Construction Law 2023 Comparisons

Legal Framework

The principal laws governing New Zealand’s construction industry are found in statutes and common-law authorities. Common-law authorities from similar overseas jurisdictions are not binding in New Zealand, yet are often influential.

Key Statutes

Building Act 2004

This is the primary legislation governing the building industry. Its stated purpose is to provide that people can use buildings safely and without endangering their health. This act provides the legal framework for the building code, which sets out the standard required for buildings in New Zealand and guidance for how to meet those standards. The Building Act 2004 also contains minimum mandatory warranties for building work in relation to household units.

Construction Contracts Act 2002

This act is predominantly concerned with regular and timely payments between the parties to a construction contract, given the importance of cash flow for contractors. This act:

• governs the requirements for parties holding retentions;
• provides for a fast-track dispute resolution mechanism (adjudication) for construction disputes and claims;
• prohibits “pay when paid” or “pay if paid” terms in construction contracts; and
• provides a default payment process of payment claims and payment schedules for construction contracts.

Health and Safety at Work Act 2015

This law outlines the standard needed at work sites to ensure personnel are safe. The Health and Safety at Work Act also controls how this standard is measured and enforced.

Resource Management Act 1991

This act promotes the sustainable management of natural and physical resources. A construction project may need a resource consent to develop or use natural and physical resources and/or carry out activities that affect the environment. If a consent is granted, it will impose conditions on such use or activities. The act regulates this process.

There are no mandatory contracts for construction projects in New Zealand. However, there are common and standard form New Zealand contracts for construction and for key construction consultants.

The New Zealand Standard (NZS) Series of Construction Contracts

The two most common standard form contracts for construction are provided by Standards New Zealand.

NZS 3910:2013 – Conditions of contract for building and civil engineering – Construction

This is a “construct-only” contract where the employer provides the design and the contractor is responsible for the construction component of the project.

NZS 3915:2005, which is a similar “construct-only” contract, is sometimes used instead of NZS 3910:2013 on projects where there is no “engineer” (see 2.1 The Employer).

NZS 3916:2013 – Conditions of contract for building and civil engineering – Design and construct

This is a “design-and-build” contract where the employer provides its requirements and the contractor is responsible for both the design and the construction of the project.

Design, which is the key distinction between NZS 3910:2013 and NZS 3916:2013, is discussed further in 3.3 Design.

Other Standard New Zealand Construction Contracts

Other standard form contracts that are found in New Zealand include the following.

The New Zealand Institute of Architects (NZIA) forms of contract

• Standard Construction Contract (used when the architect administers the construction contract).
• National Building Contract (used when the architect is not contractually involved in the administration of the construction contract).

The Registered Master Builders Association forms of contract

• Residential Building Contract (RBC1) (usually for use in residential construction projects).
• Subcontract Agreement (for use between contractors and their subcontractors).

Overseas Forms of Construction Contracts Commonly Used in New Zealand

Several overseas forms of contract are commonly used for construction projects in New Zealand, including:

• the British New Engineering Contracts (commonly NEC3 and NEC4);
• the suite of contracts from the International Federation of Consulting Engineers (FIDIC), most commonly:
1. Conditions of Contract for Construction (the “Red Book”);
2. Conditions of Contract for Plant and Design-Build (the “Yellow Book”); and
3. Conditions of Contract for Engineering, Procurement and Construction (EPC)/Turnkey (the “Silver Book”).

Standard New Zealand Construction Consultancy Contracts

The most common forms of consultancy contract for construction professional services are:

• the Conditions of Contract for Consultancy Services (CCCS), developed by Engineering New Zealand and the Association of Consulting Engineers New Zealand (ACENZ), which is used for a wide range of construction consulting services;
• the Agreement for Architects Services (AAS), used for professional design services; and
• the Contract for Quantity Surveying Consultancy Services (CQSCS), used by members of the New Zealand Institute of Quantity Surveyors (NZIQS).

Nature of Employers

The employer, also known as “the principal” in the NZS contracts, can be a wide range of persons, including:

• a local council or central government body;
• an incorporated or unincorporated entity – for example, in industries such as manufacturing, residential and commercial real estate, and irrigation; or
• individual persons (eg, for home builds and renovations).

