RISK MANAGEMENT
Legal Issues & Risk Management

CONTENTS:  This Webinar (September 2022)

LEGAL AND QUASI-LEGAL ISSUES

Negligence

Duty of care in contract

Unlimited exposure to domestic claims

Duty of care in tort

                Limitation defences       

                Joint & several liability

                Copyright

                NZRAB complaints procedures

Negligence

Failure to exercise reasonable skill, care and diligence.

Doing what others in similar circumstances would not have done.

Failure to do what others in similar circumstances would have done.

Negligence test

• Was a duty of care owed to the claimant?            
  • Was that duty breached?
  • Did the claimant suffer a loss
  • Was the loss caused by the defendant?
  • Was the loss reasonably foreseeable?

All questions must be answered YES for claim to be established

Defences available

• If one of the above five questions is answered NO
  • The claim is contractually barred (time or money)
  • The claim is statute barred (time limitation, etc)
  • The claimant contributed to the loss.

Duty of care in contract (1)

•  Described in the contract: 

                hence importance of having written engagement terms

                and having them signed and returned by the client!

• Described in the Building Act s14D  (responsibilities of designer) Responsible for ensuring that plans and specifications or advice (if followed) will result in compliance

• Domestic projects:  described in the Consumer Guarantees Act:

                done with a reasonable level of skill and care

                fit for the purpose you and the customer agreed on

                cost a reasonable amount, if a price wasn’t agreed beforehand

                completed in reasonable time, if timeframe wasn’t set before.

Duty of care in contract (2)

•  Domestic/Residential projects:

Under Consumer Guarantees Act, a $ limitation cap included in the terms of engagement (i.e. contract for service) for a residential project will be of no effect:  the liability cannot be capped.

In relation to residential contracts, the minimum/default building contract terms are set out in s6 of the Building (Residential Consumer Rights and Remedies) Regulations 2014, but under s362B of the Building Act, these do NOT apply to design.

Duty of care in tort

A tort arises when a party owing a duty of care to others breaches that obligation, and that breach results in a loss (or “damage”) to those others. Scope is established by case law, not (generally) by legislation

To whom do you owe a duty of care in tort?

It depends!  Basically, anyone who might foreseeably be affected by your actions

When does a duty of care arise?

It depends!  But if you are involved in your professional capacity, you are                                             expected to have regard for the interests of those affected by your actions, to the      extent that others in your profession would, if placed in a similar situation.

Duty of care in tort – Examples

Example 1 – Concurrent claim in contract and in tort: The architect designs a defective building, which the client on-sells to others. The new owners could bring a claim for damages against the client in contract (pre-sale representations) and against the architect in tort (duty of care to owners/users of the building).  The client could bring a claim against the architect in contract (design/observation failures), and in tort (duty of care extended beyond contract to include owners/users of the building).

Example 2 – Duty to Warn:  An LBP Carpenter was working as an employee for the non-LBP building contractor who was “cutting corners” in a house weathertight remediation project.  The LBP Board decided that the LBP had a duty to inform the owner that some of that work was inadequate or defective. The Board had regard to the significance and potential outcomes arising out of the defective work.

Example 3 – The Disappearing Developer:  Apartments and townhouses have been the source of numerous NZACS claims.  It is not unusual for the developer to be unable to fulfil a later claim by the new owners. The architects or designers (and the Council) are routinely called upon to make up the shortfall, on the basis that they owed a duty of care to the purchasers.

Joint and Several Tort Liability

                The Claimant:

• may seek full recovery from each or any parties that contributed to the damages.
  • is not (usually) concerned about who pays (if anything) to make up settlement sum.
  • cannot claim more than their actual loss, nor for any loss caused by their own negligence.

                The Designer/Defendant:

• is liable to the extent that they contributed to the damages.
  • is potentially 100% liable for the damages arising out of the design defects.
  • if not engaged for site observation, will not be liable for construction defects
  • if engaged for site observation, will be liable for the damages which arose as a result of their failure to observe, and take action

Joint and Several Tort Liability – Examples

Example 1 – Insolvency:  In a leaky building claim, all the defects were the result of poor construction.  The Council had signed off CCC.  During remediation, it became clear that the original building inspector should have picked up the defective work. The owner sued all and sundry, but only the Council had the funds available to meet any settlement.  The ratepayers paid for all of the remediation.

Example 2 – Inadequate detailing: Similar scenario, but the builder was still in business and had meagre assets. The designer had nothing to do with appointing the builder or attending to the construction phase of the project.  But the designer had failed to detail a critical junction, and the builder’s solution was the reason for the leaks. Settlement was proportional: 15% builder, 15% designer, 70% Council.

