Building Amendment Bill 2007: Site lead liability (licensing of building practitioners)

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1 Building Amendment Bill 2007: Site lead liability (licensing of building practitioners) Regulatory impact statement Statement of the nature and magnitude of the problem and the need for government action Cabinet agreed, in April 2006, to establish a site licence class as part of the licensed building practitioner (LBP) regime under the Building Act Cabinet further agreed that a role of site lead would be mandated for all significant building projects 1. During implementation of Cabinet s decisions, issues arose concerning the potential of a new liability being created for people who carry out the site lead role. Site leads could face a high risk of being found personally liable for any construction defects that subsequently arise from the building project because the site lead could be considered to have a general duty of care regarding the building project. The new liability risks faced by an individual site lead are unreasonable. The site lead could be held to account for outcomes over which they have only limited control, given that the building contractor engaged by the owner to undertake the project would control the resources for the project, how they were deployed, and many other aspects. Site leads would be unlikely to have options for managing the new liability risks through insurance or other arrangements due to the site lead role being new to the market and the liability being difficult to assess for insurers/underwriters. As a result, there may be no safe space for learning and development of the site lead role and therefore the role would be an unattractive proposition to anyone. Few site licences would be applied for, or issued, building contractors would have difficulty employing people in the site lead role and/or the costs of employment would be high, resulting in overall higher costs for building projects. The possible new liability risks were not intended, by the Government or Parliament, to be created when the Building Act 2004 was enacted. The liability risks have also highlighted broader issues that the framework for the LBP regime in the Act is not as clear as it should be. In particular, the Act is unclear about where and how the definition of the roles of site leads and other LBPs in made. The liability risks, and broader issues, can be addressed by changing some of Cabinet s previous decisions relating to the site lead role and making some amendments to the licensing regime provisions in the Building Act 2004.

2 Statement of the public policy objective(s) The broad public policy objectives are set out in the purpose of the Building Act 2004 (section 3): to provide for the establishment of a licensing regime for building practitioners, to ensure that (a) people who use buildings can do so safely and without endangering their health; and (b) buildings have attributes that contribute appropriately to the health, physical independence, and well-being of the people who use them; and (c) people who use a building can escape from the building if it is on fire; and (d) buildings are designed, constructed, and able to be used in ways that promote sustainable development. The establishment of the licensing regime is not intended to create new liabilities within the building sector. Therefore, another public policy objective is to not change existing tort and contract law. The specific public policy objective of establishing the site lead role is to ensure good quality site management that will contribute to preventing building failure particularly on building projects where multiple trades are at work. Statement of feasible options (regulatory and/or nonregulatory) that may constitute viable means for achieving the desired objective(s) The broader issues about the regulatory framework for the LBP regime can only be addressed by regulatory changes. The changes could be included in any of the regulatory options described below. Accordingly, the changes are not described in detail in this assessment, but are set out in full in the Cabinet paper. Option 1: Regulatory Option A A statutory limitation on site lead liabilities Under this option Cabinet would agree to further regulation in addition to previous decisions. There are two options to limit any new site lead liability, through amendments to the Building Act Require that any legal action against site leads must not be brought in tort (site leads could only be sued through the terms of their contracts, which would typically include a limit on the extent of site leads liability). Cap the amount of any liability that site leads could face in tort.

