The Court of Appeal recently held 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 decision is significant because it restricts the circumstances in which local authorities have a duty of care in relation to defective buildings, especially to commissioning building owners which contract with their own professionals to ensure compliance.

Background

Southland Stadium was built between 1999 and 2000 under a project agreement and lease between the 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. The gauge was too light and the roof began to sag. A different engineer designed remedial work, approved by the trust's engineer. The design work required the trusses to exhibit pre-camber measurements of 85 millimetres.

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

The work was not completed in accordance with the design. The trust's engineer did not inspect the work and the defects were not detected. The council, which intended to rely on certification by the trust's engineer, did not detect them either. 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 grew concerned about roof movement caused by wind and (prophetically) worried that it might collapse under the weight of snow. It took advice from the engineer who had designed the remedial work. He recommended an inspection of the pre-camber and welds. The trust ignored his advice and did nothing.

On September 18 2010 the roof collapsed over community courts following a heavy snowstorm. Fortunately, those inside were unhurt. The complex was rebuilt.

High Court decision and Spencer on Byron

The Southland Indoor Leisure Centre Charitable Trust brought proceedings against Invercargill City Council for negligence and negligent misstatement. The negligence causes of action were time-barred. The negligent misstatement claim alleged that the council owed a duty to the trust to exercise reasonable care and skill when issuing the code compliance certificate and had breached that duty. It claimed to have relied on the code compliance certificate in not inspecting the trusses.

In the High Court, the trust was awarded NZ$15 million, representing the rebuild cost less an allowance for betterment. Justice Dunningham concluded that the council owed a duty of care to the trust. The court relied on an earlier Supreme Court decision, Spencer on Byron,(2) to find that the council had a duty in issuing code compliance certificates to all building owners, both original and subsequent and regardless of building type.(3)

Spencer on Byron concerned a 23-storey building that had both residential and commercial uses, namely 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 owed duties to all owners, whether residential or commercial. This duty sprung from the local authorities' position of control and their obligation to ensure that all buildings were erected in accordance with the relevant bylaws and regulations.(4)

Court of Appeal decision

The Court of Appeal overturned the High Court decision. It unanimously distinguished the decision in Spencer on Byron and by majority held that there was no duty of care and that the trust had not specifically relied on the code compliance certificate.

Distinguishing Spencer on Byron

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.(5) In contrast, the present case involved only the issuing of a code compliance certificate and therefore concerned negligent misstatement and not general negligence.(6) Justice Miller noted further points of distinction:

• the trust were commissioning owners which had engaged professional advisers;(7)
• negligent misstatement required specific reliance to be proved;(8)
• the commissioning owners were not vulnerable because they had assumed specific control of risks through contract;(9) and
• the council had relied on the plaintiff's engineer's producer statements, which afforded reasonable grounds for the council to be satisfied of compliance.(10)

As a result, the court considered whether a duty was owed independently of the principles in Spencer on Byron.

No duty of care

Harrison and Cooper held that the council owed no duty of care. As a first consideration, it was not fair, just and reasonable to impose a duty of care to protect the trust from its own negligence. The defects were solely the result of the negligence of the professionals that the trust had engaged. The consequences of the professionals' fault could readily be attributed to the trust. It was therefore directly responsible for the design, construction and oversight of both the original and the remedial work and the ensuing loss. The trust could not argue that it was owed a separate duty of care to protect it against the same risks and indemnify it against the same loss.(11)

Further, Harrison and Cooper held that there was no relationship of proximity. They emphasised that negligent misstatement claims require the existence of a special relationship between the parties, where one party has assumed a responsibility as a matter of law to the other for the quality of its work.(12) For proximity to be established, the council ought reasonably to have foreseen that the other party would rely on what was said or left unsaid, and such reliance would itself have to be objectively reasonable.(13)

The trust had assumed direct control and relied on professionals that it had appointed to control the construction process.(14) It had specifically entered contracts for the purpose of guarding itself against adverse consequences.(15) The trust knew that:

• the council was not continuously present on site;
• the trust's agents controlled day-to-day performance and oversight; and
• the council was relying on its agents' advice about the nature and quality of the work.

Further, the trust continued to participate in the ongoing process designed to satisfy outstanding compliance issues after the code compliance certificate had been issued. It was clearly not relying on, nor would it have been reasonable for it to rely on, the council to protect it from loss.(16) Similarly, the council could not be taken to have understood that the trust would rely on the code compliance certificate without an independent inquiry.

