In August 2025, the Government announced the biggest reform to New Zealand’s building consent system in two decades. The problem? Councils facing massive liability for building defects have become so risk-averse that the entire consenting system has seized up.
Building and Construction Minister Chris Penk cited the scale of exposure: in one Queenstown case, ratepayers faced potential liability of $160 million for weathertight defects. Had the case not been settled privately, it could have meant rates increases of $300 per household per year for 30 years.
This was no isolated exposure. Ministry of Business, Innovation and Employment-commissioned research by Sapere Research Group found that councils and other building-consent authorities paid around $1 billion over the decade to 2018 compensating homeowners for defective buildings. Roughly a third covered the share of failed builders and developers.
The Law Commission examined the problem in 2014, recommending a statutory cap on council liability. The Government’s 2025 response goes further: replacing joint and several liability with proportionate liability, so councils pay only their share.
But the reform’s ambition conceals a deeper failure: none of this dysfunction was inevitable. It flowed from judicial decisions beginning in the late 1970s that expanded the law of negligence to create liability where none existed before. Builders became liable to subsequent purchasers for defective construction even though their contractual obligations were to the original owner alone. Councils became liable for negligent inspections.
Australia’s highest court maintained greater restraint, refusing to impose liability on councils for building defects. When the United Kingdom’s House of Lords acknowledged its wrong turn in the early 1990s, New Zealand’s courts had the opportunity to follow. Instead, they pressed on.
The 2025 reforms are now treating the symptoms. But they do not cure the disease. Councils will still face liability for building defects. Their risk aversion will continue, merely recalibrated. Other jurisdictions address the risk of building defects through transferable insurance schemes, where premiums fund protection for subsequent purchasers. Our courts chose instead to make councils involuntary insurers, funded by ratepayers.
The Orthodox Position: A Line in the Sand
Tort law traditionally protected persons and tangible property from harm. Economic interests were left to contract, insurance, or legislation – domains where parties could negotiate terms, set boundaries, and allocate risks through democratic processes or voluntary agreement.
Thus, negligence causing personal injury or property damage was actionable. Negligence causing financial loss – what lawyers call “pure economic loss” – generally was not.
This exclusionary rule was not arbitrary formalism. It reflected a fundamental choice about the limits of judicially imposed obligations and, ultimately, about individual freedom.
As Peter Watts KC explained in his seminal New Zealand Law Review essay, Taxonomy in Private Law – Furor in Text and Subtext (2014), “the benefits of the law allowing us to ignore one another’s economic interests outweigh the imposition of duties of care” (Watts, at 134). In a free society, individuals should not owe open-ended duties to protect strangers from financial loss. Such duties should arise, if at all, from voluntary undertakings – through contract, assumption of responsibility, or legislative schemes.
The distinction between physical harm and pure economic loss marks, as Watts argues, “the only intelligible line” for tort liability. Once courts move beyond protecting persons and tangible property, the boundaries become arbitrary and the problems multiply. How far down the chain of does liability extend? Why should a negligent builder owe a duty to a future homeowner but not to their mortgage lender – or neighbours whose property values decline? If economic loss is recoverable, why restrict the careless driver’s liability to repairing your car? Why not include the financial losses of everyone else stuck in traffic caused by the crash?
The potential claimants are indeterminate, the quantum unpredictable. The answer cannot be found in legal principle – only in judges’ subjective preferences about which losses deserve compensation.
Donoghue v Stevenson [1932] AC 562 (HL) illustrates proper common law development. Lord Atkin’s “neighbour principle” synthesised existing categories of duty based on proximity and foreseeability. But crucially, those existing duties protected only against physical harm. The duty was an extension of existing principles, not a policy-driven innovation.
The exception proved the rule. Hedley Byrne v Heller [1964] AC 465 (HL) recognised liability for negligent misstatement, but only where the defendant voluntarily assumed responsibility – a principle rooted in the defendant’s own conduct, not judicial preference.
The exclusionary rule was not a gap requiring judicial correction. It was a constitutional choice.
