The fourth, and latest, revision of Standards NZ's Conditions of contract for building and civil engineering construction (NZS3910:2023) was published on 28 November 2023, providing light reading for construction law experts, owners, contractors and engineers on the beach over the Christmas break. This summary outlines the more significant changes from previous editions, and points out where the opportunity for further revision has been missed.
The revised version, according to the Standards' website, was intended to:
- be widely accepted and fit for purpose,
- limit the need for special conditions,
- improve understanding of contracts,
- allocate risk fairly,
- result in more contracts that embody Construction Sector Accord principles, and
- allow the industry to document contracts quickly and easily (improving productivity) and address common issues.
Aside from some minor grammatical changes (eg, renaming Offsite overhead and profit as "Margin" and On-site overhead as "Preliminary & General") and the re-ordering of some clauses to improve the flow of the contract terms, the most significant initial change is the order of priority of the contract documents in the Contract Agreement.
Contract interpretation is often a challenge in construction contracts, with many of the sizeable documents included in the contract being contradictory. Ideally, this should not arise, with legal issues covered in the General Conditions, with detail provided in the Specific Conditions and amendments in the Special Conditions; the requirements for how the works are to be carried out and the relevant standards outlined in the Specifications; and the Drawings covering designs. Each document comprising the contract covers, or should cover, different issues with limited capacity for overlap.
The understandable and extensive use of boilerplate and "cut and paste" from other projects means that this ideal is often not achieved. In the new edition of 3910, the priority of the contract documents is set in the Contract Agreement as follows:
(a) the Contract Agreement;
(b) the letter of acceptance;
(c) post-tender documentation (to be avoided, if possible);
(d) the Special Conditions (Schedule 2);
(e) the Specific Conditions (Schedule 1);
(f) the General Conditions;
(g) the Drawings (Annex 1);
(h) the Specification (Annex 2);
(i) the Schedule of Prices;
(j) the tender; and
(k) any notices to tenderers.
This ensures that the documents prepared by the Principal (items (a), (b), (d) - (h) above) take priority over any conflicting reservations or qualifications in the Contractor's documents, (j) the tender and (i) the Schedule of Prices. It also ensures that any explanatory narrative in the Specifications which conflicts with or inaccurately summarises legal obligations does not modify the express provisions of the conditions of contract (as modified).
For contractors, this will mean ensuring that any tags or qualifications in the tender, or the basis upon which pricing is offered in the Schedule of Prices, are either withdrawn or resolved by amendment to the relevant documents (or recorded in the post-tender documentation) prior to award.
My reservations about simply binding post tender documentation (eg, agreed records of the minutes of meetings or exchanges of correspondence) is that invariably these documents do not deal with the agreed positions of the parties as clearly as they could. Where possible, time should be take to ensure that the contract documents accurately reflect what is agreed by amending the relevant provisions.
The following significant changes have been made to the General Conditions of Contract:
1. The Engineer is gone
In previous editions of NZS3910, as with other international forms, the Principal is represented by the Engineer. In that role, the Engineer was to act as the Principal's agent and to act independently and fairly as between the Principal and the Contractor in relation to issues like certifying payments, valuing variations, granting extensions of time, certifying completion and determining disputes. This raised a number of issues, not least that the Engineer was engaged and paid by the Principal, and had its own interests to protect (not least to its insurers).
For a detailed discussion of the role of the Engineer, and its extension to project managers and other notionally independent certifiers, see my paper on the Role of the Engineer.
Instead, much like the Project Manager and Supervisor in NEC3, the traditional role in NZS3910:2023 is split between the Contract Administrator, who acts for the Principal (see clause 6.2.1) and the Independent Certifier who is to be independent and impartial (see clauses 6.2.2 and 6.2.3). In a move which perhaps defeats the purpose of splitting the roles, the Contract Administrator and the Independent Certifier may be the same person (see clause 6.1.2).
The roles are outlined in greater detail in the balance of clause 6.
In light of the caselaw on such split roles (outlined in the paper linked above), it is doubtful if this change will achieve much in practical terms, let alone reduce conflicts of interest, as when issuing a Final Decision, the Independent Certifier will be determining disputes over his or her own prior certification of payments, variations, extensions of time and other matters.
