More on directors and leaky buildings

In the leaky building context, the personal liability of directors of development companies, continues to generate much jurisprudence.  A recent decision of Heath J (Body Corporate No 199348 v Nielsen HC Auckland CIV-2004-404-3989, 3 December 2008 (PDF)) held that where a director is found to have assumed responsibly for the way in which work is carried out on a building project and defects result, personal liability will likely follow.

A causative link is required between the director’s acts (or more importantly, omissions) and the defects in the building project.  But, depending on the extent of the director’s control of the building works, evidence of an omission to adequately supervise work may be sufficient to found liability.  It may not be necessary to prove the director’s knowledge, actual or implied, that defects would result if work was not supervised properly.

Greg Nielsen was a serial developer in Auckland.  He and his brother operated through companies beneficially owned through family trusts.  One of their multi-unit residential complexes in Newmarket failed, involving significant weathertightness defects.  Proceedings were issued in 2004.  Prior to a mediation, at which Auckland City Council and other defendants settled the claim by paying $2.5 million collectively, the Council had been advised there was “a strong likelihood” that it could be found liable.  As is becoming increasingly common, the Council, no doubt in an effort to lessen the burden on ratepayers, took an assignment of the plaintiffs’ rights, and pursued Mr Nielsen for the amount it had paid in settlement, as well as the difference between the full cost of remediation, and the amount the plaintiffs received in settlement.

At trial, various participants in the construction gave damning evidence against Mr Nielsen’s evidence that his role in the construction was minor.  They included a labour-only builder, the site foreman and a director of a plumbing contractor.

In response, Mr Nielsen, and his office administrator at the time, with whom he had been in a relationship, gave evidence that his role in the development was minor.  The Judge disregarded Mr Nielsen’s evidence completely, finding that:

  1. He was a director of the two companies held to be developers, with primary responsibility for supervising work, including ensuring coordination of trades and the carrying out of work in accordance with the plans and specifications;
  2. He was on site daily, to instruct the site foreman, and deal with any problems arising in relation to the implementation of work.

The Council lead unchallenged evidence that a developer of this type of project required a level of management to ensure that the building work was completed in accordance with the Building Code, including time-planning to ensure coordination of trades, quality control measures, and checking of that work to ensure it was completed in accordance with plans and specifications.  The development company had no such management.  Because Mr Nielsen controlled day-to-day work on the site, he assumed personal responsibility for its oversight.  There was no evidence that he had in place any of the quality control measures, or system of checking described by the Council’s expert.

While Mr Nielsen was not vicariously liable for the actions of the company, Heath J found that the ‘control’ test as established in Morton v Douglas Homes Limited [1984] 2 NZLR 548 (“Morton”) was satisfied so that Mr Nielsen was a joint tortfeasor along with the development company.  Yet there was no evidence that Mr Nielsen knew, or ought to have known, that a failure to implement quality control measures or systems of checking would cause problems.  In Morton, for example, the liability of the father and son directors arose from specific knowledge that each of them had, that problems with the foundations would result unless advice obtained from engineers about the way in which piling should be undertaken was implemented.

As Harrison J noted in Body Corporate 188739 & Ors v Leuschke Group Architects Limited & Ors HC AK, CIV-2004-404-2003, 28 September 2007:

It is apparent from Hardie Boys J’s careful examination of the facts in Morton that control of the development simpliciter is not enough to found liability.  There must evidence of the director’s assumption of a degree of personal responsibility for an item of work which subsequently proved to be defective.  In Morton liability rests on the director’s knowledge, actual or implied, of the piling problem, and his failure to implement remedial measures when it was within his power and control to do so. (emphasis added)

There was no evidence of knowledge, actual or implied, that Mr Nielsen had of problems in the way the work was carried out which he could have remedied.  It seems that evidence of a failure to effect a system of supervision, which resulted in defects occurring, will amount to evidence of negligence by omission, even in the absence of actual or imputed knowledge of problems this might cause.  The absence of such evidence in this case is probably explicable by Mr Nielsen’s decision to defend the proceeding himself.  While the case makes it easier for plaintiffs and others suing directors of development companies, it must concern those advising developers sued in similar situations, as to the standard of proof of negligence required in order for them to be held liable.