Questions about who should bear the risk of defective buildings, whether insurance should be mandatory, how far liability should extend, and how losses should be allocated are all policy decisions for democratic deliberation, not judicial determination. They belong to Parliament’s domain, not the courts’. Otherwise, we are left with the proverbial ‘chancellor’s foot’ – arbitrary judicial decisions varying with each judge’s preferences, producing unpredictability rather than the certainty the rule of law demands.
Bowen: The Critical Departure
Our courts leapt off the tort law tracks shortly before I started law school in Bowen v Paramount Builders [1977] 1 NZLR 394 (CA). A homeowner discovered defective foundations years after purchase. The subsequent purchaser had no contract with the builder. Could they nevertheless sue the builder in negligence for repair costs – a purely economic loss?
The Court of Appeal said yes. The reasoning seemed attractive: builders owed a duty to avoid latent defects that were “a source of danger.” The court treated the manifestation of the defect – the cracking and settlement caused by inadequate foundations – as damage to the building. Yet the damages sought were plainly economic: repair costs and diminished value.
The conceptual sleight-of-hand made the intervention easier. By treating the manifesting defect as damage to the building, the court avoided confronting what it was doing: creating liability for pure economic loss.
But the building was defective from the start. The cracks and settlement were simply the discovery of pre-existing economic loss – the difference between what the purchaser paid and what the building was actually worth. This was not damage to property in any meaningful sense. It was financial disappointment.
More fundamentally, no one voluntarily assumed responsibility to future purchasers of buildings. The builder’s relationship was with the original purchaser. If any duty existed, it arose in contract.
The Court of Appeal imposed a duty based on judicial preference: builders should be accountable, consumers need protection, the loss must fall somewhere. These are legitimate policy concerns. But they are questions for Parliament, which can consult widely, consider competing interests, design comprehensive schemes with clear boundaries, and accept democratic accountability for the choices made.
Sir Robin Cooke later defended the decision, calling the distinction between defects harming “other” property and defects harming the building itself an “impossible distinction” (Robin Cooke, “An Impossible Distinction” (1991) 107 LQR 46.) Yet the distinction was entirely possible – and courts draw distinctions like this every day. A faulty boiler that explodes and damages walls causes physical damage; a faulty boiler that merely underperforms causes economic loss. The line between “damage” and “defect” is a basic organising principle of tort and contract alike.
Cooke’s objection was not that the distinction could not be drawn, but that he disliked the outcomes it produced. That is policy preference dressed as analytical impossibility – the kind of instrumental reasoning that turns judges into legislators. The issue was not technical but constitutional: the boundary between tort and contract, between obligations freely assumed and those imposed by judicial policy. Between judicial restraint, and the judge as lawmaker.
In blurring the line, the court did not apply the common law method – it legislated.
A Commonwealth Moment
Bowen did not emerge in a vacuum. Across the Commonwealth in the 1970s and 1980s, courts were grappling with similar questions. The English case of Dutton v Bognor Regis UDC [1972] 1 QB 373 had signalled the direction – extending negligence liability to local authorities for defective building inspections. Anns v Merton London Borough Council [1978] AC 728 followed, holding that local authorities owed a duty of care when exercising their inspection functions.
New Zealand’s courts enthusiastically embraced this approach. In Mount Albert Borough Council v Johnson [1979] 2 NZLR 234 (CA), the Court of Appeal held councils liable for negligent building inspections. By the mid-1980s, in Brown v Heathcote County Council [1986] 1 NZLR 76 (CA), the Cooke court explicitly recognised liability for pure economic loss, reasoning that building controls concerned not just safety but “property values and amenities.” (Cooke P, at 91)
The high-water mark came with the Privy Council’s decision in Invercargill City Council v Hamlin [1996] AC 624 (PC). The Council appealed a finding of liability for negligent inspection, arguing New Zealand should abandon the Bowen line. The Privy Council disagreed, pointing to local conditions – high home ownership, small builders, and homeowners’ reliance on council inspections – to justify the liability.
By then, the UK had already changed course. In Murphy v Brentwood District Council [1991] 1 AC 398, the House of Lords overruled Anns, holding that pure economic loss from building defects was not recoverable in negligence.
