There is currently a trend amongst plaintiffs to commence proceedings against building inspectors personally in defective building cases. This is only appropriate in very specific circumstances.
A ‘normal’ situation, by way of example, is this: a purchaser wants to buy a house. They employ an inspector (a builder or specific pre-purchase inspection company) to look around the house and prepare a report. This is usually to satisfy the builders inspection condition in the standard-form sale and purchase agreement. The report says that the house is in good condition. The purchasers buy the house and discover that it leaks.
Variations on this ‘normal’ situation are where the report has been prepared for the vendor and provided to the purchaser with the property information pack, or where the house has some other undiscovered defect. Claims where buyers allege that the report missed earthquake damage are turning up in Christchurch, and will likely follow the same case law as leaky building claims.
Proceedings are usually commenced against the vendor and the inspection company, often alleging misrepresentation, or negligent misstatement, alongside misleading and deceptive conduct under section 9 of the Fair Trading Act. Very frequently, however, the person who actually inspected the house is joined personally to the proceeding, even if they say they were an employee of a limited liability company.
Why plaintiffs join inspectors personally
The reasons that inspectors are joined personally are fairly obvious, from the plaintiff’s point of view. A limited liability company is just that – as a distinct legal personality it has liability limited to its assets. Such companies are often uninsured and have very few assets. The private individual who wrote the report, however, will probably own a house, or have retirement savings which can be used to pay a judgment debt. Naming the inspector personally is also used as leverage by plaintiffs. The threat that an inspector will lose their house and life savings will, plaintiffs think, convince them to throw whatever they can afford at the litigation to make it go away.
The circumstances in which an inspector is liable personally are very clear in case law. Despite this, we are frequently engaged to defend inspectors who have been personally joined to proceedings where there is no legal basis to support their personal liability. Such claims are usually the result of a failure on the part of the plaintiffs’ lawyers to correctly identify appropriate defendants. Using a scatter-gun approach to this causes costs exposure for plaintiffs, along with the risk of the personal claim being struck out.
The legal basis for naming inspectors personally
Limited liability companies are often set up in the hope that they will protect their directors/shareholders from personal liability for their own actions. The aim is that the liability attaches to the company, not the individual. There is said to be a ‘veil’ between the company as a legal personality, and the owners/directors of the company. However, since the early 1990s, courts in New Zealand have been willing to ‘pierce the corporate veil’ when a director has personal responsibility for the company’s actions (Trevor Ivory Ltd v Anderson  2 NZLR 517). The general test for piercing the corporate veil is whether the company is an ‘alter ego’ of the individual (Gloken Holdings Limited v The CDE Company Limited [(HC) Hamilton, CP28195, 24 June 1997).
In a leaky home context, courts have become willing to look past the company and identify the individuals involved personally as being responsible for losses. An example of this came in the middle of the leaky homes saga, with the Taylor decision (Body Corporate 202254 v Taylor  2 NZLR 17). Mr Taylor was the sole director of a company which developed an apartment complex. The apartments leaked, and he was joined personally by the apartment owners, because his company had been removed from the companies register. Mr Taylor applied to strike out the proceedings, saying that it was his company which had liability for the development, not him. However, the High Court found that it was Mr Taylor himself who had made representations about the apartments, not his company. As his company was his alter ego, he was personally liable under the Fair Trading Act for misleading or deceptive comments he made while apparently employed by his company.
For inspectors, the most frequently referenced court decision is Steel v Spence (Steel v Spence Consultants Limited and Gary Spence  NZHC 398). Mr Spence was director and 75% shareholder of Spence Consultants. He inspected a house on behalf of the Steels, who wanted to buy it. The report concluded the house was in good condition, although after purchase the Steels found that it leaked. Even though Mr Spence said he was an employee of his company, the court found Mr Spence liable personally under the Fair Trading Act. In taking this decision, the judge reflected that no one had been involved in the inspection or preparation of the report apart from Mr Spence, that he directed and owned the company, and that the company was therefore his ‘alter ego’.
