With a fresh Level 4 lockdown, a new raft of COVID claims will inevitably follow. It is important that Engineers to the Contract are aware of, and prepared for, these claims and how to manage them in a way that encourages a smooth transition through this uncertain time.
Since the 2020 Level 4 lockdown, many organizations have included ‘COVID clauses’ into the special conditions of NZS 3910. Broadly speaking, how the impacts of the latest COVID lockdown are dealt with will depend on the following:
- the form of contract
- when the contract was entered into (i.e. before or after January 2020 when the Infectious and Notifiable Diseases Order 2020 was issued)
- whether there are any special conditions that address what is to occur in the case of a COVID outbreak, any amendments to the suspension (6.7) and/or change in law (5.11.10) clauses.
As Engineer to the Contract, it is important you carefully consider any ‘COVID clauses’ and the notice requirements under such clauses so you can continue to appropriately administer the contract, having regard to your obligations under clause 6.2.
Below we set out guidance in relation to the commonly raised clauses in the general conditions. However, it is important for an Engineer to the Contract to carefully consider any amendment to these clauses or any other special conditions that relate to COVID-19.
NZS 3910:2013 general conditions and COVID-19
For unamended NZS 3910 contracts, contractors likely have grounds to seek a variation and/or an extension of time under the general conditions. These claims will require assessment by the Engineer to the Contract.
Grounds for a Variation and suspension
Contractors may be entitled to a Variation under clause 5.11.10 (the ‘change of law’ provision) which entitles the contractor to a Variation if ‘any statute, regulation, or bylaw, or the imposition by Government or by a local authority of any royalty, fee, or toll increases or decreases the Cost to the Contractor of performing the Contract’ (emphasis added) and that increase or decrease is not otherwise provided for in the Contract. In the previous lockdown, MBIE issued guidance which confirmed that 5.11.10 would be an applicable ground for a Variation in a COVID-19 context. For each Level imposed by the Government, a separate Order is issued. The 2021 Level 4 restrictions arise from the COVID-19 Public Health Response (Alert Level Requirements) Order (No 9) 2021.
Contractors may also be entitled to a Variation under clause 6.7 if the Contract Works are required to be suspended under a Government Order. Importantly, the Engineer plays a key role under 6.7.1 in determining whether a suspension is necessary. The suspension of whole or part of the Contract Works may become necessary under 6.7.1 if work cannot take place during a Level 4 lockdown (and/or at any other alert level).
At Level 4, there are only limited projects that can continue - building construction and maintenance services are considered essential if required for one or both of the following:
- to address immediate risks to health and safety; or
- nationally important infrastructure.
During the 2020 Level 4 lockdown, the Government issued guidance on how to identify whether building and construction work met the essential business definition and was therefore allowed to continue:
- Is the work required immediately to ensure the continuation of an essential service, or prevent the failure of an essential service?
- Is the work required immediately to ensure the health safety and wellbeing of people, or avoid significant environmental harm?
- Is the work you are performing the bare minimum required to meet the criteria above?
If the whole or a part of the Contract Works cannot continue under Level 4, as Engineer to the Contract you should consider whether a suspension should be instructed. In doing so, you should keep in mind that if you fail to instruct a suspension where it was appropriate to do so, you may be at risk of breaching your obligations to act fairly and impartially (6.2.1(b).
Entitlements for Contractors
In the absence of agreement (9.3.4) the Engineer to the Contract will be required to assess the value of a Variation under 9.3. In most cases, such a valuation will require consideration of the direct costs incurred as a result of the lockdown period (from the 2020 Level 4 lockdown that this will generally include demobilisation and remobilisation costs as well as non-time related overheads such as plant and equipment costs).
It will also involve consideration of time-related costs as 10.3.1(a) gives the Contractor an extension of time for the net effect of any Variation. In turn, 10.3.7 entitles the Contractor to time-related costs. The time-related costs are generally assessed by either a working day rate or reasonable compensation for overheads and profit (9.3.12).
You should work with the Contractor as early as possible to understand the value of such direct and time-related costs to ensure you are able to reach an agreement.
The Contractor may also seek, and the Engineer may grant, an extension of time under 10.3.1(f) which applies if “any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the Contractor”. While this ground commonly applied for the 2020 Level 4 lockdown, in respect of this lockdown, whether or not 10.3.1(f) applies may depend on when the Contract was entered into. For example, if the Contract was entered into after March 2020, it is arguable that a Level 4 lockdown cannot be said to be unforeseeable on the basis that COVID-19 and Government imposed lockdowns are a very real risk which a reasonable contractor should be alive to during the tendering phase. On the other hand, the Delta variant and its highly contagious nature was not known until relatively recently.
It is the Engineer to the Contract’s role to ensure the Contract is administered fairly, impartially and in an orderly manner. We encourage Engineers to engage in an open and pre-emptive dialogue with Principals and Contractors, using the knowledge gained in 2020, to assist parties in managing their projects through this difficult time.