Engineer as a Key Agent of Employers

The main NZS forms of contract includes the concept of “the engineer”, which is similar to the engineer in the FIDIC series of contracts.

Under the NZS 3910:2013 and NZS 3916:2013 contracts, the engineer administers the contract and has a dual role as an agent of the employer and a quasi-independent decision-maker. In the latter role, the engineer is expected to act fairly and impartially. Many of the roles of the employer referred to in this guide will actually be performed by the engineer (eg, issuing and assessing variations, confirming works are complete, etc).

General Rights and Responsibilities of Employers

Common rights

• To have the contractor perform the works so that they meet the requirements in the specifications and drawings.
• To vary the works (subject to awarding extensions of time and additional costs to the contractor where appropriate).
• To have the works performed within a specified timeframe (subject to extensions of time in particular circumstances).
• To have the works be free of defects and to have the contractor remedy defects within a reasonable timeframe.

Common responsibilities

• To set out its requirements for the project (including providing the design and specifications, where applicable – see 3.3 Design).
• To have/arrange funding for the project and pay the contractor within the agreed timeframes.
• To secure building consents and resource consents for the project.
• To provide access to the site and avoid interfering with the contractor’s performance of the works.

The Relationship Between Employers and Contractors

The employer and contractor will be the parties to the construction contract. The contractor is obliged to carry out the works specified in that contract and the employer is obliged to pay for those works in accordance with the contract.

It is also common for the employer to require security from the contractor to ensure the due, proper and punctual performance of the contractor’s obligations under the contract. This is usually achieved through a contractor’s performance bond or retentions from payments due to the contractor.

Once the contract is under way, the employer and contractor usually each have a single nominated representative to facilitate clear communication. For the employer, this is usually the engineer (or the engineer’s representative).

The Relationship Between Employers and Subcontractors

See 2.3 The Subcontractors.

The Relationship Between Employers and Financiers

See 2.4 The Financiers.

Nature of Contractors

There is significant variability in the size and nature of contractors commonly operating in New Zealand. Contractors range from large listed corporations (both local and overseas) to much smaller private companies. It is not unusual for larger projects in New Zealand to involve overseas organisations (often in a joint venture with local entities).

Common Rights and Responsibilities of Contractors

Common rights

• To choose its preferred methodology for performing the works (albeit often within parameters).
• To receive payment from the employer within the agreed timeframes.
• To receive additional payments and extensions of time for a specified range of events/circumstances (typically events and circumstances beyond the contractor’s control).
• To perform the works without being prevented from doing so by the employer or third parties.

Common responsibilities

• To perform the works so that they meet the requirements in the contract (including requirements in the design and specifications, where applicable – see 3.3 Design).
• To complete the works within a specified timeframe (subject to extensions of time in particular circumstances).
• To ensure that the works are free from defects and to remedy such defects for a specified timeframe after the completion of the works.

Contractors are not relieved from their responsibilities to the employer if they subcontract works to third parties.

Relationship Between Contractors and Employers

See 2.1 The Employer.

Relationship Between Contractors and Subcontractors

See 2.3 The Subcontractors.

Relationship Between Contractors and Financiers

See 2.4 The Financiers.

Nature of Subcontractors

Subcontractors can be local, national or overseas entities. Subcontractors typically specialise in specific trades.

Common Rights and Responsibilities of Subcontractors

The rights and responsibilities of subcontractors are generally akin to the rights and responsibilities between a contractor and the employer. See 2.2 The Contractor.

Relationship Between Subcontractors and Employers

By default, due to privity of contract, the employer does not form a relationship with the contractor’s subcontractors. However, through its contract with the contractor, the employer typically places some controls on subcontracting, such as:

• requiring consent to subcontract works over a specified value;
• requiring particular sets of work to be performed by specified subcontractors; and
• permitting the employer to make direct payments to a subcontractor in particular circumstances (eg, if an undisputed amount remains unpaid).

Moreover, it is not unusual for employers to have limited rights with regard to certain subcontract works by virtue of:

• direct warranties – whereby the subcontractor provides a warranty to the employer (usually by deed) in respect of specified works or materials;
• subcontractor continuity guarantees – whereby subcontractors agree to work directly for the employer in situations where the contract between the employer and the contractor ceases to be viable (eg, owing to termination or contractor insolvency).

