment or commercial purposes: Three Meade Street Ltd v Rotorua District Council [2005] 1 NZLR 504 and Te Mata Properties Ltd v Hastings District Council CA 450/2007 [28 October 2008].

Venning adopted the reasoning of Heath J in Sunset that: “the appropriate focus is on the intended end use of the building in question.”  As the intended use of the units was residential and the Council was aware of this, it owed the normal Hamlin type duty of care.

The Council also sought to distinguish the long standing authority in Invercargill City Council v Hamlin [1994] 3 NZLR 513 CA, on a number of bases:

• Hamlin concerned latent, as opposed to patent defects, and as such ought to be restricted to such defects;
• in their evidence, none of the plaintiffs said that they had any general expectations of the Council, such as would support the principle of general/community reliance underpinning Hamlin;
• times have changed since Hamlin was decided, so that the principle of general reliance no longer exists; and
• some owners had not actually relied on the Council.

Venning J refused to limit Hamlin to latent defects simply because, while they were visible, their significance was not appreciated by the owners.

He said that the whole point of general reliance is that there is no need to prove specific reliance, and the concept does not depend upon the individual owner sharing a general expectation of reliance.

While Auckland in the 21st century was a vastly different place from Invercargill in the 1970s, Hamlin had been decided after the enactment of the Building Act 1991.  The Court of Appeal in Hamlin had ample opportunity to find that there was no community expectation on general reliance.

Finally, if owners had relied on other entities as well as the Council i.e. pre-purchase inspectors, that was not an issue which affected whether a duty was owed by the Council, unless it afforded the Plaintiff an opportunity of an intermediate inspection, a high hurdle which the Council could not surmount.  Alternatively, it could be relevant to causation as evidencing contributory negligence on the party of an owner such as was sufficient to break the chain of causation.  That would not affect the Council’s duty of care and such issues were best considered in relation to the individual claim of each unit owner.

Nature of Body Corporate Claim

The Council argued that there was no authority supporting a finding that the Council would owe the Body Corporate a duty of care.  Venning J held that the Body Corporate was a statutory creation, which served the administrative function of being the vehicle whereby owners could sue in respect of common property.  The Body Corporate is not the legal owner of the common property, which is held, or owned, by the unit owners as tenants in common.

He held that as the Council owed the owners a duty in their individual capacity, it would also owe them a duty as owners of the common property as tenants in common.

But, any defence open to the Council in respect of an individual owner’s claim, would reduce that individual owner’s claim in respect of the common property, by a similar percentage.

Council’s liability

The plaintiffs allege that the Council was negligent in issuing the original building consent, inspecting and approving the original building work (it never issued a Code Compliance Certificate) and approving and inspecting the remedial works.

Issue of building consent

Venning J confirmed that the Council owed a duty in relation to the issue of a building consent, to take reasonable care to ensure that the plans and specifications show a building that could be properly completed in accordance with those plans and specifications, and will comply with the Building Code.

The plaintiffs argued four key areas where insufficient details were included in the plans.  They alleged that as a result, the Council did not know how those features were to be constructed, so had no basis for being satisfied that the building would comply with the requirements of the Building Code.

Only in respect of one item (the failure to include flashing details for the deck post penetrations) did the Court find the Council negligent (but such negligence was not held to be causative of any loss; a drawing existed which outlined sufficient details to ensure weatherproofing of deck penetrations).

The Court said that the Council was entitled to issue a building consent on the basis of inadequate specifications, on the assumption that further construction drawings for major elements would be created subsequently. But, if it did so, there was then a greater onus on the Council while carrying out inspections to ensure that the building as built complied with the plans and specifications approved.  Venning approved the comments on Baragwanath J in Dicks v Hobson Swan Construction Limited (in Liq) & Ors HC Auckland CIV-2004-404-001065, 22 December 2006:

The operation of applying silicone sealant is not of any complexity.  But the significance of failure to apply it properly is not as immediately obvious as a failure to provide adequate foundations.  While an absence of directions would not constitute negligence of the company by an inspection process sufficiently robust to discern whether the work in critical areas was up to standard, no such process was provided.

Inspection

The Council was found to have been negligent in carrying out its inspection duties.  This was in relation to the windows and door sills, the cladding to the concrete decks and the wing wall junction.

The effect of Council’s negligence

The development ran into difficulties during construction.  The Council had reached a stage of the inspection process with enough of the units to advise that works on those units complied with the Building Code and that a final Code Compliance Certificate would be issued when all of the other 14 units complied.  Venning J found that the Council had: “… largely approved the construction of work … and was at the point of issuing a Code Compliance Certificate…”

But by then, the damage was evident and the building owners had instructed Prendos Limited to advise them of the extent of the defects.  Prendos advised of the significant moisture ingress issues following which the Council refused to issue a Code Compliance Certificate.  But Venning J found that the Council should also have issued a notice to rectify under s 43(6).