3 Statutory provisions that limit exposure to liability of persons carrying out work directly for members of the public are extremely rare and would likely be very difficult to justify during a legislative process. Site leads should face reasonable liability for any negligent performance in the role (as is the case for any other practitioner). Also such limits may be ineffective in practice, as contractors can be sued for vicarious liability arising from the actions of the site leads they employed hence contractors may be reluctant to agree to limit site leads liabilities in their contracts. Also, it is very likely that any statutory provisions of this type would be tested (by BCAs, owners and possibly also contractors) through a series of court cases and could be substantially weakened through case law over time. Consequently this option will not meet the public policy objectives. Option 2: Regulatory Option B Site lead responsibilities are prescribed in detail in law This option also requires Cabinet to agree to further regulation in addition to previous decisions. Under this option site lead responsibilities would be prescribed in detail in the Building Act 2004 or in the licence with the intent of stating limits of liability. Contractors would then have to reflect these authorities in their contracts with site leads. This would reduce the potential for conflict between the authority a site lead is delegated by the contractor and their legal responsibilities. This option would involve heavy regulation of the way that building projects are managed. It would direct contractors as to how to manage and structure their projects and contractual relationships with site leads and other practitioners, in some detail. A contractor should retain significant authority over these matters - otherwise it would be unreasonable for a contractor to be accountable for the outcomes of the project. Detailed regulation of roles would reduce contractors incentives to build right first time and might not reflect the best approach to site management for all projects. This option also does not meet the public policy objectives. Option 3: Non-Regulatory Option Site leads are not required, in law, for any building projects Under this option, the previous Cabinet decisions would be changed so that site leads do not need to be employed on any building projects. Instead the Department could signal, reinforce and provide support for building contractors to implement good site management practices. The key features of this option are: there would be a heavy reliance on measures to improve site management practices, such as the promotion of best practice site management, and fostering of training opportunities the Department would work more intensively with the sector, particularly those segments of the market at risk of weak site management/poor quality outcomes, on how to improve practices on site

4 no reference to the site lead role would be required in legislation a site licence class would still be established to signal the skills and competency of individuals wishing to operate in a site leadership role. This option would result in a significantly lower liability risk for site leads than the preferred option (outlined below). However under this option there would likely be a continuation of weak site leadership and coordination on those projects at risk of weak site management. The projects most at risk are category 2 and 3 residential buildings complex houses and low rise multi-unit dwellings (category 2) and high rise multi-unit dwellings (category 3). Further, other LBPs could then be exposed to new liability for matters that were intended to be part of the site lead role. This option also does not address the broader issues with the LBP regime that the potential site lead liability risks have highlighted. This option does not meet the public policy objectives. Option 4: Regulatory and Non-Regulatory Option (Preferred Option) Clarify regulatory framework and accountability/authority together with a set of nonregulatory measures to support site leads This option requires some of the previous Cabinet decisions to be changed to address potential ambiguity and conflict in the previously agreed regulation. Non-regulatory methods would also be used to support site leads to carry out their role effectively. This option is set out in detail in the main Cabinet paper. Under this option site leads will still face liability for any negligent performance in the role, but clarifying the limits of their delegated authority and the inputs available to them will avoid any new liability being created. Contractors would retain appropriate flexibility as to how they used a site lead in order to meet the purposes described in the Act. Accordingly, the public policy objectives will be met by this option. Statement of the net benefit of the proposal, including the total regulatory costs (administrative, compliance and economic costs) and benefits (including non-quantifiable benefits) of the proposal The preferred option will not change the costs from those assessed for the previous Cabinet decisions (see EDC (06) 43, pages 21-27). The option will have slightly higher benefits in that: the potential for new unreasonable liability for site leads will be avoided input costs in the form of insurance and other risk management methods will be reduced, thereby reducing costs to consumers

5 the regulatory framework for building practitioner licensing will be more clearly described in legislation. Statement of consultation undertaken The Department has consulted with representatives of the industry on the issues and proposals in this paper. The industry representatives support the proposals to clarify the role/responsibilities of site leads, including replacing (for all LBPs) the certification with a statement. Industry representatives have mixed views about whether changing the date of commencement of the restricted building work provisions of the Act is necessary. Some representatives believe that directly addressing the liability issues is sufficient on its own and the risks to site leads arising from other LBPs not being required to work on significant building projects until 2011 are negligible, if any. Nevertheless, all representatives support the intent of the proposed change to the definition of restricted building work and support requirements to use LBPs commencing only after regulations prescribing restricted building work come into force. The Treasury, Ministry of Economic Development, Department of Internal Affairs (Local Government) and Local Government New Zealand have been consulted on the proposals. Comments received were addressed when drafting the paper. Business compliance cost statement The proposal has no additional business compliance costs to those described for the previous Cabinet decisions (see EDC (06) 43, page 28).