Communique April 2007

Negligent Actions by Director of Limited Liability Company:

Reviewed June 2009, Edited Feb 2017The Professional Indemnity (PI) Insurance policy arranged by NZACS covers the negligent acts of directors and employees of an insured member firm.The High Court judgement of Dicks v Hobson Swan Construction Ltd (in liquidation) CIV 2004-404-1065 is of significant interest to architects for two reasons.

• Reinforcement of joint and several tort liability
• Lifting the corporate veil from company directors

Reinforcement of joint and several tort liability

The building contractor was sued jointly and severally with the local authority, Waitakere City. Since both tortfeasors were found liable, and because the builder was in liquidation and of no worth, the remaining tortfeasor, Waitakere City Council, became severally liable for the damages award, which amounted to $235,000 - the entire loss in this leaky homes claim.No building designer was brought into the proceedings. Had there been, and the architect/designer had been found to have been negligent in a material aspect, then they would have contributed to the liquidated builder's liability shortfall along with the council, as an additional joint and severally-liable tortfeasor.The major source of architects’ PI insurance payouts in NZ is in cases where the insolvency of a major joint-tortfeasor is effectively underwritten by the architect's insurance assets.

Lifting the corporate veil from company directors

It is established law that parties in the building process owe a duty to homeowners to exercise reasonable skill and care to achieve a sound building. This includes developers (Mt Albert Borough Council v Johnson [1979] 2 NZLR 234), builders (Bowen v Paramount Builders (Hamilton) Ltd [1977] NZLR 394 (CA) and territorial authorities (Invercargill City Council v Hamlin. [1996] 1 NZLR 513)In this High Court case, the builder, Hobson Swan Construction Ltd, was found to have been negligent because of its failure to maintain proper standards of workmanship, and judgment was made in favour of Mrs Dicks.Mr McDonald, a director of Hobson Swan Construction Ltd, was also found to have been personally liable for the loss suffered by Mrs Dicks. The Judge, Baragwanath J. , traversed the history of significant case-law examples relating to the apparent immunity of company directors to legal proceedings.Starting with Salomon v Salomon. [1895-9] All ER Rep 33 [1893] AC22, it was established that shareholders and directors owed no liability to plaintiffs beyond their shareholder’s capital contribution to the company.In the NZ case of Trevor Ivory v Anderson [1992] 2 NZLR 517 (CA), the Court held that a sole director/shareholder was not liable for the negligent advice given by the directors. The Court accepted that the negligent advice was given by the company and not the director, the director being an agent of the company. It was subsequently commented, that had Anderson reasonably thought that he was dealing with an individual, the result might have been different.Legally, it is argued that there are four competing interests in cases involving director's liability:

• The public interest of separate legal identity of companies.
• The public interest in providing incentives against wrongful conduct and compensating those injured by it.
• The hierarchy of wrongs, from wilful conduct to strict liability.
• The law’s greater protection of persons than property.

In respect of (1) there appears to be no reason why servants should be personally liable for conduct rendering their employer liable in tort, and directors of companies should be exempt on the same basis. It was found in Callaghan v Robert Ronayne Ltd [1979] 1 NZCPR 989, that there was no proof of individual acts of negligence on the part of directors; the defective work was in all cases done by workmen or subcontractors.In Morton v Douglas Homes Ltd [1984] 2 NZLR 584, it was found that the directors of a building company were liable because of the control they exercised over the building work. "It is not the fact that he is a director that creates the control, but rather that the fact of control, however derived, may create a duty. There is therefore no essential difference in this respect between a director and a general manager, or indeed a more humble employee of the company. Each is under a duty of care."In Dicks' case, the Court confirmed that:

• In NZ Law, the protected interest is classified as more than merely economic.
• The imposition of personal liability on the director would tend to add incentives to performance.
• Since there is no contract with later purchasers, they would be able to sue unencumbered by the present point.
• In this case Mr McDonald did not merely direct, but actually performed the construction of the house and was personally responsible for the omission of the window seals. His carelessness was a breach of a duty of care. He therefore is personally a tortfeasor and accordingly personally liable to Mrs Dicks.

Since then, there have been several building-related court cases – mostly arising out of leaky building claims – where the inter-relationships of the building (or development) company and directors of that company have been reconsidered. The general principle has been upheld that responsible individuals could be held to account for their actions despite the contracted party being a limited company. On that basis, both directors and employees could be “in the frame”.By that legal analysis, it is clear that architects who are sole directors of their limited liability company will be personally liable for their own acts of negligence, and will be unable to shelter under the corporate veil previously identified in Trevor Ivory v Anderson.In multi-director companies, directors who were not involved in negligent conduct, will be protected by the corporate veil, but the particular director who caused a plaintiffs loss by his/her own negligence, will be personally liable.The NZACS arranged P.I. insurance policy, covers the negligent acts of directors and employees.