Murphy marked a conscious rejection of judicial policymaking. The Law Lords acknowledged that Anns was an overstep – Lord Keith warning that in what was essentially a consumer protection field, the precise extent and limits of the liabilities of builders and local authorities were best left to Parliament.
Australia’s High Court never followed Anns, refusing to impose liability on councils for pure economic loss from building defects. In Sutherland Shire Council v Heyman (1985) 157 CLR 424, it maintained the traditional exclusionary rule.
Yet New Zealand’s courts pressed on undeterred.
The Perverse Consequences
The practical effects of legal indeterminacy quickly materialised with the leaky buildings scandal. Councils became the “last man standing” when builders disappeared. The spectre of multi-million-dollar claims induced extreme risk aversion. Every building consent became a potential lawsuit. Inspectors became box-tickers focused on avoiding blame. Many councils struggled to obtain insurance. The costs flowed through to ratepayers and consent applicants.
And the expansion continued: in 2012’s Body Corporate 207624 v North Shore City Council [2012] NZSC 83, [2013] 2 NZLR 297 (Spencer on Byron), the Supreme Court extended the duty to commercial buildings, rejecting distinctions based on building owner sophistication. The court saw no principled stopping point.
Why Courts Lack the Tools for Policy Choices
The expansion of liability for pure economic loss is a paradigm case of the judicial lawmaking problem I examined in Who Makes the Law? Reining in the Supreme Court: courts making policy choices that belong to Parliament, with consequences that ripple through the economy for decades.
Parliament never decided councils should insure homeowners against building defects. Parliament never weighed risk-averse processes against expanded tort liability. Parliament never considered whether warranty schemes might better serve these goals.
The courts made these choices. Yet judges lack the tools for this task. They cannot conduct broad consultation or balance competing interests across the economy. They work incrementally, case by case, through adversarial proceedings. They lack democratic accountability. When liability produces perverse outcomes, voters cannot remove judges. Parliamentary solutions can be debated and replaced. Judicial decisions become entrenched.
None of this is to impugn the courts’ motives; their concern for fairness was genuine. But good intentions are not a constitutional warrant for policymaking.
The Way Forward
The Government’s August 2025 reforms represent a tacit admission that something has gone badly wrong. When councils face $160 million claims and the Minister explicitly acknowledges that liability settings create “frustrating delays and extra cost,” he is describing the consequences of ill-considered judicial policymaking. But proportionate liability is a band-aid. It reduces councils’ exposure but leaves intact the fundamental problem: the tort duty itself. The risk aversion will continue, merely recalibrated.
Some will ask, “If Bowen was wrong, why complain 48 years later?” The answer is threefold: because the weathertightness crisis revealed costs that were previously hidden; because the Supreme Court continues expanding liability, not limiting it; and because the Government’s own reforms constitute a tacit admission of dysfunction – even if they do not address the root cause.
Unfortunately, judicial decisions create political traps. Once courts establish duties favouring homeowners, any Parliamentary reversal appears to “take away rights.” The political cost of correction is asymmetric: judges face no accountability when creating duties, but politicians pay dearly when removing them.
Parliament’s responses – the Building Act 2004 warranties, now the 2025 liability reforms – have worked within the framework courts created rather than challenging it. Each incremental adjustment accepts the judicially-imposed duty as legitimate and merely manages its consequences. This entrenches the original error rather than correcting it. Parliament has spent two decades treating symptoms while leaving the underlying pathology untouched.
Parliament could act decisively now. It could clarify that repair costs for building defects are not recoverable in negligence. This would restore the orthodox position, returning risk allocation to contract and insurance – where parties can negotiate terms, price risk appropriately, and allocate responsibility through voluntary agreement rather than open-ended duties imposed on ratepayers.
Bowen v Paramount Builders demonstrates that judicial overreach is not limited to cases with high media profiles. Sometimes it occurs quietly, in technical areas, building precedent by precedent until the cumulative effect transforms an economy. Nearly 50 years later, we live with the consequences: a building consent regime that frustrates everyone, driven by judicial policy choices never democratically debated.