Relationship Between Subcontractors and Contractors

Subcontractors are engaged on a construction project through a subcontract with the contractor. It is customary for a contractor to engage a variety of subcontractors, each with a specific trade, on a single project.

A subcontractor’s scope of responsibility is generally limited to the work and risks outlined in its subcontract with the contractor. However, it is not uncommon for a contractor to seek to pass risks in its contract with the employer down to the relevant subcontractor.

Relationship Between Subcontractors and Financiers

See 2.4 The Financiers.

Nature of Financiers and the Financing of Projects in New Zealand

Financiers of construction projects in New Zealand tend to be local and foreign commercial banks, investment banks and institutional investors (such as pension funds). Multi-financier syndicates are common on larger projects.

Rights and Obligations of Financiers

Financiers are obliged to provide financing to the employer, but will not be party to the construction contract itself or otherwise have any direct obligations to the contractor. However, they may receive the benefit of undertakings from the contractor under a direct deed – as noted in the description of the relationship between financiers and contractors further on in this section.

In traditional construction financings, financiers take security over physical assets such as land and buildings, as well as over construction contracts and other material contracts such as sale agreements or leases. They may also receive the benefit of a guarantee from a parent company guaranteeing repayment of financing provided to its subsidiary and/or take security over the shares in the employer held by its shareholder.

In limited recourse project financings, the security package may be similar. However, the financiers will have a significantly enhanced focus on the cash flows arising from the operation of the completed project. Accordingly, they will exercise a much higher degree of diligence in assessing and monitoring matters arising under the construction contract and related contracts (such as completion guarantees), given that the achievement of completion under the construction contract will unlock the cash flow.

Relationship Between Financiers and Employers

The relationships between financiers and employers under construction projects are governed by the relevant finance and security documents. These will typically comprise a facility agreement and a general security agreement (providing for “all assets” security over the employer), as well as one or more specific security agreements – for example, providing for an assignment by way of security of specific project contracts or for security over the shareholder’s shares in the employer – and/or guarantees.

Relationship Between Financiers and Contractors

On financed projects it is common for a direct deed to be agreed between the financier, the employer and the contractor. A direct deed generally requires the contractor to:

• consent to the security given to the financier over the construction contract;
• agree that certain insolvency actions (such as appointing a receiver) will not of itself trigger a contractor’s right to terminate the construction contract;
• agree to give the financier additional cure periods to remedy a default of the employer under the construction contract that could otherwise lead to termination by the contractor; and
• pre-agree the basis on which the financier may sell the benefit of the construction contract and/or of the shares in the employer to a third party on enforcement of its security.

Relationship Between Subcontractors and Financiers

It is rare for financiers and subcontractors to have a direct contractual relationship.

Sources and Descriptions of the Scope

The scope typically takes the form of:

• “requirements” in a design-and-build contract, whereby the employer sets out the parameters and minimum obligations of the works to be performed by the contractor; or
• “specifications” in a construct-only contract, whereby the employer sets out in much more granular detail what the contractor must provide.

Both requirements and specifications can also contain drawings setting out the locations, dimensions, forms and finishes required. Drawings are typically much more detailed in a construct-only contract.

Scope in Tenders

The employer will initially set out its requirement for the works (conventionally known as the “scope or specifications”) in a closed or open tender process. It is not uncommon for the contractor and employer to negotiate that scope (eg, to reduce the price) before the contract is finalised and executed.

Scope in Contracts

Once the contract is executed, the scope is generally fixed and can only be modified thereafter if – and to the extent – permitted by the terms of the contract itself (see 3.2 Variations).

Instructing Variations

The scope of an instructed variation tends to be at the sole discretion of the employer and, in NZS contracts, a variation is usually instructed by the engineer. In New Zealand, contracts typically permit the employer/engineer to:

• increase or decrease the quantity of work;
• omit any work (although major omissions may be deemed to be repudiation or termination);
• change the character or quality of any material or work; and
• change the level, position, dimensions, specifications, or any other part of the contract works.

Some events/circumstances are often variations, even though they do not arise from an instruction from the employer/engineer – for example, unforeseen ground conditions and archaeological discoveries.

