A judgment from the Supreme Court of New South Wales1 highlighted this tension last year, when it ultimately held Transport for New South Wales (TNSW) liable for creating private nuisance to affected businesses during prolonged construction of the Sydney Light Rail project (SLR).
In the wake of that judgment, this article offers practical considerations for those procuring major projects to help minimise the adverse impacts of construction activity on the public and affected business owners, and so mitigate the risk of private nuisance claims in a New Zealand context.
Sydney Light Rail
Planning for the SLR began in 2012, with construction due to complete by March 2019.
The contractor was required to progressively complete portions of the work in allocated sections, and within allocated occupation periods, along the SLR route. Owing to various project delays, including delays arising from encountering unidentified utilities along the SLR route, the contractor overstayed in certain sections, and exceeded the corresponding occupation periods.
A class action was brought on behalf of people with an interest in land within the vicinity of certain sections of the SLR route, who claimed to have suffered loss or damage due to interference with their enjoyment of their interest in the land during the construction period.
The lead plaintiffs were a retail leather goods business and a restaurateur who claimed that nuisance resulted from the construction activities (involving heavy machinery, vibrations, noise and dust, the presence of hoardings, and restriction of pedestrian and vehicle movement) and the length of time that the work was carried out.
In finding TNSW liable for damages in private nuisance, the court reviewed recent decisions from the United Kingdom2 and confirmed (among other matters) that:
- To succeed in private nuisance, the plaintiffs needed to establish that the interference with use and enjoyment of land was both substantial and unreasonable.
- The fact that construction of the SLR served an important public benefit was a relevant factor in assessing the issue of reasonableness, but did not operate as a defence.
- The plaintiffs did not need to establish that TNSW had failed to take reasonable care or acted negligently.
The court also identified that the allocation of risk under the relevant project deed had created a state of affairs that ultimately led to the nuisance. Specifically, TNSW retained most of the utilities risk, and the “penalties” that did apply where the contractor failed to complete work on time were negligible.
The New Zealand context
The tort of nuisance is well established in New Zealand. However, we have not identified a case that considers the question of whether inherent disruption caused by the construction of public works amounts to nuisance.
Although there is no clear bright-line test for the types of interference that will be considered an actionable nuisance, courts here have also confirmed that interference with the right to enjoyment of land must be both substantial and unreasonable before it will be actionable.3 When determining whether the interference is unreasonable, the courts will consider a range of relevant factors, including weighing the public benefit against the relevant interference.
Against the backdrop of a forecast Government infrastructure spend in excess of NZ$68 billion over the next five years4, it is timely to also consider some contractual and practical measures which may assist with mitigating the potential for a successful nuisance claim to be brought against a project proponent.
To set the scene, it is worth noting that NZS 3910:2013, other contracts in the NZS 391X suite, and other standard form contracts (such as FIDIC Red Book) generally seek to balance the interests of the principal and the contractor in allocating the risk of third-party nuisance claims between the parties. This means:
- on the one hand, the contractor must carry out the works in a manner to avoid unreasonable, unnecessary, or improper interference with the public convenience; and
- on the other hand, the contractor will not be required to indemnify the principal for losses it suffers if the interference was the unavoidable result of carrying out such works (NZS 3910), or was necessary or proper (FIDIC Red Book), and the principal may in fact be required to indemnify the contractor against losses arising out of certain third-party claims.5
While necessary to establish a baseline position between the parties, such risk allocation does not, in and of itself, mitigate the risk of nuisance claims by affected persons. The best way to mitigate the risk is, of course, to minimise the disruption. There are various contractual and commercial settings that can be deployed to minimise disruption, depending on the requirements of any given project. We consider some of these below, noting that the Resource Management Act 1991 (RMA) and Public Works Act 1981 (PWA) are also relevant to mitigating potential adverse effects arising from public works.6
Staging and separable portions
It is common for linear infrastructure projects to be undertaken, completed and handed over in stages. This reflects the practical and commercial reality that it is not desirable or feasible for entire networks, transport corridors or pedestrian accessways to be taken offline for extended periods until completion of the entire project (except where strictly necessary). Such an approach, if properly devised, implemented and adhered to may, in turn, mitigate the risk of a third-party claim for nuisance by limiting the period of time during which the works are being undertaken in the vicinity of any one person (with the result that the limited period of interference is neither unreasonable and substantial).
Contractually such an approach is often implemented by dividing the works across separable portions, each with its own specific contractual requirements for completion and associated consequences, including for early or late completion. The key is to ensure that such arrangements are sufficiently meaningful so as to drive the desired behaviours and outcomes. In the SLR there were “penalties” that applied where the contractor overstayed in each section which were ultimately found to be “negligible”, with the result that there was no deterrent against non-compliance with designated occupation periods.
Incentivising timely completion
Delay liquidated damages are a tried-and-tested method for minimising the period of disruption caused by the carrying out of works. These incentivise the contractor to complete the works on or before the due date for completion by, essentially, requiring the contractor to pay the principal a pre-agreed amount of money where it fails to do so (i.e., a ‘stick’). The contractor’s liability for delay liquidated damages is calculated by applying the liquidated damages rate to the period post the due date for completion where the works (either in the whole or in any individual separable portions) remain incomplete.
