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Published in October 2011

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Building Act Review: Review of Joint and Several Liability

Cabinet paper

On this page:

Appendices:

Proposal

1. I propose the Department of Building and Housing be directed to develop a targeted communications plan to educate and address sector perceptions about joint and several liability, including publishing this paper.

2. The Minister Responsible for the Law Commission has referred the issue of joint and several liability (including the contents of this paper) to the Law Commission for further consideration as part of a broad review of joint and several liability. The communications plan will be implemented in parallel to the Law Commission review.

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Executive summary

3. In August 2010 Cabinet agreed to building regulatory reforms to support improvements to the productivity, efficiency and accountability of the building and construction sector (Cab Min (10) 27/10 refers):

  • changes to the Building Act to clearly signal roles and accountabilities for building work and Building Code compliance between designers, builders, building owners and building consent authorities
  • new legislative provisions to enable residential consumers to better hold building contractors to account through contract
  • changes to the Building Act and regulations to exempt a broader range of low risk work from consenting requirements and to provide for a risk-based approach to building consent and inspection requirements, so that the requirements are proportionate to the risks and consequences of building defects and the skills and capabilities of those doing the work
  • further advice on improvements to the administration of the building regulatory system.

4. The reforms under the Building Act are being implemented as a package. This includes both an information campaign to communicate with consumers about their rights and obligations when undertaking a building project, and information to the sector to support policy and regulatory changes. A monitoring and evaluation plan to assess the impact of the reforms is also under development.

5. Accountability in New Zealand is underpinned by the “joint and several” liability rule, which is used to determine the liability of multiple parties in tort (negligence) law and how costs are allocated among them. Tort law is primarily concerned with ensuring an injured party is fully compensated (“made whole”) for damage or loss caused by negligent parties.

6. The application of the joint and several rule in practice has raised concerns among the building sector about fairness, risk aversion, risk avoidance and cost.

7. These concerns arose primarily as a reaction to leaky homes claims from residential buildings. Ultimately, all of these issues flow through to impact on consumers and homeowners.

8. The Department of Building and Housing was directed to review the application of the joint and several rule in the building sector, against the backdrop of other Building Act reforms agreed to by Cabinet in August 2010.

9. In particular, the review was concerned with establishing which liability rule is the right one to support a drive for better accountability in the building sector.

10. The primary output of the review was the Sapere/Buddle Findlay report Review of the application of joint and several liability to the building and construction sector.

11. An advisory group of key sector leaders were involved as the review progressed. The advisory group initially held strong views that a change to proportionate liability was desired, these views softened as a result of the review findings.

12. The review concluded that, in theory, joint and several liability can support effective accountability, but:

  • sector perceptions about joint and several liability are driving perverse behaviours
  • there is (some) evidence to suggest building consent authorities, architects and engineers are carrying the burden of other parties not being present
  • there is (albeit unclear) evidence to suggest those commonly not paying their share are developers, main building contractors and sub-contractors

· the parties commonly not paying their share are often uninsured, are at risk of insolvency or bankruptcy when claims arise or have structured their business in such a way as to appear to avoid liability.

13 A proportionate (or hybrid) system may be more likely to align with the accountability and behaviours sought, but it requires significant investment (in the form of Government underwriting or directly providing comprehensive insurance or other comprehensive surety).

14 A change to the liability rule may change behaviour and lead to different results for parties held to be accountable, but only on the margin.

15 Following discussions between myself, the Attorney-General and the Minister of Justice, the Minister Responsible for the Law Commission has referred the issue of joint and several liability (including the contents of this paper) to the Law Commission for further consideration as part of a broad review of joint and several liability.

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Background

16 On 2 August 2010, Cabinet directed the Department of Building and Housing to report to the Cabinet Economic Growth and Infrastructure Committee on:

  • whether any changes are needed to the application of joint and several liability in the building and construction sector, in addition to the proposed changes in the Building Act review, in order to achieve desired attitudinal and behavioural changes in favour of improved accountability for the quality of building work, and if changes are proposed
  • the implications of the proposed changes for consumers and whether or not they would necessitate a mandatory requirement for all proposed residential contract warranties to be backed by a specified scheme of insurance or financial surety
  • a recommended approach to providing the specified form of insurance or surety, including a timeframe by which it could be provided, how it would be funded and the costs, benefits and risks that would be associated with its provision [CAB Min (10) 27/10 refers].

