Tim Bates and Francesca Collins of Auckland law firm Legal Vision reveal good news for directors as a recent High Court decision declines to find a director personally liable for the faults of his company.
Last month we reported that directors of construction companies facing water ingress claims could, depending on the circumstances, be held personally liable for the deficiencies in the work carried out by their company.
While a number of High Court decisions support this premise, the very recent decision of Justice Harrison in the High Court at Auckland in Body Corporate No. 188273 & Others and Leuschke Group Architects Ltd & Others offers a very different conclusion as regards developers.
And until there is a definitive Court of Appeal decision on the issue, Justice Harrison’s judgment provides realistic hope that directors sued personally in leaky building proceedings, in particular those who have assumed a role as developer, can avoid liability.
Body Corporate No. 188273 involved 18 apartments in two residential blocks in Auckland. The apartments were found to suffer from water ingress issues, and proceedings were commenced against those parties considered responsible for the design and construction defects, namely the Auckland City Council, the architect, the builder and, in their personal capacity, the two directors of Colmark Developments Ltd (in liquidation) (hereafter referred to as “Colmark”).
By the time the case reached its hearing in the High Court at Auckland, the plaintiffs had settled the matter with all but one party, namely Cooper.
The sole remaining defendant, Cooper, was one of the founding directors of Colmark, the company which originally owned the apartments and was the purported developer of it.
Justice Harrison considered the meaning of the term “developer” and defined it as “the party sitting at the centre of and directing the project, invariably for its own financial benefit.
It is the entity which decides on and engages the builder and any professional advisors. It is responsible for the implementation and completion of the development process.
It has the power to make all important decisions. Policy demands that the developer owes actionable duties to owners of the buildings it develops.”
Counsel for the Auckland City Council advanced a number of arguments to support their theory that Cooper was a developer who owed a personal duty of care to the owners of the apartments.
In essence, they argued that Cooper and the other director only formed Colmark as an afterthought, a “vehicle” or mechanism to act for, and on their behalf, to carry out the development obligations, but that Cooper’s role as developer had already been created, and was thus, non-delegable.
Conversely, counsel for Cooper submitted that although Colmark was established two months after this project commenced, until that time Cooper had taken no positive steps as a developer.
In fact, prior to inception, Cooper had done nothing more than agree to participate through his shareholding in the company and undertake certain personal tasks including:
management of the development generally,
overseeing the development,
monitoring the construction process, and
finalising sale and settlement processes.
It was quite clear that the intention when forming the company was that Colmark, not Cooper, would be the developer.
In making his decision, Justice Harrison held that the directors were entitled to form Colmark to undertake the development, and that upon its incorporation, Colmark became the entity which assumed legal responsibility for, and controlled all aspects of, the development.
Cooper did not personally owe a duty of care to the owners — instead he had acted in accordance with his legal rights in forming Colmark along with the other director to obtain the personal protection available from incorporation.
Justice Harrison commented that although the decision may seem unjust or unfair, until Parliament radically reformed the Companies Act 1993, similar decisions will be reached.
A step backwards
This decision will no doubt be construed by leaky home owners as a step backwards in terms of making the actual individuals who create these defective buildings responsible for the consequent losses owners suffer.
However, it will impress believers in corporate structures and how the corporate veil should only be pierced in exceptional circumstances.
Having said this, this decision, while giving some hope to directors of developer companies, will not necessarily assist directors of building companies.
It will be interesting to see what the Court of Appeal decides as we are aware that the decision has been appealed by the council.