Example 3 – Contributory Negligence:  The designer had detailed the relationship between the garage door jambs and the strip drain across the garage door intended to catch surface water flowing down the drive. Damage was caused because that detail was not followed on site. But photos showed that the owners had failed to dispose of fallen leaves and failed to clear the strip drain, with the result that the same flooding and damage would have occurred regardless of the builder’s faults.  Remediation costs were apportioned accordingly.

Limitation Defense (1):

In relation to “building work” claims:

• usual liability is 6 years from the time the work done      (diagram = “A”)
  • possibility of a 3 year “late knowledge” extension.                (diagram = “B”)
  • 10 year longstop is provided by the Building Act            (diagram = “C”)

Limitation Defense (2):

In contract:

Legal proceedings related to a breach of contract cannot commence after 6 years from the date of the act of omission.

Shorter limitation periods may be contractually agreed, but insurance cover will not respond to claims with a contractual limitation period beyond the statutory 6 years.

In tort:

Legal proceedings cannot commence after 3 years from when the facts giving rise to the claim were known or ought reasonably to have been known. 

Copyright

• Generally, the person who commissions a work owns the copyright. 
  • NZIA AAS terms reverse that:  the architect owns the copyright, and the client has the right to use the design for the purpose intended by the engagement agreement. 
  • If you don’t have a signed AAS agreement, you may not be able to assert copyright.

Copyright:  Examples

• AAS not signed: Architects had a specific agreement with clients which included terms that their project was to be unique.  The AAS was part of the agreed terms, but it was never signed.  The clients brought a copyright claim on the basis that their design was later used elsewhere.
  • Copyright assigned?  A project was designed by a director of a firm, who then left, taking the construction phase of the project with him.  A dispute arose over whether the copyright in the design was also transferred.
  • Product replication: A firm issued tenderers with a photo of a furniture item they required to be included in the priced contract.  The furniture designer claimed on the basis that they alone were to be the only possible suppliers of that item.

NZRAB Complaints

The test is negligence, NOT gross negligence.  This may be a low bar, and the complaint may proceed ahead of other dispute processes which might have confirmed the facts, circumstances and contract responsibilities.  It costs a client very little to complain, but involves a LOT or effort and angst to defend.      

BEWARE!

NZRAB Complaints – Examples

Example 1 – Testing the evidence:  The architect advised the client that alterations to their cross-lease property would require approval of the neighbours.  That did not happen.  The client held the architect liable for the resulting problems and the architect conceded in the hope of avoiding punitive costs of the NZRAB process.  When the case was properly tested in preparation for a Court hearing, it became apparent that the complainant’s assertions would have failed.

Example 2 – Leverage:  The architect designed two townhouses for the client:  one for profit and one for occupation. The client’s expectations did not match the commercial realities and they sought to cut their losses by seeking recovery from the architect on the grounds of poor performance.  Their chosen route was to lodge an NZRAB complaint (at minimal cost) as a prelude to court action and/or to gain concessions that might make court action unnecessary.

Example 3 – Having your own cake and eating it too:  The clients engaged the architect for design/observation/contract administration.  The documentation was done accordingly.  The clients then sought to cut costs by curtailing the construction-stage attendances of the architect.  This resulted in unresolved detailing, uncoordinated variations, cost escalations and intermittent site visits by the architect.  The NZRAB complaint was partly initiated because the architect declined to issue a practical completion certificate.

CONTENTS: 

5 KEY RISKS

            Communication

            Information

            Performance

            Money

            Partial Services

PROFESSIONAL INDEMNITY INSURANCE

NZACS CLAIMS EXAMPLES

Communication                

Engagement terms & scope of work

Changes to design brief  – consequences

Objectives:  Client, Architect, Consultant, Contractor 

Information              

Site and site controls;  covenants, cross-leases

Client & contractor history, priorities, expectations

Performance   

Yours:                                    design, observation, administration, estimates

Consultants:                        skills & resources, timing, communication

Contractors:                        attitude, capacity, timing, communication

Materials:                            limitations, junctions, costs, warranties, moisture

Project Manager:              passing the buck?

Money                          

Budgets and estimates

Variations, monetary allowances, unknowns

Payments versus progress and performance

Contractor insolvency

Fees disputes & lack of goodwill or empathy

Partial Services           

Documentation versus site requirements

Inability to pick up issues or control outcomes

Loss of relationship with project and client

Defence of claims without first-hand knowledge

PROFESSIONAL INDEMNITY INSURANCE

• Responds only to risks arising out of the normal course of business
• Does not respond to contracted risks beyond those normally accepted
• Long tail (tale!):  Liability may not be quantified until years later
• “Claims Made” basis:  Policy must be current when events which give rise to a claim first become known to the insured.
• Policy holder has a duty to notify as soon as circumstances are known
• Policy holder has a duty to assist in the resolution of the claim

NZACS

• A co-operative run by and for architects, with group purchasing power and ability to influence PI policy terms.
• In operation 50 years, now covers 70% or more of architecture firms + some designers
• Claims Committee is available to assist members with actual or potential claims, and to provide architectural experience to their resolution by the insurers.
• Publishes Communique – advice and guidance in Risk Management
• Website resources at www.nzacs.co.nz

NZACS CLAIM EXAMPLES: 

Communication

1. Architect appointed to major upgrade/refurbishment project spanning several years, multiple revisions of design brief by a changing client management team:  design required to evolve with aspects of the work uncovered during construction.  Project manager appointed after site operations started:  later multiple problems because context and responsibilities changed and not reliably documented by the parties.  When it comes to a claim, what is in writing is what counts!