Negligent misstatement claim

Two of the owners sued the Council alleging that the Council’s issue of a certificate confirming that all of the work had been carried out according to the plans and that a final Code Compliance Certificate would be issued when all of the units complied, was a negligent misstatement.  One of the owners succeeded in their claim proving that they had relied upon the certificate in purchasing their unit.  The other claim was unsuccessful because the certificate had been alerted by the Vendor of the unit.

Personal liability of directors

The case featured the now typical claim against a director in tort, when the contracting party was the director’s company.  Venning J had obvious sympathy for the criticisms levelled at the leading decision of the Court of Appeal in Trevor Ivory Limited v Anderson [1992] 2 NZLR 517 ("Trevor Ivory").  He said that it seemed illogical that any employee of a company will be liable if negligent in carrying out tasks on behalf of a company, but a director may not be, simply by virtue of his or her status as director.  But he was constrained to apply the law in Trevor Ivory. Before a director could be liable, there must have been an assumption of personal responsibility by the director to the plaintiffs.

There were claims against three directors.

First, against Mr Smythe, who was the architect.  Venning J had no hesitation in finding that he owed a duty and had breached it.

Second, the claim against Mr O’Hagan and his company in respect of the remedial works.  Venning J looked closely at how Mr O’Hagan had acted in his dealings with the plaintiffs.  Importantly, Mr O’Hagan personally carried out the work, controlled the work, carried out inspections, prepared the specification and details, and supervised the remedial work.

His company was obviously liable under its contract with the plaintiffs.  The issue was whether there was a sufficient relationship of proximity between Mr O’Hagan and the plaintiffs and whether Mr O’Hagan as a director assumed a personally responsibility to them.  Clearly there was, as his Honour held:

In the particular circumstances of this case, there was nothing more that Mr O’Hagan could have done to assume personal responsibility to the plaintiffs for the work that he carried out on behalf of his company.

The plaintiffs alleged that Mr O’Hagan failed to identify a number of defects in the units; that there was a defect in the design he prepared for the initial remedial works; and that he failed to supervise the remedial works properly.

Venning J examined the scope of work undertaken by Mr O’Hagan and his company.  He found that the scope of the remedial work was to address moisture ingress issues in relation to the doors and windows.  Because the scope of any duty which he owed in tort, having assumed a responsibility to the plaintiffs, could not be any wider than his contractual duty, he owed no duty in respect of wider issues in relation to the building.

The plaintiffs alleged that Mr O’Hagan should at the time have recommended a re-clad instead of targeted repairs.  Venning J held that judged by the standards of the time (late 2002/early 2003), it was reasonable of Mr O’Hagan to recommend that remedial works be carried out rather than a full re-clad.

The plaintiffs then alleged that there were defects in the design for the remedial works.  Mr O’Hagan’s company had excluded any liability it may have had if the designs were accepted by the plaintiffs without further testing, which is in fact what happened.  In any event there was no evidence that the designs were negligently prepared.

However, Mr O’Hagan was held liable for failing to supervise the remedial works.  It seemed that he had agreed to carry out a level of supervision but did not actually do so, largely relying upon the builder whom he did not know.  Mr O’Hagan decided to reduce the level of supervision because he thought that the repairs were being carried out adequately.  As a result, Mr O’Hagan failed to detect that there were defects in the way the door sills were installed.

The Council was also liable in respect of the remedial works, as it had effectively required the plaintiffs to carry out remedial works.  It would not issue a Code Compliance Certificate, and suggested that they engage a building services consultant.

The plaintiffs were therefore able to recover the cost of the failed remedial work as failed mitigation from both Mr O’Hagan and the Council.

Third, the claim against Mr Walden and Stack NZ Limited.  This claim failed as their role was limited.  They had no control over the works, and issued a practical completion certificate solely to enable the drawdown of funds.  They also did not approve the quality of the work.  They did not owe a duty, and had not been negligent.  What they did do was inspect for quantitative reasons, rather than qualitative.  Venning J also found that no act by Mr Walden or Stack NZ Limited caused the plaintiffs any loss.

Contribution

Findings of contribution between the liable parties were made, which were largely consistent with what Venning J referred to as the “generally accepted allocation of responsibility between builder and Council of 80%/20%.”