17. 27 June 2011 Cabinet considered my proposal for the rule of joint and several liability to be retained as part of the accountability framework in the building sector. Cabinet referred the proposal (contained in this paper) back to EGI for further consideration and invited me to discuss the proposal with the Attorney-General and Minister of Justice [CAB Min (11) 24/9A refers].

18. A companion paper considers the issue of the regulation of guarantee products and services.

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Context

19. Under tort (primarily negligence) law New Zealand uses the “joint and several liability rule.” The joint and several rule applies in various areas of the law, including claims in the building sector relating to faulty work.

20. The rule applies in cases where two or more people are liable for the same loss to a plaintiff through separate negligent acts. Where this occurs, the rule holds both (or all) of the wrongdoers who caused the loss 100 percent responsible for compensating (“making whole”) the plaintiff. The claimant is able to bring a claim against one wrongdoer to recover all of their loss. A defendant can then seek a contribution from other wrongdoers.

21. The application of the joint and several rule in practice has raised concerns among the building sector, who claim it:

  • is fundamentally unfair to respondents (because they have to pay “more than their fair share” when others cannot pay and the high defence costs incurred when they are vexatiously joined to claims)
  • undermines trust, confidence and cooperation within the sector, driving up costs and reducing quality
  • creates overly risk averse, defensive behaviours – especially local government, as they are often the “deep pocket” or “last man standing”
  • potentially undermines the Building Act review changes to rebalance accountability
  • gives rise to risk avoidance practices (such as the use of limited liability companies and “gold plated” inspection by building consent authorities)
  • causes specific problems, such as lack of insurance availability and high cost where it can be obtained.

The review found many of these issues are not caused by the joint and several rule, but exist independent of the liability rule. More information about sector concerns and the findings of the review can be found in Appendix 1.

22. Ultimately, all of these issues impact on consumers and homeowners. In particular, the sector perceives consumers are worse off under the joint and several rule because they bear the higher costs.

23. T hese concerns arose primarily as a reaction to leaky homes claims. For many in the building sector, leaky homes problems were the first time they realised they were liable for faulty work, could face prosecution and have to pay out significant sums to owners of leaky homes. This came as a shock.

24. In particular, concerns have been raised in the residential building sector, where contracting and other risk management practices are weaker (and where the focus of leaky homes issues has been the strongest) than the commercial sector, who manage risks through contract. In the residential sector, most claims have been pursued through negligence (using the joint and several rule) because of a lack of adequate contractual remedies for consumers.

25. The Building Act Review provided the sector with an opportunity to formally raise these concerns. Many champion a change from the joint and several rule to an alternative system; the primary alternative being proportionate liability.

26. As a result Ministers agreed to a formal review of the joint and several liability rule as it applies to the building sector.

27. The primary output of the review was the Sapere/Buddle Findlay report Review of the application of joint and several liability to the building and construction sector (“the Sapere/Buddle Findlay report”). The findings in the report are reflected in the information that follows.

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Future direction

28. The review has taken place in the context of other Building Act reforms agreed to by Cabinet in August 2010 [CAB Min (10) 27/10 refers].

29. It is anticipated the following Building Act reforms, once implemented, will go a long way to meeting the desired improved accountability outcomes and addressing sector concerns.

Figure 1: Building Act reforms to improve the accountability framework

Reform Impact Status
Amendments to the Building Act to clarify responsibilities of building practitioners, building consent authorities and consumers Clarifies the accountabilities of all parties, based on the work they do

Improves cooperation and trust – people are more able to rely on the work of others because they know what others are responsible (and liable) for

Clarifies what accountabilities a consumer has in respect of the work they choose to have done, and manages their expectations

Building Amendment Bill (No. 3)

Awaiting Second Reading

A move to risk-based consenting Better manages building consent authorities’ risks and liability

Reduction in risk averse behaviour, because responsibilities on consent authorities are clearer (based on risk of building failure)

Building Amendment Bill (No. 3)

Awaiting Second Reading

Mandatory written contracts and disclosure by building contractors Accountabilities (rights and obligations) of parties are in contract, in addition to tort law

