The impact of COVID-19 on construction projects

While at present it is impossible to ascertain the true nature and extent of the impact COVID-19 will have on the sector, there is a real potential for delays to both the carrying out of existing projects and the procurement of new projects.

In this first part of a two part series, we focus on the former and provide some baseline guidance by reference to the general conditions of NZS 3910:2013.¹ We discuss general time, variation and cost issues that could arise under NZS3910 as a result of COVID-19. 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.

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​The people
While the economic and commercial impacts of COVID-19 are, and will become increasingly, significant, there is a clear and obvious human overlay to the current crisis which needs to be borne in mind at all times. The construction industry acutely depends on the availability and sound physical and mental health of its workforce.

As such, we encourage all clients to stay abreast of the rapidly developing government response to the situation, to implement all necessary compliance systems and, especially, to monitor the wellbeing of each other and their respective workforces. MATES in Construction is offering a range of training and support services which can assist with this and can be contacted on 09 302 0535 or 0800 111 315.

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How NZS 3910 responds

We anticipate, and are already seeing signs, that COVID-19 (and the regulatory, political, and economic responses to COVID-19) may result in shortages of certain materials, constrained labour resources and potentially the shutdown of entire construction sites. It is conceivable that other, less direct circumstances may also impact on the progress of the contract works. If such impacts are realised, they would inevitably cause delay to, and potentially increase the cost of, carrying out construction projects. Care and precision is, however, required when defining and assessing the impact of an alleged event of default.

Critically, NZS 3910 does not contain a typical 'force majeure' provision, so such impacts need to be analysed in the context of the extension of time (EOT) regime and, in certain circumstances, the variation provisions. In extreme circumstances, the common law doctrine of frustration may apply.

Both parties should also be aware that NZS 3910 requires each party to take proactive steps to ensure that any entitlement to an EOT or a variation claim is realised.

Extension of time

The qualifying delay events under NZS 3910 are set out in general condition 10.3. While there is no delay event in general condition 10.3 which specifically responds to a pandemic or similar situation, general condition 10.3.1(f) requires the Engineer to grant an EOT if the contractor is “fairly entitled" to an extension by reason of any circumstances “not reasonably foreseeable by an experienced contractor at the time of tendering" and “not due to the fault of the contractor".

Was COVID-19 reasonably foreseeable?

This will depend on when the relevant tender was issued and what information was available about the evolving COVID-19 outbreak at that time. Key dates for consideration may include:

• 28 January 2020: The New Zealand Ministry of Health set up the National Health Coordination Centre in response to the outbreak. At that time, the likelihood of a sustained outbreak in New Zealand was described as “low".
• 30 January 2020: The World Health Organisation declared the outbreak to be a “Public Health Emergency of International Concern".
• 28 February 2020: The first case of COVID-19 was confirmed in New Zealand.
• 4-5 March 2020: The second and third cases of COVID-19 were confirmed in New Zealand.
• 11 March 2020: The outbreak was recognised as a “pandemic" by the World Health Organisation.

Importantly, for the purposes of testing reasonable foreseeability in this context the standard is an objective one: would “an experienced contractor", not the contractor, have reasonably foreseen the circumstances giving rise to the delay. It is not uncommon for Special Conditions to enhance this standard, typically by reference to “an experienced contractor exercising Good Industry Practices".

As a general rule of thumb, we would expect a contractor to argue that if its tender was submitted prior to the end of January 2020, the Engineer should prima facie find that a delay arising out of COVID-19 was not reasonably foreseeable. Of course, the circumstances pertaining to each tender are different so a conclusive view on this point can only ever be determined on a case by case basis.

Is the contractor fairly entitled to an EOT?

This requires the Engineer to assess whether the claimed delay has actually been caused by the relevant event, whether the delay impacts on the critical path of the project, and whether any steps can or have been taken to mitigate the delay.

