Tim Bates and Francesca Collins of Auckland law firm Legal Vision debate when a director can be found personally liable for the faults of his or her company.
With the number of leaky buildings in New Zealand tipped to exceed 30,000, a large number of construction companies facing water ingress claims will accordingly fail or will be placed into liquidation.
Depending on the circumstances, the director or directors of these ill-fated companies may also find themselves personally liable for the deficiencies in the work carried out by their company.
However, it needs to be clarified from the outset that a director is not automatically personally liable simply because they hold the position of “director”. Instead, to be deemed personally liable, a director must owe a duty of care to the claimant, and must have personally made an act or omission which directly related to the loss and damage that forms the basis of the claim against their company.
This duty of care extends over and above ordinary company obligations, and is determined by a two-stage test:
Whether there is a relationship of proximity between the parties such as would give rise to a duty of care, and
Whether there are any policy factors which prevent such a duty being held to exist.
In the leaky building context, in order to determine whether there is a relationship of proximity between the director and the claimant such as would give rise to a duty of care, the court will apply the “degree of control” test.
Degree of control
In essence, a duty of care exists where the court is satisfied that the director was personally involved in the building or construction works and/or that they exercised a degree of control over the relevant operations.
This approach has been highlighted in a number of recent cases. In Hartley v Balemi & Others, the plaintiffs were the subsequent purchasers of the property and had not contracted the building company to carry out the construction.
The director in question had not played any role in the actual construction of the solid plaster house. However, he was in overall control of his company’s operations.
Perhaps the most important fact is that the director was found to have overruled genuine concerns expressed by the plasterer as to the appropriateness of the plastering work he was undertaking. Essentially the director ordered the plasterer to continue with this disputed work.
The plastering turned out to be a key defect which led to the water ingress problems suffered. With personal involvement and the clear exercise of control over key operations, the director was deemed personally liable by the court.
Likewise, in Dicks v Hobson Swan Construction Ltd (in liquidation), the director in question was found jointly and severally liable, even though the fact that the plaintiff had directly contracted with the company for the construction of her dwelling-house was an indicator that she relied on the company, rather than on the director personally.
Although this fact set proved a greater hurdle than in Hartley where the plaintiffs did not contract the company themselves to undertake the relevant work, the judge was satisfied, nonetheless, that the director was personally liable.
The director had played an active role directing and, further, had in fact himself carelessly constructed the defective house. This rendered him liable for the failure to apply sealant which would have prevented the damage the plaintiff ultimately suffered.
Even if a plaintiff can establish the requisite relationship of proximity, it also needs to show that there are no policy considerations that should negate or limit that duty of care.
There are a number of policy considerations that a presiding judge will take into account before holding a director personally liable. Whilst it is in the public interest to require building controls be exercised with reasonable and proper care, and to expose wrongful conduct and order compensation for those injured by it, there are competing considerations which weigh heavily against the imposition of a duty of care on a director.
In particular, before imposing liability against a director, judges and adjudicators must consider the public interest in the separate legal identity of a company, and the fact that the law gives greater protection to persons than to property.
Only where a judge is satisfied that no policy considerations negate the imposition of a duty of care will they rule a director to be personally liable.
In conclusion, where a director has played an active role in the construction of a leaky building, and has exercised control over the operation of the works, then there is high risk that he/she will be found personally liable for the defective works of their company.
However, a director who exercises a restricted role, such as in administration only, will not meet the personal duty of care threshold.