IMPACT OF COVID-19 ON CONSTRUCTION PROJECTS UNDER EXISTING NZS3910/3916 CONTRACTS

Posted by Deanna Clark & John Kearns on April 9 2020 in News

We provide below a brief summary of the provisions of the NZS3910/3916 Contracts that may be relevant in these current circumstances (and beyond). The below analysis focuses only on the general terms of the contracts and is not intended to be legal advice in respect of any specific contracts or set of factual circumstances.

Each individual contract will likely have their own special conditions, some of which may amend or vary the general terms resulting in different outcomes. Therefore, it is important that a full analysis of the relevant contract is undertaken to determine what provisions, remedies etc. will apply to the particular set of circumstances and what the effects the Covid-19 restrictions may have on your project.

General

The impacts of Covid-19 on existing construction projects are wide ranging and likely to continue for some time after the Level 4 Alert Restrictions in New Zealand have been lifted. By way of example only, these might include:

1.Level 4 Alert Restrictions: The Level 4 Alert Restrictions in New Zealand have a clear and direct impact on the ability for construction works to continue on site for the duration of the Level 4 Alert. Unless the works are essential (or specifically authorised by Government), all business including construction sites must close.

2.Level 3 Alert Restrictions (and beyond): In some circumstances, the Level 3 Alert Restrictions may also directly impact works being undertaken on site – either halting them altogether or causing reduced capacity on site.

3.Procurement and Supply: There will likely be delays arising around procurement and supply of materials. There are similar restrictions around the globe and delays with shipping and movement of goods, all of which will likely affect contractor’s supply chains and ability to source materials in a timely manner.

4.Labour/Consultants: There may also be a shortage of construction labour as a result of isolation/quarantine requirements or sickness. However, these shortages are also likely to affect consultants such as planners, engineers, architects, surveyors etc.

5.New legislation/regulation: New legislation and/or regulations may be introduced to reduce the spread of Covid-19. These may cause delays in undertaking to work and compliance will also likely increase the cost to the contractor.

6.Consenting/Approvals: In addition, delays may be experienced in consenting and approvals if the relevant Local Authorities are affected. For example, site inspections may not be able to be carried out delaying the issue of consents and/or approvals to enable construction to continue to the next stage.  

Contractual Provisions – NZS3910/3916

Lack of Force Majeure Provision

The NZS3910 and NZS3916 do not contain a force majeure provision, which is common in many commercial contracts. Therefore, we consider below the other provisions with the contracts that may respond in these circumstances. These include extension of time, variation provisions, frustration and the introduction of new legislation.

Extensions of Time Clause 10.3.1

Clause 10.3.1(f) provides that the engineer must grant an extension of time for completion of the contract works (or separable portion) if the contractor “is fairly entitled to an extension” of time by reason of… “any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor.”

Therefore, provided that the tendering took place prior to the current circumstances (i.e. the outbreak of the virus, the announcement by the Government of the Level 4 Alert Restrictions coming into effect, etc.), it is difficult to see how these current circumstances could have been reasonably foreseen by the contractor and an extension of time would likely be granted. On that basis, we consider it likely that the engineer to the contract would determine that a delay arising out of Covid-19 was not reasonably foreseeable.

We note that whether the effects of Covid-19 were reasonably foreseeable will be different for new contracts being entered into where tendering took place after the announcement of the outbreak being declared a “pandemic”, the New Zealand Covid-19 Alert system and the National Emergency. There may be some argument as to exactly what date a contractor should have been able to reasonably foresee these circumstances and what information was available to the contractor at that time (although we do not expect this to affect many projects).

Whether a contractor will be “fairly entitled to an extension of time” will depend on an assessment by the engineer as to whether there has been a delay impact on the critical path of the project, and whether any steps could and/or should have been taken to mitigate these delays.