Prolongation costs

General condition 10.3.7 of NZS 3910 provides that the contractor will not be entitled to compensation for time-related costs where an extension of time is granted pursuant to general condition 10.3.1(f). However, in some situations the same circumstances may entitle the contractor to a variation, in which case both time and cost relief may be available as set out below.

Variations

Possible scenarios

There are a range of circumstances which NZS 3910 provides are either to be treated as a variation or which entitle the contractor to claim a variation. Relevantly to the potential impacts of COVID-19, any delay or cost incurred by the contractor as a result of the following matters may result in a variation:

• if the capacity of the principal's design consultants is restricted (for example, due to remote working requirements) resulting in the late issue by the Engineer or the principal of any instructions or documents (general condition 2.7.7),​
• if the Engineer is unable to properly carry out his or her duties under the Contract (for example, if the Engineer is required to self-isolate),
• if the principal is delayed in supplying any materials, services or works required to be provided by the principal (for example, due to supply chain interruption resulting from reduced air/ ship movements or reduced manufacturing capability) (general condition 5.16),
• if a nominated subcontractor is unprepared or unable to enter into a subcontract with the contractor or repudiates the subcontract (for example, because it is unable to procure the materials, or staff the work, required under the subcontract) (general condition 4.2.6), or
• an act or omission of a person for whom the principal is responsible (for example, if a member of the principal's staff is infected with COVID-19, enters the site, and interfaces with personnel of the contractor, resulting in those personnel having to self-isolate).

Importantly, there is no express basis for a variation as a result of a change in law or regulation other than where General Condition 5.11.10 applies. As such, the imposition of a mandatory 14-day lockdown period for the population (similar to what is occurring in Europe), for example, may only result in an entitlement for an extension of time under general condition 10.3.1(f) as outlined above.​

Cost and time consequences

The cost consequences of any such variation are to be valued in accordance with general condition 9.3 and the net effect of any delay consequences will be dealt with as an extension of time under general condition 10.3.1(a).

Suspension

General condition 6.7.1 provides that the Engineer shall instruct the contractor to suspend the contract works for such time as the Engineer thinks fit if suspension “becomes necessary". There is limited guidance in New Zealand as to when suspension “becomes necessary". If COVID-19, and in particular the regulatory response to COVID-19, result in a situation where it is impossible to continue with the contract works for a period of time, it is conceivable that suspension may become necessary.

Any such suspension is to be treated as a variation.

It should also be noted that it is open to the principal and the contractor to mutually agree to suspend the contract works for a period of time and the consequences of such a suspension.

Early warning

As the situation continues to develop, parties will also need to be mindful of the particular notification requirements under their contract, including:

• the contractor must notify the Engineer of its EOT claim in writing within 20 working days after the circumstances arise which are relied on as the grounds for extension (general condition 10.3.2(b)), and​
• contractors and principals / Engineers may also want to consider whether advance notification should be given under general condition 5.21.1 of any matters which may delay completion of the Contract Works or materially alter the Contract Price.

Other considerations

Outside of the general conditions, parties should carefully consider how their specific contract allocates the risks of delay or increased costs that may result from COVID-19. In particular:

• it is common for the standard EOT and variation provisions in NZS3190 to be modified to suit the particular needs of each project, so it is critical for parties to understand the specific requirements of their contract and to consider early what steps should be taken in light of the evolving nature of the outbreak,​
• many construction contracts respond or relate to upstream obligations (such as commitments made by principals to incoming tenants or purchasers of completed premises or financing covenants in favour of lenders) and principals need to be across all such obligations when assessing the impact and consequences of COVID-19 on performance under the construction contract, and
• as the industry continues to move towards a collaborative approach to contracting, it is increasingly common for construction contracts to include 'partnering principles' in the contract agreement, which may require the parties to act cooperatively and in good faith, often in relation to the occurrence of unanticipated events. Such provisions can affect the operation of, and entitlement to enforce, the general conditions of NZS 3910.

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 advise​r.

To view our other COVID-19 related publications, click here.

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Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.