Valuing Variations

The process for valuing variations differs across contracts. In New Zealand, particularly in NZS contracts, valuation is established by one of the following methods (in descending order of precedence):

• by agreement;
• by application of rates and prices in the contract;
• by application of rates and prices derived from similar rates in the contract; or
• by assessment of net cost.

Where rates do not include overheads and margins, or if the variation is valued on a net cost basis, allowances for overheads and margins are usually added.

Where variations prolong the works, time-related costs may apply (see 5.2 Delays).

In New Zealand, the two most common frameworks for allocating design responsibilities and risk are the following.

Construct Only

The contractor is responsible for its methodology of construction based on the design, but not for errors or omissions in the design itself.

• Between the contractor and the employer, the design risk sits with the employer except to the extent that such design relates to the contractor’s methodology/temporary works.
• The employer tends to allocate the design risk separately by contract to an architect and/or engineer. The designer’s duty is only to the employer and the designer owes no responsibilities to the contractor.
• NZS 3910:2013 is frequently used for such contracts.

Design and Construct

The contractor is responsible for both the design and the construction of the works (if the owner has a pre-existing design, it may be novated to the contractor).

• Between the contractor and the employer, all design risk sits with the contractor.
• Contractors without in-house design resources typically subcontract the design aspects of such projects.
• NZS 3916:2013 is often used for such contracts.

The employer’s role in the construction itself is mostly limited to providing site access for the contractor and its subcontractors. However, the employer may be obliged to provide supplementary information/design clarification when requested by the contractor.

The contractor usually has the autonomy and primary obligation to:

• select the appropriate construction methodology;
• source the necessary materials and resources; and
• manage and perform the construction works.

Subcontractors are managed by the contractor and have a similar role to the contractor in respect of their subcontracted works.

The employer is responsible for making the site available to the contractor by a particular date for the purposes of performing the works.

In respect of the geotechnical site conditions, responsibility and risk can vary significantly by contract. Ordinarily, the employer will bear the risks of adverse conditions unless:

• those conditions have been disclosed to the contractor;
• the contractor has had the opportunity to investigate those conditions before pricing;
• the conditions could have been foreseen by an experienced contractor; and/or
• the contractor accepts the risk.

Contamination

Pre-existing contamination is usually the employer’s responsibility, whereas the contractor is responsible for ensuring that it does not contaminate or pollute the site in the course of construction.

Pollution and contamination are governed by the Resource Management Act 1991, the resource consent for the relevant project, and often local council guidelines.

Archaeological Finds

Archaeological discoveries, and any delays and additional costs caused by such discoveries, are mainly the employer’s responsibility.

Archaeological finds on a construction site are governed by the Heritage New Zealand Pouhere Taonga Act 2014, which requires that no person may modify or destroy a site if that person knows – or ought reasonably to have suspected – that the site is an archaeological site.

Common Permits

• Resource consent – authorisation to develop or use natural and physical resources and/or carry out activities that affect the environment.
• Building consent – authorisation to carry out building works in a specific way that complies with the building code.
• Code compliance certificate – confirmation, once the work is completed, that the work performed complies with its building consent and the building code.
• Certificate of public use – an interim permit for members of the public to use a premises until the code compliance certificate is issued.

Responsibility for Permits

Arrangements for permits vary by contract. In most cases:

• the employer obtains the resource consent;
• the party responsible for the design obtains the building consent; and
• the contractor obtains any permits/licences for its temporary works and services and for the operation of its machinery.

Most construction contracts exclude general maintenance obligations after completion. These become the employer’s responsibility.

Typically, the employer will either self-perform maintenance works or enter into separate maintenance service agreements with third parties for the proper operation and maintenance of the works. The NZS 3917:2013 fixed-term contract is available for such maintenance services.

For defects in construction works arising after practical completion, see 3.11 Defects and Defects Liability Period.

Finance and maintenance primarily sit outside the construction contract between the employer and the contractor. See 2.4 The Financiers and 3.7 Maintenance.

Some projects require key materials or equipment to be tested to ensure that they meet contractual or regulatory requirements.

The processes vary by contract. The contractor will typically give the employer notice of the date when it will be ready for such tests to be carried out. The contractor will then carry out the tests or arrange for the tests to be performed by specialists, with the employer having the right to attend (or to have an agent attend) such tests.

