Protecting construction projects from COVID-19
COVID-19 is having varying impacts on the ability of some parties to successfully deliver their construction and projects contracts, with some projects facing delays, disruption and additional costs due to:
- procurement delays for internationally sourced materials (due to factory or port closures)
- delays in domestic manufacturing due to international supply chain issues
- unavailability of foreign labour caused by restrictions on labour entering New Zealand (or being quarantined upon arrival)
While these circumstances may provide “time relief” for contractors and consultants under their project contracts (for example, an extension of time may be available for a contractor under clause 10.3.1 of NZS3910/3916 for circumstances “not reasonably foreseeable”, for consultants under clause 12.5 of ACENZ CCCS for events “beyond their control” or under ‘force majeure’-type clauses in other contracts), contractors and consultants are unlikely to be able to recover their additional costs (including time-based costs) due to the delaying or disruptive effect of COVID-19.
For many principals, the virus outbreak is also presenting increase costs, risk and uncertainty. For instance, principals are exposed to their own time-based costs of delayed completion and the risks and liabilities associated with being late on related project contracts (e.g. leasing arrangements and on-sale contracts).
It is also common in New Zealand construction contracts for principals to pay their contractors advances for offshore materials and there are already instances of pre-payment having been made for materials that are now facing many months of procurement delays. Unless principals have appropriate security arrangements (through advanced payment bonds for instance), and similarly contractors with their international suppliers, this presents significant title risk for both parties.
COVID-19 is presenting unique issues for projects. While the project contract will govern the parties’ rights and obligations in relation to these issues, given the magnitude of the situation and that its effects are not yet fully understood, contractors and principals, with their independent contract administrator may find it beneficial to work together to find project-specific solutions to facilitate success for all. This may involve:
- openness – the contractor openly and regularly communicating its programme risk areas and driving proposals for dealing with those risks. The principal should look to proactively engage with the contractor in relation to those proposals.
- alternatives – the parties looking at opportunities to source locally (or through unaffected international manufacturers).
- flexibility – the parties investigating revised or staged completion arrangements which may involve project acceleration in unaffected parts.
Principals and contractors should also scrutinise the appropriateness of their respective security arrangements for pre-paid off-shore materials, particularly those materials at risk of prolonged delay. Parties should also engage with their insurance brokers to check that their policies (in particular, contract works policies) provide coverage for extended project timeframes.
 In extreme circumstances, the common law doctrine of frustration (which has been codified into New Zealand’s NZS391X suite of contracts, see clause 14.1), may be available to set the contract aside if an unforeseen, uncontrollable event occurs that render it impossible to fulfill the contract or transforms the obligation to perform into a radically different obligation – however, frustration has a narrow application and our courts do not lightly invoke the doctrine.