Individual plaintiffs’ claims

The Court then moved to consider whether individual plaintiffs had made out their claims and whether their claims ought to be reduced as a result of any contributory negligence on their behalf.  There were reductions in the claims of three owners as a result of contributory negligence by two of the owners, and through one of the owners transferring the property to a company she owned at the time she knew that remedial work was required.  A deduction of 25% was made on the basis of contributory negligence.

His Honour rejected a submission by the Council that a number of owners were contributorily negligent.  The most important of these was his rejection of the submission that there was negligence in failing to obtain a pre-purchase inspection report prior to purchasing units.  His Honour commented that while such reports are common place there is no evidence that a failure to do so at the time amounted to contributory negligence.  A factor which may have swayed him was the fact that this was a new building.

Apart from these reductions, the plaintiffs recovered the entire cost of repairs, including remedial works, along with consequential losses, less a reduction for betterment for the painting of the units.

General damages

Venning J approached the issue of general damages in a different way to Heath J in Byron.  He preferred a tariff of awards depending on individual circumstances.  Owner/occupiers were awarded $20,000; owners who did not occupy were awarded $12,500.

Result

The bulk of the judgment for the repair costs was entered against the Council, Mr Smythe and the plasterer.  Judgment for the failed remedial works was entered against the Council, Mr Smythe, Mr O’Hagan and his company and the plasterer.

Given that the plastering company was defunct, and that Mr Smythe did not defend the proceedings, the burden of meeting the judgment will fall squarely on the shoulders of the Council.

Venning J commented on this apparent unfairness:

[428]  This case shows that even where there are acknowledged defects that constitute breaches of the Building Code, the ability of individual plaintiffs to recover in relation to the defects that may affect their units will depend on a number of factors, including the circumstances in which the particular unit holder came to purchase the property.  Each claim must therefore be fact dependent.  That makes the predicted outcome of claims in relation to multi-unit developments difficult to asses.

[429]  Further, although in cases of this nature the Courts routinely allocated the Council’s responsibility (where the Council is found to have contributed to the defects in the building) at between 10 and 25 percent, the practical reality is that with the insolvency of others more directly responsible for the defects, such as developers, building companies and, in some instances, architects, the burden of meeting the entire judgment is likely to fall on Councils and through Councils, individual rate payers.  Whether that is a fair result given the limited responsibility for the defects and whether it is sustainable long-term is a matter that this Court is not able to address.  But it is an issue that deserves discussion and further consideration in an appropriate forum.

This case confirms that the outcome of proceedings involving multi-unit dwellings depends very much upon the factual circumstances surrounding each individual unit owner’s purchase of their unit.  While the facts of this decision were slightly unusual, as there had been failed remedial repairs, it is also a reminder that as the leaky buildings phenomenon carries on and is more widely known, Judges may be more inclined to find that parties ought to have been aware of the propensity of monolithically clad buildings to leak, and to have taken steps to protect themselves accordingly.  While the Courts have not recognised any expectation that a prospective purchaser will obtain a building report prior to purchasing a unit, this position may change in the future,

Sunset, Byron and Dicks all show that local authorities have a difficult job in defending claims of negligence where a property is shown to be suffering from weathertightness defects, particularly in relation to the carrying out of inspections.  This presumably persuades Councils, and their indemnifiers, to enter into negotiated settlements in most leaky building claims, where possible.  Such settlements may involve Councils settling with the owners, and taking an assignment of their rights to pursue solvent defendants who chose not to contribute to a settlement: see Body Corporate No 188273 & Anor v Leuschke Group Architects Limited & Ors HC Auckland CIV-2004-404-002003, 28 September 2007.  But where facts exist, such as might persuade a Court to reduce an individual owner’s claim through causative contributorily negligent conduct, Councils will seek to defend such claims.  The writer understands that a key ground of the Council’s appeals of Sunset and Byron is the issue of whether it owes a duty of care in respect of residential units, which are not owner-occupied, but are owned for investment purposes or for “mixed” purposes (i.e. for the operation of a home business as well as for residential purposes).  In Sunset and Byron, the judges found that a duty was owed where the Council was aware that the proposed units would be used for residential purposes and this logic seems hard to fault.  Given the continued failure of Councils to successfully defend claims of negligent inspection in both the High Court and Weathertight Homes Tribunal (e.g. Offord & Anor v Patel & Ors TRI-2007-100-000038, 5 December 2008, SG Lockhart Q.C.), an attempt to reduce Councils’ exposure to such claims by narrowing the duty of care to dwellings owned and occupied must seem to Councils to be a less hard road to hoe.  In doing this, Councils may be attempting the long journey back from Hamlin.