There are numerous potential testing types and stages, including:

• factory acceptance tests – tests in the factory itself to ensure that equipment works as expected or that materials have the specified qualities;
• tests on completion – tests after the works have been installed and commissioned, before completion is certified, to ensure that works conform with the standards required by the contract;
• tests after completion – ensure the work continues to meet the standards required by the contract (eg, to ensure ongoing reliability) and to demonstrate that the performance guarantees specified in the contract have been attained; and
• discretionary tests – some contracts in New Zealand allow a representative of the employer to perform tests if they have concerns regarding an aspect of the works and any costs/delays resulting from those tests are borne by either:
1. the employer (if the works meet contractual requirements); or
2. by the contractor (if the works are found not to meet contractual requirements).

Completion/Taking Over

Most standard forms set out a process for verifying/delineating when works are completed/taken over. In some contracts this can be a multi-stage process, including:

• practical completion – when works are largely complete apart from minor defects/snags that do not prevent occupancy/use of the works; and
• final completion – when works are complete and all defects have either been remedied or accepted.

For construction contracts, the employer (or, more likely, its engineer) will typically inspect the works and issue a practical completion certificate, followed later by a final completion certificate, certifying the works meet the requirements of the contract.

However, there are also some actions (eg, taking possession and using the works before practical completion) that can result in the employer being deemed to have taken over the works.

Delivery

The term delivery is typically used for materials or equipment and is often linked to obligations to make payment and the transfer/allocation of risk or title.

In New Zealand, the point of delivery will usually be expressly stated in the contract. The International Chamber of Commerce’s Incoterms rules are not mandatory but are frequently referred to for international deliveries.

Most construction contracts have a limited period after the works are completed (typically ranging from a few months to one to two years), within which the contractor must remedy any snags/defects. This is known as a defects notification period (DNP). In addition, the employer will often require various standalone warranties for defects arising after the DNP.

Common standalone warranties relate to key materials/equipment remaining defect-free and the weather-tightness of the works. The NZS forms of contract include standard form warranties as a schedule to the main terms.

Defect Notification Periods

If a defect or fault emerges during a defect notification period as a result of defective workmanship or materials, the contractor is obliged to remedy the defect or fault. If the contractor does not remedy the works within a reasonable time, the employer may engage third parties to remedy the works and then recover the cost of doing so from the contractor.

Employers often retain some of the contract price as a retention until the end of the DNP, so as to incentivise the contractor to return to fix such defects (and thereby ensure the payment of the retentions to the contractor).

Statutory Warranties

Under the Building Act 2004, residential building work is covered by a ten-year warranty that building work will be carried out with reasonable care and skill – complying with plans and the building consent – and that the building materials will be suitable for the purpose for which they are to be used. Parties cannot contract out of this warranty.

Cost Structures

The following structures are among those used most frequently to price construction projects.

• Lump-sum contracts – a fixed price for a defined scope of work. However, the price may change if the owner alters the design/works, or if unexpected circumstances are encountered.
• Measure and value – a schedule of prices is usually agreed at the outset (eg, a rate per unit of work) and the quantity of work is then measured/assessed and paid accordingly.
• Cost reimbursement – the employer pays the contractor the net costs plus a pre-agreed margin. This is rarer than the above-mentioned options, owing to the lack of cost certainty and control.
• Target cost – prior to signing the contract, parties will outline the target cost of the project. It is normal for parties to agree to a structured formula to estimate the cost of the project. At practical completion, if there are any savings or cost overruns, the balance will be shared between the employer and contractor.
• Alliances and other forms of collaborative contracting are increasingly used on major projects.

Payment Structures

In New Zealand, project payments tend to be based on either:

• progress – payments are based on the percentage of the work that is complete; or
• milestones – payments are made when key stages of a project are achieved.

Advance Payments

Advance payments are common in New Zealand for long lead items and recently have been used more frequently as a means of locking in costs and reducing the risk of delays.

If materials are to be paid for before they arrive on site, separate agreements for offsite materials are often entered into to allocate the relevant risks and obligations. The NZS forms of contract include a standard form offsite material agreement as a schedule to the main terms.

Employers also often protect their interests in high-value advance payments by way of advance payment bonds.

Progress Payments

Typically, at regular intervals, the contractor submits a payment claim. The employer will then assess the claim and issue a payment schedule of amounts that it considers to be due.

