Cost-effective quality: next generation building control in New Zealand — Building Act Review discussion document February 2010
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Part 3: Building consumer confidence
Building cost-effective, dependable-quality buildings requires consumers (the people commissioning building work) to be better equipped to participate confidently in the building and construction market.
Participating confidently means being able to make informed decisions, being aware of their rights and obligations, and being able to enforce those rights.
Many New Zealanders commission residential building work, including new homes and renovations where the financial investment is substantial, with very limited knowledge of their rights and responsibilities, the risks they may face, and the steps they can take to manage those risks.
This is partly because for many people commissioning building work is a rare event, so they have little experience to call on. Building work is typically complex and involves many different parties and arrangements. Consumers often find it difficult to assess the quality of the plans or the skills of the people doing the work, and have trouble identifying who is responsible when things go wrong and how to get it put right.
When things go wrong, and in the absence of agreed means of resolving disputes and fixing defects, often the only legal recourse available to disaffected consumers can be to sue for negligence and rely on the rule of joint and several liability.
‘Joint and several’ means that liability is jointly shared between multiple parties, and the payment of damages must be shared by the parties (in the proportion determined by the Court). However, where some of the parties cannot pay their share, the cost of damages must be carried by those who can pay, and in practice in many weathertightness cases this has seen much of the cost carried by local authorities, even when their responsibility for the defects was small relative to other parties.
The proposed measures are expected to result in a more balanced allocation of responsibility between consumers, building professionals and tradespeople, and building consent authorities, and more options for fixing defects and resolving disputes under contract law or through alternative dispute resolution procedures rather than through suing for negligence. These proposed measures include:
- better informed consumers
- improved contracting practices
- effective warranties
- financial backstops for warranties – surety
- access to fair and prompt dispute resolution at reasonable cost.
These proposed measures are expected to motivate building professionals and tradespeople to take more responsibility for getting it ‘right first time’ and accept responsibility for efficiently fixing defects when they occur.
If warranties and surety become mandatory, this could also include limits on the rights of surety providers to pursue other parties.
Consumers would be better equipped to take more responsibility for decisions they make about what to build, who to contract to build it, what materials to use and how to make sure what is built is appropriately maintained.
This would provide an environment where building consent authorities could step back from regulation of lower-risk building work (as proposed in Part 2) because the other parties are stepping up to take responsibility.
This would benefit consumers and building professionals and tradespeople, because less regulation of lower-risk building work will reduce costs.
Overview of the connections between measures to build consumer confidence.
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3.1 Well-informed consumers
Well-informed consumers would be better equipped to recognise their responsibilities, make informed choices, and take steps to manage the risks that lie appropriately within their sphere of influence.
The current situation
In comparison with other countries, New Zealand’s approach to informing consumers about building and home maintenance matters is relatively passive. Good-quality information and advice is available from a number of sources, including the Department of Building and Housing and the website consumerbuild.org.nz, but the onus is on the consumer to recognise that they need such information and to seek it out.
What is being considered
We propose a more proactive approach to consumer education and information for residential building work. A more proactive approach would raise consumer awareness of the steps they can take to reduce the likelihood of problems arising, and how to resolve any problems that do arise.
A range of communications tools would be developed
– building on what is already available – to:
- raise consumer awareness of their rights and responsibilities and how they can enforce those rights
- encourage informed decisions about matters such as choice of contractor, contractual arrangements, design and materials
- raise awareness of warranties, ways of preventing and resolving disputes, and post-construction maintenance obligations.
The following questions may help you formulate your feedback. Use our online submission process to answer these questions and give us your comments:
| Questions about well-informed consumers |
| Q54 Do you agree the Government should do more to inform consumers about their responsibilities and rights in relation to residential building projects? If so, why? |
| Q55 What further information do consumers need? |
| Q56 Should the Government publish information on acceptable standards of workmanship for residential building work? |
| Q57 Are there other steps that would help consumers commission residential building work knowledgeably and with confidence? If so, what are they? |
| Q58 Do you have any other comments about consumer knowledge and behaviour in relation to residential building work? |
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3.2 Improved contracting practices
Improving contracting practices in the domestic building market would better protect the interests of all parties by:
- providing clarity about specifications, plans, standards, tolerances, timeframes and price
- making it easier for disputes to be resolved in contract law
- providing for a shared understanding of respective rights and responsibilities
- encouraging better performance.
The current situation
Currently, residential building work does not need to be covered by a written contract. Many projects are entered into without adequate contractual documentation. This differs from other major purchases, such as cars purchased from dealers and real estate where, for the protection of consumers, written contracts are required by law.
If the consumer does not have an adequate written contract there is a greater risk that problems and disputes will arise, and resolving them becomes more difficult, because:
- the parties may have different understandings of what has been agreed
- as time passes, people’s recall of what was agreed may change
- consumers and building professionals and tradespeople may be unaware of their respective rights and responsibilities
- where problems arise, the parties may be unsure of, or unable to agree on, appropriate steps to resolve them fairly, promptly, and at reasonable cost.