While a contractor may be entitled to an extension of time pursuant to clause 10.3.1(f), the contractor will not be entitled to compensation for time-related costs (refer clause 10.3.7), unless a separate variation entitlement arises. This approach represents a sharing of risk between the parties in respect of unforeseeable events i.e. the contractor is granted an extension of time but each party bears their own costs in respect of the delay. By way of example, delay costs might include labour costs for the contractor where works are suspended and holding/funding costs for the principal. Note also that the contractor may, in these circumstances, be able to access Government subsidies (contained in the Government’s stimulus package) which might go some way to reducing the contractor’s labour costs during the restriction period.

Operation of the Extension of Time Provision: Clause 10.3.2

In order to be granted an extension of time, the contractor must notify the engineer that it is claiming an extension and state the grounds for the extension.

The notice must be issued within 20 working days after the circumstances arise which are relied on as the grounds for extension (or as soon as practicable thereafter). Consideration will need to be given to the date on which the Government restrictions created circumstances sufficient that the engineer must grant an extension of time. We consider that this is likely to be the date on which a National Emergency was declared and the Level 4 Alert Restrictions were imposed, on 25 March 2020. Therefore contractors should ensure that they submit notice to the engineer as soon as possible if they intend to rely on the extension of time provisions.

The notice should provide details of the period of extension sought (or be followed within a reasonable time by a further notice providing these details). It may be difficult for contractors to know at this stage how long these restrictions will be in place. Further, even after the Level 4 Alert Restrictions have been lifted, there may still be circumstances which give rise to an extension of time. This is likely to be a grey area as while the Level 4 Alert Restrictions are in place, it is relatively clear that most construction sites will not be operational. It is the easing of restrictions that will create the most issues. Contractors will need to be clear as to what restrictions and circumstances are likely to affect the critical path of the project so as to ensure clear information and supporting evidence can be provided to the engineer.

Clause 10.3.3 is also likely to apply in these circumstances. Where the effect of any ground for an extension of time is of a continuing nature, the contractor may give more than one notice, each notice claiming a specific period of extension on that ground. Again, this is something the contractor should be aware of and ensure that as the restrictions are eased, the grounds for claiming the extension are updated accordingly.

Advance Notice: Clause 5.21.1

The contractor and the engineer are required to each notify the other in writing as soon as either of them become aware of any matter which is likely to materially alter the contract price, delay the works or result in a breach of statutory duty. Failure by the contractor to do so will not result in the loss of a variation if the circumstances give rise to a variation. However, the variation will be valued as if notice had been given and take into consideration whether notification might reasonably have resulted in the impact of the matter being avoided or reduced.

Clause 5.21.2 also provides that the engineer or the contractor may require the other to meet for the purpose of exploring proposals for avoiding or reducing the impact of the notified matter. We consider that in these circumstances it would be prudent for these meetings to take place as soon as possible, and to also involve the principal.

Acceleration: Clause 10.3.6

If both the principal and the contractor agree, the engineer may approve the contractor taking steps to accelerate the work. In those circumstances, the engineer will either reduce the extension of time granted or not grant any extension at all. The contractor is then paid such sum as agreed between the parties (or such reasonable sum) to compensate the contractor for the additional cost of accelerating the works.

This may be useful where the completion date is of particular importance to the principal (for example, sunset dates in on-sale agreements or funding arrangements). However, note that given the current circumstances it may not be possible for works to be accelerated if there are issues with supply chain, labour and consultant availability and consenting/approval delays.

Variations: Clause 9.1 (and other deemed variations throughout)

Clause 9.1 sets out specific circumstances in which a variation may be ordered by the engineer. However, perhaps more likely is that variations will be deemed pursuant to other provisions in the contract. For example, if there is late supply of materials by the principal (5.16); documents or drawings are delayed as a result of restricted working conditions or unavailability of consultants (2.7.7); if the engineer is unable to properly carry out their duties under the Contract (6.2.4) etc.