Provides a basic framework for parties to manage risks appropriately

Encourages practitioners and consumers to think about risks at the outset, rather than reactively dealing with them when they arise:

  • for building practitioners, to think about their business risks and how they could be managed (e.g: through use of surety backing, guarantees or insurance for their work)
  • for consumers, to think about whether the building practitioner they want to contract with has the ability to rectify any defects that may arise in the future
Building Amendment Bill (No. 4)

Introduced on 6 September 2011

Improved dispute resolution, especially planned changes to the Construction Contracts Act 2003 Reduces reliance on tort law (and hence the joint and several rule) to resolve disputes: instead, consumers rely on contractual rights and obligations

Dispute resolution is faster and cheaper (because it is based on contractual rights and obligations)

No vexatious joinder to claims when defects occur – parties cannot be involved in a claim unless they were a party to a contract under which they had responsibility for the work

Construction Contracts Amendment Bill

Cabinet decisions on amendments made April 2011

Legislation bid will be made for introduction in the 2012 round

Clearer implied warranties and direct remedies where those warranties are breached Supports clearer accountabilities, especially those on builders and consumers

Provides clear means for consumers to enforce accountabilities in practice (through contract)

Building Amendment Bill (No. 4)

Introduced on 6 September 2011

30. Clearly signalling accountabilities and how those accountabilities can be enforced in practice will provide good incentives for practitioners and consumers to change their behaviour.

31. Given those upcoming changes, and the expected outcomes for behaviour change, what is the right liability rule to support the objective of the Building Act reforms of better accountability in the sector?

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The liability rules

32. The following liability rules were considered as part of the review:

  • joint and several liability
  • proportionate liability, with statutory requirements taking into account the need for warranties or other consumer protection
  • a split liability regime that would apply joint and several liability for primary wrongdoers, and proportionate liability for peripheral wrongdoers
  • allowing parties to limit or exclude their liability in tort through contracts
  • liability caps: involving statutory caps for building consent authorities, and/or professional standards schemes for all involved in the sector.

Taking a closer look at proportionate liability

33. Proportionate liability is the primary alternative liability rule preferred by many in the sector. It is now in place in most Australian states.

34. Under proportionate liability, negligent parties who are found liable for a loss are only required to contribute a set amount. The court determines this amount based on the extent to which each negligent party was responsible for the loss and damage.

35 . The key difference (in outcome) with proportionate liability is that each negligent party only has to pay the share that takes into account their contribution to the loss and damage. If there are multiple parties, no single party can ever be 100 percent responsible for the loss. This means the consumer must sue each responsible party if they want full compensation and, if any of those parties cannot pay, the consumer bears the cost. The “uncollected share” is not reallocated to other negligent parties, as it is under the joint and several rule.

36 . Many in the building sector view proportionate liability as the silver bullet for addressing issues that are (mostly incorrectly) identified as resulting from the joint and several rule. There are strong assumptions within the sector about how proportionate liability might work in practice and the likely outcomes for them.

37. For example, many in the sector expect proportionate liability would mean the cost of their liability would be reduced (both the share they pay and the cost of defence), their costs would be more certain and, overall, the whole process of determining liability would be fairer. In addition, there is some expectation that front-end problems of mistrust and non-cooperation would dissipate.

38. These assumptions are not supported by the Sapere/Buddle Findlay report or the Australian experience of proportionate liability and some of the other outcomes of the Australian models are not well understood. For example:

  • in New South Wales, building contractors are more exposed than they would be under joint and several liability
  • litigation tends to be longer and more complex under proportionate liability and more costly for respondents to defend themselves
  • in some states the shift to proportionate liability was accompanied by changes to rules affecting joinder and evidence, that lowered the threshold of proof for claimants and made it easier for respondents to be found negligent.

Comprehensive home warranty insurance: a necessary part of the “proportionate” package

39. To mitigate consumers’ exposure to financial loss when negligent parties cannot pay, proportionate liability would have to be supported by comprehensive mandatory home warranty insurance (or other comprehensive surety product).

