The Supreme Court recently reversed a Court of Appeal judgment that a local authority did not owe a duty of care to a commissioning owner in issuing a code compliance certificate for a non-compliant building.(1) The judgment is significant because it recognises that local authorities owe a duty of care even to commissioning owners that engage their own professionals to ensure compliance with building standards.(2)

Background

The case concerned Southland Stadium, which was built between 1999 and 2000 under a project agreement and lease between Invercargill City Council (the landowner) and the Southland Indoor Leisure Centre Charitable Trust (the building owner).

During construction, the trust's engineer approved a gauge of steel for trusses that supported the roof. However, the gauge was too light and the roof began to sag. A second engineer designed remedial work, approved by the trust's engineer. The design work required the trusses to exhibit precamber measurements of 85 millimetres.

The council issued a building consent based on the remedial design. In doing so, it required the trust's engineer to provide a producer statement certifying that the work had been completed according to design before it issued a code compliance certificate.

The work was not completed according to design. The trust's engineer failed to inspect the work and the defects went undetected. The council, which intended to rely on certification by the trust's engineer, also failed to detect them. However, a code compliance certificate was issued anyway, before the producer statement was received. Eventually, the trust's engineer provided a producer statement, but it omitted the pre-camber measurements. The council did not require the engineer to provide the omitted measurements.

In 2006 the trust (prophetically) grew concerned about leaking from the roof and roof movement caused by wind. It was particularly concerned that the roof might collapse under the weight of snow. It took advice from the second engineer, who advised that the strength of the trusses met the Building Code, but recommended an inspection of truss welds and support fixings by a suitably qualified person to check for fatigue. The trust repaired the leaks, but ignored the inspection recommendation.

On September 18 2010 the roof collapsed following a heavy snowstorm. Fortunately, no one inside was hurt. The complex was rebuilt.

 

 

 

High Court Decision and Spencer on Byron

The trust brought proceedings against the council, alleging that it had breached its duty to the trust to exercise reasonable care and skill when issuing the code compliance certificate.

The key issue was whether a duty of care was owed. In the High Court, Justice Dunningham, relying on the Supreme Court's decision in Spencer on Byron, ruled that it was.(3) Spencer on Byron concerned a 23-storey building that had residential and commercial uses as:

• apartments;
• hotel rooms; and
• other hotel facilities.

The building leaked and its owners sued the council, alleging general negligence in issuing building consents and inspecting and approving the development. By majority, the Supreme Court held that local authorities owe duties to all owners, whether original or subsequent and regardless of the nature of the premises. This duty springs from local authorities' position of control and their obligation to ensure that all buildings are erected in accordance with the relevant bylaws and regulations.(4) The council owed a similar duty in respect of issuing code compliance certificates to commissioning owners, and its breach of that duty had caused damage to the trust.

Dunningham also ruled that the trust was not contributorily negligent in failing to implement the second engineer's recommendations to inspect the trust welds and support fixings. It was not unreasonable for the trust not to incur the expense of undertaking the recommended steps, as its concerns about the stadium's ability to withstand snowfall were squarely addressed and the recommendations did not indicate that there could be welding-related defective construction.(5)

The court awarded damages of NZ$15 million against the council, representing the rebuild cost less an allowance for betterment.(6)

 

 

Court of Appeal decision

The council successfully appealed. The Court of Appeal unanimously distinguished Spencer on Byron.(7) Justices Harrison and Cooper held that Spencer on Byron was authority for the more narrow position that, when exercising its function of inspecting the construction of a building which combines commercial and residential uses, a local authority owes the same duty of care regarding general negligence to all owners regardless of their status.(8) By contrast, because the only claim brought within the limitation period was based on the negligent code compliance certificate, the trust's claim concerned negligent misstatement, not general negligence.(9) Justice Miller noted further points of distinction – namely, that:

• the trust was a commissioning owner which had engaged professional advisers;(10)
• negligent misstatement required specific reliance to be proved;(11)
• the commissioning owner was not vulnerable because it had assumed specific control of risks through contract;(12) and
• the council had relied on the trust's engineer's producer statements, which afforded reasonable grounds for the council to be satisfied of compliance.(13)

The majority considered that no duty of care was owed. It was not fair, just and reasonable to impose a duty of care to protect the trust from the loss caused by the negligence of its own professionals.(14) Further, there was no special relationship of proximity between the parties, as required for negligent misstatement, as:

• the council had not assumed a responsibility as a matter of law to the trust for the quality of its work; and
• the trust had clearly not relied on the certificate, having engaged its own contractors for the purpose of guarding itself against adverse consequences.(15)

The majority also considered that the main purpose of code compliance certificates is to protect the health and safety of building users and the commercial interests of subsequent owners, insurers and financiers (not commissioning owners that control the construction process).(16)

Miller considered that the council had owed a limited duty of care to check that an appropriately qualified person had supplied adequate evidence in the producer statement that the consent conditions had been met before issuing a code compliance certificate.(17) However, the council had breached its duty by issuing the certificate without adequate evidence that consent conditions had been met and without receiving a satisfactory producer statement.(18)

In any case, the court unanimously held that the trust had not specifically relied on the code compliance certificate, as required for a negligent misstatement claim, and had instead relied on its own agents.(19)

The court also unanimously considered that the trust had been contributorily negligent in failing to follow the second engineer's recommendations and would have reduced the damages award by 50%. Miller said that the trust was aware of the need to inspect the trusses, given its concerns about the building's structural integrity. The trust was on notice that the pre-camber measurements should be checked.(20) The majority suggested that the trust could also have contributed to its own damage through its agents' negligence.(21)

