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Parties to construction contracts, especially those contractors (and subcontractors) who are engaged to carry out particular contract works by an agreed due date for completion, may be exposed to penalties or "liquidated damages" if unable to carry on or complete those works during the Covid-19 Alert Level 4 lockdown.
Those contractors who are prevented from completing the contract works before the agreed date for completion as a result of the lockdown need to take prompt and accurate steps as contemplated under their construction contracts to seek suspension of the contract works or an extension of time for completion from the contract Principal (or the engineer where appropriate).
Each case must be dealt with on a case-by-case basis. However, if a construction contract incorporates NZS 3910:2013, NZS 3915:2005 or NZS 3916:2013 (collectively the "NZS Conditions of Contract") as part of its terms, and unless the NZS Conditions of Contracts were substantially varied, then those contractors may be able to rely on the suspension of works and/or extension of time clauses.
In many cases, seeking suspension and/or an extension of time will be the best and the most viable option available to those contractors. This is because the NZS Conditions of Contracts do not include a "Force Majeure" clause by default. If a construction contract includes a "Force Majeure" clause in its terms, separately to those set out in the NZS conditions of contracts, then the contractors may be excused from incurring penalties or liabilities without taking active steps to invoke suspension of works and/or extension of time clauses.
However, to err on the side of caution, it is recommended that all contractors and subcontractors take active steps to seek suspension or extension of time as contemplated under their contracts.
NZS Conditions of Contract - Suspension of Work
Pursuant to clause 6.7.1 of NZS 3910:2013, NZS 3916:2013 or clause 6.5.1 of NZS 3915:2005, the Principal (or the Engineer in NZS 3910) is required to suspend the progress of the whole or any part of the contract works where suspension becomes "necessary", and to notify the contractor of the same.
The NZS conditions of contracts do not otherwise define or provide guidance on when suspension of works becomes "necessary". The ordinary meaning of the word favours an interpretation encompassing a broad range of circumstances, including where further progress of the contract works have become unrealistic or otherwise problematic for the contractor without any party to the contract being at fault.
Government agencies have adopted the approach that the suspension of the affected contract works have now "become necessary". Please follow this link "Covid-19 Construction Contract Management Guidance" for a full text of the Ministry of Business, Innovation and Employment's guidance statement on this issue.
Nonetheless, some contractors may expect to face some resistance from their Principals or the Engineers to the contracts in the private sector when requiring them to suspend the contract works. This tension and resistance may arise because unless the suspension is due to the contractor's default, the suspension is to be treated as if it was a variation pursuant to clause 6.7.3 of NZS 3910/3916 and 6.5.3 of NZS 3915.
As a result, the contractor may be entitled to an extension of time by reason of the net effect of the variation pursuant to clause 10.3.1(a), being the only qualifying ground for extension of time which entitles the contractor to a compensation for the time related costs incurred in relation to that extension.
Furthermore, if the suspension remains in effect for more than three months, contractors can take steps under clause 6.7.4 of NZS 3910/3916 and 6.5.4 of NZS 3915 to delete the uncompleted portion of the suspended work from the contract, or where the suspension affects the whole of the contract works as a deemed abandonment of the contract by the principal.
While it is not yet clear whether the Covid-19 lockdown will be extended, and what the magnitude of its on-flowing effects will be within the construction sector, many principals and engineers to construction contracts will be conscious of the above outcomes.
Parties to a construction contract may nonetheless suspend the contract works for any period by agreement, and they may negotiate to contract out of the above clauses - at least in respect to the present Covid-19 lockdown - to achieve an outcome satisfactory to both sides of the contract.
The NZS Conditions of Contract do not specify a time limit for giving notice requiring the principal or the engineer to suspend the contract works, but we recommend that affected contractors act promptly.
NZS Conditions of Contract - Extension of Time
Recently, there has been some discussion within the legal profession on whether the affected contractors are entitled to seek either suspension of the works or an extension of time for completion, or both at the same time. The author takes the view that the two courses are not inconsistent with each other, and may be invoked concurrently.
Pursuant to clause 10.3.1(f) of the NZS Conditions of Contract, the principal or the engineer must grant an extension of the time for completion of the contract works if the contractor is "fairly entitled" to an extension 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." The reference to "time of tendering" in clause 10.3.1 is also important to consider as the time of submission of the tender will be relevant in deciding what was foreseeable, as opposed to the date that the force majeure event occurs.
