New Zealand company directors are increasingly exposed to personal liability for tortious wrongs committed by their companies. This runs contrary to the supposed immunity created by the formation of a limited company as the contracting party. The director’s exposure is amplified in cases involving building defects, particularly where the company in question is owned and controlled by one director.

Defective buildings background New Zealand courts have held that developers and builders owe duties of care to initial and subsequent owners of defective buildings. Often, damage caused by such defects occurs many years after the building has been completed or even sold on to someone else. By then, any companies responsible for its design or construction may have become insolvent or been struck-off the companies register.

In these circumstances, one (if not the only) remedy open to the building owner is to try and recover damages from the directors of the design or construction companies involved.

Recently, the number of such claims has increased substantially. This is due in part to: 

  • section 91 of the Building Act 1991 and section 393 of the Building Act 2004, which create a long-stop limitation period of 10 years from the date on which the alleged error or omission occurred; and 
  • the Weathertight Homes Resolution Services Act 2003, which set up a statutory system of mediation and adjudication to resolve disputes relating to what is known as the ‘leaky buildings syndrome’.

The statutory weathertight homes system of mediation and adjudication was established in response to a vast number of claims arising from residential buildings that had been constructed with untreated timber framing and thin plaster exterior cladding. These buildings then suffered widespread damage associated with water leakage.

The New Zealand approach

Since Callaghan v Robert Ronayne Ltd (1979) 1 NZCPR 98, the New Zealand courts have been prepared to hold directors personally liable for activities carried out on behalf of their company. The courts’ approach has been to enquire whether the actions of the director created – and then breached – a duty of care owed in a personal capacity to other parties.

In Trevor Ivory Ltd v Anderson [1992] NZLR 517, the New Zealand Court of Appeal held that a director’s liability depended on whether the facts showed that they had done more than merely act on behalf of their company. Instead, the director’s actions had to be of such a type and extent that the director should be treated as having assumed a duty of care towards the parties affected by the acts or omissions of the company. One of the appellate judges summarised the test as requiring “something extra” than the acts and functions of a director. This personal assumption of responsibility approach has been the accepted judicial test in New Zealand for more than a decade.

Until recently, personal claims against directors have had limited chance of success. This is because a plaintiff must prove that an individual director was closely involved with the acts and decision-making process that led to the defect. The plaintiff must also show that the director’s actions went beyond those of someone carrying out the typical functions of a company director to a level where that individual could properly be regarded as having assumed a duty of care personally to the affected party.

In two recent New Zealand cases – Hay v Dodds WHRS claim No 01917 (10 November 2005) and Dicks v Hobson Swann (unreported, High Court, 22 December 2006) – a tribunal and the High Court held that building company directors had, by their actions, assumed sufficient responsibility to owe a duty of care to the building owner. In the first case, the claimants were the second owners of a defectively built house. The director was the former owner of the land on which the house was constructed and the sole director of the company that built it. In the second case, the plaintiff had contracted direct with the defendant company to build the house which leaked to such an extent that it had to be demolished.

During the hearings, factual findings were made that the directors had been solely or primarily responsible for the building company’s selection of subcontractors and materials, and had also directed and managed the building works. The combination of the duties owed by the directors in their capacity as the former owner of the land and/or the controlling entity of the building companies was enough, the tribunal and the High Court said in their respective cases, to justify imposing personal liability.

The English approach

New Zealand courts’ focus on whether the acts of individual directors are sufficient to amount to a personal assumption of responsibility is slightly at odds with the approach in England. There, the House of Lords recently held in Standard Chartered Bank v Pakistan Shipping Corporation [2002] 3 WLR 154 (SCB) that a claim in deceit against a company director who was instrumental in making a false declaration based on a letter of credit could succeed. The individual concerned had acted within his scope as a director of a company, but he was nevertheless held personally liable.

The House of Lords decided that the necessary elements of the tort of deceit (personally making the fraudulent misrepresentation, intending the bank to rely on it and subsequent reliance on that misrepresentation by the bank) had been proved. The law lords ruled that the personal nature of the acts in question – and the director’s close involvement in the commission of those acts – was sufficient to make him (as well as the company) liable.

This liability was not imposed because the individual was a director or because he had assumed responsibility. It was imposed because his actions amounted to the tort of deceit. If he had been a manager or an employee of the company, he would have been clearly liable. That being so, the House of Lords refused to accept that he could potentially escape liability merely because he happened to be a director of the company.

Deliberate and unintentional civil wrongs

The House of Lords’ decision in the SCB case was based on a claim involving the intentional tort of deceit. For now anyway, the approach adopted in SCB can be confined to such intentional torts. These require a greater level of personal involvement and control than unintentional torts such as claims in negligence. This makes it easier for courts to come to the conclusion that the individual’s actions (and particularly their intentions) amount to an assumption of responsibility. Most claims in tort are not based on intent.

The act or omission giving rise to the claim is often unintentional but still allegedly wrong because it fell below the appropriate standard of care and was negligent. For this reason, the director’s negligent act alone is insufficient to make that person liable. The approach taken by New Zealand courts considering claims in tort against a company director focuses on whether the director has, by their acts or advice, assumed responsibility towards the claimants.

This differs from the English approach – at least in the case of intentional torts – which does not expressly require a finding of assumption of responsibility. Instead, the English approach concentrates on whether the claim in tort against the director (involving a factual enquiry to see if a duty of care was owed, and breached, and whether any other issues should limit liability) is made out.

A test based on whether a director owed and breached a duty of care will always involve a factual enquiry as to whether, by his actions, the director assumed responsibility towards the plaintiff. If the enquiry is restricted to whether there was sufficient proximity to give rise to a duty of care, this degree of contact or connection will often be enough.

In those circumstances, if a New Zealand court adopted the same approach as the House of Lords in SCB, it would not need to embark on the further factual enquiry as to whether the director’s actions amounted to something extra than the typical or ordinary actions of a director to determine whether he owed or breached a personal duty of care.

The obvious distinction between the two approaches is that one involves a ‘knowing’ tort claim, where the test for liability only requires an assumption of responsibility, while the other involves an ordinary or unintentional tort claim where unusual, out of the ordinary or extra conduct is required to impose liability. But in cases where the corporate entity is insolvent, there is always a temptation to shift the burden on to a director. This might encourage a court to blur the distinction between these two different tortious claims. If the liability enquiry concentrates solely (or even primarily) on whether responsibility has been assumed without examining the extent of the director’s conduct, the prospects of that director being held liable will increase.

Limiting the SCB approach

New Zealand courts are still influenced by English decisions, particularly those from the House of Lords. Unless the decision in SCB is restricted only to knowing torts, there is a danger that courts may be persuaded that the SCB approach should apply to all personal claims against directors without the need to look for ‘that something extra’ in the director’s conduct or, alternatively, that they may end up accepting a lower threshold of such conduct.

The simple fact that an individual also happens to be a company director does not make them a protected species. For example, it is difficult to conceive of any credible reason why their exposure should be different from, say, individuals who are employees of the company. However, the law has long recognised that a limited company is a separate, distinct legal entity and that its directors are entitled to carry on ordinary business on behalf of that company, enjoying immunity from personal claims.

Any relaxation of the approach to determine when, and in what circumstances, a director is personally liable is an erosion of that immunity. This is likely to happen if the courts blur the distinction between intentional and unintentional torts and the need to look for that something extra in the director’s conduct. The end result will be that more company directors will be held liable for ordinary activities carried out on behalf of their companies. Plaintiffs who would otherwise be unable to make any (or only a limited) recovery will welcome this trend. But it will have significant implications for individual company directors – and their insurers.