40. Insurance is not a substitute for consumers’ ability to be directly compensated by those at fault:

  • if home warranty insurance cover is “last-resort” (as it is in Australia), then consumers would have to sue every possible party to demonstrate there is no other avenue for compensation
  • it is more costly – both through having to sue all available parties before compensation can be obtained (if the scheme is “last-resort”) and through having to pay for the product in the first place
  • policy exclusions, conditions and caps can limit the amount of compensation; potentially leaving consumers worse off
  • insurance provision can be unreliable – in Australia, private home warranty insurance providers have pulled out of the market or collapsed (most notably the HIH Insurance collapse in 2001 and the withdrawal of major private insurers from the New South Wales and Victorian markets in 2010, including Vero), forcing Government intervention.

41. Proportionate liability without comprehensive insurance (or other comprehensive surety) would leave consumers financially vulnerable to events outside their control (such as insolvency of parties).

42. Private insurers are generally reluctant to or disinterested in providing comprehensive home warranty insurance in the New Zealand market. At the moment, they feel the market is too small and they are nervous about providing home warranty insurance due to features particular to the New Zealand market. A number of interrelated factors make it difficult to price risk, including:

  • lack of data on claims history
  • long tail – cover would be required for 10 years (the backstop or limitation period within which parties remain liable for faulty building work)
  • mistrust of the skills and quality of practitioners (and the fact licensing is not currently mandatory)
  • regular changes being made to the regulatory framework that oversees the building sector.

43. Attempting to stimulate private provision of comprehensive home warranty insurance is unlikely to be successful at the present time.

44. While comprehensive home warranty insurance is not available in New Zealand, other, more limited, financial surety products are.

45. The two main products are the Registered Master Builders Federation Masterbuild Guarantee and the Certified Builders Association Home First Builders Guarantee. These products are not insurance, have significant limitations and exclusions and are not likely to be sufficient to support a nationwide surety scheme at this time. Their current market share is approximately 50 percent of new builds and approximately one-third of all residential building work.

46. The risks, costs and benefits of these products are detailed in the accompanying paper Building Act Review: Regulation of Guarantee Products and Services.

47. The main option available for providing comprehensive mandatory home warranty insurance (or other comprehensive surety) at the present time is for the Government to establish its own scheme. There are some options for how a scheme could operate:

  • via a levy on building consent applicants – this may displace existing surety products on the market (given their limitations and exclusions) and, therefore, meet with resistance from industry groups who have invested significant resources into developing their own surety schemes
  • via a competing scheme (with other guarantee products) – this would likely see the Government insuring all of the higher-risk practitioners, as a large proportion of the lower-risk practitioners are already likely to be covered.

48. Regardless of the approach, the Government would need to set aside a pool of money to cover the costs of any claims that may arise from day one. The size of this pool would depend on the limitations and exclusions on the cover offered by the scheme and the likelihood of defects occurring (however it is possible the pool would potentially need to be in the order of tens of millions of dollars).

Comparing joint and several with proportionate

49. Figure 2 outlines some of the key differences between the joint and several and proportionate liability regimes. Some of the features and outcomes would depend on system design.

Figure 2: Comparison of joint and several and proportionate liability regimes

 

Joint and Several

Proportionate (with insurance)

FEATURES

Both regimes are rules for apportioning liability (and costs) among respondents

Costs are split where more than one party is liable

Costs are apportioned to reflect judgment as to proportionate liability among respondents and other possible liable parties

Claimant can sue one party to recover the entire loss – the respondent can choose to join other parties

Claimant must sue all potentially liable parties to recover the entire loss

The conduct of each party is considered when determining share – more of the cost of doing this is borne by respondents

The conduct of each party is subject to more detailed enquiry when determining share – more of the cost of doing this is borne by claimants

When one negligent party cannot pay, the amount is reallocated among others

Where a negligent party cannot pay, the claimant (or backstop insurance) bears the cost

Outcomes for respondents in litigation are uncertain – slightly more so if one party cannot pay

Outcomes for respondents in litigation are uncertain – the amount each party pays is determined on a case-by-case basis

Greater certainty that the claimant will recover the entire loss

Less certainty that the claimant will recover the entire loss

OUTCOMES

Productivity, efficiency, performance, quality – no option clearly superior

Debate about fairness to respondents (e.g: “deep pockets”)

Debate about fairness among respondents

May reduce a sense of individual accountability – in combination with other rules (e.g: insolvency)

Likely to reinforce a sense of individual accountability – but may further diminish co-operation among parties

Focus is on the interests of the claimant

Focus is on the interests of the respondent

50. The main trade off between the joint and several and proportionate liability rules is who pays when others cannot. Under joint and several, “deep pockets” or “the last man standing” (usually local government and others with professional indemnity insurance) pays. Under proportionate, the consumer bears more of the cost.

