On 19 March 2020 we published an article focussing on how the general conditions of NZS 3910:2013 respond to the circumstances created by COVID-19. Optimistically, we envisaged a follow up article focussing on the options for procuring new construction projects in the post-COVID-19 world.
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https://www.bellgully.com/publications/covid-19-updates
Since then, however, the landscape has changed radically with the imposition of the Alert Level 4 ‘lockdown’ on 25 March 2020, resulting in a complete shutdown of almost all construction sites across New Zealand for a minimum period of four weeks.
This article examines some of the options currently being considered in the market in relation to how NZS 3910 responds, or should respond, to the current circumstances. In doing so, this article outlines the merits of adopting a collaborative solution using general condition 6.7.5 as a starting point. Of course, every project is different and every principal-contractor relationship has its own dynamics which may mean that one particular option is worth pursing over others.
This is not legal advice regarding any specific contracts, special conditions or factual circumstances. If you would like to discuss any specific issues that you are facing, you should contact your usual Bell Gully advisor.
What are the options?
There are a range of views circulating in the market as to how construction contracts based on NZS 3910:2013 respond to this situation as outlined below.
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There is some support for a variation under general condition 5.11.10 on account of the regulatory response to COVID-19 being ‘new law’. As outlined below, we think there are real doubts, limitations and risks associated with this approach.
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The contractor is entitled to an extension of time under general condition 10.3.1(f) on account of COVID-19 being an unforeseen event, however this is not a complete solution, especially from the contractor’s perspective, because it does not enable the contractor to claim time related costs. Other downstream variation entitlements may also arise, however these will take time to play out and are contingent on the initial response taken by the parties. Both options are discussed in our previous article.
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There is an increasingly strong push from contractors for the view that the combined effect of COVID-19 and the regulatory response to it means that suspension of the contract works has ‘become necessary’ under general condition 6.7.1, with the result that the engineer must suspend the contract works. There are potential adverse consequences to the principal if such a suspension order is given.
As none of these options are perfect, and the legal position is not clear-cut, we consider that there is real merit in a pursuing an alternative response: a mutually agreed suspension of the contract works as expressly permitted under general condition 6.7.5. This creates an opportunity for a bespoke, collaborative response which fairly protects the interests of both parties to the contract, avoids some of the risks of unilateral responses and has the potential to mitigate against some of the long-lasting, macro effects of the current crisis.
The ‘new law’ argument
General condition 5.11.10 relevantly provides that if after the date of the contract “the making of any statute, regulation or bylaw … increases or decreases the Cost to the Contractor of performing the Contract … the effect shall be treated as a Variation”. It clearly and specifically requires a statute, regulation or bylaw to have been made and it does not make reference to other types of legislative instruments (cf. the breadth of the definition of ‘licences’ in 5.11.2 with the phrasing ‘any statute, regulation or bylaw’ in 5.11.10). It also does not use a general description such as ‘the making of any law’ or a ‘change in law’ (other than in the heading to general condition 5.1, which is itself illustrative).
While the Government’s regulatory response to COVID-19 is constantly evolving, to date only three new statutes have been passed and the balance of the Government’s regulatory response – including Alert Level 4 – is through the exercise of existing statutory powers, notably section 70(1)(m) of the Health Act 1956. The basis for the exercise of these powers, and the consequences of doing so, are relatively complicated, however for present purposes the key events are:
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the orders in council made on 28 January 2020 and 9 March 2020 under section 3(a) of the Health Act (Orders In Council); and
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the publication in the Gazette on 24 March 2020 of an epidemic notice pursuant to section 5 of the Epidemic Preparedness Act 2006 and an epidemic management notice pursuant to section 8 of the same Act.
The Orders in Council declared COVID-19 to be an “infectious disease” and a “quarantinable disease” for the purposes of the Health Act, which activates the pre-existing special powers under the Health Act to prevent the outbreak and spread of such diseases. Likewise, the epidemic prepared notice activated powers under the existing Epidemic Preparedness Act.
