The construction sector is among the hardest hit by the steps taken to address COVID-19. With the outbreak forcing a nationwide lock down (and more restrictions to come), there will be delays in materials, labour shortages, and new ways of working required, potentially on a permanent basis. The economic impact will affect finance and the number of projects going up for tender. These issues are important for people considering construction work, but also parties to existing construction contracts. The terms of those contracts may no longer be suitable for the current landscape.
We set out below some of the options which most construction contracts will contain. In New Zealand, most construction of any value is carried out under NZS 3910:2013 (with an engineer) or NZS 3915:2005 (without an engineer). However those forms often come with significant amendments shifting risks, and other forms are becoming more common. Most residential builders will have their own form prepared for their business or by a franchise or industry body.
Extension of time
The lock down and restrictions moving forward will impact the timing of completion. This is important to both parties, as the principal wants to use their new works, and the contractor wants to avoid liquidated damages. Most contracts will include a right to an extension of time in circumstances not reasonably foreseeable by the contractor at the time of tender / not caused by the contractor. This may be an issue if the tender was made in February or March 2020.
The specific contract may well have tight notice timeframes, so we recommend examining the sections carefully and making sure all parties discuss the options. Most principals and contractors are able to work out a solution commercially but the formalities are there to protect against disputes.
With delay comes additional cost. Contractors will have additional wage payments, financing costs, subcontractor costs and plant on site. There may also be further costs after site works can re-commence caused by any new health and safety requirements.
As with approaching an extension of time – the key to determining who wears these costs lies in the contract, and ensuring appropriate notices are given.
Frustration / exceptional event
If COVID-19’s impact means the project is impossible to perform, or lock down delays are likely to exceed a certain period, the contract may contain provisions allowing a party to terminate or suspend the contract.
It is worth noting that “impossible to perform” is a fairly high threshold. Simply incurring additional costs for the works to be completed will not be enough to prove that the contract has been “frustrated”. If a party wrongfully terminates its contract due to “frustration” the other party may have a right to claim for damages.
How can we help?
Existing contracts: if you believe that your existing contractual arrangements are affected by the coronavirus outbreak, we recommend that seek advice urgently, as notices often have strict “use it or lose it” time limits.
Future contracts: Given that the coronavirus outbreak is very likely to be considered a foreseeable event moving forward, we recommend that any future construction contract that is being entered into during this period is reviewed and tailored correctly in order to address any issues that may arise from the effects of this global pandemic.
Our experienced, specialist construction law team will be happy to talk through your situation and review your contracts, whether existing or before you sign. Please give us a call.