• Architect sends terms of engagement and fees proposal to client;  client instructs the work to proceed (either directly, or by actions in continuing to review and comment on the design) but never actually signs and returns the service contract, or continues to debate its terms.  Architect proceeds in good faith.  Project terminated because:  (a) the designs are never going to meet expectations or (b) getting the required resource consent is too hard or (c) costs are running ahead of budget or (d) divorce is pending or (e) commercial reasons do not support the investment or (f) anything else!  Client then says fees are not payable because the contract either was never signed or because the architect had failed to perform;  architect discovers that copyright may be unenforceable because the contract was not signed;  architect discovers that the interest provisions on unpaid fees may also be voided.

• A “novel” design feature fails.  Architect digs out several emails to prove that the client was fully aware of the risks and chose to proceed with the design feature.  Client digs out just as many (and perhaps some of the same) emails to prove that they were “talked into” the design feature by the architect.  It is unclear who actually made the decision and on what grounds, but the client’s view prevails on the basis that they relied on the architect’s advice, and the architect had the professional duty to make prudent design decisions.
• In housing work, the maximum stress level is reached when the construction is almost complete, the client can only see the defects and uncompleted work;  they are stressed out by the endless decisions and costs;  the builder is already overdue and being pressured to start the next project:  the dream is now reality and it may not be perfect.

• Be aware that if you “recommend” a builder, the client may think they can hold you responsible for their performance.

• If you elevate your concept of priorities over those of your client, there is a risk it may backfire.  Examples:  The design featured the architect’s selection of views, but when the clients went on site during construction they discovered that their requirement for expansive views had been ignored.  Another where the architect “expanded” the client’s design brief (and budget) to include work not asked for.  Many cases where the architect’s idea of aesthetics has not matched the client’s availability of money

Information

Exceeding building height:

1. Can be especially contentious in domestic circumstances where neighbours may be concerned about the effects of new work on their sun/views/values.

• House alteration designed to maximum height envelope:  existing construction required the overall height to be slightly raised above expectations.  Neighbour complained, and the framing had to be removed and the new top floor redesigned.

• Misunderstanding about the position of the boundary, and therefore the height control planes:  was the actual boundary at the bottom or the top of a change in level or retaining wall near the boundary?  A similar case where there was a misunderstanding about the boundaries in relation to an adjacent accessway:  which side of the accessway generated the height planes?

• Commercial premises designed to the maximum envelope but the height controls were then exceeded by services installations designed by others.

Site Services

• Development of residential rear site required drainage to be run through the neighbour’s property.  Client on good terms with the neighbour and instructed the design to proceed.  Neighbour later refused to give consent, and the client claimed on the architect (and refused fee payment) on the basis that the project had to be abandoned. 

• Building project required piles in vicinity of known subgrade services.  Services plotted and test bores sunk.  Despite best endeavours the piles or test bores unexpectedly encountered the services either not where they were understood to be, and/or whose existence was unknown.  Examples include:  shutting down an area of city electrical supply;  filling a substantial sewer with pumped concrete;  puncturing a water main;  breaking up a major stormwater pipe;  structural redesign to bridge over services or reposition bearing structure. 

Site levels/boundaries/covenants

• No clear datum for floor levels shown on the drawings, but lid levels of manholes and sumps shown.  House slab level clearly shown, and adjacent retaining walls were dimensioned but the level at their base was not.  Builder built the retaining walls to required dimension and then set out the house from the derived height:  house floor 250mm too high.

• Rural house designed to specific slab level and submitted for building consent.  Council required increased slab level approx. 300mm above surface water flow path.  House framed up to roof level and council pre-clad inspector noted that the builder had set out the slab level from priced drawings instead of the consented drawings. 

• Site is subject to both local body setbacks and covenants recorded on the title or terms of sale.  Examples:  Architect assumes (or decides) that one or other of the controls either supercedes the other or is not required to be complied with:  this results in a major redesign and damages paid to affected parties.  Others where the architect advised the clients to gain the approval of neighbours but proceeded without confirming that the necessary approvals had been given and recorded in writing.