What is being considered
We propose that all contracts between consumers (such as homeowners) and principal building contractors (the main contractor who manages the project for residential building work) will be in writing and signed by all parties. The contract would have minimum terms that apply in all cases and cannot be contracted out of. Principal building contractors would be required to disclose certain information to the consumer before the contract is entered into, so consumers can make informed decisions. If homeowners project manage or do the building work themselves, this would be disclosed when the house is sold (see page 37).
Minimum contract terms
The suggested minimum contract terms, for the purposes of discussion, include:
- the full names and addresses of the parties
- the date the contract is agreed and signatures
- a description of the work to be carried out (plans and/or specifications to be appended)
- details of warranty (see Part 3.3 below) and the arrangements to back up the warranty (see Part 3.4 below), or a statement that there is no warranty
- the contract price and payment schedule or, if the contract price is not fixed, an explanation of the basis on which the price will be calculated
- a clause stating that any agreement to vary the contract will be taken to form part of the contract, and must be in writing and signed by both parties
- start and completion dates (or, if not known, an explanation of how these are to be determined)
- an outline of who to contact and the process to be followed in the event of a dispute.
Required disclosures
We suggest for the purposes of discussion that principal building contractors disclose the following before entering into an agreement with the consumer:
- trade qualifications, number of years in practice, practitioner licence number (if licensed) and any professional memberships of everyone working on the site, including subcontractors
- details of arrangements to back up the warranty (see Part 3.4 below) or, alternatively, a statement that no such backing exists
- information to prompt consumers to consider all relevant matters before signing a contract (for example a checklist)
- details of any previous disputes over warranty obligations.
The following questions may help you formulate your feedback. Use our online submission process to answer these questions and give us your comments:
| Questions about improved contracting processes |
| Q59 Do you agree that contracting arrangements between consumers and principal building contractors for residential building projects need to be strengthened? If so, why? |
| Q60 Do you agree that all contracts between consumers and principal building contractors for residential building work should have to be in writing and signed by both/all parties? If not, in what circumstances, or for what type of building projects, should written contracts not be required? |
| Q61 Do you have any comments on the proposed minimum terms for contracts as set out in Part 3.2? Please indicate what, if any, information you would like to see added to or removed from the proposed list. |
| Q62 Do you have any comments on the proposed required disclosures for residential building projects? Please indicate whether there is any information you would like to see added to or removed from the proposed list of required disclosures. |
| Q63 How should information required to be disclosed be provided? |
| Q64 Are there other steps the Government could take to improve contracting practices for residential building projects? If so, please indicate what additional measures should be taken. |
| Q65 Do you have any other comments about contracting practices for residential building work? |
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3.3 Develop more effective warranties
Effective warranties would ensure any defects in building work were fixed efficiently.
A warranty is a guarantee from the principal building contractor about the quality of the building work and states the conditions under which no-cost repairs will be made. As well as immediately obvious defects, a warranty addresses the risk of latent defects (flaws in the building work that are not immediately obvious but surface later). Warranties can also apply to standards of workmanship and completion of work.
The current situation
There is currently some consumer protection for building work in New Zealand law. The Consumer Guarantees Act 1993 applies to building services and materials supplied to consumers but excludes a whole house.13
The Building Act (sections 397–399) currently provides statutory warranties that apply to:
- workmanship and materials
- compliance with legal requirements, including consent requirements
- compliance with contractual obligations (the plans and specifications)
- fitness for purpose (the building will be habitable and reasonably achieve the owner’s stated objectives)
- completion.
However the current statutory warranties are uncapped, where generally commercial building warranties are capped at a dollar amount or the contract price.
The obligation to fix defects (the warranty service obligation) currently lasts for up to six years from when the defective work was performed (bound by the Limitations Act 1950). The review heard that this may be:
- too long for many building defects
- too short for some critical building performance elements such as structural stability and weathertightness
- mismatched with the 10-year longstop limitation on building consent authority liability under section 393 of the Building Act.
There are currently no generally accepted standards for workmanship, and no mechanisms for making claims or resolving disputes under the current statutory warranties.
Currently, if the building contractor will not fix a defect that falls within the scope of the statutory warranties as requested by the consumer, the consumer’s only recourse is to sue the building contractor.
In addition to these statutory warranties, builders often offer their own warranties.
What is being considered
We propose to amend the sections of the Building Act that relate to statutory warranties so that the obligations on building contractors are more practical. Below, we list the elements of the warranty we propose to amend, subject to feedback.
Length of the statutory warranty
The length of the statutory warranty would differ depending on whether the building element is critical or non-critical.