When courts make law, they build houses of cards. Parliament is now attempting repairs, retrofitting a structure built on unsound foundations, addressing symptoms while the underlying problem persists. Some houses of cards need to be demolished and rebuilt – this time by the right builder: Parliament itself.
Roger Partridge is chairman and a co-founder of The New Zealand Initiative and is a senior member of its research team. He led law firm Bell Gully as executive chairman from 2007 to 2014. This article was sourced HERE
The Law Commission examined the problem in 2014, recommending a statutory cap on council liability. The Government’s 2025 response goes further: replacing joint and several liability with proportionate liability, so councils pay only their share.
But the reform’s ambition conceals a deeper failure: none of this dysfunction was inevitable. It flowed from judicial decisions beginning in the late 1970s that expanded the law of negligence to create liability where none existed before. Builders became liable to subsequent purchasers for defective construction even though their contractual obligations were to the original owner alone. Councils became liable for negligent inspections.
Australia’s highest court maintained greater restraint, refusing to impose liability on councils for building defects. When the United Kingdom’s House of Lords acknowledged its wrong turn in the early 1990s, New Zealand’s courts had the opportunity to follow. Instead, they pressed on.
The 2025 reforms are now treating the symptoms. But they do not cure the disease. Councils will still face liability for building defects. Their risk aversion will continue, merely recalibrated. Other jurisdictions address the risk of building defects through transferable insurance schemes, where premiums fund protection for subsequent purchasers. Our courts chose instead to make councils involuntary insurers, funded by ratepayers.
The Orthodox Position: A Line in the Sand
Tort law traditionally protected persons and tangible property from harm. Economic interests were left to contract, insurance, or legislation – domains where parties could negotiate terms, set boundaries, and allocate risks through democratic processes or voluntary agreement.
Thus, negligence causing personal injury or property damage was actionable. Negligence causing financial loss – what lawyers call “pure economic loss” – generally was not.
This exclusionary rule was not arbitrary formalism. It reflected a fundamental choice about the limits of judicially imposed obligations and, ultimately, about individual freedom.
As Peter Watts KC explained in his seminal New Zealand Law Review essay, Taxonomy in Private Law – Furor in Text and Subtext (2014), “the benefits of the law allowing us to ignore one another’s economic interests outweigh the imposition of duties of care” (Watts, at 134). In a free society, individuals should not owe open-ended duties to protect strangers from financial loss. Such duties should arise, if at all, from voluntary undertakings – through contract, assumption of responsibility, or legislative schemes.
The distinction between physical harm and pure economic loss marks, as Watts argues, “the only intelligible line” for tort liability. Once courts move beyond protecting persons and tangible property, the boundaries become arbitrary and the problems multiply. How far down the chain of does liability extend? Why should a negligent builder owe a duty to a future homeowner but not to their mortgage lender – or neighbours whose property values decline? If economic loss is recoverable, why restrict the careless driver’s liability to repairing your car? Why not include the financial losses of everyone else stuck in traffic caused by the crash?
The potential claimants are indeterminate, the quantum unpredictable. The answer cannot be found in legal principle – only in judges’ subjective preferences about which losses deserve compensation.
Donoghue v Stevenson [1932] AC 562 (HL) illustrates proper common law development. Lord Atkin’s “neighbour principle” synthesised existing categories of duty based on proximity and foreseeability. But crucially, those existing duties protected only against physical harm. The duty was an extension of existing principles, not a policy-driven innovation.
The exception proved the rule. Hedley Byrne v Heller [1964] AC 465 (HL) recognised liability for negligent misstatement, but only where the defendant voluntarily assumed responsibility – a principle rooted in the defendant’s own conduct, not judicial preference.
The exclusionary rule was not a gap requiring judicial correction. It was a constitutional choice.
Questions about who should bear the risk of defective buildings, whether insurance should be mandatory, how far liability should extend, and how losses should be allocated are all policy decisions for democratic deliberation, not judicial determination. They belong to Parliament’s domain, not the courts’. Otherwise, we are left with the proverbial ‘chancellor’s foot’ – arbitrary judicial decisions varying with each judge’s preferences, producing unpredictability rather than the certainty the rule of law demands.
