Are you a “developer”?

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The definition of a “developer” is a critical issue because if an individual is labelled “developer”, they are said to then owe a non-delegable duty of care to people who purchase the house they have developed, even though the house might have been constructed by an independent contractor.
While often a frequent issue in leaky building claims, it remains a highly pertinent issue in all cases where a purchaser claims that the house they purchased suffers from construction defects.

An example is a recent High Court decision in Keven Investments Ltd v Montgomery & Others (2012) NZHC 1596).
In 1993 the Montgomerys purchased land at Beachlands which, at the time, had one commercial building on it occupied by a Post Office that the Montgomerys owned and operated.
In 1999, the Montgomerys decided to build a house on the land so that they could live near their place of work and, to that end, they engaged a company, Simpson Builders Ltd (SBL), to build the house.

The building contract with SBL was a build and supervise contract, with SBL being responsible for contracting the majority of the subcontractors. The Montgomerys were neither involved with the building work nor the supervision of the building work, other than making the choices usually made by owners, such as design and aesthetic matters.
The house was duly constructed and, in September 2000, the Code Compliance Certificate was issued. The Montgomerys lived in the house from 2000 until it was sold to Keven Investments Ltd (KI) in 2007.

In 2009, the house was found to be leaking and a full reclad over cavity was recommended. KI duly carried out the repair work and then sought to recover the cost ($360,780) from the Montgomerys and the director of SBL in the Weathertight Homes Tribunal.
The relevant claim against the Montgomerys for present purposes was in negligence on the basis that the Montgomerys were “developers”. The claim against the director of SBL was also in negligence.

The tribunal dismissed all claims against the Montgomerys and the director of SBL, and KI appealed that decision to the High Court.
For the purposes of this month’s topic, the area of interest was the consideration given by Justice Woodhouse to the issue of whether the Montgomerys could be considered “developers” and, hence, owed a non-delegable duty of care to KI.
Ultimately, if that was answered in the affirmative, the admitted facts meant that the Montgomerys’ liability for negligence in connection with the construction would follow. Accordingly, the Montgomerys’ position was heavily dependent on whether or not the court considered them “developers”.

Were the Montgomerys developers?
After a useful review of the tribunal’s decision, Justice Woodhouse went on to consider the legal principles of determining who a “developer” is.
At paragraph 14, his Honour stated that the word “developer” is not a legal term. Rather, it is a word which has been used as a label for a person, or other legal entity, whose involvement in connection with construction of buildings (or in the subdivision of land, or both) was such that the person is held by the court to have a duty of care to people who purchase one of the buildings (whether from the person described as the developer or subsequently), even though the physical construction of the building was carried out by an independent contractor.

Justice Woodhouse noted that the duty of care in such circumstances is said to be non-delegable — ie, the person labelled “developer” is not able to delegate the duty of care to the builder.
Justice Woodhouse considered that there was one essential requirement for a person to have liability as a “developer” in the present context — that was, that the person must be “in the business” of having a building or buildings constructed for the primary purpose of sale to other people.

While there may be other factors required in other cases for a defendant to be found to have a non-delegable duty of care, if this business element is lacking, the court considered that it is unlikely that a defendant will be considered a developer.
His Honour considered that it is this business element which provides the “policy foundation” for imposing the duty of care in the terms that it is imposed — it cannot be avoided by engaging an independent contractor to carry out the physical construction work.

This was, to some extent, reinforced by the definition of a “residential property developer” contained in section 7 of the Building Act 2004, because that section makes clear that liability arises because the person is “in trade”.
In this instance, the court was not convinced that the Montgomerys were developers. At paragraph 25, Justice Woodhouse stated that the context here did not establish that there was a business of constructing buildings for the primary purpose of sale.

His Honour noted that the focus needed to be on the Montgomerys’ reasons for building the house. In this instance, their reasons for building the house (including a self-contained flat) were in substance no different from those of large numbers of New Zealanders who build houses, with or without self-contained flats. It was simply built as their home.
Accordingly, the court held that the Montgomerys did not owe a duty of care to potential future purchasers (including KI).

So, are you a developer?
The decision of the High Court is, in our view, a clear, well reasoned judgment which provides a simple framework within which to consider whether someone fits within the “developer” definition.
While arguably not conclusive, the main assessment comes back to basic principles — was the individual in the business of having a building or buildings constructed for the primary purpose of sale to other people?

The comments of Justice Woodhouse probably also serve as a reminder to those building their own homes. One should at least query whether their involvement in the build process (even though far removed from the physical construction) might be enough to attract the label “developer”.
Simply engaging a builder to do the construction work may not necessarily be enough to avoid owing a non-delegable duty of care to subsequent purchasers.

Critical to the assessment of whether someone would attract the description of “developer” is whether they were in the business of having buildings constructed for sale.
This decision also shows the risk claimants face where they rely specifically upon terminology such as “developer” to establish a duty of care.
A more general inquiry and focus on core construction tasks carried out by an individual/company is likely to result in better prospects of recovery.

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

 

 

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