Covid-19: Suspension of Construction Contracts

The Covid 19 lockdown resulted in many contractors and property owners examining the provisions of their construction contracts in order to check the circumstances in which the contract may be suspended and the implications of a suspension for both parties.

The most common form of contract used for large construction projects in New Zealand is NZS 3910:2013. Clause 6.7.1 of the General Conditions states:

“If the suspension of the whole or a part of the Contract Works becomes necessary, the Engineer shall instruct the Contractor in writing to suspend the progress of the whole or any part of the Contract Works for such time as the Engineer may think fit, and the Contractor shall comply with the instruction”.

When the Alert Level 4 took effect many contractors asked the Engineer to the contract to suspend the contract works under clause 6.7.1 on the basis laws passed by the Government prevented the contractor from continuing work. These laws included amendments to the Health Act to give the Government powers to stop the spread of infectious diseases, an Epidemic Notice under the Epidemic Preparedness Act 2006 and a Health Order issued under the Health Act. These measures required that all premises close (excluding houses and essential businesses amongst other things) and prevented people from congregating in outdoor places.

The list of “essential businesses” included “Tradespeople” but only in respect of “maintenance if it is to maintain the necessities of life or critical to safety. This includes electricians, plumbers and builders.” Most building projects contracts did not fall into that category and could not continue.

Clause 6.7.3 of NZS 3910:2013 states unless the suspension is due to default on the part of the Contractor, the suspension is to be treated as a Variation. Clause 5.11.10 also states that a Variation arises when the Government passes laws that increases the cost of performing the contract to the contractor. The Variation is to be valued in accordance with clause 9.3 and the Engineer is to grant an extension of time to the contractor for the net effect of the Variation under Clause 10.3.1.

Under clause 9.3 the contractor is to notify the Engineer of any Variation claim within 1 month of the Engineer issuing the suspension notice (9.3.2). A Variation claim arising from the lockdown would likely include time related costs including off-site and on-site overheads and profit for the period of the suspension. Where the contract includes a schedule of prices with applicable rates, including working day rates, these would apply. Otherwise, the formulas set out in clause 9.3 for determining time-related costs are used.

The assessment of the contractor’s time related costs during the Alert Level 4 period is likely to be an area of dispute between contractors and owners. The extent to which problems may arise will depend on whether the relevant rates are clearly stated in the Special Conditions of Contract and the ability of the parties to work together to resolve any differences. Covid 19 is an extraordinary event and it will require collaborative approach from contractors and owners in order to resolve the issues arising from the lockdown. If this is not possible, the adjudication process in the Construction Contracts Act is available for the parties to resolve their differences.

Grimshaw & Co regularly acts for contractors, property owners and bodies corporate in construction contract disputes and adjudication claims under the Construction Contracts Act. Call us on 09 377 3300 for practical expert advice on how to manage your dispute.