New Zealand’s Joint and Several Liability Law Needs Changing

by | Jun 12, 2024

Poor legislation can significantly impact productivity and economic growth. New Zealand’s joint and several liability regime, particularly in the construction and agricultural sectors, exemplifies this issue. This system is not only unfair and inequitable but also creates massive inefficiencies, leading to negative consequences for both industries.

The Problem with Joint and Several Liability

Consider a typical scenario: a body corporate sues the developer, architect, engineers, builders, subcontractors, and the council over a leaky building, claiming that their combined negligence led to the loss. This situation is common not only in urban settings but also on farms, involving structures like cowsheds or farmhouses.

Under the current joint and several liability law, every defendant is liable for the full amount of the loss, irrespective of their actual contribution to the problem. This often results in the most financially stable defendants, often the least responsible, shouldering the entire financial burden when other parties cannot pay.

The Unfair Burden on Ratepayers and Farmers

As ratepayers, we indirectly end up providing insurance for building defects because councils, who are often the consenting authorities, become the “last man standing.” Consequently, the responsibility of construction quality and negligence of other parties falls on councils and, by extension, on us as ratepayers and farmers. Professional advisers and their insurers similarly become guarantors for the conduct of others over whom they have no control.

International Reforms: A Better Approach

Other regions, such as Victoria and New South Wales in Australia and various states in the United States, have introduced reforms to distribute liability more evenly. These reforms ensure that if a plaintiff selects the cheapest bid significantly lower than others, they bear some of the insolvency risk.

Economic Costs of the Current Law

There is a widespread misconception that councils and insurance companies, with their “deep pockets,” can easily absorb the full liability. However, this ignores the reality that such losses are ultimately borne by the community and farmers through increased rates and insurance premiums.

For instance, in New Zealand, insurance companies must reserve the full amount of a plausible claim, irrespective of the number of defendants. In contrast, in Australia, insurers can assume their clients will only be liable in proportion to their fault, resulting in lower reserves and, consequently, lower premiums. This discrepancy discourages foreign insurers from operating in New Zealand due to the high capital requirements, reducing insurance options and increasing costs for consumers.

The Broader Impact on Housing and Construction

New Zealand’s housing and building costs have skyrocketed, making homeownership unaffordable for the next generation. The extended time required for housing projects, from land purchase and resource consent to building consent and actual construction, exacerbates this issue. Houses that used to cost about four times the annual salary now cost around ten times, and this ratio is expected to rise further.

The fear of liability for issues like leaky buildings has turned council liability into a significant productivity bottleneck, creating a culture of excessive caution. This situation leads to unnecessary bureaucracy, with multiple inspections and delays, slowing down construction projects. For example, one builder had to undergo 26 inspections for a single house, while another faced six inspections for a farm shed.

The Need for Change

The current liability law hampers society by creating unnecessary red tape, stifling businesses and farmers, and fostering agencies that work at cross purposes with duplicated efforts. Bureaucratic organisations tend to be less creative, highly risk-averse, and resistant to innovation. They avoid accountability, contributing to a toxic work environment.

New Zealand’s joint and several liability laws urgently need reform. Adopting a fairer system of liability apportionment, similar to those in other countries, would alleviate the undue economic burden on councils, ratepayers, and farmers, fostering a more efficient and equitable construction and agricultural sector.