LIMITATION DEFENCES AND LEAKY BUILDINGS

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1 BuildLaw: Limitation Defenses and Leaky Buildings Page 1 LIMITATION DEFENCES AND LEAKY BUILDINGS Brad Spiers, Associate, Simpson Grierson A recent High Court decision makes it more difficult for respondent parties in leaky building claims to strike out negligence claims against them under the Limitation Act This decision will be welcomed by owners of affected properties, especially those who may have delayed bringing a claim because they did not initially appreciate the significance of their homes' problems. The test: when does time start running? Under section 4(1) of the Limitation Act 1950, a claimant is prevented from bringing a claim against any respondent if the "cause of action" accrued more than six years before the claim is made. For claims based in negligence, the cause of action accrues when "damage" arising out of the negligence occurs. The Privy Council in Invercargill City Council v Hamlin said damage occurs when: "the cracks become so bad, or the defects so obvious, that any reasonable home owner would call in an expert that marks the moment when the value of the building is depreciated, and therefore the moment where the economic loss occurs". This test was echoed by the Court of Appeal (COA) in its 2007 decision, Pullar v The Secretary of Education: "It is now well established that, where through negligent construction, design or inspection, damage occurs in a building, its cause being obvious, any cause of action which may exist accrues when the damage becomes manifest. That is because from that point economic loss occurs, as the market value of the building would then be affected". The recent High Court Case of Burns v Argon Construction means that parties may no longer be able to rely on the Limitation Act to strike out negligence claims. Pullar involved a leaky school library. The COA found that the Secretary of Education's claims against a building contractor were time barred because defects around windows were "readily apparent" more than six years before proceedings were issued. It applied the Hamlin test bullishly, saying that it was not necessary to be able pinpoint with precision the exact cause of every defect for time to start running. The emphasis was to determine when the market value was depreciated. The COA held that this occurred in 1998 when the Secretary obtained an expert's report that detailed the defects and recommended remedial work.

2 BuildLaw: Limitation Defenses and Leaky Buildings Page 2 In reaching this conclusion, the COA overturned and criticised the decision of the High Court. The High Court judge felt that he could not confidently state that the cause of action had accrued in 1998 because (despite the existence of the expert's report) "there was still some uncertainty, at the time, as to the extent of the problem. The COA said that this was the "wrong test". The critical consideration was, rather, to determine "when economic loss occurred: when was the market value of the building affected?" The COA had no hesitation in saying this coincided, at the very latest, with the 1998 expert's report. On the back of Hamlin and Pullar, the commonly held view was that a leaky home owner's cause of action arose when the leaking caused visible damage (ie cracks, rot, delamination, bubbling of paint etc). This was often confirmed by the point at which the homeowner would respond by either carrying out repairs or "calling in" an expert to investigate. The application of the rule in this manner has generally been viewed as defendantfriendly, as many owners of affected homes took such steps well before the problems associated with leaky building syndrome were understood. This meant some owners received poor advice and carried out inadequate repairs, only to find that by the time the problems re-emerged, the six-year window for bringing a claim had closed. The commonly held view is that a leaky home owner's cause of action arises when the leaking caused visible damage as homeowner would respond by either carrying out repairs or "calling in" an expert to investigate Burns v Argon Construction Ltd This recent High Court decision involved an appeal of a decision by the Weathertight Homes Tribunal (WHT), where the Adjudicator struck out a claim by Mr Burns and the other owners against Argon on the basis that the cause of action arose more than six years before they brought their claim. The claimants carried out substantial renovations to their property in Before the renovations were complete, a leak was found in a ground floor bedroom. They consulted a building expert, Prendos Ltd, and two reports were prepared which identified a significant number of defects and recommended repairs. These repairs were substantially carried out as renovations continued. Several years later these works were inspected by the Auckland City Council and a code compliance certificate was issued on 25 July In late 2003, the claimants noticed further signs of leaking, and after repairs did not alleviate the problem, they applied to (what is now known as) the WHT on 28 May In the WHT, the Adjudicator had no hesitation in striking out the claimants' claim. They had, after all, called in an expert in 1997, The Adjudicator struck out the claim on the basis that Burns had called in an expert more than 6 years before the claim was filed who had identified virtually all of the defects. more than six years before the claim was filed, who identified virtually all the significant defects. Accordingly, the Adjudicator

