The Government has introduced the Building Amendment Bill (the Bill) into Parliament, giving legislative form to the reforms the Government announced for the building sector last year.
Its centrepiece is a shift from joint and several liability to proportionate liability for defective building project work – a change that reworks how responsibility for building defects is shared among those involved. However, the Bill also:
(a) makes professional indemnity insurance compulsory for design professionals;
(b) mandates home warranties for many residential projects;
(c) allows councils to consolidate their consenting functions; and
(d) introduces a fast-track consent pathway for more sustainable homes.
The shift to proportionate liability was signalled last year; what the Bill now supplies is the detail, and a timetable. For the first time, the shape of the regime can be assessed, together with what it is likely to mean in practice for everyone involved in a building project.
How proportionate liability works
Under the current law of joint and several liability, each party that has contributed to a defect may be held responsible for the whole of a plaintiff’s loss. In practice, where some of those responsible are insolvent or have since disappeared, the solvent parties – often insured professionals and councils – have been left to meet the shortfall, at times well out of proportion to their actual contribution to the loss caused. Proportionate liability reverses that position, so that each defendant is responsible only for its own fault-based share.
The new proportionate liability regime applies to claims for loss or damage arising from defective building project work, a term the Bill defines broadly. It captures work that is defective, as well as work that is incomplete or non-compliant with the Building Code, a building consent, or the relevant plans and specifications, where that shortcoming contributes to loss or damage on a building project. Importantly, building project work is not confined to physical construction. It extends to design work for the construction or alteration of buildings, and to the exercise of statutory functions and powers under the Building Act 2004 by territorial authorities and building consent authorities. It does not generally include manufacture or supply of building materials.
Where several parties have contributed to a loss, each defendant’s liability is limited to an amount reflecting its own contribution. Defendants who are concurrent wrongdoers will be liable only for the proportion of the loss that the decision-maker considers just and equitable, having regard to the extent of each party’s responsibility. A concurrent wrongdoer is a person who, together with one or more others, has independently or jointly caused the relevant loss or damage. The apportionment of responsibility is left to the broad discretion of the decision-maker, and as remediation costs frequently run into the millions, the allocation of even a few percentage points may be significant. How decision-makers approach that task is likely to be among the most closely watched aspects of the new regime. The corollary is that recovery risk shifts to the plaintiff: where a responsible party is insolvent or absent, it is the building owner, rather than the remaining defendants, who bears that share of the loss.
Contribution, indemnity and subsequent proceedings
The core principle of proportionate liability for apportionable claims is set out in section 393D. Sections 393E and 393G then limit the ability of the plaintiff or concurrent wrongdoers to reallocate liability after an apportionable claim has been determined by a court. Once a court has determined an apportionable claim against a defendant, that defendant cannot be joined as a defendant in another proceeding (which includes an adjudication, which in turn includes an arbitration) involving the same apportionable claim. Similarly, such a party cannot be required by a court to contribute to, or indemnify, another concurrent wrongdoer in respect of that liability. These provisions reinforce the principle that each concurrent wrongdoer should bear responsibility for its own share of the loss.
At the same time, the Bill preserves a plaintiff’s right to pursue other concurrent wrongdoers in subsequent court proceedings (not adjudication or arbitration) (see s 393(H)). However, a plaintiff cannot recover more than the loss actually suffered, and any damages previously recovered must be taken into account to prevent double recovery (s 393H(2)).
Defendants will also be subject to a disclosure obligation (in court proceedings only) (s 393F). They must notify the plaintiff, in writing and as soon as reasonably practicable, of any person they reasonably believe may be a concurrent wrongdoer. A failure to do so may result in adverse costs consequences where the plaintiff incurs unnecessary costs as a result. In practice, the obligation is unlikely to be onerous, as defendants will generally have a strong incentive to identify all potential concurrent wrongdoers at an early stage in order to reduce their own share of any liability.
Application to arbitration and adjudication
The proportionate liability regime will apply to arbitration and adjudication proceedings although the parameters of that application are somewhat unclear. The following appears to be the position.