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Conclusions

51 In theory joint and several liability can support effective accountability, but:

  • sector perceptions about joint and several liability are driving perverse behaviours
  • there is (some) evidence to suggest building consent authorities, architects and engineers are carrying the burden of other parties not being present
  • there is (albeit unclear) evidence to suggest those commonly not paying their share are developers, main building contractors and sub-contractors
  • the parties commonly not paying their share are often uninsured, are at risk of insolvency or bankruptcy when claims arise or have structured their business in such a way as to appear to avoid liability.

52. Based on these factors, any misalignment between joint and several liability and accountability in the building sector appears to arise from an intersection of:

  • the laws of insolvency and bankruptcy
  • the rules of joint and several liability
  • specific conditions in the building and construction sector.

53. A proportionate (or hybrid) system may be more likely to align with the accountability and behaviours sought, but it requires significant investment (in the form of Government underwriting or directly providing comprehensive insurance or other comprehensive surety).

54. A change to proportionate liability may only be symbolic. Even though this in itself may be a powerful driver of behaviour change, over time the perceived problems with the current liability rules (unfairness, uncertainty, risk avoidance, distrust and poor co-operation) are likely to continue – driven by a history of disputes, exposure to risk, poor practices in managing risk, poor understanding of the law and distrust of skills and quality.

55. Proportionate liability may also introduce new issues and exacerbate existing ones. For example, proportionate liability is likely to even further discourage co-operative behaviour because there is less incentive to consider or care about the actions of other parties.

56. The expected outcomes for the sector, consumers and local and central government under proportionate liability are unclear and uncertain at best. Evidence suggests costs for all parties would likely increase if a change to proportionate liability were made. These outcomes are further described in Appendix 3.

57. There is a belief within local government that a change to proportionate liability would limit the amount they pay out in building defects cases – local government have limited means to otherwise manage risk and claim a change to the liability rule is one way to manage those risks.

58. It is unclear (in the New Zealand context) whether parties’ current allocation of costs under the joint and several rule would supplant to the costs they would be allocated under proportionate liability. Evidence from Australia suggests it does not.

59. A change to the liability rule may change behaviour and lead to different results for parties held to be accountable, but only on the margin.

60. This raises two questions:

  • are the benefits of an alternative liability rule significant enough to warrant change, making a special case of the building sector, at significant investment?
  • or should we take steps to improve what we have, given the expected impact of other reforms?

61. The package of Building Act reforms will set a new baseline for assessing options for a liability rule. Under this package the expected outcomes are:

  • improved incentives on building practitioners to build right first time and improved co-operation and trust, leading to fewer defects in the first place
  • reduction in risk averse behaviour, driven by clearer accountabilities and options for managing risk
  • better risk management by building practitioners and consumers at the outset, through incentives to actively consider risks before building work commences
  • where defects do arise, disputes are resolved through contract in the first instance, rather than tort
  • overall reduction in tort cases (and therefore, reduction in reliance on the joint and several rule) to determine accountability and liability for defective work
  • better access to fast, cost-effective dispute resolution services 
  •  reduction in negative impacts arising from joint and several liability, such as costs associated with vexatious joinder.

62. The addition of accountability statements in the Building Act 2004 may result in changes to the application of the joint and several rule in practice by the Weathertight Homes Tribunal and the courts.

63. The expected impacts can be monitored once they are implemented and will provide important information on which to assess potential benefits of a change to the liability rule. A monitoring and evaluation plan is being developed to test the effectiveness of regulatory and other changes resulting from the Building Act Review, identify improvements as the implementation proceeds, and provide a basis for further policy and operational decisions on an ongoing basis. The monitoring and evaluation plan will involve a rolling consumer survey.