Bowen: The Critical Departure
Our courts leapt off the tort law tracks shortly before I started law school in Bowen v Paramount Builders [1977] 1 NZLR 394 (CA). A homeowner discovered defective foundations years after purchase. The subsequent purchaser had no contract with the builder. Could they nevertheless sue the builder in negligence for repair costs – a purely economic loss?
The Court of Appeal said yes. The reasoning seemed attractive: builders owed a duty to avoid latent defects that were “a source of danger.” The court treated the manifestation of the defect – the cracking and settlement caused by inadequate foundations – as damage to the building. Yet the damages sought were plainly economic: repair costs and diminished value.
The conceptual sleight-of-hand made the intervention easier. By treating the manifesting defect as damage to the building, the court avoided confronting what it was doing: creating liability for pure economic loss.
But the building was defective from the start. The cracks and settlement were simply the discovery of pre-existing economic loss – the difference between what the purchaser paid and what the building was actually worth. This was not damage to property in any meaningful sense. It was financial disappointment.
More fundamentally, no one voluntarily assumed responsibility to future purchasers of buildings. The builder’s relationship was with the original purchaser. If any duty existed, it arose in contract.
The Court of Appeal imposed a duty based on judicial preference: builders should be accountable, consumers need protection, the loss must fall somewhere. These are legitimate policy concerns. But they are questions for Parliament, which can consult widely, consider competing interests, design comprehensive schemes with clear boundaries, and accept democratic accountability for the choices made.
Sir Robin Cooke later defended the decision, calling the distinction between defects harming “other” property and defects harming the building itself an “impossible distinction” (Robin Cooke, “An Impossible Distinction” (1991) 107 LQR 46.) Yet the distinction was entirely possible – and courts draw distinctions like this every day. A faulty boiler that explodes and damages walls causes physical damage; a faulty boiler that merely underperforms causes economic loss. The line between “damage” and “defect” is a basic organising principle of tort and contract alike.
Cooke’s objection was not that the distinction could not be drawn, but that he disliked the outcomes it produced. That is policy preference dressed as analytical impossibility – the kind of instrumental reasoning that turns judges into legislators. The issue was not technical but constitutional: the boundary between tort and contract, between obligations freely assumed and those imposed by judicial policy. Between judicial restraint, and the judge as lawmaker.
In blurring the line, the court did not apply the common law method – it legislated.
A Commonwealth Moment
Bowen did not emerge in a vacuum. Across the Commonwealth in the 1970s and 1980s, courts were grappling with similar questions. The English case of Dutton v Bognor Regis UDC [1972] 1 QB 373 had signalled the direction – extending negligence liability to local authorities for defective building inspections. Anns v Merton London Borough Council [1978] AC 728 followed, holding that local authorities owed a duty of care when exercising their inspection functions.
New Zealand’s courts enthusiastically embraced this approach. In Mount Albert Borough Council v Johnson [1979] 2 NZLR 234 (CA), the Court of Appeal held councils liable for negligent building inspections. By the mid-1980s, in Brown v Heathcote County Council [1986] 1 NZLR 76 (CA), the Cooke court explicitly recognised liability for pure economic loss, reasoning that building controls concerned not just safety but “property values and amenities.” (Cooke P, at 91)
The high-water mark came with the Privy Council’s decision in Invercargill City Council v Hamlin [1996] AC 624 (PC). The Council appealed a finding of liability for negligent inspection, arguing New Zealand should abandon the Bowen line. The Privy Council disagreed, pointing to local conditions – high home ownership, small builders, and homeowners’ reliance on council inspections – to justify the liability.
By then, the UK had already changed course. In Murphy v Brentwood District Council [1991] 1 AC 398, the House of Lords overruled Anns, holding that pure economic loss from building defects was not recoverable in negligence.
Murphy marked a conscious rejection of judicial policymaking. The Law Lords acknowledged that Anns was an overstep – Lord Keith warning that in what was essentially a consumer protection field, the precise extent and limits of the liabilities of builders and local authorities were best left to Parliament.
Australia’s High Court never followed Anns, refusing to impose liability on councils for pure economic loss from building defects. In Sutherland Shire Council v Heyman (1985) 157 CLR 424, it maintained the traditional exclusionary rule.
