Defective construction work – Setting up a company is not a shield to personal liability

Builders commonly operate their construction business as a limited liability company of which they are the director. Incorporation as a company is an important step toward self-protection for the builder-director from personal liability – that is, liability for claims when something goes wrong is generally limited to the assets of the company.

However, builder-directors (and their advisors) often mistakenly assume that operating as a company means they are completely protected from personal liability for defective work or other claims when something goes wrong. That assumption is incorrect. This surprises many clients, given that a key purpose in setting up their company was to restrict their own liability.

The starting position is, in general, a builder-director’s actions will be identified with the company and no personal liability will attach to them if something goes wrong. They will be covered in most circumstances so long as they were acting in their capacity as the director.

Where personal liability can arise is when the builder-director has directly caused the defective work (and been negligent in doing so). For instance, if they personally did the work or their decision-making caused the defects, such as by directing an employee to carry out work in a way which resulted in defective work. Specific circumstances where personal liability might arise include where the builder-director:

• Personally used building materials that caused a completed home to leak.
• Knew their employees were using materials which can result in defects to completed work.
• Hired sub-contractors knowing that their practices could lead to defects in the resulting work.

Ultimately, the test the Courts use is to assess the degree of actual control (and personal involvement) which the builder-director had in a piece of faulty work. If the builder-director worked in a hands-off way (such as if they did not come on site), or if their employee made a unilateral decision without their knowledge, that is unlikely to give rise to personal liability for the builder-director.

Ultimately, of course, the best way to avoid claims of personal liability is to comply with the Building Code and regulations, and use all reasonable skill and care in completing construction work. Of course, directors can also face personal liability in other areas, including for breaches of the Fair Trading Act 1986 and their health and safety obligations, so it is vital to be aware of those obligations as well.

If you are a builder-director it pays to take legal advice regarding any contracts you enter into to make sure you understand your obligations.