 

 

Supreme Court decision

The Supreme Court unanimously agreed with Dunningham. It considered Spencer on Byron to be indistinguishable from the present case.(22) The court, by reference to Spencer on Byron and other New Zealand authorities, affirmed that local authorities are liable to original and subsequent building owners for loss caused in carrying out their statutory and regulatory functions without reasonable skill and care. This duty is not dependent on:

• the type of dwelling;
• the form of ownership; or
• the value of the building.(23)

The court emphasised that the duty's underlying rationale was the control which local authorities have, through legislation, over construction projects and the general reliance which persons place on such authorities to exercise their independent powers of control and inspection with reasonable skill and care.(24) The Court of Appeal had taken insufficient account of this statutory role.(25)

The Court of Appeal had also been wrong to distinguish between commissioning owners, which engage their own contractors, and subsequent owners. This distinction was inconsistent with the rationale for the imposition of the duty of control and reliance stemming from its regulatory role. The part played by other professionals did not absolve local authorities of liability.(26)

The court held that there is no valid distinction, for the purposes of a duty of care, between issuing a code compliance certificate and a local authority's other functions, such as building consents or inspections. All are directed at compliance with the building code and are not obviated by another party's negligence or knowledge (although there may be issues of contributory negligence). Further, as a matter of policy, the actions and knowledge of independent contractors are not to be attributed to a building owner.(27)

The court also emphasised that local authorities cannot contract out of their statutory obligations or contractually allocate responsibility for regulatory compliance to commissioning owners.(28) It rejected the submission that the council had intended to rely on the producer statement from the trust's engineer, noting that:

• the statement had not been provided until after the certificate had been issued;
• there was no evidence of reliance by the council and the council had not withdrawn the certificates when the producer statement was inadequate; and
• the measurements had been non-compliant.(29)

Finally, the court rejected, on the facts, submissions that the certificate would have been issued whether or not the producer statement had been made and that the council had known that the certificate had been issued without compliance.(30)

As a result, the court applied Spencer on Byron and held that the claim was in negligence and not a negligent misstatement. There was therefore no dispute that a duty of care had been breached and that the breach had caused loss.

The court also held, by majority (Chief Justice Elias and Justices O'Regan and France), that the trust had been contributorily negligent. It found that the trust should have followed the second engineer's recommendations. The trust had been concerned about safety and the recommendations to check deterioration and fatigue were clearly referable to safety concerns. Further, there was a background of ongoing issues with the roof including its movement. The trust should have, at a minimum, made some inquiry of its investigative team. As such, damages were reduced by 50%.(31)

The minority (Justices William Young and Glazebrook) disagreed, noting that the recommendations had been made in the particular context of safety concerns triggered by leaks and the flexing of the roof. Once satisfied that the flexing was within design tolerances and that the leaks had stopped, the trust had not been obliged to carry out the recommended steps.(32)

 

Comment

The decision is an unwelcome one for local authorities. Unlike the Court of Appeal decision, which significantly restricted local authorities' potential liability for defective buildings, the Supreme Court decision emphasises that local authorities owe a duty of care to all building owners, regardless of type. This includes commissioning owners that have engaged their own contractors to ensure compliance with building standards.

By contrast, the decision is likely to be welcomed by developers and commissioning owners, which may have recourse in negligence against negligent agents and local authorities in respect of buildingdefects. It is now clear that a local authority's obligations exceed duties to parties that are unable to control the process or protect themselves (except by relying on the local authority).

Conversely, commissioning owners and developers must still take reasonable steps to ensure that the required building standards are met. Over-reliance on agents and contractors, and neglecting to ensure that the building standards are met, risks a finding of contributory negligence and a reduction in damages.

The decision also simplifies negligence in the defective building context. It removes the distinction between code compliance certificates (requiring specific reliance and a special relationship of proximity according to the negligent misstatement test) and other parts of the regulatory process (eg, building consent and inspections). The need to consider negligent misstatement has been removed from most if not all claims against local authorities for defective buildings. Councils owe a duty to all owners (commissioning or subsequent) for all types of buildings and for all regulatory steps in the construction process for which it is responsible.

For further information on this topic please contact Adam Holden at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.

Endnotes

(1) Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2017] NZSC 190.

(2) The Court of Appeal decision was the subject of a previous update. Please see "No duty of care owed by local authority to commissioning owner after stadium collapse".

(3) Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2015] NZHC 1983.

(4) Body Corporate 207624 v North Shore City Council [2012] NZSC 83, [2013] 2 NZLR 297 [Spencer on Byron].

(5) Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council (HC), ibid, at p 167 to 172. 

(6) Id at p 186 to 217.

(7) Invercargill City Council v Southland Indoor Leisure Centre Charitable Trust [2017] NZCA 68, [2017] 2 NZLR 650.

(8) Id at p 165.

(9) Id at p 166.

(10) Id at p 69.

(11) Id at p 71 to 72.

(12) Id at p 74 to 77.

(13) Id at p 82.

(14) Id at p 178 to 185.

(15) Id at p 175.

(16) Id at p 189.

(17) Id at p 87.

(18) Id at p 100.

(19) Id at p 116 and 199 to 206.

(20) Id at p 136 to 140.

(21) Id at p 208.

(22) Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council (SC), ibid, at p 51.

(23) Id at p 55 to 61.

(24) Id at p 58.

(25) Id at p 87.

(26) Id at p 62 to 70.

(27) Id at p 62.

(28) Id at p 71 to 72.

(29) Id at p 73 to 74.

(30) Id at p 75 to 83.

(31) Id at p 109 to 114.

(32) Id at p 126 to 128.