Yet New Zealand’s courts pressed on undeterred.
The Perverse Consequences
The practical effects of legal indeterminacy quickly materialised with the leaky buildings scandal. Councils became the “last man standing” when builders disappeared. The spectre of multi-million-dollar claims induced extreme risk aversion. Every building consent became a potential lawsuit. Inspectors became box-tickers focused on avoiding blame. Many councils struggled to obtain insurance. The costs flowed through to ratepayers and consent applicants.
And the expansion continued: in 2012’s Body Corporate 207624 v North Shore City Council [2012] NZSC 83, [2013] 2 NZLR 297 (Spencer on Byron), the Supreme Court extended the duty to commercial buildings, rejecting distinctions based on building owner sophistication. The court saw no principled stopping point.
Why Courts Lack the Tools for Policy Choices
The expansion of liability for pure economic loss is a paradigm case of the judicial lawmaking problem I examined in Who Makes the Law? Reining in the Supreme Court: courts making policy choices that belong to Parliament, with consequences that ripple through the economy for decades.
Parliament never decided councils should insure homeowners against building defects. Parliament never weighed risk-averse processes against expanded tort liability. Parliament never considered whether warranty schemes might better serve these goals.
The courts made these choices. Yet judges lack the tools for this task. They cannot conduct broad consultation or balance competing interests across the economy. They work incrementally, case by case, through adversarial proceedings. They lack democratic accountability. When liability produces perverse outcomes, voters cannot remove judges. Parliamentary solutions can be debated and replaced. Judicial decisions become entrenched.
None of this is to impugn the courts’ motives; their concern for fairness was genuine. But good intentions are not a constitutional warrant for policymaking.
The Way Forward
The Government’s August 2025 reforms represent a tacit admission that something has gone badly wrong. When councils face $160 million claims and the Minister explicitly acknowledges that liability settings create “frustrating delays and extra cost,” he is describing the consequences of ill-considered judicial policymaking. But proportionate liability is a band-aid. It reduces councils’ exposure but leaves intact the fundamental problem: the tort duty itself. The risk aversion will continue, merely recalibrated.
Some will ask, “If Bowen was wrong, why complain 48 years later?” The answer is threefold: because the weathertightness crisis revealed costs that were previously hidden; because the Supreme Court continues expanding liability, not limiting it; and because the Government’s own reforms constitute a tacit admission of dysfunction – even if they do not address the root cause.
Unfortunately, judicial decisions create political traps. Once courts establish duties favouring homeowners, any Parliamentary reversal appears to “take away rights.” The political cost of correction is asymmetric: judges face no accountability when creating duties, but politicians pay dearly when removing them.
Parliament’s responses – the Building Act 2004 warranties, now the 2025 liability reforms – have worked within the framework courts created rather than challenging it. Each incremental adjustment accepts the judicially-imposed duty as legitimate and merely manages its consequences. This entrenches the original error rather than correcting it. Parliament has spent two decades treating symptoms while leaving the underlying pathology untouched.
Parliament could act decisively now. It could clarify that repair costs for building defects are not recoverable in negligence. This would restore the orthodox position, returning risk allocation to contract and insurance – where parties can negotiate terms, price risk appropriately, and allocate responsibility through voluntary agreement rather than open-ended duties imposed on ratepayers.
Bowen v Paramount Builders demonstrates that judicial overreach is not limited to cases with high media profiles. Sometimes it occurs quietly, in technical areas, building precedent by precedent until the cumulative effect transforms an economy. Nearly 50 years later, we live with the consequences: a building consent regime that frustrates everyone, driven by judicial policy choices never democratically debated.
When courts make law, they build houses of cards. Parliament is now attempting repairs, retrofitting a structure built on unsound foundations, addressing symptoms while the underlying problem persists. Some houses of cards need to be demolished and rebuilt – this time by the right builder: Parliament itself.
Roger Partridge is chairman and a co-founder of The New Zealand Initiative and is a senior member of its research team. He led law firm Bell Gully as executive chairman from 2007 to 2014. This article was sourced HERE
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