Government releases guidance on suspension of construction work during covid-19 outbreak

Unlike many international standard forms of construction contract, NZS3910 has no force majeure clause.  This raises a number of esoteric issues, which will have significant financial impacts in the construction sector.  

As most will appreciate, force majeure typically relieves the parties from their contractual obligations while the event persists, and frequently while the effects of the event are felt.  The concept is, however, not a creature of the common law; it is a creature entirely of contract.  The common definitions tend to limit application to unforeseen events beyond the control of the parties which make performance impossible or unlawful.  Typically, making performance more difficult or more expensive is not a force maeure event, however that is a matter of contract.

Conversely, NZS3910 in all its versions contains no such general relief, instead providing for time and/or money and ultimately on frustration under clause 14.1.  Whether or not complying with a contract has become "impossible of performance or has been otherwise frustrated" leads only to one outcome - termination.  This is an unattractive outcome for most in the industry.

The issue is then how the suspension is treated as a matter of contract, and what the consequences of that treatment are.  The reality is that the Government moving to Alert Level 4 on 26 March 2020 brought construction work to an end for at least the following 4 weeks.  The immediate consequence of that must be that contractors of all tiers were required to make their work areas and construction sites safe, protect the work in progress, and suspend further work until the Level 4 status is lifted.  

NZS3910 responds to such events by granting extensions of time (with corresponding relief from liquidated damages) and, where the event is "treated as a Variation" by also awarding time related costs.  How the suspension is treated under the contract then becomes of considerable financial importance.

Save in those rare cases where contracts were entered into after the pandemic became likely (some would say the Alert Level 4 was an inevitability at that stage), an extension of time under clause 10.3.1(f) for "circumstances not reasonably foreseeable by an experienced contractor at the time of tendering not due to default of the Contractoris a minimum entitlement.  That entitlement, however, would not carry with it any time related costs (see clause 10.3.7).  That entitlement is restricted to the net effect of any Variation or where the extension of time arises by reason of default by the Principal.

The strongest grounds for establishing that the lockdown is a Variation are under clauses 5.11.10 (change in law) and 6.7.1 (suspension).  Neither is without difficulty.

Clause 5.11.10 provides (emphasis added):

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 are two difficulties with the application of this clause to covid-19 - (1) the law under which the Government effectively suspended work by moving to Alert Level 4 was under existing legislation.  True, there were Orders in Council issue on 11 March, but the statue had been in effect since 2006 and arguably already covered this situation, and (2) the clause expressly covers increasing or decreasing the Cost of the contract works, not suspending work altogether - ie, making continuing work unlawful.

Alternatively, clause 6.7.1 provides that if suspension of the works "becomes necessary" then the Engineer shall instruct the contractor to suspend the works.  Unless the suspension arises from the contractor's default, then it is to be treated as a variation.  If contract engineers across the country have actually suspended work under clause 6.7.1, then there can be little argument on this issue.  If engineers have not issued such instructions, then we fall into an interregnum, and clause 5.11.10 may be the only recourse.

Commercially, the impact of this issue across the industry is not to be under-estimated.  For construction work undertaken under FIDIC or NEC or any other internationally recognised standard, the covid-19 lockdown would almost certainly be a force majeure event for which the contractor would be entitled to an extension of time, demobilisation costs, but no time related costs for the period of any extension of time.  If clause 5.11.10 or 6.7.1 of NZS3910 apply, then contractors will be entitled to potentially significant time related costs for the uncertain duration of the lockdown.  

The Government has elected in its guideline to remove this uncertainty for all public sector procurement by accepting that the move to Alert Level 4 is Government action in terms of clause 5.11.10, bringing with it the entitlement to time related costs.

While this announcement removes uncertainty for the interpretation of public sector procurement, it arguably creates a difficult position for private sector projects.  They will need to raise the argument that, while this may be the Government's decision, they are not bound by it, and they do not accept this interpretation.  That argument has not been made any easier by the Government pre-empting the issue.

The announcement is here -