For critical building elements, such as being weathertight and structurally stable, the building contractor’s obligation to perform warranty service could be for either six or 10 years. For non-critical elements, such as interior fittings, the period could be two or three years.
The statutory warranty could be assigned to the building, so that subsequent owners have the same rights and obligations as the original owner.
Cap
The current statutory warranty is not capped. It could be capped at:
- the contracted value of building work
- a fixed amount such as $500,000 or some other amount.
The warranty could cover :
- compliance with legal requirements (Building Act and Building Code)
- suitability of materials (possibly with exceptions where the building owner requires particular materials to be used)
- standard of work and exercise of care and skill
- adherence to plans and specifications
- suitability of the premises for habitation
- carrying out the building work with reasonable diligence (completion)
- calculation of claims for provisional sums.
Loss of deposit and non-completion
The warranty could include guarantees in relation to:
- loss of deposit
- non-completion of the contracted building work within a reasonable period of time.
Voided in some circumstances
The obligation to fix defects (the warranty service obligation) could be voided (no longer apply) if certain events occur, such as:
- a change of use from residential to commercial
- the owner’s actions or inactions (such as inadequate or improper maintenance, for example incorrect use of a water-blaster).
Types of building projects covered by the warranty
We are also considering whether the warranty obligation should be mandatory for all residential building work, or:
- limited to residential building work where the contract price is over a threshold amount, for example $15,000
- limited to new residential dwellings
- able to be renounced at the option of the building owner – that is, the principal building contractor would be required to offer a warranty, but the building owner could decide to go ahead without a warranty.
Other issues
The current Building Act statutory warranties apply to the sale of homes by property developers (people whose business is arranging the construction of properties). Developers may use special purpose companies that are liquidated when the development is complete. This may make it difficult for buyers of the property to get defects fixed under warranty if something goes wrong. One option would be to require developers of residential properties to offer an independent third-party warranty at no extra cost to the buyer.
Where people do building work themselves on their own property (owner-builders), subsequent buyers of the property would not have any warranty protection. This could be overcome by requiring owner-builders to make it clear to prospective buyers that there is no warranty, or by requiring them to purchase a third-party warranty when they sell the property.
As individuals who are building contractors approach retirement from the industry, or plan to wind up their company, they would remain liable for warranty service claims for six or 10 years after they finish working. An arrangement is needed to ensure their obligations continue to be met. This might happen by transferring the unexpired portion of the warranty to another building contractor or to a third-party warranty provider or surety plan provider (see Part 3.4 below).
The following questions may help you formulate your feedback. Use our online submission process to answer these questions and give us your comments:
| Questions about more effective warranties |
| Q66 Do you agree there should be a mandatory warranty for residential building work? Please give reasons. |
Q67 Which of the options for warranty listed in Part 3.3 do you prefer? Which do you disagree with?
Please comment on:
- length
- cap
- coverage
- loss of deposit and non-completion
- circumstances where the warranty service obligation could be voided
- projects covered.
|
| Q68 Should the building owner be able to renounce the offer of a warranty by a building contractor by signing a notice revoking the warranty? |
| Q69 Should developers be required by law to provide third-party warranty cover? |
Q70 Should owner-builders, or those who renounce the offer of a warranty, be obliged to:
- disclose on sale of the building that no warranty is offered?
- purchase a third-party warranty on sale of the building?
|
Q71 Should building contractors upon retiring or winding up their company be required to transfer warranty service obligations to another party:
- with prior notice to affected building owners?
- with prior consent of building owners?
|
| Q72 Do you have any other comments on warranties? |
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3.4 Surety as a financial backstop for warranties
Providing a financial backstop for warranties would provide extra protection for consumers.
A surety is an organisation that agrees to be responsible for the obligation of the principal building contractor to fix defects under warranty (warranty service obligation). Having a surety backing a building contractor’s warranty gives the consumer added certainty that problems will be fixed even if the builder is no longer around, for example if he or she has died or gone out of business. A surety backing means that if the building contractor is not available to fix defects or refuses to do so, then the consumer goes to the surety provider, who gets the work done. Home warranty insurance schemes in Australia are one example of this.
The current situation
Surety can be provided in many ways by organisations that provide financial services. Typical surety plan providers are bonding agents, banks offering guarantees, credit insurance underwriters or fidelity funds. Warranty associations are groups of building contractors who, by mutual agreement, stand behind the quality of the workmanship of the members of the association. There are also specialist warranty companies that combine elements of the various approaches and offer third-party warranty.
Currently, there is no obligation on building contractors to have surety to back up their warranty obligations, but many choose to do so. There are two main providers, the Registered Master Builders Federation and the Certified Builders Association New Zealand.
Consumers may face an undue level of risk if they choose building contractors without knowing whether the contractor has the financial backing and intention to stand behind their warranty service obligation. Even if the building contractor intends to stand behind their work, events beyond his or her control may result in default on their warranty service obligation.
