The recent announcement by the coalition Government of its intention to introduce a proportionate liability framework within New Zealand represents one of its pillars to drive reform within the building industry. Rob Clarke and Helena Crawford of Auckland law firm Greenwood Roche comment on what this ultimately means for the sector, and how the Government and the courts can best ensure there is balanced and meaningful protection for plaintiffs and defendants in defective building claims.
What is “proportionate liability”?
The question of liability assesses the degree of responsibility of the parties involved in the design and construction work on a project.
Under the current regime, section 17 of the Law Reform Act 1936 provides for “joint and several” liability. This means that where there are multiple parties responsible for loss on a project, any one of them may be held liable for the entire cost of the damage or repairs.
That party can claim contribution from others involved, but this is subject to those companies or individuals remaining in business (and having sufficient assets to recover these costs).
In practice, when defective building claims reach the courts, often years after a build is complete, companies involved in the project may no longer be operating, or have limited assets.
This places a significant burden on the well-resourced defendants, who are often referred to as the “last party standing”, to bear the relevant liability.
Historically, this burden has disproportionately fallen on local councils involved in the consenting process — and, ultimately, ratepayers.
Under a “proportionate liability” regime, each defendant is liable only for the proportion of the loss or damage commensurate to their level of responsibility (as determined by the courts).
This system provides greater protection for defendants (including local councils). But, ultimately, the risk of payment shortfalls (due to liquidity issues of any relevant defendants) is transferred to the plaintiffs (usually the owners).
The liability question in the courts
Concerns around the joint and several liability regime are not new. In 2014, the Law Commission’s report Liability of Multiple Defendants (NZLC R132, 2014) considered the proportionate liability regime. The Law Commission largely recommended retaining the status quo.
However, concerns around local councils disproportionately footing the bill have remained, with the $163m Oaks Shores claim against Queenstown Lakes District Council being an often-cited example of inherent flaws within the joint and several liability system.
Last year, in Beca Carter Hollings & Ferner Limited v Wellington City Council [2024] NZSC 117, the Supreme Court acknowledged the need to protect well-resourced defendants by allowing contribution claims to proceed outside the 10-year “longstop” limitation period for defective building claims under the Building Act 2004.
The court emphasised that applying the 10-year longstop limitation period to contribution claims would, in some circumstances, unfairly prevent defendants from seeking contribution before the determination of liability.
Parties normally have two years from the date of judgment to pursue claims against potential co-defendants.
The finding in Beca extended the time period for filing co-defendants’ contribution claims in some cases, but did not protect remaining defendants when others have become insolvent.
The Government’s proposed proportionate liability regime responds to this gap by ensuring each party is liable only for its share, preventing solvent defendants from bearing an unfairly large portion of loss.
The structure of the new proportionate liability regime
Questions remain as to the final structure of the proportionate liability regime, particularly concerning how shortfalls will be mitigated to ensure plaintiffs will not bear any shortfall.
The Government has indicated that this may take the form of compulsory professional indemnity insurance or home warranty schemes (such as those currently provided by Master Builders), and has pointed to Australia as a successful example where proportionate liability has been operating successfully since the 1990s.
How this will operate in a challenging insurance market, and how compulsory warranty schemes will be funded and accessed will be key issues for the Government to resolve.
Of particular interest will be how closely the New Zealand Government will follow the Australian model, where most states have allowed commercial builds to opt out of the proportionate liability scheme altogether.
Provided it is paired with strong consumer protections, including warranties and insurance, the proposed regime could create a balanced system and decrease costs for councils and ratepayers, while ensuring building owners are not left to foot the bill for payment shortfalls.
How the bill intends to achieve this balancing act will be the real challenge facing the Government.
