Directors’ personal liability — new leaky buildings cases

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You may have noted in the New Zealand Herald recently, two cases reported of directors of development companies being held personally liable for water ingress issues.

One of these cases was Body Corporate No 199348 and Others v GCO Nielsen. The facts of this case were as follows:

• Between May 1999 and January 2000 a number of townhouses were erected at 3 Laxon Terrace, Newmarket, Auckland.
• The units were poorly built and the defective building work resulted in severe water ingress.
• There were a number of defendants to the claim brought in the High Court, including the Auckland City Council, Progressive Building Systems Ltd and others to recover losses alleged to have been suffered due to defects in the construction of the units.

• The council and other defendants settled the claims made by the Body Corporate and the individual owners. The council took an assignment of the rights of the Body Corporate and owners so that it could pursue claims against the remaining defendants, Mr Nielsen and Mr Wayne Scarrott. Mr Scarrott settled his claim.
• Mr Nielsen was the director of the companies involved in the development and construction of the units. He was sued on the basis that he personally assumed duties owed by the developers to property owners.

Key issue

The key issue to be determined by the High Court as regards Mr Nielsen was whether, in fact, he could be personally liable for all or any of the owners’ loss arising from this complex being a leaky building.

Prior to assessing the liability of Mr Nielsen, Justice Heath made the following findings of fact as to the role on site that was adopted by Mr Nielsen:

• He was the director of the development company with the primary responsibility of supervising construction. This extended to ensuring that the work of various trades was properly co-ordinated, and that the work was carried out in accordance with the approved plans and specifications.
• He would attend on site for at least two hours per day, usually in builder’s clothes. He would provide instructions for that day’s work to Mr Scarrott, who would then take responsibility for implementing them.

If a significant problem arose on site then Mr Nielsen would attend the site or speak by telephone to those responsible for undertaking the work, to provide direction on what should be done.
An example of this was given, being the decision about how many downpipes were to be put on the roof of each unit.

The Judge then looked closely at a decision involving Leuschke Group Architects Ltd and borrowed from the comments of J Harrison.
At paragraph 66 he states:

“In Leuschke Group Architects Ltd, J Harrison observed that the word ‘developer’ is not ‘a term of art or a label of ready identification’, unlike a local authority, builder, architect or engineer. His Honour regarded the term as ‘a loose description’, applied to the legal entity which, by virtue of its ownership of the company and control of the consent, design, construction, approval and marketing process, qualifies for the imposition of liability in appropriate circumstances”.

Intimately involved

Then further in the judgment, Justice Heath concluded that Mr Nielsen was intimately involved in the project, was responsible for giving day-to-day instructions on work to be undertaken, was instrumental in arranging for Mr Scarrott to have appropriate trades on site at relevant times, and had involvement in important decisions affecting the value of the completed units.

He was also responsible for reporting to his solicitor on when practical completion had been reached.
Therefore, it was held that as Mr Nielsen was in control of the site, he assumed personal responsibility for its oversight. He was found liable as a developer.

Judgment was entered against Mr Nielsen for the full amount of the settlement the Auckland City Council paid out, together with the shortfall from the settlement to complete the repair costs.

Important decision

So, this is an important decision in that it now means that individuals will find it difficult to hide behind the shell of their development company entity, where they come onto the site and are actively in control of that site.

However, the court did make it clear that had the companies of Mr Nielsen employed a project manager, then the result may have been quite different.