It is also possible that the restrictions on accessing sites might be considered “unforeseen physical conditions” for the purposes of clause 9.5.1. The term “physical conditions” is deemed to include “artificial obstructions” which could not have been reasonably foreseen and any additional costs or delays will substantially increase the contractor’s costs will be treated as a variation.

The cost of any variation will be valued in accordance with clause 9.3 and the net effect of any variation on the programme is addressed by clause 10.3.1(a).

Suspension: Clause 6.7

The NZS3910/3916 contracts include a provision that allows the engineer to suspend the contract works if that “becomes necessary” for such time as the engineer “may think fit”.

There are few guidelines and little or no New Zealand authority as to the meaning of the word “necessary” and/or the circumstances that might give rise to a suspension (other than those specifically referred to in the contract).  However, the language in the provision is wide and the engineer retains the discretion to instruct such a suspension. And, there is some commentary that suspension might be justified in circumstances where:

a.An event that might otherwise be provided for under a force majeure clause occurs and it is impossible to continue with the works for a period; or

b.There is a temporary inability on the part of either party to the contract to perform and the parties or, at least, the principal, wish to maintain the contract with a view to future performance.

Suspension pursuant to clause 6.7 does not require any notices to be issued by the contractor or the principal and can be invoked by the engineer at any time the engineer thinks fit. The engineer has duties under the contract to be independent of either party and make decisions fairly and impartially.

A suspension under clause 6.7 will give rise to a variation (provided that the suspension is not due to the default of the contractor). Therefore, from a contractor’s point of view, a suspension under this provision may be preferable to an extension of time under clause 10.3. Indeed some in the industry consider that the Level 4 Alert Restrictions compels an engineer to order a suspension and not doing so will breach the engineer’s duties under the contract. Alternatively, there is some commentary that suggests the engineer need not suspend the works because they have in effect already been suspended by the Level 4 Alert Restrictions.

However, note that where a suspension remains in effect for more than 3 months, the contractor may request the engineer to lift the suspension. If the engineer does not do so within one month of the request, then the contractor may treat the suspension as a variation to remove the uncompleted portion of the contract works from the contract (by way of a negative variation); or where the suspension affects the whole of the contract works, it may be treated as an abandonment of the contract by the principal and may give rise to a payment of compensation as a result. These are significant adverse consequences to the principal and may affect the ability of the principal to complete the project (and have other consequences in terms of funding (and funders) and other contracts such as on-sale agreements etc.).

Perhaps a better outcome for all parties is for the principal and the contractor to agree the period of suspension and the terms that will apply, as permitted under clause 6.7.5. This provision also allows the parties to agree how any resulting delays and costs will be allocated. This approach is far more likely to result in a positive short-term and long-term outcome for both the principal, the contractor and the project (and possibly even the survival of all).

Given the potential for serious consequences arising from a suspension, both in terms of cost and possible termination/deemed default by the principal, we suggest that the parties to a construction contract communicate early as to the effects of Covid-19 on the project as a whole and on the each of the party’s individual circumstances.

Frustration: Clause 14.1

Either party may give notice to the other that they consider the contract has become “impossible of performance” or otherwise “frustrated”.

Notwithstanding the contractual provision contained in the contract, frustration is generally very difficult to establish and will ordinarily require that the obligations in the contract are impossible to perform. Increased cost and delays will not usually be sufficient to establish that the contract has been frustrated.

On that basis, we consider that it is much more likely that the extension of time provisions and suspension will be utilised in the first instance.

Change in laws: Clause 5.11.10 (NZS3910) and clause 5.11.13 (NZS3916)

These clauses provide that if there is a change in legislation or regulation by the Government or a local authority that increases or decreases the cost to the contractor, then the effect will be treated as a variation.