In most cases it will be readily accepted that the Covid-19 induced lockdown was not reasonably foreseeable by an experienced contractor at the time of tendering, and that it was not due to the fault of the contractor. However, the contractors must still show that they are "fairly entitled" to the duration of extension period sought, and cannot claim for an unreasonably lengthy extension of time. The absence of reference to an "epidemic" or "pandemic" in clause 10.3.1 will not be necessarily fatal to any application for an extension of time where there has in fact been a delay to the contract works.
Contractors may therefore seek, as part of the period of extension, reasonable time it would take them to regroup its production capacities and resources, but must keep it to the minimum reasonably required. In other words, contractors will invariably be obliged to take steps to prevent and/or mitigate the risks and consequences of Covid-19 as the disruptive event.
As the effect of Covid-19, including but not limited to the lockdown, is of a continuing nature, pursuant to clause 10.3.3, contractors may give more than one notice each claiming a specific period of extension on that ground, as the situation develops. Preventative measures could include obtaining materials from other suppliers, engaging alternative subcontractors or amending the works program so that specific tasks are completed at a future date.
Contractors seeking extension of time must notify the principal or the engineer that it claims an extension, the grounds for the extension, and the period of extension sought within 20 working days after the circumstances arise which are relied on as the grounds of extension. However, the 20 working days period under the NZS Conditions of Contract may be replaced by a shorter period as negotiated by the parties under their contracts. Care should be taken to check their contract to see whether this period has been shortened by amendment in the Special Conditions of their contract.
For example, it is common for a subcontract agreement to require that the subcontractor notifies the contractor within 18 working days rather than 20 working days, so as to allow the contractor sufficient time to notify the head contractor.
We recommend that you contact us immediately should you require our assistance in taking the above contractual steps.
NZS 3902:2004 - Housing, Alterations and Small Buildings Contract
NZS 3902:2004, Housing, Alterations, and Small Buildings Contract, also provides similar provisions for the builders to rely on during the Covid-19 lockdown. Pursuant to clause 5.7, where the owner owns the site, and the builder encounters adverse physical conditions which could not have been reasonably foreseeable, the builder may require a time extension from the owner and recover any reasonable costs attributable to such conditions. Pursuant to clause 11.5, the owner and the builder must then agree an adjustment to the finish time for the period of delays caused by anything beyond the builder's control.
While the above NZS contracts are widely adopted standard form documents incorporated into a vast number of construction contracts, this article only offers some broad guideline. Each case must be assessed individually as most construction contracts include non-standard terms and conditions negotiated by the contracting parties, often deviating from the default NZS terms in one form or another.
Frustration of Contract
In certain circumstances, either party to a construction contract may be able to rely on the doctrine of frustration to terminate the contract as opposed to delaying its performance. NZS 3910:2013 and NZS 3916:2013 permit a party to give notice to the other party if it considers the contract has been frustrated, although the threshold for assessing whether this is the case is a very high one and takes into account a wide variety of factors. The doctrine itself requires the party asserting frustration to prove that the contract can no longer be performed in the way originally intended. The fact that performance will be delayed or be more costly is not enough.
It is clear that the impact of Covid-19 on the construction industry will lead to disputes over delay and termination, with the parties' rights being determined by the scope of the underlying contract. In the current climate, care must be taken regarding advisory statements from the Government in relation to Covid-19 as such statements may not be enough to give rise to frustration, as opposed to a law change that makes performance of the contract illegal, for example. Each case will depend on its circumstances.
Finally, a party seeking to rely on the frustration doctrine to cancel should take legal advice before doing so, because there is always a risk that refusing to perform contractual obligations may give rise to the other party claiming a breach of contract together with a claim for damages for repudiation.
If you require our assistance with the matters discussed in this article, including going through the contractual steps to invoke suspension and/or extension of time clauses, negotiations to achieve advantageous contractual position in the long run, or any other issues with your construction contracts, please get in touch with us directly to organise an appointment for a telephone/video conference.
Please direct any enquiries to:
Craig Andrews (candrews@mcveaghfleming.co.nz) (09) 306 6745, Auckland Office
John Burley (jburley@mcveaghfleming.co.nz) (09) 306 6741, Auckland Office or
Kai Ling Chiu (kchiu@mcveaghfleming.co.nz) (09) 951 2573, Auckland Office.
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© McVeagh Fleming 2020
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