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Law Commission review

64. I have discussed the results of the review of joint and several liability with the Attorney-General and Minister of Justice. We have agreed the issue of joint and several liability needs to be considered in a broader review, not just limited to the building sector. The Law Commission is the appropriate agency to carry out this review. The Minister responsible for the Law Commission has accordingly referred the matter to the Law Commission.

65. The Law Commission will prepare the terms of reference for its review in consultation with the Ministry of Justice, which is the administering agency, and other interested agencies. It is the Law Commission's practice, when conducting reviews, to consult with stakeholders which, in this case, will include the Department of Building and Housing and the building sector.

66. Pending the outcome of the Law Commission review, the Department of Building and Housing will develop a targeted communications plan to address sector perceptions of joint and several liability as part of a wider communications plan for the Building Act Review. The communications plan will include publishing the Sapere/Buddle Findlay report Review of the application of joint and several liability to the building and construction sector and this Cabinet paper.

67. Ministers should note the Department of Building and Housing will also implement and monitor the Building Act reforms, including the impact they have on liability-related behaviour within the sector – this information will be provided as an input to the Law Commission’s review.

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Consultation

68. The Treasury, the Department of the Prime Minister and Cabinet, the Ministry of Justice, the Ministry of Economic Development, the Department of Internal Affairs and the Ministry of Consumer Affairs were consulted on this paper before its first consideration by EGI. This version of the paper was sent to them for their information.

69. The Officials Committee for EGI was consulted on this amended paper and had no comments on the paper.

70. Stakeholder consultation was undertaken as part of the review. A summary of this consultation, and a summary of the review methodology, is contained in Appendix 2.

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Financial implications

71. There are no fiscal implications arising from the proposals in this paper.

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Human rights

72. The proposals in this paper are not inconsistent with the New Zealand Bill of Rights Act 1990, or the Human Rights Act 1993.

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Regulatory impact analysis

73. A regulatory impact statement is not required at this time as no regulatory changes are proposed.

Publicity

74 The Department of Building and Housing will publish the Sapere/Buddle Findlay report Review of the application of joint and several liability to the building and construction sector and this Cabinet paper as part of the Government’s wider communications strategy for the Building Act Review. The Department will also develop a targeted communications plan to educate and address sector perceptions about joint and several liability.

Recommendations

75 The Minister for Building and Construction recommends the Cabinet Economic Growth and Infrastructure Committee:

1. note Cabinet directed the Department of Building and Housing to report to Cabinet Economic Growth and Infrastructure Committee on whether any changes are needed to the application of joint and several liability in the building and construction sector, in addition to the proposed changes in the Building Act review, in order to achieve desired attitudinal and behavioural changes in favour of improved accountability for the quality of building work [CAB Min (10) 27/10 refers]

2. note Cabinet considered a report from the Minister for Building and Construction on 27 June 2011 and referred the matter back to EGI for further consideration [CAB Min (11) 24/9A refers]

3. note the Minister for Building and Construction discussed the issue of joint and several liability with the Attorney-General and Minister of Justice and the Ministers agreed the issue needs to be considered in a broader review

4. note the Minister responsible for the Law Commission has referred the matter to the Law Commission and the Minister for Building and Construction agrees with that approach

5. note the Law Commission’s practice is to consult with stakeholders which, in this case, will include the Department of Building and Housing and the building sector as well as other relevant government agencies

6. note Building Act reforms already agreed to by Cabinet are being progressed in legislation currently before Parliament

7. note the Department will implement and monitor the impact of the Building Act reforms on the operation of joint and several liability in the sector as part of the monitoring and evaluation programme for the Building Act review

8. note information to address sector perceptions about joint and several liability (including publication of the Sapere/Buddle Findlay report Review of the application of joint and several liability to the building and construction sector) will be contained in a targeted communications plan prepared by the Department of Building and Housing

9. agree this paper, and the minute related to it, can be published by the Department of Building and Housing as part of the wider communications plan for the Building Act Review.

 

Hon Maurice Williamson
Minister for Building and Construction

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Appendices

Appendix 1: Issues raised by the sector

Issues raised by sector stakeholders Findings of the review
Accountability
Joint and several liability potentially undermines the Building Act review objectives to rebalance accountability across the sector, and to strengthen individual accountability: Joint and several liability may reduce parties’ sense of individual accountability to some extent.

Proportionate liability (or a hybrid) could potentially reinforce the sense of individual accountability.

