In a landmark Supreme Court decision last month, the Court held that a Council's duty of care under the Building Act 1991 extends to non-residential or commercial buildings (Body Corporate No 207624 & Ors v North Shore City Council  NZSC 83 (11 October 2012) (Spencer on Byron)). Previous authority established that councils owe a duty of care when they inspect and issue code compliance certificates for residential buildings (which has generated a considerable amount of "leaky home" litigation). However, the Spencer on Byron decision paves the way for a new class of claimant.
The case concerned a 23 storey tower in Takapuna known as the "Spencer on Byron". The Spencer on Byron had 249 individually titled hotel rooms and six penthouse apartments. The building was leaky and remedial costs were estimated at $19 million. The body corporate and many of the individual owners brought a claim in the High Court alleging that the Council breached its duties of care when it passed the plans and construction of the building as compliant with the building code. The Court of Appeal struck out the claims and entered summary judgment for the Council. In doing so, the Court of Appeal followed its earlier decisions holding that local authorities' liability in tort for building inspection and certification for building code compliance does not extend to claims in respect of buildings for commercial use (Te Mata Properties Ltd v Hastings District Council  1 NZLR 460 and Queenstown Lakes District Council v Charterhall Trustees Ltd  3 NZLR 786, cases which involved a motel and a lodge respectively).
The Supreme Court decision
The Supreme Court reversed the Court of Appeal by a majority of four to one (William Young J dissenting). The Supreme Court held that councils owe a duty of care in their inspection role to owners (both original and subsequent) and that "the duty of care is owed regardless of the nature of the premises." (Chambers and McGrath JJ at ). Key reasons given by the Supreme Court included the following:
- There did not appear to be any sufficient principled basis for drawing a distinction as a matter of law between home-owners and owners of other buildings passed by the Council as code-compliant. The scheme and purpose of the Building Act is to provide all owners with an assurance of compliance through the building consent and certification process undertaken by the Council.
- Further, the specific provisions of the Act cover all building work and draw no distinction between commercial and residential buildings. In each case the Council controls the building process to ensure that it conforms with the building code, and in each case the person involved pays a fee to the Council for the inspection and other work it does under the Act. In each case it is foreseeable that carelessness on the part of the Council may cause loss to the present or subsequent owner.
- The functions performed under the Act sets up a relationship of sufficient proximity between the Council and building owners to give rise to a duty of care (indeed, the Act explicitly envisages tortious liability on the part of councils) and "the nature of relationship between the Council and owners of buildings does not differ according to the use to which the building is put." (Elias CJ at ). If, through want of care on the part of the Council, the system of assurance fails, then the owner is entitled to look to the Council for his loss, whether or not that owner is an owner of a residential property or a commercial property.
- A duty of care to owners of commercial buildings was not truly inconsistent with prior authority. Chambers and McGrath JJ (with whose reasons Justice Tipping and the Chief Justice agreed) looked at other Commonwealth case law and concluded that Commonwealth jurisdictions did not draw distinctions based on the nature of the building being constructed. "On the contrary, the duty of care owed by those involved in the erection of a building applied whatever the nature of the building." (At ). Reference was made to the Supreme Court's own recent decision in North Shore City Council v Body Corporate 188529 (Sunset Terraces)  2 NZLR 289 which confirmed the Council's duty of care in respect of "premises designed to be used as homes" (at ). The result of the Spencer on Byron decision is that that qualification ("designed to be used as homes") is removed.
In reaching its conclusion, the Supreme Court rejected a number of policy arguments raised by the respondent Council. Those arguments included that matters were more complex with commercial buildings than for a modest home. Specifically, the Council submitted that purchasers of commercial buildings are more likely to rely on experts such as architects and engineers, than they are to rely on the inspection and controls under the Building Act. The Court was not persuaded by this argument and took the view that the fact there might be overlapping duties owned by different potential defendants (i.e., the engineers, architects etc) was no answer to a claim based on loss caused by the Council's distinct fault.
Will we see a flood of new claims?
The outcome of this specific case means that the Spencer on Byron owners are able to continue their claim against the (former) North Shore City Council. More broadly, the case paves the way for commercial property owners to bring claims against councils where they believe that building defects ought to have been picked up in a Council's building consent and certification process. Perhaps unsurprisingly, this has caused some nervousness amongst local government that it might now be exposed to an indeterminate liability to an indeterminate class. However, addressing this "floodgates" argument, the Supreme Court pointed out that those to whom the duty is owed are the owners of buildings constructed under the supervision and certification obligations of councils while the Building Act 1991 was in force,1 and that councils' liability is confined to meeting the minimum standards of the code. (See, e.g., Elias CJ at ). In other words, it is only in the discharge of its own functions and to a specified class (those that have paid the Council fees for this service) that a Council is exposed to liability. Moreover, councils' liability is confined (under both the 1991 and the newer 2004 Acts)2 to a period of 10 years from the date of the act or omission on which the claim is based (for example, 10 years from the date a Council certified a building as compliant with the building code).
Though the Spencer on Byron decision will likely result in more leaky building claims against councils, whether or not those claims are successful will depend, in each individual case, on proving specific defects and establishing that such defects could and should have been picked up by the Council in its approval process.