The liquidated damages rate may operate on the basis of a relatively blunt single daily rate, or a more nuanced tiered-rate regime. In either case, delay liquidated damages operate to cap the contractor’s liability for late completion at the agreed rate. It is also relatively common for the contractor’s liability for liquidated damages to be capped in aggregate at a specified amount, for example a percentage of the contract price.
A less common approach to incentivising the contractor to limit the duration of the works, and so the impact on third parties, is to provide the contractor with a bonus payment for early completion of the works (i.e., a ‘carrot’). There are various reasons why the ‘stick’ of delay liquidated damages is more widely used in New Zealand than the ‘carrot’ of a bonus payment, but in recent times we have observed the domestic construction market move towards a more relational approach to contracting which focusses on longer term, ‘partnering’ type arrangements between principal and contractor. With such a shift in dynamics we expect to see renewed consideration of the ‘carrot’ over the ‘stick’ (or, indeed, both).
An alternative option at the ‘carrot’ end of the spectrum is to use a target outturn cost pricing model with a corresponding pain-share/gain-share mechanism, which (when correctly structured) may also incentivise timely completion and reduce the duration and impact of the works on third parties. This incentive is achieved indirectly and on the basis of the logic that time equals cost. If the contractor is able to complete the works quickly, the cost of completing the works is likely to be less than the target outturn cost, for example due to preliminary and general (P&G) savings. As a result, the contractor receives a gain-share payment from the principal. Similarly, where the cost of completing the works exceeds the target outturn cost, the theory is that the contractor will still be incentivised to complete the works quickly and so reduce its exposure to a pain-share payment to the principal.
We have been involved in a number of projects in recent times which have used such a pricing model. While some of these have taken the form of an alliance (traditionally the form of contract where such a pricing model has been used), others have adopted this pricing model within the context of a 3910-based contract. This reflects the fact that not every project will justify the time and cost in establishing an alliance but some may nonetheless benefit from this model. The increased uptake in the use of this model outside of alliancing appears to have been the catalyst for the inclusion of this model in the new NZS 3910:2023, albeit there are ongoing concerns as to the efficacy of the model as included in NZS 3910:2023.
Early contractor involvement
Early contractor involvement (ECI) is another mechanism which may assist with expediting project delivery and, in turn, reduce the potential for a nuisance claim to be brought on the basis of sustained and substantial disruption to affected property owners. For example, an ECI contractor may be required to:
- Test the buildability of a design to limit the potential for delays during the carrying out of the works in accordance with the design.
- Perform groundwork investigations to limit the potential for future delays due to unforeseen site conditions.
- Devise appropriate construction methodologies and sequencing to promote programme and on-site cost efficiencies.
Carry out limited early works to establish better conditions for the carrying out of the main works and/or reduce the scope of the main works, and so expedite the completion of the main works.
Managing utilities interface risk
Utilities, services or network interface risks must be carefully navigated in order to successfully deliver major infrastructure projects (as noted above, this was a key issue encountered by the SLR). Identification of utilities and engagement with applicable network utility operators should occur early on, and with sufficient time to identify issues and opportunities and to conclude associated arrangements. This helps mitigate the extent of disruption from managing utilities risks, including dealing with the related design and construction work that will be required to replace (and in some instances, upgrade) utilities.
It is not uncommon for network utility operators to use the opportunity of a project in the same location as its network as an opportunity to either replace existing utility assets, and where funding allows, to also upgrade or future-proof those assets. In our experience, the time which may be required to conclude arrangements to the satisfaction of all stakeholders underscores the importance of addressing utilities interface risks early to mitigate the impact on project timelines and ultimately the extent of disruption to the public.
Insuring against nuisance
Project participants may also consider insuring nuisance claim risk under a public liability insurance policy. It is important to note that policy wordings vary between insurers, and the extent of coverage for this risk may also fluctuate depending on the insurance market. Whether or not coverage does extend to nuisance claims may turn on how broadly “property damage” is defined under those policies at any point in time.
While it may have been possible to secure broad coverage under bespoke policy wordings in the past, insurance advisors have observed a trend toward pure financial loss exclusions being written into policies that would cut across policy provisions that may otherwise respond to a nuisance claim.
For the latest insurance positions, we recommend consulting with your insurance broker.
Looking ahead
The challenge, and the opportunity, for the New Zealand construction sector is immense, as demonstrated by the latest infrastructure budget figures earmarked by the Government. How the sector ultimately rises to meet that opportunity remains to be seen, but one thing is clear: there is a real focus on delivering projects in a way that takes into account, and appropriately minimises, the disruption from construction activity to the public along the way.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.
[1] Hunt Leather Pty Ltd v Transport for NSW [2023] NSWSC 840.[2] Fearn and others v Board of Trustees of the Tate Gallery [2023] UKSC 4, and Jalla and another v Shell International Trading and Shipping Co Ltd and another [2023] UKSC 16.[3] Smith v Fonterra [2021] NZCA 552.[4] https://budget.govt.nz/budget/pdfs/at-a-glance/b24-at-a-glance.pdf.[5] The right of indemnification may vary on a project-specific basis, either due to the use of special conditions or a bespoke project agreement.[6] For example, physical effects on properties are managed under the RMA (e.g., through measures to manage dust, noise, or access), or where a property related economic loss arises then via financial compensation under the PWA. Yesterday the Government announced a review of the PWA which will likely change the way in which such compensation is assessed.