Late Payments

Construction contracts in New Zealand generally include interest on late payments.

The Construction Contracts Act 2002 has default payment structures intended to ensure regular cash flow throughout the industry. If a qualifying payment claim/invoice (see 4.3 Invoicing) is not appropriately disputed in a payment schedule and is then late/unpaid, this law enables a contractor to:

• suspend work after giving notice; and/or
• issue a statutory demand for payment.

Requirements for Tax Invoices

In New Zealand, an invoice will normally include:

• the words “tax invoice”;
• the name and GST number of the provider;
• the date of issue; and
• a description of the goods or services.

Recommended Requirements for Construction Invoices

To benefit from the Construction Contracts Act (see 4.3 Payment), a payment claim/invoice should:

• be in writing;
• identify the construction contract to which the payment relates;
• identify the construction work and the relevant period to which the payment relates;
• state the amount to be paid and the due date for payment;
• indicate the manner in which the payee calculated the claimed amount; and
• state that it is made under the Construction Contracts Act.

A payment claim must also be accompanied by an outline (in a prescribed form) of the process for responding to the claim and the consequences of not responding or paying the relevant amount.

Invoices issued after payment claims are mainly a formality to reflect the outcome of the payment claim and payment schedule process.

Role of, and Responsibility for, Construction Programmes

In New Zealand, a programme is usually prepared by the contractor at the outset of a project and it is often integral to setting up a project for success. The programme is often reviewed by the employer, who may provide comments/input, but good programming is ultimately the contractor’s responsibility.

Many contracts require the contractor to report against and update the programme regularly throughout the course of a project.

Standard Programme Requirements

Standard contractual requirements for a programme are that it should set out:

• the proposed sequence of works and start/end dates of the component activities, demonstrating how the contractor proposes to meet the due dates for completion;
• the critical path and dependencies between activities; and
• the dates by which the contractor requires access to specific areas of the site and any materials, services, or work to be provided by the employer.

If a delay occurs, standard contracts in New Zealand include a process along the following lines:

• the contractor must notify the employer/engineer, often within a specified timeframe, and provide details of the cause and effect of the delay;
• the employer will assess the extent of the delay and determine the extension of time that it considers appropriate (the employer/engineer is generally required to act reasonably when making this assessment); and
• the dispute resolution procedure will apply if the parties disagree on the appropriate length of the extension of time.

There is an expectation in New Zealand that contractors will take reasonable measures to avoid potential delay events and mitigate delays if such events occur. In standard form contracts, failure to give notice can affect the contractor’s eligibility for extensions of time and variations if it deprives the employer of the opportunity to avoid or mitigate the delay.

Delay can cause additional cost for a contractor and loss for a principal. The responsibilities and remedies for such costs and losses (typically residing with the party responsible for those delays) and the applicable approach to concurrent delays, are described in 5.3 Remedies in the Event of Delays.

Contractor Delays

If the contractor is responsible for the delay, then contracts provide that the contractor:

• will be liable for damages for the period between the due date for completion and actual completion, with contracts in New Zealand typically specifying a sum of liquidated damages per day/week; and/or
• must expedite the works at its cost to make up the lost time.

Employer Delays

If the employer is responsible for the delay, then contracts ordinarily provide that the employer will:

• allow more time for the contractor to complete the work; and
• pay the additional costs arising from the prolongation of the work.

Concurrent Delay

There is no single accepted definition of concurrent delay. However, the essence of concurrent delay is where the principal and the contractor each cause overlapping delay to the critical path of the works.

New Zealand courts are yet to address the issue of concurrent delay. Nonetheless, it is likely that they will adopt the approach set out in the High Court of England and Wales decision in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999) 70 Con LR 32. The Malmaison approach to concurrent delay is that the contractor is entitled to receive an extension of time for the full period of delay – but not prolongation costs – for the period of concurrency. However, in accordance with the principle of freedom of contract, the parties may agree to an alternative approach.

Contractors usually issue notices for extensions of time to the employer/engineer in writing.

Contractors are often required to set out the basis for an extension of time claim under the contract. Common grounds for an extension of time claim include:

• the effects of variations;
• weather;
• events that an experienced contractor could not foresee at the time of its tender;
• defaults by the employer under the contract; and
• some force majeure-type events, such as flood, volcanic, or seismic events.

