Setting up your business as an incorporated company is an effective way to reduce the likelihood of being held personally liable if something goes wrong in a construction project. However, the protection provided by incorporation is not absolute. Although each situation will need to be assessed on its individual facts, having an understanding of the relevant legal principles will help directors to avoid facing personal liability.
When will personal liability arise?
The 2021 High Court decision in Hsu v Mahoney confirmed that to assess whether a director owes a duty of care in their personal capacity, the Court will look at the degree of control that the director had over the act or omission that caused the damage complained of. Evaluating personal liability therefore involves a factual analysis of the specific acts the director has undertaken and taken responsibility for in relation to the causative negligence and damage.
Case examples
In Hsu v Mahoney the director’s control of remediation attempts, personal actions in undertaking water testing and repairs, and reassurances given to the owners led the Court to decide that a duty was owed.
Hsu considered the 2019 High Court case Queenstown Lakes District Council v Dent, which involved a director of a development company who was responsible for the construction of a leaky apartment complex. The Court held that the director’s control over two key decisions ultimately gave rise to liability:
(i) He instructed the architect to issue a Practical Completion Certificate for the units that were not weathertight.
(ii) He unilaterally released the retention fund which was being held for the purpose of ensuring the defects were remediated.
Justice Gendall held that the above decisions showed that the director exercised a sufficient level of control over the project and therefore owed a duty which was breached.
In the Court of Appeal case, Morton v Douglas, also considered in Hsu, Hardie Boys J found the degree of control a director exerts over the operations of a company determines the likelihood their personal carelessness will harm a third party and, therefore, whether they are subject to a duty of care.
The takeaway message for directors
The takeaway message from Hsu is that incorporation of a business may not necessarily protect you from personal liability where you are responsible for an act or omission that causes damage.
Where a breach of duty of care and subsequent liability is alleged the Court will look at the level of involvement and degree of control asserted by the director(s), and whether there is a sufficient relationship of proximity between the director and plaintiff. The best way to avoid liability is to ensure all work is completed in compliance with the Building Code and to always act with reasonable care and skill.
The difficulty with this area of law is that each case will be fact specific. For detailed advice, please get in touch with our experienced building and construction team.
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