3 BuildLaw: Limitation Defenses and Leaky Buildings Page 3 held that the market value of the property was affected in 1997 and the limitation clock started then. In the High Court, Justice Asher agreed with the Adjudicator's factual findings that most (21 of 25) of the defects affecting the property were identified by Prendos in 1997 and that the market value of the building was affected that year as a consequence of the defects. However, in his view, the enquiry into determining whether the claim was statute-barred should not stop there. Firstly, Justice Asher said that identifying the defects was not, in itself, sufficient. It was also necessary to identify their cause. As there was evidence that the defects arose out of the inherent design problems associated with the direct-fixed monolithic cladding, which have only become understood as a consequence of the leaky building crises, it could not be said, in Pullar-terms, that the cause of the defects was obvious when the defects were first discovered. The 1997 reports did not criticise the design system and the Council "signed off" the system in In addition, the fact that the repair required a cavity system at a far greater cost than the comparatively minor repairs recommended in the Prendos reports, indicated that the actual problem was not appreciated in Secondly, he said it was arguable that the time delay between the discovery of the initial damage in 1997 and later damage in 2004 was sufficient to treat the later damage as distinct and giving rise to a separate cause of action. Citing two COA decisions from the 1970's, Bowen v Paramount Builders Ltd and Mt Albert Borough Council v Johnson, he said that a new cause of action could arise from damage attributable to an underlying cause if that underlying cause was not understood when repairs were initially carried out. He said there was nothing unfair in this reasoning; it simply allowed a party to pursue a claim against a builder for defects when the underlying cause was established. To deny otherwise would itself be unfair. In this case the claimants relied on the 1997 reports in good faith and yet they were not alerted to the inherent pitfalls associated with the direct-fixed design. Justice Asher considered that identifying the defects was not in itself sufficient and it was arguable that the time delay between the initial damage and the later damage was sufficient to treat the damage as a separate cause of action. Finally, as most but not all of the defects were identified in 1997, Justice Asher held that it was not appropriate to exclude the possibility of separate causes of action arising in relation to each "new" defect. On this approach, he thought it was hardly feasible to be able to determine in a strike out application which defects were discovered in and out of time. Therefore, to summarise, although Justice Asher agreed that the Adjudicator was correct to find that a cause of action accrued in 1997, it did not follow that the claimants claim against Argon was time-barred because it was arguable that:

4 BuildLaw: Limitation Defenses and Leaky Buildings Page 4 A potential underlying cause of the defects (an inherent design problem) was not understood at the time; A new cause of action arose when further leaks and rot were identified in 2004 (meaning the limitation clock starts again); Separate causes of action arose in relation to any defects not identified outside the six-year timeframe. What this decision means This decision means that it will be significantly more difficult for respondents in leaky building claims to successfully apply for removal on the basis of a six-year limitation defence based on discoverability of defects. Justice Asher has changed the focus of the limitation enquiry away from the point at which a building displays outward signs of damage to the point at which the actual cause(s) are understood. Therefore, even if the home-owner "calls in" an expert to investigate, that alone may not be decisive. The cause must be obvious. A home-owner who receives bad advice from an expert will not, therefore, be disadvantaged by the mere involvement of the expert more than six years before lodging their claim. Justice Asher has changed the focus of the limitation enquiry away from the point at which a building displays outward signs of damage to the point at which the actual cause(s) are understood Also, by associating the cause of the defects with the inherent problems associated with direct-fixed monolithic cladding, and requiring that the cause be obvious before time starts ticking, it is difficult to see how the cause of action could ever accrue before 2002 when the leaky building crisis first emerged. But even then, the problems with the direct-fixed system were not immediately clear. The Building Industry Authority did not require a drained and ventilated cavity behind stucco solid plaster until 2004 and Parliament did not pass the revamped Building Act until later that year. Taking this test to the extreme, one could say that the causes are not obvious until after a home-owner has applied to the WHT and received their free assessor's report! What about the market value test? It might be difficult to see how Justice Asher's decision is compatible with Hamlin and Pullar, whose tests were plainly focused on ascertaining the point at which the market value of a property is affected. Understanding the underlying cause of leaking or knowing with precision every single defect is not

5 BuildLaw: Limitation Defenses and Leaky Buildings Page 5 essential to this enquiry (as was stressed by the COA in Pullar). A home that displays obvious signs of rot has an affected market value notwithstanding any failure to understand its latent problems. However, Justice Asher distinguished Pullar on the facts: it involved a case where the causes of the defects were obvious, whereas the same could not be said for the problems affecting the claimants' property. But this might be considered a rather artificial distinction. Pullar also involved a leaky building, and the Secretary had argued that time should not start running because the underlying causes of the leaking were not properly understood in While this submission was accepted by the High Court, the COA largely dismissed it as being beside the point. The focus of the COA's judgment was to determine the point when economic loss occurred (i.e. when something was "obviously wrong") and not the point at which the underlying causes were obvious. This decision has thrown many an unexpected life-line as claims that were previously out of time may now be within time.. Conclusion By restricting the approach in Pullar to cases where the causes of leaking are obvious, this decision has thrown many claimants an unexpected life-line. Knowing where and how to trace and find the cause of leaks has been a dilemma facing man since the beginning of time! Leaky building syndrome itself remains a conundrum of building science. It would take an extremely bold Adjudicator to state confidently that a claimant owner today had this high degree of understanding more than six years before lodging their claim. At the very least, this decision virtually rules out an Adjudicator's ability to remove a respondent on discoverability grounds at any stage before a full hearing of the evidence.