- The liability of a defendant for an apportionable claim is limited to the defendant’s proportionate liability in both arbitrations and adjudications (section 393D).
- A person who is a party to an arbitration or an adjudication in respect of an apportionable claim is not protected under section 393E from being joined as a defendant or other party in a subsequent proceeding (court, arbitration, adjudication) involving the same apportionable claim.
- A defendant against whom an arbitration or adjudication award of proportionate liability is given is not protected under section 393G from being required by a court to contribute to damages recovered from a concurrent wrongdoer or to indemnify that wrongdoer.
- A plaintiff is not expressly empowered by section 393H(1) to bring a court proceeding (or for that matter an adjudication or arbitration) against a concurrent wrongdoer who was not party to a prior arbitration or adjudication of an apportionable claim. The Bill is silent on this point.
- If silence means a court proceeding can be brought against a concurrent wrongdoer who was not a party to a prior arbitration or adjudication of an apportionable claim, the plaintiff cannot recover an amount of damages that would result in double recovery (section 393H(2)). This would require the party seeking recovery to disclose the amount awarded to it in the prior arbitration or adjudication. For arbitrations, this would require consideration of the confidentiality provisions of the Arbitration Act 1996.
- If arbitration or adjudication proceedings can be brought against a concurrent wrongdoer who was not party to a prior arbitration or adjudication, section 393H(2) does not bar double recovery by the plaintiff.
-
-
The merits of including arbitration in the proportionate liability regime at all are a subject of debate – weighing the desirability of a uniform measure of liability across different types of dispute resolution proceeding against the difficulties of applying proportionate liability in the arbitral / adjudication context, where joining all parties to the same proceeding may not even be possible. The differential treatment of court proceedings versus arbitration / adjudication in respect of future claims against concurrent tortfeasors adds a further layer of uncertainty of outcome in respect of these non-court proceedings. A concern is that these considerations will render arbitration, in particular, a less desirable process for dispute resolution, contrary to the purposes of the Arbitration Act.
Contracting out
As drafted, section 393C includes a prohibition on excluding or limiting liability in a contract for low-rise residential building work. This is intended to provide protection for smaller residential builds where the principal is less likely to be a sophisticated commercial party. It will impact consultants most significantly, whose current standard short form agreements typically contain liability cap provisions.
The Bill is silent on whether or not you can contract out of the proportionate liability regime as a whole and revert to joint and several liability. This issue pits advocates of freedom of contract against proponents of one system for all. Assuming, however (as seems likely given the absence of an express prohibition), that contracting out of proportionate liability and back into joint and several liability is intended to be permitted under the Bill, again, a question arises as to how this impacts arbitration.
Arbitration is a creation of contract. It would be odd indeed if proportionate liability could be contracted out of in relation to court proceedings but was mandatory in contractually agreed arbitral proceedings. Perhaps the intended approach is that proportionate liability should be the default regime for arbitration as it will be for litigation, but that parties can expressly contract out of this. This could give parties a way of avoiding the problems identified earlier. However, the net effect would likely be that most arbitral agreements would opt out, rather defeating the purpose of including arbitration in the regime to begin with.
Application to arbitral/adjudication proceedings and contracting out are key issues that merit further discussion and on which it is anticipated submissions will be made at the select committee stage.
Commencement and transition
The reforms will not take effect immediately. If the Bill is passed, proportionate liability will come into force one year later. For work that requires a building consent, the regime will apply where the consent is issued more than a year after the amendments are passed; for work exempt from consent, it will apply to building work that begins on or after that first anniversary. The result is a staggered transition, under which projects consented before the cut-off remain governed by joint and several liability while those consented afterwards fall under the new regime. That transition year will be important. It is the period in which parties will need to reassess and reprice risk, and to adapt their contracts to the new settings – a task complicated by the fact that a single project may involve contracts entered into months, or even years, apart.
