The effect of COVID-19 on construction contracts
Introduction
Our experience was that COVID-19 first impacted procurement. Then, once the alert level increased to levels 3 and 4, most construction sites were shut down completely. In some cases, design (and other tasks which can be carried on remotely) continues but physical works have come to a standstill.
This article considers the effect of COVID-19 on construction contracts, with specific reference to NZS 3910:2013 (Conditions of contract for building and civil engineering construction). Construction contacts based on NZS 3910 often contain special conditions which vary and/or add to the general conditions. Particular attention should be given to those special conditions to ascertain whether they are relevant in this context.
Suspension by the engineer
Once alert level 4 took effect some, but not all, engineers suspended works under clause 6.7.1, which states:
“If the suspension of the whole or a part of the Contract Works becomes necessary, the Engineer shall instruct the Contractor in writing to suspend the progress of the whole or any part of the Contract Works for such time as the Engineer may think fit, and the Contractor shall comply with the instruction.”
From a contractor’s perspective, the advantage of a suspension is that it will be treated as a variation, entitling the contractor to an extension of time and time related costs. Conversely, principals may argue that the current situation does not constitute a suspension under clause 6.7.1, given that the site has been shut down by Government (not the engineer). In some cases, parties are taking a practical approach and agreeing to suspend the works, which is provided for in clause 6.7.5.
If the suspension continues for more than 3 months, the contractor is able to request permission to continue the works. If the engineer does not grant permission within 1 month, then the contractor is entitled to treat the suspension as a variation (deleting the uncompleted portion of the works).
Change of law
Clause 5.11.10 states:
“If after the date of closing of tenders the making of any statute, regulation, or bylaw, or the imposition by Government or by a local authority of any royalty, fee, or toll increases or decreases the Cost to the Contractor of performing the Contract, such increase or decrease not being otherwise provided for in the Contract, the effect shall be treated as a Variation.”
There has been debate within the construction industry as to whether the various orders issued, and/or relied on, by Government in the fight against COVID-19 constitute the “the making of any statute, regulation, or bylaw”. Unsurprisingly, many contractors are arguing that clause 5.11.10 does apply (entitling the contractor to a variation and corresponding extension of time and time related costs).
We understand the interpretation adopted by MBIE is that the various restrictions put in place, including the escalation to alert level 4, emanate from regulations or statutes meaning that clause 5.11.10 does apply. While this interpretation is not binding, it will be persuasive. You can read the statement issued by MBIE here.
Advance notification
Under clause 5.21.1, both the contractor and engineer have an obligation to notify each other in writing as soon as they become aware of any matter which is likely to (among other things) materially alter the contract price or delay completion. Once notified, the contractor or engineer may require the other to meet (presumably including via electronic means) to explore proposals for avoiding or reducing the impact of the matter which has been notified.
The purpose of clause 5.21 is to encourage early communication so that the parties can work together to avoid or mitigate the impact of the matter (in this case COVID-19) as much as possible.
The failure of a contractor to promptly notify the engineer under clause 5.21.1 can cause any variation arising out of the matter to be valued as if advance notification had been given and the parties were able to avoid or reduce its impact.
Extensions of time
A construction contract typically permits the contractor to have more time to achieve completion in specified circumstances. In NZS 3910, the grounds for an extension of time are set out in clause 10.3.1, and include:
the net effect of a variation;
any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor; and
default by the principal, which is not a variation.
A contractor is only entitled to time-related costs where an extension of time is granted under clause 10.3.1(a) (a variation) or 10.3.1(g) (a default by the principal).
It seems unlikely that the consequences of COVID-19 were foreseen by the most experienced contractors even in the first few weeks of 2020. However, it will be more difficult for a party to claim an extension of time for contracts entered into since COVID-19 became widely known, given the impact of COVID-19 should have been foreseen (at least to some extent).
If the works have been suspended under clause 6.7 or clause 5.11.10 applies, the suspension or other effect is treated as a variation, entitled the contractor to an extension of time under clause 10.3.1(a) and time related costs.
Frustration
The doctrine of frustration should also be considered, particularly if there is no force majeure or extension of time clause that applies. NZS 3910 refers to frustration in clause 14.1.1, which states:
“In the event that either the Principal or the Contractor considers that the Contract has become impossible of performance or has been otherwise frustrated, one may notify the other that it considers the Contract to be terminated. If the other party agrees, or in the event of disagreement if it is so determined by the Engineer or by mediation or arbitration under Section 13, then 14.1.2 shall apply.”
A contract is not easily frustrated. While COVID-19 has made the performance of many construction contracts more difficult, delayed and/or more expensive, due to the very high thresholds of ‘impossible’ or ‘radically different’, we expect that the frustration of contracts will be less common.
Get in contact
If you would like advice about the effect of COVID-19 on a construction project you are involved with, or you would like our assistance with another legal matter you are facing, please contact your usual point of contact at Kemps Weir or contact us here.
Disclaimer: This publication should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.