Contractors may seek to rely on this provision in order to recover costs as a result of the Level 4 Alert Restrictions (and possibly beyond). However, there are differing views in the market as to whether the Orders in Council constitute the “making of” any statute, regulation or bylaw or rather an exercise of existing statutory powers. We do not propose to address this in great detail here. However, we would note that:

a.The general purpose of this provision is to allocate the risk of a change in law that was unknown at the time of tendering, therefore it is arguable that these provisions apply in the current circumstances.

b.There are other provisions within NZS3910/3916 that address the effects of these new “laws” pursuant to which the outcome will likely be similar e.g. suspension, extension of time etc.

c.We are still in the early stages of this outbreak and therefore, there may also be additional laws and regulations passed as the current restrictions are eased. These new laws which may increase operational costs to a contractor. For example, fewer workers on site at any one time, more stringent hygiene practices, quarantining staff where necessary etc.

d.The commentary in the market to date suggests that contractors are favouring the view that this provision will apply in the current circumstances, while principals do not. Again, we suggest that an early and collaborative approach be taken between the parties in this regard. A holistic view of the situation and the contract provisions will likely result in a better outcome for all.

Health & Safety and Protection of Persons and Property: Clause 5.7

Both the principal and contractor are PCBUs under the Health and Safety at Work Act 2015.

The contractor retains primary obligations for site safety and ensuring that employees, subcontractors and others involved in undertaking the contract works are properly protected and a safe working environment is maintained.

This might include introducing the measures noted above but may also include keeping a register of persons on site, possibly undertaking medical checks and other measures to prevent the spread of Covid-19.

The parties should also consider the insurance policies that they have in place for the contract works and whether the insurers might respond to any increase in costs to the project and/or as a result of delays or other measures/laws that are introduced.

SUMMARY

As the industry takes account of the impact of Covid-19 on both existing contracts/projects and the effect on procurement and future construction contracts/projects, it is becoming increasingly clear that a collaborative approach will serve the individuals and the industry better both in the short term and in the long term. In many cases, it will be important to involve and consultant financiers and funders in the discussion.

There is an understanding that many interested parties within the industry are inextricably linked. This includes contractors, subcontractors, principals, suppliers, funders, surveyors, architects, engineers and other consultants.  The success, or otherwise, of these projects and individuals depend on the ability of the parties to act cooperatively and in good faith. Each project will need to take account of the individual situation and factors involved in order to achieve the best outcome for all under these difficult and exceptional circumstances.

There will need to be a focus on adapting and finding solutions by working together to ensure existing projects are delivered as quickly as possible and to ensure the continued viability of the parties involved.

Failing agreement between the parties as to how to approach and address the Covid-19 impacts, the operation of the various contractual provisions will depend on the individual circumstances of the project and the parties. The engineer will be heavily involved with determining whether to instruct a suspension and, given the potential consequences of doing so, the engineer is not likely to do so lightly. The assessment of extensions of time and potential variations would like be time consuming and give rise to potential conflict between the parties (resolution of which may take weeks or months and would be costly). The engineer will need to be alert to any potential “double-dipping” and will need to take account of the Government stimulus package and the extent to which either party has been take advantage of these.

Either way, we suggest that the parties ensure that any timeframes for issuing notices are complied with so as not to lose the right for certain remedies to apply.

If you have an existing construction contract that may be affected by the Covid-19 restrictions, please contact us to discuss further what provisions may be applicable in the circumstances and, more importantly, what early action you can take. Being prepared for any eventuality will be key to ensuring a project’s success notwithstanding the current restrictions. 

 

Deanna Clark | Special Counsel
t +64 9 300 8751 | Deanna.Clark@shieffangland.co.nz

John Kearns | Partner
t +64 9 300 8752 | John.Kearns@shieffangland.co.nz

Kalev Crossland | Partner
t +64 9 300 8755 | Kalev.Crossland@shieffangland.co.nz

Jesvin Boparoy | Associate
t +64 9 379 0655 | Jesvin.Boparoy@shieffangland.co.nz