Performance

Engineering consultants

1. Confusion about who is to detail/specify foundation waterproofing or grades versus floor levels. 
2. Engineers being overly specific about scope of work, leaving gaps (in observation particularly) that the architect is not aware of.  Example – termination of foundation tanking at ground level not protected or perhaps allows water to enter behind it.
3. Survey/geotech input which does not go far enough out from the immediate area of work.  Examples:  survey stopped at boundary, so the architect was unaware that the overland flow path was restricted = bottom floor of house built in a puddle;  another where engineered fill under a house washed out because of flowing subsurface water.
4. Conversely/similarly, engineer is required to observe as part of BC requirements, but architect is not:  engineer fails to spot/report architectural issues which might appear self-evident, and architect gets lumbered with the outcome.  Example:  foundations boxed up and reinforcing placed and inspected by the engineer, but an error in the setout in relation to an existing building or boundaries is not picked up and is blamed on the architect’s drawings.
5. Structural detailing (or approval of shop drawings) which requires a change to the architectural detailing, or which compromises acoustic design or vapour barriers, or creates thermal bridging, but which is not made apparent to the architect.
6. Services engineers – typically works not performing to required standard, or corrosion problems – swimming pools especially!
7. Late delivery/changes of structural work which then requires downstream alteration of other design work.
8. Errors in calculations of lintel deflection, cantilevered slabs, wind loads, capacity of existing structural work to carry proposed new work.

Tolerances and detailing

1. Inadequate allowance for lintel deflection in the pursuit of minimal detailing:  large sliding windows couldn’t.
2. Joinery using solid timber sections as panelling did not sufficiently accommodate timber shrinkage/warp/movement.  (Similarly, veneered MDF joinery panels with one “feature” side and another thinner laminate on the reverse which warped accordingly).
3. Concrete structural items designed on the assumption that specified cement or reinforcing would be used, or end-seating as designed would be provided;  failure occurred because there was insufficient on-site monitoring and/or inferior products were substituted by the contractor.
4. Technical issues with special places or spaces that require special attention:  Indoor pools and gyms;  coastal or geothermal environments;  localised wind or weather conditions;  animal accommodation;  laboratory pressure differentials;  acoustic separation or isolation;  wet area tiling and associated balustrade installations;  inbuilt fireplaces;  concealed gutters and low-pitch roofs;  materials or details which require secondary protection;  exposed polished concrete floors;  concealed spaces subject to potential condensation or cold bridging;  remediation/recladding or leaky buildings;  flooring slip hazards,  plus many more!!!!

Money

Cost estimation    

• House client instructs design work to proceed on the basis of a prospective contractor’s guesstimate based on concept drawings.  Final design costs considerably more and the previous contractor refuses to become involved:  architect accused of embellishing the work and adding costs.
• Very expensive house;  client expands the budget significantly, but the cost of the final design as tendered is still well above that:  client abandons the project and seeks refund of architect’s fees as well as other abortive costs.
• Client for 4 or 5 townhouses pushed the development options and cost-savings to the extreme and eventually could not achieve what they sought, at which time they lodged a claim in NZRAB as a prelude to a civil claim on the basis that they lost money and potential development profit. 

Certification & payments

• Client maxes out the funding approvals, and the funders require a fixed cost price without contingencies.  Site or existing building throws up issues which are clearly a contingency item:  cost cutting must be applied elsewhere to free up the necessary funds.  Examples:  On opening up the ceiling in alteration works it is discovered that services and/or structure is unexpectedly present/absent/failed/redundant.  Another where the contractor’s tender was based on using a mobile crane but unforeseen circumstances made that impossible, and extra cost was incurred because a tower crane had to be used.  

Client refuses to accept Variations. 

• Examples:  Retaining structures requiring to be “beefed up” and/or extended in scope to deal with ground conditions which only became known when excavation done.  Others where the architect has had second thoughts about a better design during the course of construction, and the contractor provides minimal credit for deleted work and maximum cost for the new design. 

The death spiral of Slow Payers: 

• The client thinks the contractor has overcharged;  the contractor cannot fully pay his subbies;  the subbies prefer to work on other sites where they are getting properly paid;  there are resulting problems in co-ordinating work on site;  the contract period stretches out;  the client thinks the contractor might abandon the site or become insolvent, and with-holds payment as leverage to get the work done (or to retain funds for it to be done by others).  The architect (if doing observation and contract administration) loses hair and sleep trying to get the project back on track, and the client holds the architect responsible for the contractor’s work – or lack of it, whilst the contractor thinks the architect has been biased in under-certifying payments due.  If the architect is not involved in the construction phase, then the client and contractor will both take the position that the drawings and specification were inadequate and the cause of all these problems.  When the client consults their lawyers, the death spiral has firmly taken hold, and the prospect of an amicable resolution fades.