Court of Appeal rules that leaky building claims against James Hardie can proceed

Friday, December 21, 2018

The Court of Appeal has released its long-awaited decision, confirming that claims brought against four operating companies and three holding companies in the James Hardie group may proceed.

Background to the claim

The claimants are past or present owners of homes, commercial buildings and retirement villages which have all been clad with exterior cladding products manufactured and supplied by James Hardie. The claimants allege that the James Hardie products were defective, not watertight, and failed to comply with the prevailing building standards. 

Proceedings have been brought against a range of companies, including the ultimate parent company, James Hardie Industries Plc (JHI). The holding company defendants, including JHI, challenged the claim on the basis that "since they did not manufacture, market or supply the allegedly defective products, the claimants cannot succeed against them."

Negligence

First, the Court of Appeal considered whether a holding company can owe a duty of care to those who have used a product manufactured by the holding company's subsidiaries. The Court noted that:

"The application of principles emerging from three separate lines of authority are at issue on this appeal. The first is to do with the principle of separate legal personality for corporate entities; the second, the circumstances in which a duty of care will be imposed; and the third, linking the first two together, is a line of authority as to the circumstances in which a parent company may owe a duty of care to those affected by the actions and omissions of its subsidiary."

The Court of Appeal confirmed that generally a parent company would not be liable for its subsidiaries. The Court remarked that "the principle that a company must be treated like any other independent person with rights and liabilities appropriate to itself extends to groups of companies", and that "something more than ownership, and the ability to control which comes with that, is needed to justify the imposition of a duty of care in the circumstances of this case".

If the requisite extent of control can be shown, the next step is to determine whether the holding companies can owe a duty of care. To impose a novel duty of care, the Court of Appeal followed the Supreme Court's decision in North Shore City Council v Attorney-General [2012] NZSC 49, [2012] 3 NZLR 341, requiring the party alleging the duty of care to show:

  • the loss was a reasonably foreseeable consequence of the defendant's acts or omissions;
  • the loss occurred within a relationship that was sufficiently proximate; and
  • as a matter of policy, is there a reason that no duty should be imposed.

Having reviewed authorities from a range of jurisdictions, the Court of Appeal said this is a developing area of law, which is far from settled.  The Court recorded three categories of potential liability:

  • where the parent takes over the running of the relevant part of the business of the subsidiary;
  • where the parent has superior knowledge of the relevant aspect of the business of the subsidiary, the subsidiary relied upon that knowledge, and the parent knew or ought to have foreseen the alleged deficiency in process or product; and
  • more generally, where the parent takes responsibility (irrespective of superior knowledge or skill) for the policy or advice which is linked to the wrongful act or omission.

The Court of Appeal noted that:

"It is clear that the mere fact of coordination within a group is not enough. Evidence will need to show that coordination results from control by or reliance upon the parent, and that control is in some way relevant to the alleged wrong… We prefer to leave to be decided, within the facts of a particular case, whether it is sufficient for the imposition of a duty that a parent company publishes the guideline, policy or specification later implicated in the wrongful act or omission and requires the subsidiary to adhere to it."

With a lack of clear evidence from JHI as to their level of involvement (and, notably, an affidavit claiming only three employees, all solely involved in company secretary work, which was at odds with JHI's annual reports and website material which described a multi-national business pursuing, in different locations, a single business strategy), the Court of Appeal determined that JHI's potential liability should not be decided at an initial stage, and should instead go to a full hearing.

Fair Trading Act claim

Similarly, in respect of a claim for breach of the Fair Trading Act, the Court of Appeal decided that "there is a serious issue whether, by allowing its own reputation to be attached to the New Zealand product to the extent that it did, JHI held itself out to the public as manufacturer of the product."

In addition, there is an argument that, "through the efforts of its senior executive team, JHI directly involved itself in the business of testing, producing or processing of the allegedly defective goods." Again, this is an issue to be resolved at a trial, not as a preliminary matter.

Conclusion

The Court of Appeal has determined that the claims against the holding companies, and particularly against JHI as the ultimate parent company, may proceed. 

As the New Zealand branch of the James Hardie group is unlikely to have sufficient funds to pay compensation for all claims (approximately 1,132 homes, four commercial buildings, and five retirement villages) if the claimants are successful, this may be the only way that any damages awarded may actually be paid.

If you have any questions, please contact Jonathan Scragg.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.