Protecting homeowners: insurance and warranties
Because proportionate liability exposes plaintiffs to the risk of an incomplete recovery where a responsible party is insolvent, uninsured, or no longer in existence, the Bill introduces two safeguards: compulsory professional indemnity insurance for design professionals, and compulsory home warranties for certain residential projects.
Design consultants – including architects, designers, engineers and surveyors who contribute, through advice or other services, to the design or certification of building work – will be prohibited from carrying out “prescribed design and other services” unless they hold professional indemnity (PI) insurance. Non-compliance is an offence, with maximum fines of $50,000 for individuals and $150,000 for entities. Many design professionals already hold comprehensive cover, so for them the requirement largely formalises existing practice. It is, however, subject to important limitations. It applies only where the prescribed services relate to building project work with a total value of $100,000 or more, and the services actually caught are to be specified by regulation, leaving the ultimate reach of the requirement to be settled at a later date. Designers working on smaller projects fall outside it.
The Bill does not itself fix the minimum level of PI cover. Instead, it leaves the minimum levels of cover, and any applicable terms and conditions, to be prescribed by regulation. That detail will be significant, as it will determine the degree of protection the requirement actually provides. Designers will also be required to disclose their PI arrangements before providing prescribed services, with failures attracting fines of up to $2,000. The increased visibility of insurance arrangements may confer a commercial advantage on designers who choose to carry cover above the prescribed minimum.
Home warranties will be mandatory for the construction of new houses and “small-to-medium apartment buildings”, and for renovations to them, where the work has a total value of $100,000 or more, includes restricted building work, and requires a building consent. The Bill defines the categories with some precision: a house is a single, free-standing and fully detached residential unit, while a small-to-medium apartment building is a building containing multiple residential units, no non-residential space, and not exceeding 10 metres in height. MBIE will establish a registration regime for home warranty providers. The precision of these definitions may nonetheless give rise to anomalies. Mixed-use developments are excluded altogether, and developments with similar risk profiles may be treated differently according to which side of the 10-metre threshold they fall. Many three-storey townhouse developments, for example, are likely to sit close to that limit, with the consequence that the scheme may not always align with the underlying defect risk.
A home warranty must provide an “adequate level of cover” for defective building work identified within one year of completion, and for structural defects arising within a ten-year period. The Bill does not, however, define what constitutes an adequate level of cover. The practical significance of the scheme will therefore depend heavily on how that standard is interpreted by insurers, regulators and the market, and in the absence of further guidance there is likely to be tension between providing meaningful consumer protection and keeping cover commercially viable. The Bill addresses that tension in one respect, by providing a power to suspend the home warranty and PI requirements temporarily where the relevant cover becomes unavailable or unaffordable, for example following major market disruption or the withdrawal of an insurer. The provision is a pragmatic one, but it also underscores that the protection these reforms offer will ultimately depend on the capacity of the insurance market to support them.
Beyond liability: consenting reforms
Beyond liability and insurance, the Bill makes two changes directed at the consenting system. The first allows councils to consolidate and share their Building Consent Authority (BCA) functions on a voluntary basis, without requiring any change to the way they currently operate, enabling greater collaboration across the consenting system. The second introduces a fast-track consent pathway for residential buildings of up to three storeys that meet specified performance criteria for solar electricity generation or sustainability, the latter measured by attributes such as energy efficiency, low embodied carbon, water efficiency and climate resilience. Applications on the fast-track pathway must be determined within 10 working days, rather than the standard 20. Neither change carries the significance of the liability reforms, but together they reflect a broader objective of making the consenting process faster and more consistent.
Comment
The Bill provides the first meaningful opportunity to assess how the Government’s reforms will operate in practice. The broad direction has been apparent for some time, but the detail now available reveals both the scale of the changes ahead and the number of questions that remain unresolved. With much still dependent on regulations yet to be made, the Bill now proceeds to select committee, where the industry will have the opportunity to be heard. We will follow its progress through Parliament closely, and will report further once the select committee reports back.
If you have any questions about the Building Amendment Bill, please get in touch with our Construction & Infrastructure Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
