Opinion Piece: Warranty Schemes by Philip O’Sullivan

October 27, 2015

If the Government, back in 1991 had introduced a UK-style home warranty scheme, I believe this would have largely spared us the expense and heartache of leaky buildings.

Minister of Building, Dr Nick Smith will soon be making the same critical decision and another poor one would adversely impact on homeowners for years to come. The Minister’s stated preference is to ensure that consumers are well-placed to manage their subsequent liability risk through residential building guarantee products. What does this mean and what are the risks to consumers?

I realised early in 1999 that all the ingredients of the leaky building crisis were in place. I contacted the appropriate agencies, but they were reluctant. I had to warn the industry, but people were reticent, disbelieving, or it was someone else’s fault. Good people in good organisations were reluctant to act due to the powerful and pervasive influence of self-interest. In 2002 the Hunn Report confirmed we had a problem. The responses should have been simple; understand and then resolve the causes. We did improve construction, introduced cavities and returned to treated timber. However achieving accountability and managing self-interest, has proved elusive.

The Government’s response was Building Act 2004, subsequently amended a number of times, following policies dislocated from reality. This is exemplified in a 2014 legal paper by Frana Divich, Partner at Heaney & Partners, to the Construction Law Society. She states in part:

Section 362M(2) gives the client the option of requiring the building contractor to remedy the breach. If the building contractor refuses to or does not succeed in remedying the breach, the client can cancel or get another builder to remedy the breach and recover the cost from the building contractor.

There is no obligation on the client either to give notice of an alleged breach or to provide a reasonable opportunity for the building contractor to remedy the breach. Nor is there any sanction for a client who cancels the contract without good cause. Given the lack of any requirement to provide evidence of a breach and a lack of any definition of “defective”, a client could cancel any contract whether it was reasonable or not, with impunity.

Liability is like pain; beneficial because it prevents poor or risky behaviour, but too much pain is incapacitating. In the recent Nautilus decision those most culpable have disappeared leaving our city’s long-suffering ratepayers to foot a $25m bill. Council is trying to learn from this and its response is to apply the law rigorously to avoid future liability. They are asking the hard questions, but they are finding more questions than answers. As a result their consent and compliance processes are hindering and halting progress; adding cost and delay at a time of unprecedented demand.

So what is the answer? The Law Commission recommended joint and several liability, council liability be capped and to protect homeowners, a home warranty scheme be investigated. The Minister agrees with the first two, but favours residential building guarantee products. Typically guarantee schemes are either insurance based, or at worst rely on avoidance and the income of today to pay for the mistakes of yesterday. The tendency is to take money in good times and disappear in bad. Such schemes also rely on the regulatory system to get it right, but is our system reliable?

The Ministry of Education (MoE) found solvent-based treated plywood used for claddings in schools was rotting. It investigated and then banned its use. Across town at the DBH, now part of MBIE, there has been no action despite the MoE suing Carter Holt Harvey over this product. MBIE can ban products, but never has. Why? The failure of products does not affect them, and even if they intervened they would then run the gauntlet of industry lobbying. Who is protecting the consumer?

A building guarantee/warranty scheme was recommended by the Building Industry Commission as part of the reforms that led to the Building Act 1991. A home warranty scheme, based on the UK NHBC model, now 75 years old, would bring together a fragmented industry. More importantly it would provide the homeowner with a one-stop-shop should things go wrong. Most importantly it would align the interests of the industry with that of the homeowner.

To accomplish this a warranty system must manage risk; approving and monitoring the products, systems, designers and builders. It would approve the consents and construction, and when things go wrong find out why, implement change and hold those responsible to account. It would be collaborative and technically based. It would protect the homeowner, save the ratepayer from being the unwitting underwriter of a flawed system, and it would take the legal fraternity, politicians and the media out of the picture.

The irony is that we need the latter two to bring about this much needed and overdue change as the building industry is incapable on its own, due to the self-interest of some. What we need right now is courage and leadership, to learn from our mistakes, and to make the right decision so future generations can enjoy their homes and be spared from future unnecessary expense and heartache.

Philip O’Sullivan is a Past-President of the New Zealand Institute of Building Surveyors and a Director of Prendos New Zealand Limited.

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