20 March 2020
Coronavirus will have many effects on construction contracts.
This is a list of what we anticipate will need consideration and which many parties will be currently focusing their thoughts on:
- Suspension clauses being invoked to suspend works. These will be activated by principals and there is some evidence of this already occurring on government contracts;
- Force majeure clauses (unsurprisingly whether a party can suspend or terminate will turn on the exact wording of the clause). This is where you will need to look carefully at the special conditions, if any, of your contract as neither NZS3910:2003 or the standard NIZA contracts have force majeure clauses in their standard conditions;
- Notices – ensuring, if you are a contractor, that you are promptly issuing notices for delays, disruption and working out of sequence, and that you know when to give them. My favorite adage when it comes to notices applies – ‘bang it in Bill’. You can always withdraw a notice at a later point but it’s damn hard to justify a financial claim at a later point if you did not give early notice;
- Increased need for record keeping/evidence;
- Frustration – a remedy to terminate a contract, but which can be very difficult to establish; and
- What to do with contracts that are about to be signed.
The need to exit contracts or the risk of a contract being terminated under a force majeure clause or for frustration are matters that require careful strategic consideration and a close analysis of the contract wording and obligations. We will shortly provide a separate bulletin on these concepts.
What is a given, is that for many contractors they will face delay, disruption and will have to work out of sequence. That brings us to the need to give prompt notice and good record keeping for extensions of time.
Giving prompt notice
What will delay the works? In our view, it will be deliveries being delayed and contractors having to be self-isolated or choosing to self-isolate.
These are matters for which you should, whether you are a contractor or sub-contractor, give prompt notice of and state them as reasons for an extension of time. An email is sufficient - but clearly state what is causing the delay and the likely impact on the programme. For many sub-contractors, the time frame under their subcontracts to notify of such delays will only be 5 days, so time is of the essence.
Extensions of time and compensation
Under NZS3910 an extension of time can be claimed under clause 10.3.1(g), which states “Any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor”. If you are a contractor , refer this clause, check the impact of any amendments in the special conditions, and leave no one in any doubt that you are claiming an extension of time.
NZIA contracts are more generous in the reasons allowed for an extension of time. Relevantly, clause 11.5.1(j) allows a claim for a ‘a separate contractor’s act or omission” and sub-clause (k) allows for “something else of significance beyond the Contractor’s control”.
The trickier issue is whether such delays will allow you to claim compensation for loss and expense caused by the prolonged time on site, working out of sequence etc. In most cases, delays caused, on a project that is underway by the virus are unlikely to be recoverable. That is because compensation can only be sought for variations and delays
caused by the principal or other persons for whom the principal is responsible. In respect of the latter point, it is arguable that compensation for delays could be sought if the principal engaged architect is delayed in issuing design revisions or if the principal’s suppliers are late with deliveries.
We suggest worrying about the niceties of whether compensation can be claimed at a later point. The key point is to give notice as soon as possible to preserve and log your entitlement.
From a purist point of view, claims for extensions of time and loss and expense should be advanced separately anyway. A good tactical reason for this is that the employer does not have to physically pay anything to the contractor when agreeing an extension of time so he or she may be more generous. Also, not all claims for an extension of time are compensable – for example a contractor cannot claim any compensation if they are delayed by weather events. However, if a contractor is delayed due to variations then they can claim compensation for delays as a result. So it makes sense to firstly see how much is granted for an extension of time and for what reasons before advancing a claim for compensation.
The burden of proof is on the party claiming an extension of time. This would require the usual evidence, which should be given after the initial notification, which may only be a few paragraphs in a site notice or email. Examples of evidence are:
- Records – evidence of staff being unable to attend site due to coronavirus. This may be in the form of doctor’s certificates, or if there are issues of confidentiality, witness statements confirming sickness or self-isolation.
- If sites are closed, evidence to confirm why they were closed and by whom. For late delivery/inactivity by a supplier, some form of contemporaneous confirmation from the supplier as to the effect of coronavirus on deliveries.
- It may be that the contractor’s own head office staff are not available; again evidence will be required as to their lack of availability being due to coronavirus and some form of confirmation that there were no substitute employees who could have taken up the slack/taken their place.
- Evidence that (say) the contractor has sought alternative staff from an agency, but has been unable to find any suitable replacements. If (say) the contractor’s regular supplier of fasteners in China was unable to deliver, some form of evidence that the contractor sought alternative NZ sources but still could not find a supplier who could deliver on time will prove to be useful.
As always, some form of programming evidence showing that the virus did indeed cause delay is crucial.
The key call to action from this is to firstly give notice and do so as soon as possible.
All information in this newsletter is, to the best of the authors’ knowledge, true and accurate. No liability is assumed for any losses suffered by any person relying directly or indirectly on this information.
Before acting on any information in this newsletter, it is recommended that you seek our advice.