08.04.2020

COVID-19: Government contract guidelines for NZS3910:2013

The Government has announced contract guidelines to help support the construction industry during the Covid-19 restrictions.  These apply to contracts based on NZS3910:2013 (un-amended), being the most common form of contract for construction projects in New Zealand. 

The guidelines were developed by the Construction Sector Accord steering group with the support of the Building and Construction Minister, and are the first action from the Accord’s Covid-19 Response Plan.  Strictly speaking, they only apply to government agencies working with the construction industry.  Nevertheless, they send a very clear message to the entire industry about the Government’s interpretation and expectation, which will be hard to ignore.

The issues

Since New Zealand moved to Level 3 and then Level 4 restrictions, much of the sector has been grappling with two immediate issues under NZS3910:2013:

  1. Whether the Engineer was obliged to suspend the whole or part of the works in response to these restrictions under clause 6.7.1; and
  2. Whether these restrictions amounted to effectively a change of law under clause 5.11.10.

The significance of these issues is that in each case the Contractor becomes entitled to a Variation (if there is a suspension or a change of law), which in turn enables the Contractor to recover time-related costs for the period of the restrictions. 

There seems to have been little, if any, dispute that the restrictions, being entirely unforeseeable events if the contract was entered before Covid-19 arose, would lead to an extension of time under clause 10.3.1(f).  While that may provide a Contractor with relief against liquidated damages, an extension for an unforeseen event does not give rise to time-related costs.  Under clause 10.3.7, time-related costs are only available where an extension is granted for the net effect of a Variation (10.3.1(a)) or for a default by the Principal (10.3.1(g)).  Since the restrictions are not due to the default of the Principal, any entitlement to time-related costs rests on whether there is Variation, which is why a suspension (6.7.1) and/or a change of law (5.11.10) becomes relevant.

Contractual Guidelines

Engineer Suspension

The guidelines suggest, but fall short of stating expressly, that suspension of the Contract Works has “become necessary” because of the Covid-19 restrictions (ie that the Engineer was obliged to suspend).  They do, however, affirm that where a suspension notice has been issued by the Engineer, the Contractor is entitled to a Variation under clause 6.7.3 for the suspension.

Change in Law

In any event, the guidelines state that the Government’s actions to enable the establishment of the Alert Level 4 directive “constitute the making of a statue and/or regulation” that gives rise to a variation under clause 5.11.10.  In other words, it was a change of law.  This is the Government’s interpretation of 5.11.10 in the circumstances.

Entitlement to a Variation

The upshot is that, where the guidelines apply, a Contractor will be entitled to a Variation – because the Engineer has issued a suspension notice under 6.7.1 and/or as a result of new Covid-19 laws or regulations under 5.11.10.  Any increase in costs, including any time-related costs, will therefore be treated as a Variation and recoverable by the Contractor on that basis.

The quantification of such costs is a separate issue, which the industry is still working through given the unique circumstances.  That aspect will be contract-specific to some extent and best resolved by agreement between the contracting parties in each case.  The guidelines are intended to remove unnecessary disagreements about whether there is an entitlement in the first place. 

Cashflow and additional hardship

Despite the above clarifications, the guidelines also recognise that there is still likely be significant financial consequences for Contractors from the Covid-19 restrictions, which stands to affect the industry and economy as a whole.  To that end, they ask government agencies to consider:

  • Other mechanisms to improve cashflow and remobilisation. Specific suggestions include:  forward ordering, payment in advance/prepayment, faster payment cycles, issuing purchase orders for costs incurred, interim payments, or for results-based contracts, basing payment values on previous months; and
  • Whether additional extra-contractual financial relief for individual Contractors is warranted and in the public interest. MBIE says it is developing processes for considering and approving requests for special relief.

Relevant Links

Government Announcement

Contract Guidelines

Government guidelines contact: procurementplanning@mbie.govt.nz

Construction Law Team

To discuss these guidelines and any other construction law concerns relating to Covid-19, please feel free to contact one of our construction team or your usual contact at Hesketh Henry.

Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

The Legal500 Construction Comparative Guide
The Construction team at Hesketh Henry is the exclusive New Zealand contributor to The Legal 500: Country Comparative Guide for Construction.  Partners Glen Holm-Hansen and Helen Macfarlane along wit...
21.05.2024 Posted in Construction
Government trumps Member’s Bill with the Contracts of Insurance Bill 2024
It now seems there is at least the possibility 2024 will be the year New Zealand finally sees the reform of insurance law with the Government’s own bill, the Contracts of Insurance Bill, now before ...
16.05.2024 Posted in Insurance
Computer Hand Wide
Privacy Commissioner releases draft biometrics privacy code
Biometrics is a trending issue and with the development of technology there are consistently more ways biometric data can be used, from replacing a password to identifying repeat shoplifters in a shop...
03.05.2024 Posted in Business Advice
Building Permit
Build-to-Rent (BTR) Basics
If the term Build-to-Rent is new to you, you are probably not alone.  Unlike countries such as the USA, UK and Australia where BTR is well established, the BTR sector is still emerging in New Zealand...
26.04.2024 Posted in Property
Insurance Contract Law – Parliament finally gets to consider long-awaited reforms
The Government’s Contracts of Insurance Bill was introduced on 30 April 2024.  See our article on this Bill. In February 2022, the Ministry of Business, Innovation and Employment (MBIE) released an...
24.04.2024 Posted in Insurance
Tower Troubles – Body Corporate 366567 (Harbour Oaks) v Auckland Council
Standing 40 storeys tall with 406 units, the Gore Street building in downtown Auckland (formerly known as “Harbour Oaks”) is presently the subject of New Zealand’s largest claim for residential ...
18.04.2024 Posted in Construction & Disputes
Construction Framework Wide BW
OIO Spotlight:  Government issues new directive on foreign investment for build-to-rent housing developments
Earlier this year, the coalition Government announced that it would be introducing a new streamlined consent pathway for build-to-rent developments by way of amendments to the Overseas Investment Act ...
16.04.2024 Posted in Business Advice & Property
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.