Would behaviours change? Only on the margin, as the liability rule is not the major driver. Other factors are more important:

  • exposure to risk per se
  • uncertainty about how to manage risk, including through contracts
  • weak understanding of tort law.

The over-reliance on BCAs for quality assurance is caused by:

  • overall exposure to risk (rather than joint and several liability itself)
  • many small firms - with low skills, low capability, low capital
  • previous perception of BCA role.

Some parties do escape accountability (because they are insolvent, or the company has wound up) – under any liability rule.

Fairness

Joint and several liability creates unfairness, partly because when one liable party cannot pay costs (under an initial allocation by courts or adjudicators) other liable parties cover this share

The primary purpose of tort law is to ensure an injured party is fully compensated:
  • fairness to the injured party (the focus of joint and several liability) is primary
  • fairness among parties who caused damage (the focus of proportionate liability) is of secondary importance.

Proportionate liability shifts more cost and risk onto the injured party (and evidence from Australia suggests that insurance is an unreliable and incomplete substitute for compensation from liable parties).

For this reason joint and several liability has been retained in almost all countries following reviews (excluding Australia, and some US states where a number of hybrid rules have been introduced).

Initial allocation of costs under joint and several liability does not reflect proportionate degree of fault (as some argue) - proportionate systems have different procedures, rules of evidence, extent of examination.

It is unclear whether a change to proportionate liability would directly benefit the current “last man standing” or “deep pocket” – local government.

Trust, confidence, cooperation
Joint and several liability undermines trust, confidence and cooperation within the sector Trust, confidence and cooperation are undermined by:
  • the history of disputes within the sector
  • high awareness of exposure to risk per se
  • distrust of the skills and capability of other parties
  • poor risk management practices (with a reactive, ex poste awareness of risk).
Risk aversion

Joint and several liability creates overly risk averse, defensive behaviours, especially by BCAs as they are “deep pockets”

The main cause of risk averse, defensive behaviours is exposure to liability risk, per se.

Limited evidence of risk aversion occurring.

BCA practices are likely driven by the combined effect of:

  • overall exposure to risk
  • limited ability to manage risk through insurance or company structures
  • regulatory powers
  • ability to set own fees, to cover costs of regulatory activity
  • distrust of skills, capability in the sector

but joint and several liability could be a contributing factor.

While BCAs do incur costs higher than initial allocation, their costs are lower than their degree of responsibility.

Risk avoidance practices

Joint and several liability drives specific risk avoidance practices, such as the use of limited liability companies

Use of limited liability companies is independent of the liability rule – it is part of New Zealand company law.

This practice would likely continue under either rule.

Specific issues
Joint and several liability contributes to specific problems, such as a lack of supply (and high cost) of home warranty and professional indemnity insurance in New Zealand Lack of home warranty insurance within the market is caused by a range of factors, in particular:

insurers’ distrust of quality and skills within the New Zealand building sector

insurers’ inability to price the risk (no data, long tail – cover required for 10 years)

view of New Zealand as a small and distant market.

Weathertight Tribunal joinder and strike-out procedures are creating unnecessary cost.

The impact on small firms can be high and affect their viability.

There may be opportunities to streamline procedures for joinder and strike-out, and create stronger disincentives to the unnecessary joining of other parties.

These opportunities can be examined in work ahead.

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Appendix 2: Review methodology

Approach and methodology

1 Sapere Research Group (formerly the Law and Economics Consulting Group) and Buddle Findlay were engaged to carry out a fundamental review of joint and several liability. A report Review of the application of joint and several liability to the building and construction sector (April 2011) was the primary output of the review.

2 The report examines the outcomes and impacts of joint and several liability for:

  • reinforcing an effective accountability framework
  • creating positive incentives for performance (both individual and team)
  • minimising any perverse incentives
  • reducing the extent of any behaviour which is overly defensive or risk averse
  • the supply of professional indemnity and home warranty insurance.

3 In assessing the system of joint and several liability, and possible alternatives such as proportionate liability, the report considers the following criteria:

  • overall efficiency (both allocative and technical)
  • total economic cost (for example, overall litigation costs tend to be higher under proportionate liability – this is a component of total economic cost)
  • the distribution of costs
  • fairness (and the various dimensions of fairness).
  • 4 An Advisory Group of sector stakeholders (and a senior official from the Ministry of Economic Development) was also established to provide input and testing for the review.

