COVID-19: Impacts on Construction Contracts

New Zealand entered Covid-19 Alert Level 4 at 11.59pm on Wednesday 25 March.  Anyone not working in essential services is required to stay at home.  This restriction does not apply to building or construction work that is related to essential services or critical infrastructure, or which is immediately necessary to maintain human health and safety at work or home. 

The Issues

In this article we look at some of the key issues that have emerged during the crisis and that parties to construction contracts need to consider in light of COVID-19.  We cover existing construction projects (including potential suspensions of work, claims for variations and extensions of time (EOTs) as well as options for terminating the contract) and new construction contracts (including relevant considerations during the tender process and contractual clauses relating to risk allocation).  The situation is changing very rapidly, and we will be updating the article as new information comes to hand.

Keep in mind that the options discussed in this article may not apply to your contract.  You should seek legal advice before taking any significant steps (such as terminating your contract). 

Existing Construction Contracts

Relevant contracts should be identified and the contractual terms reviewed and carefully considered.  Should a suspension notice be issued?  Has COVID-19 caused delays and price escalations?  Can or should the existing terms of the contract be renegotiated?  Are there any clauses covering force majeure, termination or frustration?  How can the adverse effects of COVID-19 be mitigated?  What are the relevant notice provisions?

Continuing to perform under the contract

Most construction contracts require claims to be made within a prescribed period of becoming aware of the circumstances giving rise to them.  If an existing construction contract is impacted by the effects of COVID-19, the first step that should be considered is providing proper and prompt notice to the relevant party as required by the contract.  

• Extension of time: check whether COVID-19 will entitle you to an extension of time.  For example, clause 10.3.1 of NZS 3910:2013 may entitle the contractor to an extension of time on the basis that the impact of COVID-19 was not reasonably foreseeable at the time of tendering.  You will not necessarily have to wait until you can fully quantify the amount of delay – for example, NZS3910 contemplates that EOTs can be submitted even where the exact amount of time being claimed is uncertain, to be followed up by quantification when that is known.  It also contemplates regular updates where the ground for an extension is of a continuing nature (cl 10.3.2 to 10.3.5).  
• Suspension: ascertain whether it is appropriate for a suspension of contract to be applied for and/or obtained.  Whether a suspension is appropriate, and the mechanism for valuing a suspension, will be a matter to be assessed based on the relevant contractual terms.
• Variation: check whether you might be able to argue that the effects of government or local government action in dealing with COVID-19 constitute a variation to the contract.  For example, you might be able to use clause 5.11.10 of NZS 3910:2013 if, after the date of tenders, the making of any statute, regulation or bylaw increases the cost to the contractor in performing the contract.  Additionally, if a suspension of the works has been granted, then this suspension may be treated as a variation (for example, clause 6.7.3 of NZS 3910:2013).  The valuation of any variation will need to be assessed based on the contractual terms. 
• Time at large:  if the impact of COVID-19 is so significant that it cannot effectively be dealt with by extensions of time under your contractual provisions (i.e. the impact on completion is essentially unknown or unknowable), you may want to consider whether the parties should agree to treat time as being at large while construction is impacted upon by COVID-19.  This means there is no right to claim liquidated damages, but the contractor is required to complete within a reasonable time (and will be liable for the principal’s loss if it fails to do so).

• Price Escalation: check the provisions of your contract to see who carries the risk of price escalations and whether you can invoke any price escalation clause.

• Mitigation: parties claiming for time related costs or variation costs should keep in mind their obligation to mitigate their losses (including whether reprogramming or other measures might be appropriate to limit the impact of the shutdown). 
• Health and safety: parties undertaking work on essential services or critical infrastructure projects will need to put in place measures to protect employees, contractors and visitors to site against the transmission of COVID-19.  Furthermore, parties returning to work after the Level 4 shutdown has been lifted should consider whether a revised health and safety plan ought to be implemented.

The Government has announced guidelines applying to contracts based on NZS3910:2013 (un-amended), which are relevant to variations for a suspension and a change of law. Please see our separate article about this.

Terminating the Contract

• Force majeure: COVID-19 might constitute a force majeure event (an unforeseeable circumstance that prevents you from fulfilling your contract).  Check the contract carefully to identify whether or how your contract deals with force majeure events.  
• Termination for convenience: consider whether the contract includes a termination for convenience clause which would enable you to terminate the contract without a specific reason.  
• Frustration: check whether you might be able to argue that COVID-19, or the effects of government action, have frustrated or prevented your ability to perform the contract. 

Assessing whether COVID-19 entitles you to terminate for any of the above reasons will ultimately depend on the specific contractual terms and relevant facts, including the extent to which staff are unable to work, whether the works are unable to be re-sequenced or products are unable to be sourced.  Terminating a contract can have serious consequences.  It is important that you seek legal advice before doing this.

Future Projects / New Construction Contracts

Parties entering into construction contracts should turn their mind to how they will deal with the risks of COVID-19. Specific bespoke terms may be necessary to address the impact of COVID-19 on the project. 

Considerations at tender

• Tender tag: consider a ‘tender tag’ indicating that no allowance has been made for the impact of COVID-19 or any epidemic or national emergency.  Expressly note that should the project be affected by this in any way, it will constitute a variation, entitling you to additional cost, and where applicable, an extension of time and/or time being deemed at large, unless the impact is sufficiently serious to frustrate the contract altogether. 

Contractual clauses

• Extension of time: consider amendments to the extension of time clauses by specifically stipulating that an extension of time will be granted by reason of any delays caused by COVID-19 (including government action).  

• Time related costs: consider whether a COVID-19 EOT should entitle you to time-related costs.

• Variation: consider including a clause stipulating that additional work or costs relating to COVID-19 (or any epidemic or national emergency) will constitute a variation.

• Excepted risk to contractor’s responsibility for the contract works: it is common for standard form contracts to place responsibility on the contractor for the contract works and all plant from the time it takes possession until a particular event (see, for example, clause 5.6.1 of NZS 3910).  You may consider including COVID-19 as an excepted risk to this responsibility.

• Frustration: consider amendments to clauses dealing with frustration to allow for termination if COVID-19, or the effects of government action, have frustrated or prevented your ability to perform the contract.
• Key personnel: if you have a key personnel provision, you may wish to provide that failure to comply with this provision due to the effects of COVID-19 will not amount to a breach and that the parties will use reasonable best efforts to agree on substitute personnel or how otherwise to address the situation.  

• Force majeure: consider including a force majeure clause that specifically refers to COVID-19 as well as epidemics and pandemics generally. 
• Termination for convenience: consider including a termination for convenience clause.
• Cost fluctuation provisions: address whether cost fluctuation provisions may be invoked in the event of impact on the project by COVID-19 and ensure that any formula for this will adequately capture the impact of COVID-19.
• Health and safety: consider an appropriate health and safety plan that will deal with a COVID-19 Alert Level 2 or 3 situation where physical distancing requirements are necessary. 

The parties to a construction contract will need to consider their options for working together to complete the project safely and as cost-effectively as possible.  Cooperation and compromise is likely to be the sensible choice, particularly where insolvency and/or not completing a project become a real possibility. 

Relevant Links

The Government has released plans for the construction sector post COVID-19.  These plans include identifying projects that are ‘shovel ready’, or will be within the next six months, that might be the subject of Government initiatives (https://www.beehive.govt.nz/release/government-seeks-infrastructure-projects).   

A list of essential services is posted at www.mbie.govt.nz/about/open-government-and-official-information/coronavirus-covid-19/essential-services/.

A call centre has been set up to help answer questions (0800 22 66 57 or essential@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.