Harrison and Cooper noted that the purpose of code compliance certificates is to give notice that the council is reasonably satisfied that a building is compliant. This is primarily to protect the health and safety of building users and secondarily to protect commercial interests, particularly those of subsequent or prospective owners, insurers and financiers. It is a crucial aspect of such situations that those parties have no control over the construction process or a means of protecting their interests.(17) A special relationship of proximity may arise in such circumstances. However, the assumption of responsibility did not extend to the economic interests of commissioning owners that chose to protect themselves against loss by engaging professional advisers.

Miller considered that the council 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. The council never assumed a duty to inspect the remedial works to ensure that they complied with the building code, but rather had intended to rely on the trust's engineer to certify compliance in a producer statement. As the council had insisted that the trust seek building consent, Miller reasoned that it must have known that the trust had expected it to insist that its engineer would supply a producer statement confirming that the work was code complaint.(18) However, the council had breached its duty by issuing the code compliance certificate without adequate evidence that consent conditions had been met and without receiving a satisfactory producer statement.(19)

No reliance

The court was unanimous that the trust had not specifically relied on the code compliance certificate, as required for a negligent misstatement claim. Instead, it had relied on its own agents. The trust was indifferent as to whether a code compliance certificate had been issued. It elected to open the stadium to the general public without obtaining a code compliance certificate for the specified remedial work. It was indifferent to the primary purpose of building safety and did not rely on the certificate for any other extraordinary or ancillary purpose.(20) Its request for a final code compliance certificate was generated only by a desire to satisfy liquor licensing requirements.(21) Finally, the trust had approached the remedial design engineer about their concerns regarding the roof despite the code compliance certificate and had decided to do nothing in response to the advice received.(22) The trust relied solely on its own experts rather than the council.(23)

Comment

This decision is a welcome one for local authorities, as it significantly restricts their potential liability for defective buildings. It also clarifies that local authorities do not, as a general rule, owe duties to all owners of all buildings, regardless of type, either in negligence or negligent misstatement.

It is now difficult to argue that local authorities owe duties in either negligence or negligent misstatement to commissioning owners which cause their own loss, either on their own or through negligent professionals. In those cases, the appropriate remedy for the building owner may be against the professionals themselves. Indeed, the High Court judgment was reduced by NZ$1,000,000 to reflect a contribution made by the trust's negligent engineer.

Plaintiffs relying on negligent misstatement with respect to a code compliance certificate, whether commissioning owners or otherwise, will have to demonstrate a special relationship for the purposes of proximity and specific reliance on the code compliance certificate in question. This is consistent with the broader policy that a local authority's duty of care in defective building cases should be restricted to those parties that are unable to control the construction process or protect themselves (except by relying on the local authority). Commissioning owners and developers which can control the building project, ensure compliance and reduce their own risk likely fall outside of the special relationship of proximity.

This position is in line with that in the United Kingdom, where local authorities do not owe a duty of care to building owners which fail to comply with obligatory building regulations through their contracted professionals' negligence. Instead, they are treated as 'negligent building owners' and the source of their own loss.(24) However, the decision shifts New Zealand's legal position away from Canada's approach, where commissioning owner negligence is considered a matter of causation or contributory negligence, rather than part of the duty analysis.(25)

The Supreme Court has granted leave to appeal the Court of Appeal's decision.(26) It has the opportunity to clarify the scope of a local authority's duty of care to building owners in light of the Court of Appeal's narrow interpretation of Spencer on Byron.

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 atwww.wilsonharle.com.

Endnotes

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

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

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

(4) Spencer on Byron, ibid.

(5) Invercargill City Council v Southland Indoor Leisure Centre Charitable Trust, ibid, at [165].

(6) Id at [166].

(7) Id at [69].

(8) Id at [71] to [72].

(9) Id at [74] to [77].

(10) Id at [82].

(11) Id at [178] to [185].

(12) Id at [175].

(13) Id at [176] and [188].

(14) Id at [190].

(15) Id at [195].

(16) Id at [191].

(17) Id at [189].

(18) Id at [87].

(19) Id at [100].

(20) Id at [199].

(21) Id at [206].

(22) Id at [116].

(23) Id at [200].

(24) Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1985] AC 210; Anns v Merton London Borough Council [1978] AC 728 (HL).

(25) Rothfield v Manolakos [1989] 2 SCR 1259; Ingles v Tutkaluk Construction Ltd 2000 SCC 12, [2000] 1 SCR 298.

(26) Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2017] NZSC 81.