What is being considered
We propose that principal building contractors must disclose whether they have surety, and who is providing that backing, so that consumers can make an informed decision on whether or not to purchase building work from that contractor. This would be achieved through the proposed mandatory written contract and disclosure (see Part 3.2 above). This would be supported by better information for consumers about the questions to ask. We expect well-informed consumers would opt for the added protection of surety.
We are also considering whether principal building contractors should be required by law to have surety, and under what conditions, or whether it should be left to the consumer to decide on the benefits of surety relative to the cost. If surety were to be mandatory, consideration would also be required as to whether or not surety providers would be allowed to pursue other negligent parties such as building consent authorities.
Making it mandatory for principal building contractors to have surety may result in more surety providers entering the market. However, it may also be necessary for the Government or industry to set up a default provider. This would provide cover for any building contractors who were unable to get surety cover from a commercial provider. There would be costs associated with setting up a default provider.
required disclosures
We propose the providers of surety (whether it is voluntary or mandatory) should be required to provide certain information to consumers. This is likely to have to be provided as part of the principal building contractor’s requirement to provide certain information as set out in Part 3.2 above. The information to be disclosed may include:
- name and address
- who to contact and how to contact them
- a plain language description of what is covered and what is not covered by the surety plan
- a plain language description of the consumer’s obligations and any conduct that would see the warranty and surety arrangements no longer apply
- information about avenues for appeal
- a summary of the surety’s financial statements (prepared in accordance with the requirements of the Financial Reporting Act 1993)
- an insurance rating if the surety plan provider is an insurance company
- a summary of all recent actuaries’ reports on claims paying ability
- information on claims handling and fulfilment performance.
The following questions may help you formulate your feedback. Use our online submission process to answer these questions and give us your comments:
| Questions about surety |
| Q73 Do you agree that building contractors should have to disclose whether they have surety backing? If not, why not? |
| Q74 Do you agree that building contractors should be obliged by law to have surety backing? If not, why not? |
| Q75 What do you see as the benefits and/or costs of mandatory surety? What is your view on when the benefits would outweigh the costs? |
| Q76 Do you agree with the proposed list of required disclosures about surety? Is there is any information that should be added or removed? |
| Q77 If surety were to be mandatory, should surety providers be restricted in their ability to pursue other negligent parties such as building consent authorities? |
| Q78 Do you have any other comments on surety? |
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3.5 Better access to dispute resolution
Better access to fair, prompt and cost-effective dispute resolution would protect consumers better by improving their ability to hold poor-performing building contractors to account.
When disputes arise between consumers and building contractors it is desirable that these are resolved fairly, promptly and at reasonable cost in proportion to the value of the dispute.
If consumers and building contractors are unable to resolve an issue between them, they may seek the assistance of a third party with experience in dispute resolution, take the matter to the Disputes Tribunal, or take action through the courts.
The current situation
Currently, despite the options for dispute resolution, consumers can find it difficult to hold building contractors to account when building work is defective or unfinished. The reasons consumers find it difficult are that:
- the majority of consumers embark on building projects relatively infrequently and therefore tend to be unfamiliar with both technical building matters and the options for dispute resolution
- there are gaps in the coverage of current mechanisms available for resolving disputes, notably for disputes that are too high in value to be heard by the Disputes Tribunal14 and too small for court action to provide a cost-effective and timely solution.
There are opportunities to strengthen the system for protecting consumers by ensuring they have better access to dispute resolution services other than the court system (known as alternative dispute resolution).
What is being considered
We propose that, subject to feedback on the need for better access to alternative dispute resolution services, we recommend an option for improving dispute resolution.
There is a range of options for how this could be done, for example:
- requiring contracts for residential building work to state that an alternative dispute resolution process will be followed in the event of a dispute that cannot be resolved directly between the consumer and principal building contractor, and allowing the parties to the contract to determine what that alternative dispute resolution process would be (see Part 3.2 above)
- specifying the type of alternative dispute resolution process to be followed for various types of residential building disputes
- establishing a specialist service for resolving disputes between consumers and building contractors in relation to residential building matters, similar to the dispute resolution process for tenancy disputes.
The following questions may help you formulate your feedback. Use our online submission process to answer these questions and give us your comments:
| Questions about better access to dispute resolution |
| Q79 Do you agree that consumers currently face barriers or problems in resolving disputes with building contractors? If so, why? |
| Q80 Do you agree that consumers need more information about options for resolving disputes with building contractors? If so, how could this be provided? |
| Q81 Do you think there are adequate services available to resolve disputes between consumers and building contractors? If not, what other dispute resolution services do you suggest? |
| Q82 What would be the characteristics of an appropriate dispute resolution service? |
| Q83 Do you have any other comments about disputes between homeowners and building contractors? |
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