Leaky building litigation: potential expansion of liability

Carter Holt Harvey Limited (CHH) is a manufacturer of cladding installed in various schools throughout New Zealand. The Minister of Education brought a number of negligence claims against CHH, alleging that defects in its cladding had caused weathertightness issues in school buildings that had resulted in property damage and threats to health and safety.

CHH has attempted to have these claims struck out, most recently at the Supreme Court. While many of the questions raised will not be resolved until the trial phase of the proceedings, some interesting insights can be gleaned from the Justices’ reasoning in this strike-out application.

The Court made it clear that when a novel duty of care is alleged, as in the present case, it will be extremely difficult to have a claim struck out. Generally, the question of whether a novel duty of care exists turns on the degree of proximity between the parties, as well as broader policy considerations. These require highly fact-specific judgments, and the Court was not willing to reach a view without having the full benefit of the facts that would be available at trial.

CHH argued that the negligence claims should be struck out due to insufficient proximity between it and the Minister of Education. To this end, one of its key arguments was that the relationship between CHH and the Minister of Education was not close enough to justify a duty of care. CHH had no direct contractual relationship with the Minister of Education; rather, it had contracted with the head contractors of each school building, and it was through these contracts that the relevant risks and responsibilities were allocated. It would be unreasonable, CHH argued, for the Court to impose a duty of care beyond this contractual arrangement, as this would undermine CHH’s right to contract for what risks it assumed.

CHH also argued that the Minster of Education was not “vulnerable” in a sense that would support the imposition of a duty of care. The Ministry of Education is a large government department that CHH said was perfectly capable of protecting itself against these losses via contract, and it always had the option of insisting on warranties from the relevant head contractors.

The Court was of the view that the contractual arrangements in this case were too fluid and complex to be resolved at the strike-out phase. The Court did not agree with CHH that there was a “carefully calibrated contractual regime” that made clear how the risk should be allocated, and there were open questions concerning the level of interaction between the Minister and the builders that would need to be resolved by the trial judge. Nor did the Court think it was “realistic” to expect the respondents to anticipate all potential losses “from the nails to the paint to the glass” and provide for them via contracts and warranties. This is especially true in this case, which involves latent defects that would not have been apparent at the contracting stage, and indeed required specialist assistance to uncover.

CHH tried to draw a distinction between the present case and other weathertightness cases heard in the Supreme Court. Those cases, like Spencer on Byron usually involved councils who were already subject to statutory obligations under the Building Act 2004. CHH argued that the imposition of a duty on the councils in Spencer on Byron was reasonable, as that duty merely supplemented these pre-existing statutory obligations to inspect and approve building work. But to impose a duty on CHH, it argued, would be different; it would create new obligations, not supplementary ones, and would thus override its freedom to make contracts that limit the extent of its liability.

While the Court accepted that the Building Act 2004 did not impose duties on suppliers of building components, it did not think that this ruled out the existence of a separate duty at common law. While CHH are under no direct statutory obligations, the practioners who use their products are, as the buildings they work on must comply with the Act and the building code. In practice, then, CHH are still required to meet standards relevant to questions of proximity and the foreseeability of harm – key ingredients for establishing a duty of care. The Court therefore did not accept the argument that imposing a duty of care would necessarily impose greater responsibilities than what was already expected of CHH in the broader context of the Act and building code requirements.

CHH’s policy arguments echoed their proximity arguments in many respects. They argued that it would be against public policy to undermine risk allocation by contract, and that an imposition of a duty of care would create contractual uncertainty. They also argued that the imposition of a duty would lead to “incoherence” in the common law, because if it was found that the respondents were owed a duty, this would mean they had greater legal protection than those who had purchased cladding directly from CHH. The Court acknowledged that these were important policy issues that required “careful and comprehensive analysis.” But it was for exactly this reason that it was unwilling to resolve them at the strike-out phase.

Finally, there was some discussion on the 10-year limitation period prescribed by the Building Act 2004. Section 393 provides for a 10-year longstop for claims relating to “building work.” CHH argued that, although it was merely a manufacturer of the cladding, it was still involved in “building work” as the supply of this cladding was effectively part of the building and code compliance process. The Court held that the cladding was better described as a “building element” as defined in the building code, as it was a component incorporated into a building, while CHH was not itself involved in the construction work. The Court did not think it mattered that effective cladding was part of the code compliance process; the Court saw this claim as one concerning the supply of defective products, and independent of the Building Act.

Thus, the Court concluded that it was at least arguable that CHH owed the respondents a duty of care, and their strike-out application was declined. The case has raised some important issues, and could result in a considerable expansion of liability for manufacturers of building products. It will be a case worth following closely.


Read the full judgment here