The Orders in Council and the epidemic management notice did not involve the making of a new statute, regulation or bylaw as required by general condition 5.11.10, but rather were the result of the exercise of existing statutory powers. Arguably, to the extent that the orders altered the application of existing statutory provisions, such alteration was already authorised by the underlying statutes which contemplate that such actions can be taken.
The purpose of general condition 5.11.10 is to adjust the position under the contract where the making of a new law results in a change in the cost to the contractor of performing the contract (which, it should be noted, can lead to a positive or negative variation). The premise is that the parties must be taken to know and understand the laws in existence at the point of time of entry into the contract, it is not that a party should be entitled to contractual relief as a result of the later application of existing laws to a set of unforeseeable circumstances. Understood in this way, it is the circumstances that are the appropriate basis for relief, not the way the existing regulatory regime is activated in response.
We are aware that there are different views in the market on the application of general condition 5.11.10 to the current circumstances. Notwithstanding our views expressed above, it is arguable that general condition 5.11.10 could be interpreted more broadly to include other legislative instruments such as orders in council. For example, for the purposes of statutory interpretation, the term “regulations” can include there “an Order in Council, Proclamation, notice, Warrant, or instrument, made under an enactment that varies or extends the scope or provisions of an enactment” (Interpretation Act 1999, emphasis added). There is, however, some doubt as to whether general condition 5.11.10 should be read that broadly and whether, in fact, the Orders in Council extend the scope of the Health Act.
Unsurprisingly, views in the market seem to be divided along party lines, with many contractors taking the view that the general condition does apply and many principals that it does not.
Contractual entitlements are, of course, important and should not be waived freely, but pursuing a debate that is unlikely to be definitively resolved in the near term may perhaps not be the most constructive approach in the current context. We would encourage those who may be engaged in such a debate to instead shift the focus to considerations of project recovery and continuity post-lockdown and beyond, something which can be facilitated through a managed suspension process (see below).
Unilateral suspension
General condition 6.7.1 relevantly provides that if the suspension of the contract works “becomes necessary, the Engineer shall instruct the Contractor in writing to suspend the progress of the … Contract Works for such time as the Engineer may think fit, and the Contractor shall comply with the instruction”. General condition 6.7.3 provides that unless the suspension is due to the contractor’s default, the suspension shall be treated as a variation.
There is not much guidance in respect of general condition 6.7.1 to illuminate when suspension ‘becomes necessary’. Many contractors contend that the Government shutdown requirements do make suspension under this condition necessary, principally because a contractor is not legally permitted to be on the construction site and so it is impossible to progress the contract works. Of course this assumes that the contract works and the site are not for the purposes of an essential service.
In that scenario, if the engineer does not issue the instruction to suspend the contract works, we expect the following secondary arguments will follow:
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the engineer has an independent duty under general condition 6.2.1(b) to make a decision to suspend or not suspend the contract works fairly and impartially (e.g., it should not be the principal’s call behind the scenes); and
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if the engineer does not suspend, this will be a breach of the engineer’s obligation to do so (and general condition 6.2.4 will allow a variation based on the engineer failing to carry out the engineer’s duties).
The contrary argument is that the Alert Level 4 has overtaken the need for an engineer’s decision and it is not necessary for the engineer to suspend the works because the lockdown means they are already suspended in practice.
In any event, the consequences of suspension under 6.7.1. will be complex and may lead to unintended outcomes. Chief amongst these is termination of the entire contract – if the suspension remains in effect for more than three months, the contractor may request the engineer to lift the suspension and if the engineer does not do so within one month of that request, then:
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if the suspension affects only part of the contract works, the contractor may treat the suspension as a variation which deletes the suspended works from the contract works; or
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if the suspension affects the whole of the contract works, the contractor may treat the suspension as an abandonment of the contract by the principal (which, in turn, is treated as an event of default by the principal).
