Local authority liability in New Zealand for defective homes

AuthorKenneth Palmer
PositionDepartment of Law, The University of Auckland, Auckland, New Zealand
1 Introduction

This article sets out the legal position in New Zealand in 2012 concerning the liability of territorial local authorities (city and district councils) for defective homes1. The defects may arise from inadequate foundations and water leaks and other causes. The article considers the history of the determination by courts of liability, issues relating to the limitation period for claims, and the divergence of New Zealand law from UK law2. The question of liability for other buildings used for commercial purposes, such as hotels and motels is considered. The question of central government responsibility is addressed. The decisions of the Supreme Court of New Zealand in the Byron Avenue and Sunset Terraces cases (2010) are discussed3. Finally, the systems available for mediating and determining liability under the Weathertight Homes Resolution Services Act are considered, together with a recent commitment of government to share in the burden of repair costs4.

2 History of local authority liability for defective homes

In 1972, in Dutton v. Bognor Regis Urban District Council5 the English Court of Appeal determined that a builder could owe a duty of care in tort law to a subsequent purchaser of a property which had defective foundations. The builder could be liable even though there was no immediate contractual relationship with the subsequent purchaser. More significantly, the Court determined that the local authority could also owe a duty of care to the subsequent purchaser for failing to carry out inspections with reasonable care. The council could be liable in negligence for this failure of duty. Assuming the builder remained solvent, the question of apportionment of liability between the builder and the local authority could be determined having regard to the degree of responsibility for the damage. Lord Denning, Master of the Rolls, was a driving force in the Dutton decision.

Within a short period, the Dutton decision was followed by the New Zealand Courts. In Gabolinscy v. Hamilton City6 the council was found to be liable to the purchaser of a dwelling erected on a former council refuse tip, for subsidence damage occurring ten years after construction. The property foundations were not adequate for the ground conditions.

The validity of the common law in the UK came before the House of Lords in Anns v. Merton London Borough Council7 being another case involving a claim for faulty foundations and subsidence damage. The Lords considered that in principle negligence liability should be approached in two stages. First, a question arose whether there was a sufficient relationship of proximity between the alleged wrongdoer and the person suffering damage, and second, if that proximity existed, it was necessary to consider whether or not there was a reason to exclude liability. This approach, containing a presumption of liability for harm, advanced the scope of responsibility to a significant level where damage arose.

Returning to New Zealand, the Anns decision was followed by the Court of Appeal in Mount Albert Borough Council v. Johnson8. The Court considered the liability of a builder and the council in respect of a block of flats which had been erected on a former refuse tip site. The foundations were inadequate, the dwellings subsided, and the claim was made. The Court held the defendants were jointly and severally liable, and apportioned the damages award at 80 per cent against the builder and 20 per cent against the council. This ratio of apportionment has been commonly adopted in other decisions. Where the builder is insolvent and recovery cannot be made, under the law the council may be liable to pay the full damages award, and to seek any remedy for recovery of the balance against the insolvent builder.

3 Divergence of New Zealand Law following Murphy decision

In 1984, the House of Lords in the Peabody Donation Fund case9 reconsidered the principled approach to liability enunciated in the Anns decision. The Peabody Group was developing a housing estate through a building firm and permits had been obtained from the Lambeth London Borough Council. An error was made in respect of the use of rigid drainage connections. The Lords declined to find any liability against the local authority holding that in determining whether or not a duty of care was incumbent, it was material to take into consideration whether it was just and reasonable that a duty should arise10. Further, the Lords considered that as the loss was essentially economic, and not related to personal injury, that would be a ground for not imposing any duty of care.

Subsequently in Murphy v. Brentwood District Council11, another claim relating to defective foundations and economic loss came before the House of Lords. On this occasion, the Lords determined that the loss was purely economic and the council owed no duty of care in exercise of its statutory building bylaw functions. A duty could only arise in respect of foreseeable harm in the nature of injury to health or safety. Furthermore, liability in torts should be established on an incremental basis, and the statements in the Anns decision were generally disapproved.

With this background, in 1994 the New Zealand Court of Appeal was faced with conflicting authorities in the case of Invercargill City Council v. Hamlin12. A dwelling had been constructed in 1972 on a boggy site. The depth of foundations was approved by the council but found to be inadequate for the site conditions. Within a short period cracks appeared. Finally in 1989, with the doors sticking, a claim was brought against the local authority for negligence in approving the shallow foundations on the plans and also in failing to carry out proper supervision under the bylaws. The Court noted the differing views expressed by the House of Lords in the Murphy decision, as against the earlier Anns decision. Cooke P stated:

While the disharmony may be regrettable, it is inevitable now that the Commonwealth jurisdictions have gone on their own paths without taking English decisions as the invariable starting point. The ideal of a uniform common law has proved as unobtainable as any ideal of a uniform civil law13.

The Judge noted that New Zealand did not have any equivalent of the Latent Damage Act 1986 (UK), and in 1991, a longstop claim limitation of ten years from the approval of plans or supervision by the local authority had been introduced for future claims. That particular limitation did not apply to the Hamlin facts where the claim was brought before the enactment of the statutory restriction.

Another member of the Court, Richardson J, stated there were six distinct and longstanding features of the New Zealand housing scene which justified a duty of care being owed by the local authorities. First was the high proportion of occupier-owned housing. The second reason was that much of the housing construction was undertaken by small scale cottage builders for individual purchasers and these builders may require some supervision. The third reason was the nature and extent of government support for private home ownership with provision of low interest loans. The fourth ground was the surge in house building construction. The fifth ground was the wider central and local government support for private home building, through model bylaws and close supervision. The sixth reason was that there has never been a common practice for new house buyers, to commission engineering and architectural examinations or surveys of the building or proposed building before purchase. The Judge summed up that the question of whether it was just and equitable for the local authority to be under a wider duty of care had to be considered against this background which was particular to New Zealand14. The Court held the duty of care could apply to pure economic loss and the council was liable for the cost of repairs. Because the building company had gone out of business and was insolvent, the council would be obliged to meet the full damages award.

That decision of the Court of Appeal then proceeded to the Privy Council.

In Invercargill City Council v. Hamlin15, the Privy Council was faced with a relatively unique situation as to whether it should follow the decision of the House of Lords in Murphy, or affirm the wider approach asserted by the New Zealand Court of Appeal. In giving judgment, Lord Lloyd of Berwick, noted that 17 years had passed between the construction of the dwelling and the later determination that the subsidence problems were due to the inadequate foundations. His Lordship noted the change to New Zealand law in 1991 imposing a longstop on claims of this nature16. It was acknowledged that the New Zealand judges were in a better position to decide on the appropriate divergence of the common law. It was also acknowledged that as the loss was economic loss, that no loss occurred until the defect was discovered or was so obvious to a reasonable owner that they would take action. On the facts, the claim was not time barred applying the claim period of six years from discovery of the cause of action. This important decision, accepting that in New Zealand a local authority could be liable for negligence in issuing a building permit, and in any failure of the inspection duty, has remained the legal position, but with an exclusion of liability in respect of commercial premises (including schools).

4 Limitation period for claims

An aspect of several of...

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