Stakeholder Consultation

5 As part of the Sapere/Buddle Findlay report, interviews with a number of stakeholders in the building and construction sector were undertaken. These interviews included representation from Building Consent Authorities (BCAs), engineers, architects, insurers, a range of building and construction representatives and some parties representing the interests of consumers.

6 In general, a wide range of issues were raised in the interviews. The key findings of stakeholder consultation were that:

  • Many of the issues did not have much depth to them or much evidence to support the claims made.
  • Most parties expressed the view that there are a range of issues in relation to liability and that no single solution, such as proportionate liability, would correct the situation.
  • The extent of knowledge and understanding of joint and several liability is weak and reactive.
  • Parties take more action to identify liability implications following the discovery of loss/damage than they do prior to any such event. This reactive approach means that exposure to risk is greater than it needs to be.
  • Many expressed the view that a proportionate liability regime would need to be seen as part of a package and that other issues such as warranty schemes, cheaper and faster tribunal processes and certification practices all need to be looked at.

Advisory Group Consultation

7. The advisory group consisted of:

  • Barry Dacombe, Principal, BJ Dacombe Architects
  • Gavin Clyne, Commercial Risk Manager, Naylor Love Ltd
  • Geoff Hardy, Principal, Madison Hardy Law
  • Peter Neven, Fletcher Construction
  • Geoff Connor, Chief Advisor, Corporate Law and Governance, MED
  • George Skimming, Director Sector Projects, Wellington City Council
  • David Russell, Former Chief Executive, ConsumerNZ.

8. Initially the Advisory Group held firm views that problems in the sector are either caused by the joint and several rule or are otherwise perversely supporting them and that a change to proportionate liability would be the "silver bullet" that resolves the sector's issues.

9. As the review progressed, these views seem to have softened. Concerns remain about the way that liability has fallen in the sector, but the Advisory Group provisionally seem to accept that a shift to proportionate liability will not solve many of the issues that are said to exist in the sector.

10. There was also consensus amongst members of the Advisory Group that the changes agreed to by Cabinet in August 2010 will result in behavioural changes and will affect positively on responsibilities and accountabilities.

11. Some residual concern remained that joint and several liability has resulted in unfairness in the past and it was commented on that this wouldn't change even with the Building Act review changes.

12. Some of the members of the Advisory Group believe that misunderstanding of joint and several liability in the sector is rife. Most agreed that the sector is relatively unsophisticated and liability only comes to most minds after damage is discovered.

13. Views were mixed about the position of BCAs – between those who believed BCAs have become more risk averse and those who did not. Concern was expressed about issues faced particularly by small scale builders and subcontractors.

14. A view appeared to emerge that a new means of solving disputes for the sector needs to be developed. The Advisory Group commonly discussed the high cost of claims (even in seeking strike out and having to take time away from the tools to fight a claim) and other procedural concerns as pointing to a need for a bespoke system tasked by experts. There was some acknowledgement that a Construction Contracts Act-type dispute resolution mechanism could improve the current situation.

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Appendix 3: Cost/benefit of options for parties

  Joint and Several liability + Building Act Review initiatives Proportionate liability + Building Act Review initiatives
Building and Construction Sector Concerns about joint and several liability should diminish over time, as less building failures/disputes occur and as use of alternative dispute resolution mechanisms rise. Unclear/outcomes uncertain

Likely to spend more on legal costs

May have positive impact on professional indemnity insurance costs

Any impact may only be on margin

Local Government Less disputes because builders perform better and consumers are better informed

Remain a “deep pocket” (along with others)

Unclear/outcomes uncertain

Could end up paying lower or higher costs

Likely to spend more on legal costs

Any impact may only be on margin

Consumers Easier to build and better quality

More protection during building process

Likely to spend more on legal costs

Likely to bear more of the costs of building failure

Government Status quo

Lower court administration costs

Significant change to legal system – costs association with education

Could be additional court-related costs as cases would become more complex, costly and lengthy

Would need to be accompanied by comprehensive insurance/surety (costs associated with provision as market unwilling to provide)