As an interim measure, I see no difficulty in the Independent Certifier issuing interim binding decisions, but the underlying conflict of interest remains. Adjudication is a better forum for such interim decision making, if used appropriately.
2. Payment
The new edition retains the options of lump sum, measure and value, and cost reimbursement. Each option now reflects that the contract may include a mix of payment methods, with different items identified in the Schedule of Prices as being lump sum, remeasure, cost plus or even target price (see below).
A new addition is the target price option (see clause 2.5). This is a concept carried over from alliance contracts, where the Contractor is paid the cost of the works (limb 1), margin (limb 2) and a painshare/gainshare adjustment to the Contractor's margin depending on the final outturn cost (limb 3). In alliance contracts, a great deal of time and effort is put into agreeing the target outturn cost, and the basis upon which it is adjusted to formulate the final target cost against which the final actual cost is measured. Clause 2.5 lacks much of that detail, providing simply that the Target Price is adjusted on the same basis as the Contract Price, ie by Variations. Time will tell if this is sufficient.
The Final Account and Final Certification provision is new (see clause 9.11). Neither is to be covered by the payment provisions in the Construction Contracts Act (see clause 9.11.8). If this is effective, or if a Court will hold that a Final Account expressed to be a payment claim will still fall under the default provisions in sections 22 & 23 of the Act, is an open question.
The provisions relating to working day rates (see clauses 9.3.12, 9.3.13 & 9.3.15) remain unchanged, with the result that while the Contractor may have nominated a working day rate, to be applied to extensions of time, that may be adjusted (presumably by the Independent Certifier - that is not specified) if that amount is "inequitable".
3. Bonds
The bond provisions (see clause 3) have been cleaned up, compared to previous editions, with the form of bond being clearly "on-demand" (see Schedule 3), the Contractor removed as a signatory to the bond, and the basis upon which the bond is to be released being spelt out explicitly.
I expect most banks to require the ability to pay out the bond at its option (notwithstanding the lack of any demand by the Principal), and for the bond to be released on payment of the bonded sum.
4. Limit of Liability
There has been a tendency in some cases to use the indemnity provisions in clause 7 as a catchall for the Contractor's liability under the contract. That position has been clarified in the revised indemnity to recognise that the indemnity is fault based (see clause 7.1).
A new limitation of liability clause has been included (see clause 7.2), bringing NZS3910 into line with other international standard forms. Two issues are of note:
(1) the limitation of liability is all inclusive, rather than excluding liquidated damages as with most international standard forms. If the Principal's advisers simply set the limit at "the contract price" (which is likely), then the effective limitation will be 90% of the contract price, if the typical cap of liquidated damages at 10% of the contract price is achieved.
(2) where either party has insurance for a sum greater than the limitation stated in the Specific Conditions, the cap shall be the amount of the insurance cover. This is a very unusual clause, which I would expect to be deleted in most cases.
5. Disputes
Previous versions of 3910 adopted the tiered approach to dispute resolution, commencing with the Engineer's review and formal decision, followed by mediation, the potential for expert determination and ending with arbitration. Adjudication under the Construction Contracts Act is always available, at any time. The only precondition to going directly to arbitration was an Engineer's formal decision.
That position was modified by the line of cases culminating in the Court of Appeal decision in SRG Global Remedial Services (NZ) Ltd v Body Corporate 197281 [2022] NZCA 518, which held that as the Engineer was effectively functus officio (ie, is no longer engaged in the project), then arbitration was also no longer available as there was no ability to obtain a formal decision. The starting point appears to have been an assumption in prior cases that arbitration only applied during the construction phase of the project. That assumption is nowhere supported in the contract itself. Clause 13.4.1(b) of NZS3910:2013 expressly provides that arbitration is available if no formal decision is given, and nowhere does NZS3910 provide an end date for the role of the Engineer.
NZS3910:2023 avoids this interpretation by providing that the parties may refer a dispute to arbitration at any time, without any preconditions (see clause 13.3.1). Review and Final Decision by the Independent Certifier, mediation and adjudication under the Construction Contracts Act remain available, but none are preconditions to either arbitration or adjudication.
