Q&A: Construction law in an extraordinary year

Our leading construction team answers some of the big questions affecting New Zealand’s construction and infrastructure sectors following an unprecedented year of activity and uncertainty.

Q | What are the key procurement trends arising from COVID-19 lockdowns and the pandemic’s wider impacts?

Travis Tomlinson, Partner

To set the scene, the private and public sectors continue to present opportunities in the form of large construction projects and major works programs. Some parts of the industry – most noticeably in the retail, hotel and tourism sectors – are understandably less active, but in the large, Government, developers and other principals are advancing their planning and project initiation activities and putting opportunities to market. The construction pipeline looks positive, with many projects and programmes gathering momentum and looking to proceed at pace – often to overcome procurement delays and interruptions related to the pandemic.

While traditional procurement models remain the preference, there is greater emphasis on collaborative procurement processes and contracting structures.

"The construction pipeline looks positive, with many projects and programmes gathering momentum and looking to proceed at pace"

Unique co-design frameworks are being formulated to integrate principal, advisor (including project management, cost and legal) and consultant expertise in collaborative working environments, and this is occurring early in project planning phases. There is also a resurgence of preconstruction or “ECI” processes, with current processes designed and structured around the interrogation of project risk – particularly risk presented by COVID-19. There is also a noticeable uptake of collaborative contracting principles in traditional procurement models.

In the private sector, there has been a mix of direct negotiation and competitive tendering – but on balance, developers and other principals are running competitive processes, particularly in light of some available market capacity and the resulting opportunities (e.g. commercial/pricing and contract positions) that this is providing. Competitive single or two- stage procurement processes are and will continue in the public sector, but panel appointments will likely become more prevalent due to the need to accelerate procurements that have been impacted by the pandemic.

With the uncertainties being presented by COVID-19, principals are procuring with an eye on flexibility. While principals generally look to retain broad discretionary rights in their procurement activities – such as to change, delay and/or cancel their projects at will, there is a heightened focus on those discretionary rights and privileges being carried forward from tendering phases into project delivery contracts. Discretionary “pause” and termination for convenience rights are becoming the norm but principal are wanting to have sensible discussions with their counterparties to ensure that fair relief and compensation regimes are available should those privileges be exercised.

Finally, it is worth highlighting that consultants, contractors and their suppliers have started to re-engage in certain proactive and forward-looking risk management activities – activities that were largely put on hold as resources (financial and personnel) were allocated and tied up earlier this year due to the pandemic. There has been a lot of activity from these parties recently, with them re-visiting their standard form agreements and subcontracts to see whether they remain fit for purpose in the COVID-19 era, interrogating and updating their corporate risk and tendering policies, and providing risk, tendering and contract management training programs for staff.

These forward-looking behaviours and trends are encouraging signs for the construction sector, particularly considering the significant impacts that the pandemic has created across the board.

Q | There was a lot of talk last year, and out of the Construction Sector Accord, on terms of construction contracts and a push or request from the sector for ‘fairer contract terms’. What are you seeing in the approach to construction contracts for larger commercial projects?

Mark Crosbie, Partner

This protest had been coming through from main contractors for a while and was amplified through and embodied into the Accord, through reference to fairer risk allocation – which of course is primarily set at the outset in the construction contract.

No matter your view on that (whether that it takes two to sign, or that its rich for contractors to cry unfair when those same contractors use vastly more onerous terms with their subcontractors, or conversely that many Government key projects are run by consultants who advise risk transfer to contractor side and leverage the tender process to avoid meaningful rebalancing by contractors), there is starting to be a move towards a rebalancing.

We are currently involved with representatives from a key sector group, preparing a suite of contract documents for their future projects. The group and the contract suite acknowledge that there is more than just a contract document required for a successful project and references project governance and management structures, project culture, as well as contract mechanisms.

Good governance and management in projects is something we’ve been banging on about for a while. Over the next few years this will be tested – both for the companies and for projects.

In the initial phase of development of the contract document, it contains a range of initiatives both in and around the contract itself (from an expectation of complete design documents for pricing, inclusion of a risk allocation matrix, inclusion of more fulsome project information and processes and protocols, to an independent administrator for the contract, among many other things). I’m looking forward to using the suite on the first projects next year.

Q | Prospecting and disputes, managing the uncertain certainty of a litigation outcome?

Janine Stewart, Partner

One of the most challenging questions for a dispute lawyer is the strength of a client’s claim or defence. When I first started practicing, the senior lawyers often refused to answer it.

Parties were expected to take an extraordinary “punt” at significant cost without any clear prospect of success. Now days, and rightly so, clients are demanding clear indications of prospects of success. But even now, there is rarely, if ever, satisfactory certainty of return on investment in disputes.

Of course, a claim assessment is subjective to the lawyer, and trust me,  if you have a prospect of better than 70% – you’re doing very well.

My expectation post lockdown was that disputes would dwindle and strength of claim assessments would come under even more scrutiny, as finances and resources came under strain. But not so.