In this context, there is a real risk that such a suspension may spark a game of brinkmanship between principal and contractor as each strives to protect is short term position, with the result that the parties spend the lockdown period locked in unconstructive, entitlement-focussed discussions which are unlikely to result in either party being made whole through litigation, and which could well result in project failure. This will also hamper the ability for the contractor to realise immediate cash flow relief and, longer term, may generate real concerns for both principal and contractor around ongoing project certainty and viability post-COVID-19.
An alternative option: managed suspension
The current situation is unlike anything we have experienced before. It is unique in the sense that it generally affects everyone in the same way, and the regulatory response similarly does not discriminate except where it is essential to do so. There is a growing societal recognition that ‘we are all in this together’, as evidenced by the virtually universal support for Alert Level 4. While we can strive to rationalise and respond to these unprecedented circumstances via existing contractual mechanisms, for the reasons we have outlined none of the generally available mechanisms is a contractual ‘slam dunk’ resulting in an objectively fair outcome for all affected parties.
General condition 6.7.5 allows the parties an opening to mutually agree to suspend the contract works and to determine the consequences which arise from doing so. Generally speaking, we expect that the most mutually satisfactory, best-for-project solutions to the current circumstances will be able to be derived through pursuing this option. A bespoke approach enables the parties to have maximum visibility on, and understanding of, each other’s position which enhances the possibility of a quid pro quo being identified and implemented. It may also provide the necessary flexibility to allow the parties to respond appropriately and in real time to the evolving situation, including the impact of the Government’s stimulus measures as they are rolled out and the incremental lifting of the Alert Levels in due course.
A managed suspension could also include an agreement between the parties for valuing the variation. This will assist the engineer and the contractor to appropriately determine the value of the variation by agreement under general condition 9.3.4 without the need to rely on the balance of general condition 9.3 as a fall-back (which, left to run its course, could become complex and ripe for dispute given, among others, the impact of the Government stimulus package and the open-ended nature of the current situation). Such an agreement could be developed using a collaborative approach – e.g., setting principles that work fairly for everyone in these unique circumstances.
Critically, this approach can be used to shift the focus from the shutdown to the eventual restarting of the contract works. This could include tasking a project control group with developing (or at least reviewing) a detailed strategy for restarting the contract works, including opportunities for value engineering and acceleration to assist with mitigating the effects of the current situation.
From an industry perspective, this approach is consistent with the Construction Sector Accord and the general trend toward collaborative contracting. Indeed, this is the right time for contracting parties and the industry more generally to truly embrace the guiding principles of the Accord – including by building trusting relationships and acting with collective responsibility – with a view to jointly overcoming a situation that is not of any one person’s making.
Industry initiative
It is quite heartening to see that, faced with the COVID-19 pandemic and its consequences, the industry does have strong and practical leadership. Today’s announcement that industry leaders have already been selected to form the Infrastructure Industry Reference Group in order to identify ‘shovel-ready’ projects for commencement and acceleration post-COVID-19 is a positive development. More broadly, it seems that active consideration is being given to the new reality that all involved in construction procurement, design, completion and certification are inextricably linked together.
Obviously, the weakest links impact on the whole and collaboration and appropriate empathy are needed to support all to keep projects together. This will require a degree of ‘flex’ by all project participants in order to absorb costs, strengthen weaker links in labour and supply, and to find solutions to get the work going again as fast as possible. It will be one thing to agree an outcome that may work between a principal and a contractor (and works for the labour and supply chain), however for such an outcome to be implemented the support of project financiers or funders will be required. No doubt this is a large consideration for the Government and the banks in their discussions as to how to minimise the economic fallout from COVID-19.
Advice
If you have any questions about the matters raised in this article, or would like advice on your particular situation, please get in touch with the contacts listed, or your usual Bell Gully advisor.