The Decision and Final Decision procedures in clause 6.4 require careful review. In each case, time limits of 3 months, 1 month (request for a Decision under clauses 6.4.1 & 6.4.2) and 3 months (for a Final Decision under clause 6.4.5) are imposed, but no consequence for a failure to meet those times limits is specified, unlike the previous versions (see for example, the Engineer's formal decision becoming final and binding under clause 13.2.4 of NZS3910:2013). This uncertainty is compounded by the deletion, in the new edition, of the arbitrator's express ability under clause 13.4.4 of NZS3910 to re-open any decision of the Independent Certifier (though I would expect such a power to be implied).
As it appears that the time bars have been removed from the new edition, the courts and arbitrators are expected to hold that arbitration is available at any time, subject to the over-arching limitation periods.
Not addressed
The following issues with the previous editions have not been addressed:
- good faith obligation - it is difficult to draft contracts to ensure that every potential issue is properly covered, and NZS3910 is particularly thin in this respect. An obligation to give effect to the contract in the spirit of good faith and mutual trust may seem like sophistry to some, but it can be effective (see Gold Group Properties v BDW Trading [2010] EWHC 1632).
- risk register - the latest edition retains the requirement for early warning (see clause 6.10), but omits a detailed obligation on the Contract Administrator to prepare and maintain a risk register, in consultation with the Contractor. The early identification of potential disruption events and the joint maintenance of the risk register is key to retaining a cooperative relationship, establishing a "no surprises" approach and avoiding disputes.
- contractor's design - while NZS3910:2023 is not a design and construct form (presumably that will follow in the update to NZS3916), it does include identification of Contractor's design obligations in the Specific Conditions (see clause 5.2) and clarifying design obligations. Where the Contractor is responsible for design, the standard would benefit from a submission and review procedure by the Contract Administrator and a set of specific warranties (eg, excluding any fitness for purpose warranty in favour of confirmation that the Contractor's designs will meet the Principal's specified requirements).
- government instructed suspension - where the works are suspended under existing government powers (eg covid), there is significant uncertainty over whether the event is to be treated as a time or time and cost event (the Government's position is at odds with most private developer's reading of clause 6.8).
- termination - the termination provisions remain problematic in two respects - (1) the Contractor's right to terminate under clause 14.3.3 remains preconditioned by suspension of the works by the Contract Administrator (see Custom Street Hotel v Plus Construction [2018] NZCA 36), and (2) as the law currently stands, if a party disputes the validity of a notice of default, that issue must be dealt with under the disputes procedure before the issuing party can move to termination (see Rau Paenga v CPB [2023] NZHC 2974).
Summary
In its scoping for a review of NZS3910, Standards New Zealand acknowledged that there was "an overwhelming consensus from the construction sector that NZS3910 required a comprehensive review". The published result has not achieved that lofty goal and is unlikely to obviate the need for extensive special conditions, or to discourage the use of other conditions of contract.
The construction industry has been described for some time as being "dysfunctional" and "in crisis" - the rate of project failure, and construction industry company liquidations would support that view. Taking the examples of other jurisdictions, and projects here, a number of lessons can be drawn for successful project delivery:
- reducing project uncertainty, and pricing and delivery risk, prior to award by identifying project risks (eg, ground conditions) and further developing designs
- engaging with potential contractors prior to tender to ensure build-ability and reducing or avoiding pricing for uncertainty
- providing for mutual cooperation and good faith in project delivery
- recognising that some pricing cannot realistically be fixed at award, and agreeing a pricing mechanism which is fair
- legislating for project uncertainty which is fair and predictable
- acknowledging that the contractor should recover its actual costs and a reasonable profit for the work done, while maintaining project efficiency
- recording project risks in a risk register, a live document, prepared by the contract administrator prior to tender, workshopped with tenderers prior to tender award and updated during the course of the project
Starting, as it does, from a prescriptive base (which FIDIC achieves more successfully) with a healthy dose of risk transfer, NZS3910 endeavours to clarify the rights and obligations of the parties, and to outline the consequences of breach; by failing to establish a framework for cooperation, it struggles to achieve either.
The "comprehensive review" which NZS3910 clearly does require remains for another day.