We are seeing numbers of disputes climb, more disputes escalating and more parties prepared to take their disputes through the contractual process or adjudication under the Construction Contracts Act 2002 with less scrutiny on actual prospects of success.

While this may be a helpful growth industry for lawyers, it is not necessarily the best alternative for parties. In some cases the stakes or matters of principle are high enough to justify the spend, but we would encourage parties to continue to challenge the merits of their position, and explore all options.

Q | How has the disputes landscape changed in 2020?

Stephen Price, Partner

COVID-19’s impact on the construction industry has led to increased disputes over delays and cancellation of contracts, including termination on the basis of frustration. We anticipate that these disputes will continue to rise in 2021 as the economic consequences of the pandemic manifest. The easing of manufacture and disruption to supply chains due to COVID-19 restrictions and lengthy border/port closures, culminating in higher costs, will fuel the number of construction disputes.

However, the increase in construction disputes may not be immediately reflected in the New Zealand courts.

"It is unlikely that any substantive construction proceeding will be heard and determined by the courts in 2020/2021"

Apart from disputes involving urgent injunctive relief, it is unlikely that any substantive construction proceeding will be heard and determined by the courts in 2020/2021. Like the Construction industry, New Zealand’s alert level restrictions have had a major impact on the court roster, resulting in adjournments of hearings and limited windows of time to re-allocate priority fixtures on civil/construction litigation matters.

The courts have signalled that they are committed to allocating fixtures in 2021 to criminal jury trials that were cancelled as a result of the alert levels. This means, for example, that the High Court at Auckland will be running seven jury trials every week during the first seven months of next year, as well as three jury trials in Hamilton and one trial each in Rotorua and Whangarei. It follows that the earliest date on which the courts will allocate a fixture (including priority fixtures) for civil/construction matters will be

mid to late 2022. Due to this situation, adjudications and/or arbitrations may be preferred by those seeking immediate certainty, clarification and/or speedy resolution. Those seeking to slow a dispute or further frustrate the dispute process, may opt for court proceedings.

Q | Is collaboration key to resolving COVID-19 disputes?

Scott Thompson, Partner

From my perspective, the year has been one of contrast between parties in conflict on construction and infrastructure projects.

Many of the disputes have arisen, in part, from parties adopting rigid and uncompromising contractual positions to advance their own interests. In addition, a claims-focused mentality has prevailed across many work sites. Both trends typically lead to poorly articulated and substantiated claims which make compromise and dispute resolution protracted and expensive. It certainly detracts from best-for-project outcomes, and long-term relationship building.

However, when looking at the time and cost implications arising from COVID-19, project participants on the whole came together to address the issues in a pragmatic and solutions- focused manner. We expected to see many disputes in this area, and given the costs involved, anticipated these running through the formal contractual dispute resolution processes. What transpired on many work sites was the opposite. Parties provided costs on an open-book basis, worked together to mitigate time and cost implications, and contractual formalities were often forsaken in the spirit of commerciality. Of course, there were exceptions, and some of the larger infrastructure projects have been more adversarial (which is to be expected given the dollars at stake).

Looking ahead, restrictions to bringing in talent from overseas to provide necessary expertise is a concern for the sector from a project outcomes and disputes perspective. Historically, New Zealand has relied on overseas experience to assist in the design and construction of the more complex construction and infrastructure projects. Without the required depth of talent, projects can suffer from delays and performance issues such as design and construction errors. These issues inevitably lead to disputes. Parties need to be aware of these potential bottlenecks of personnel getting into New Zealand and ensure they have plans in place to protect themselves.

Q | Infrastructure development is being promoted as critical to New Zealand’s recovery. What trends are you seeing in this sector?

Sarah Sinclair, Partner

Whilst building infrastructure was firmly on the national agenda prior to COVID-19, there is an even greater spotlight on investment and activity now with it being identified as a key driver of New Zealand’s economic recovery.

Infrastructure investment has the opportunity to deliver social and economic outcomes and contribute to long term sustainable growth.  And yet, like many sectors, the Infrastructure sector has faced several challenges in recent months given the economic and logistical disruptions brought about by the COVID-19 pandemic and, as we are all acutely aware, many challenges still lie ahead.

We anticipate that momentum in the sector will rise over the coming months in line with the Government’s efforts to boost the economy through public sector stimulus packages, with a particular focus on new and previously unfunded infrastructure projects.

Our team is currently at the heart of a number of key public sector infrastructure initiatives and large, complex infrastructure projects (including water reform and mass transit projects). Through our involvement, we are seeing a clear trend towards projects that seek to drive both social and economic outcomes – and that are planned and procured with sustainability as a key criteria.

Added to this focus on outcomes, there is a move towards “joined-up” projects that traverse sectors that have traditionally been planned separately (e.g. land transport and urban development) as well as broader system thinking. Critically, some of the large-scale initiatives rely on, or may need, legislative reform or will be impacted by the legislative reform programme expected to be on the Government’s agenda.

So now, more than ever, is a time for constructive communication and collaboration between all players in the infrastructure and construction sectors – through central and local government, iwi, the private sector and all who support them.

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