In New Zealand, force majeure only applies if and to the extent that it is expressly included in the contract.

Force majeure clauses are not included in most New Zealand construction contracts as standard. However, most standard form contracts include some degree of relief for events that would usually be considered force majeure events and force majeure clauses are occasionally added to standard form contracts as special conditions.

Force majeure clauses may suspend or excuse the non-performance of contractual obligations for the duration of the effect of the force majeure event. They may also permit termination of the contract if the effect of the force majeure event extends beyond an agreed duration.

Relief for unforeseen circumstances is normally only available if it is included in the contract. However, New Zealand recognises the common-law concept of frustration, which can apply in some instances of unforeseen circumstances. Frustration is grounds for termination under the NZS 3910:2013 and NZS 3916:2013 contracts.

In standard form contracts in New Zealand, a contractor is entitled to additional time for unforeseen circumstances but not necessarily additional costs.

Disruption is an interruption to or hindrance of a contractor’s intended methodology, resulting in loss of productivity and efficiency. Disruption is recognised as a concept in New Zealand, but disruption claims and associated remedies are only available if allowed for under the particular contract and if the requirements of that contract have been met.

There is no universal method for demonstrating disruption. However, a popular method is the “measured mile” approach, whereby a contractor demonstrates the productivity it was capable of in portions of the project/site that did not experience disruption and then causally links a disruptive event with the lesser productivity achieved in the affected portion of the works.

Productivity-based approaches, which often use comparative projects and industry standards to establish achievable baselines “but for” the disruption, are also recognised. Alternative cost-based methods – whereby contractors compare estimated costs with actual costs – are possible but comparatively difficult to causally link with disruptive events, owing to the potential for tender insufficiency as an alternative cause.

Warranties under the Building Act 2004 cannot be contracted out of for residential construction. On policy grounds, a person cannot exclude liability for their own fraud.

The concepts of wilful misconduct and gross negligence are not well-established in the New Zealand courts. However, where contracts include limitations on liability (see 6.3 Limitation of Liability), such clauses often seek to ensure that any limitation of liability does not apply if the contractor engages in wilful misconduct or gross negligence.

Consumer Contracts

In consumer contracts in New Zealand, limitations of liability are restricted by the Consumer Guarantees Act 1993. By way of an example, a contractor cannot limit its liability for completing construction with reasonable skill and care, so that it is fit for purpose and on time or within a reasonable timeframe.

Commercial Contracts

In CBL Insurance Ltd (Liq) v Harris [2021] NZHC 1393, the High Court confirmed that clear limits of liability are enforceable in commercial contracts in New Zealand. Limitations of liability are not included in New Zealand’s most common standard form contracts; however, it is not unusual for parties to add such clauses.

Parties are mostly free to negotiate indemnities subject to policy restrictions – for example, not indemnifying certain court issued fines and penalties. Standard form contracts in New Zealand typically include indemnities:

• from the contractor to the employer for losses:
1. arising out of the construction;
2. for remedying defects in the construction; and
3. injuries to persons or damage to property; and
• from the employer to the contractor for losses:
1. arising from the employer’s lack of rights to carry out construction on the site;
2. arising from acts or omissions of the employer; and
3. injuries to persons or damage to property.

It is not uncommon for parties to agree to further indemnities (to the extent permitted by law) for:

• infringement of third-party IP rights; and
• infringement of law, including the Building Act 2004 or Resource Management Act 1991.

There are no mandatory guarantees in New Zealand. However, there are several forms of performance guarantee that are used frequently in the New Zealand market, such as bonds and parent company guarantees.

Bonds

Standard form contracts in New Zealand anticipate performance bonds. These may be provided by the principal to the contractor or by the contractor to the principal.

Parent Company Guarantees

If the contractor is a subsidiary and/or has limited assets, the employer may require (and financiers will usually expect) performance to be assured by way of a guarantee from a parent company.

In the NZS forms of contract, there are four types of insurances that are usually taken out by the parties:

• construction insurance – for loss and damage to the works;
• plant insurance – for loss of equipment on site that is critical to the performance of the contract;
• public liability insurance – for legal liability to third parties; and
• professional indemnity insurance – for the design of the construction work.