The case law is settled – the same reasoning was applied recently in the decision of Mitchell v Murphy (Mitchell v Murphy as trustee of the Victor Sydney Trust  NZHC 3262). Again, the inspector was the alter ego of his company, and was found liable personally for misleading and deceptive conduct under the Fair Trading Act.
At the other end of the spectrum, a contrasting decision was released before Steel v Spence. Where the building inspector is truly an employee of the inspection company, with no control over the company and no shareholdings, a court will likely not find they were personally responsible alongside their employer. In Wightman (North Shore City Council v Wightman (HC) Auckland CIV-2010-404-3942, 30 November 2010), the purchasers of the leaky house claimed that the inspector (who was an employee of the inspection company) had assumed personal responsibility for the contents of the report. They said he assumed personal responsibility by making the inspection, writing and sending the report, and offering to discuss his findings with the purchasers. They also said that it was his skills they relied on when reading the report, not the company’s. This was too far for the High Court, which found that there was no personal assumption of responsibility. Under the Fair Trading Act, the inspector was not the person ‘in trade’; his employer was. There was sufficient separation that the inspector was not the company’s alter ego.
The Wightman decision is in line with the case law from outside the leaky home context, relating to when it is appropriate to pierce the corporate veil and name directors personally.
Summary – Where the line is drawn
The case law in this area is quite clear. It is not unique to claims against pre-purchase property inspectors. The table below shows indicators which suggest a property inspector might have personal liability for the reports they produce.
For inspectors - what’s the point of setting up limited liability companies?
||Not liable personally
|Director/shareholder of property inspection company, as well as employee.
||Employee or contractor with no ownership or control over company.
|The only person who inspected the house and wrote report.
||One of several employees involved in inspecting, drafting, peer reviewing etc.
|Customers’ engagement is only with the one individual.
||Customer engages company / head office, and then inspector is allocated.
|Customers might not realise the inspection is by the company, instead thinking they were employing the individual.
||Customer chooses the property inspection company from its website etc, without knowledge of the individual inspector.
If correctly set up and administered, such companies can protect individual inspectors from personal liability. However, the mere fact that an inspector has registered a company with the Companies Office is no automatic defence to personal claims.
The further the company as a legal entity is separated from the individual inspector, the better. Different directors, shareholders, other employees, a separate office outside the director’s home address, all add legitimacy to the company. Registering the company to the inspectors’ home, being the sole director, being the majority shareholder alongside a family member, using a personal email address/phone number for work, all point to the company being the alter ego of the inspector.
Most lawyers are well placed to advise on this. Given the fact that property inspection is a fairly risky industry to be in, it would be worth the investment to get set up properly. Inspectors working for themselves will find it more difficult to prove they are not personally liable than those employed by someone else.
It is also worth bearing in mind that terms and conditions should be sent to customers and agreed before the inspection, to gain maximum protection from them. Including terms and conditions with the report is of some assistance, but not ideal.
For lawyers – should you name an inspector personally in the proceedings?
Under the Conduct and Client Care Rules 2008, all lawyers have an obligation to facilitate the administration of justice as an officer of the court (Under Chapter 2 - Rule of law and administration of justice
). Part of this obligation is to use the law for its proper purpose: a lawyer must use legal processes only for proper purposes. A lawyer must not use, or knowingly assist their clients to use, legal processes for the purpose of causing unnecessary distress or inconvenience to another person’s reputation, interests, or occupation (Rule 2.3).
Recommending that leaky home proceedings be filed against an inspector personally when they are clearly a bona fide employee, not an alter ego of the inspection company, surely skirts close to contravening Rule 2.3. The Court of Appeal explored a lawyers’ duties in this regard in Gordon v Treadwell Stacy(Gordon v Treadwell Stacy
 3 NZLR 281), finding “it is as well to confirm the existence of a duty to the Court on the part of both counsel and instructing solicitors not to lend assistance to a litigant if satisfied that the initiation or further prosecution of a claim is mala fide or for an ulterior purpose so as to be an abuse or unjustifiably oppressive
Given the fundamental obligation of litigators to correctly target potential defendants, it is always disappointing when proceedings are issued personally with no justification other than to intimidate the individual and make them fear for their livelihood.