By Timothy Bates of Auckland law firm Legal Vision
In this month’s article I wish to discuss a long-standing debate as to whether the current principle of “last man standing” in multi-party litigation ought to be replaced by some other method of joint liability assessment.
Territorial authorities and/or their insurers have often complained that this principle has led to them meeting a disproportionate amount of liability, because in the context of leaky building claims, they are often found to be the last entity standing.
This issue was addressed by the Law Commission in 2012 and 2014. The accountability of tortfeasors (wrongdoers) in New Zealand is underpinned by the “joint and several” liability rule, which is used to determine the liability of multiple parties in tort (negligence) law, and how costs are allocated among them.
Tort law is primarily concerned with ensuring an injured party is fully compensated (“made whole”) for damage or loss caused by negligent parties.
The “joint and several” rule has raised concerns among the building sector about fairness, risk aversion, risk avoidance and cost.
It is important to set out how the rule works. If a leaky house is built, and the council, the builder and the developer are all found liable for the entirety of the cost to repair the leaky house, the home owner can seek 100% of the liability from a party of its choice.
Typically, the home owner would seek the full 100% from the council, and leave it for the council to seek the various apportionments from the other parties.
In particular, underlying the judgment will be apportionment of liability in respect of the three parties. Potentially, the council might attract 20% apportionment, the builder 40% apportionment, and the developer 40% apportionment.
Section 17 of the Law Reform Act 1936 provides for contribution between multiple parties for the same damage. Alternatively, equitable contribution can be claimed.
Various alternatives to joint and several liability have been considered, but proportionate liability was considered the most viable replacement. It is now in place in most Australian states.
Under proportionate liability, negligent parties are only required to contribute a set proportion. The court determines the set proportion based upon the extent to which each negligent party was liable for the plaintiff’s loss.
In the example set out above, the council would only be liable for 20% of the liability no matter the solvency of the other parties. Where a liable party is insolvent, then the victim bears the loss.
But proportionate liability was not advocated for in the Sapere Report, a specialist report commissioned by the DBH in April 2011.
For proportionate liability to work and not impact too negatively on consumers, it would need to be accompanied by comprehensive mandatory home warranty insurance.
This would help ward off the vulnerability of the victim not being able to recover all of his or her loss because one of the parties is not able to meet its proportionate liability.
This is known as the “empty chair” phenomenon. If a development company is no longer in existence, it is not going to meet its 40% proportionate liability.
But the insurance can be expensive and burdensome — the policy may require consumer exhaust recovery actions before an insurance pay out — and policy exclusions may limit cover. The solvency of insurers can be unreliable as well.
In addition, insurers in the New Zealand marketplace are reluctant or disinterested in providing this type of cover.
The conclusion reached in a briefing paper from the Minister of Building and Construction to Cabinet was that there was not sufficient benefits to come from a proportionate liability system to justify moving away from the joint and several liability scheme.
Whilst it is important to acknowledge the legitimacy of territorial authorities’ claims that proportionate liability would take away findings where they must pay where others refuse to or are unable to, it noted that any misalignment between joint and several liability in the building sector was also caused by the laws of insolvency and bankruptcy, and specific conditions in the construction sector.
The policy choice as between joint and several liability versus proportionate lability comes down to a “choice between a liable defendant having the risk that a co-liable defendant will not be able to pay their share, or the plaintiff bearing that risk”.
The Law Commission, as recently as 2014, has concluded that protection should continue to be afforded to the innocent party. Liable defendants who have actually caused the harm should bear the risk of the “empty chair”.
Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision or Building Today to anyone who relies on the information contained in this article.