Are you bob the builder … and director, and shareholder, and employee?

Bob is a builder, and is also the Director and Shareholder of his building company.  He has registered his business as a limited liability company, which is a great step toward self-protection from personal liability for negligence and other potential risks, but it is not fool-proof, because some of Bob’s actions as a builder are in his role as an employee of his own company.

Bob will be covered in respect of the majority of situations that he finds himself in during the course of running his business … when he is acting in his capacity as Director.

Generally speaking in most of those situations, his actions are identified with the company itself and no personal liability will attach if something goes wrong. But when Bob acts as “employee” of the company and something goes wrong, he can be held personally liable for that.

This reality surprises many clients we talk to because for most business-owners a key purpose of registering their business as a company is to restrict their own liability as Director if something goes wrong.

So in what types of situations might you be found to be personally liable?

In general,where you have directly caused the outcome you are exposed to personal liability.  This might be by actually physically building the aspect of the structure that is defective, or via your decision-making.  In the latter case, you might direct an employee to act in a way that results in a defect.  And you may have done so from an office that is physically away from the building site.

Your liability can arise as a result of a positive act that causes a defect, but also where there is a failure to act.  Whether you intended to cause the defect is irrelevant when considering whether you should be held liable for it.

What are some practical situations that might result in personal liability?

• Do you know your employees are using building materials that can cause completed homes to be “leaky”?
• Did you personally use building materials that resulted in the completed home being leaky?
• Did you hire contractors to do the wiring of your building, knowing that their cheaper rates are possible because they cut corners that might result in substandard work?
• Did you make the decision regarding the laying of inadequate foundations for a retaining wall that falls down and injures a passer-by?

When assessing whether a Director should be held personally liable for faulty work the courts (and the Weathertight Homes Resolution Service) look at the degree of control over the faulty piece of work.  That is, they assess the degree of your personal involvement in the defective work and your assumption of responsibility over it.

The fact that you are the Director of the company that caused the defective work does not in itself give rise to the “degree of control” they are looking for.  They look at the reality of the situation – the actual control you had in the project.  So if you operate in a hands-off manner, or if an employee makes a unilateral decision about how to act without your knowledge and/or permission, it is unlikely that you would be held personally liable for any resulting defect.

So why should you be held liable for defects over which you’ve had the required degree of control?  In your work as a builder or property developer you owe what is called a “duty of care” to any future owner or user of the building you create.

Any personal liability is tied integrally to you discharging this duty of care.  If you don’t, you are considered to be “negligent,” and it is your negligence that attracts liability.

Luckily, your duty will most often be discharged by complying with the minimum standards provided in relevant building regulations and codes that you should already be working to.

So in most cases, regardless of whether any defect is present in your building or not, if you have complied with the relevant regulations you are unlikely to be held personally liable for the fault.

So what can you do to avoid personal liability for defective work?  There is one, almost fool-proof golden rule:

• Ensure that you and your employees are aware of the relevant building regulations and codes and comply with them.