However, it is not uncommon for other insurances (eg, marine cargo insurance) to be taken out where the specific project involves relevant risks.

Under most contracts in New Zealand, the insolvency of a party permits the other party to terminate the contract. The insolvency of the contractor also permits the employer to resume possession of the site.

Risk-sharing arrangements are not particularly common in New Zealand and are most often found in alliance agreements or target cost arrangements (see 4.1 Contract Price).

The orthodox approach regarding risk in New Zealand is to allocate the risk to the party who is best placed to control that risk. Alternatively, a party may accept additional risk in return for a price premium (if accepted by the contractor) or reduction (if accepted by the employer).

Employers frequently require the contractor to:

• retain key personnel – often any change to the key personnel will require the employer’s approval; and
• remove unsuitable personnel – in standard form contracts, the employer may require that contractors remove personnel for serious misconduct, incompetence, negligence, or for causing danger to safety or welfare.

The standard NZS construction contract prohibits a contractor from subcontracting the whole or substantially the whole works. Subcontracting generally requires the employer’s consent. Subcontracting does not relieve the contractor from any liability or contractual obligations owed to the employer under the contract.

Typically, the employer and the contractor will each retain their IP rights but grant licences to the other to the extent necessary for the project. Rights over new IP that may result from the work under a contract are negotiated and vary significantly. One common approach is shared ownership of the new IP with cross-licences. It is not uncommon for parties to agree indemnities for infringement of third-party IP rights.

Contract law in New Zealand recognises general damages for breach of contract. Sufficiently serious breaches of contract may also entitle a party to terminate the contract.

Common Employer Remedies

Common employer remedies include:

• liquidated damages for delay (see 5.3 Remedies in the Event of Delays);
• rectification of defects, or the right to recover the cost of rectifying defects by third parties (see 3.11 Defects and Defects Liability Period);
• damages for non-performance (see 7.2 Guarantees);
• the right to draw upon bonds, parent company guarantees, or retentions (see 7.2 Guarantees and 3.11 Defects and Defect Liability Period); and
• suspension or termination of the contract.

Common Contractor Remedies

Common contractor remedies include:

• payment, including interest when payment is late (see 4.2 Payment).
• variations (see 3.2 Variations);
• extensions of time (see 5.4 Extension of Time); and
• suspension or termination of the contract.

For further details of restricting remedies, see 6.1 Exclusion of Liability, 6.3 Limitation of Liability, 9.3 Sole Remedy Clauses and 9.4 Excluded Damages.

Parties often limit the duration of some liabilities. Liability under consultancy contacts, for example, is typically limited to six years from the date on which the services were completed.

Sole remedy clauses are not included in the standard NZS construction contracts but are enforceable in commercial contracts. Where a contract provides for delay liquidated damages, this will typically be considered the sole remedy for delay.

It is not unusual for commercial parties in New Zealand to exclude liability for:

• indirect, consequential, special, incidental, exemplary or punitive loss or damage; and
• loss of profit, revenue and goodwill or loss of production.

Retentions

Retentions are permitted and commonplace in New Zealand construction contracts. Employers are required to hold retention monies on trust for the contractor under the Construction Contracts Act. Further requirements, such as holding retentions in a separate and compliant bank account in New Zealand and regularly reporting on those retentions, will come into force on 5 October 2023.

Suspension Rights

Contractors have statutory suspension rights for non-payment but, under the NZS forms of contract, are not usually permitted to suspend works owing to a dispute.

The power to terminate a construction contract, and the associated remedy, depends on the particular contract terms. Construction contracts in New Zealand usually permit termination for frustration and default, with the types of default enabling termination mainly being aligned with the obligations of each party.

Contractor Default

For contractors, events that may result in termination include:

• an insolvency event;
• subletting the whole or the majority of the works to another entity without consent;
• material breach of contract; or
• persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract.

Termination for contractor default ordinarily results in the principal being entitled to expel the contractor from the site and to have the works completed by third parties, with additional costs being recoverable from the contractor.

Some construction contracts also permit the principal to terminate the contract at its convenience. Such clauses may entitle the contractor to payment for completed works and under-recovered costs, as well as an allowance for lost profit.

Principal Default

For principals, events that may result in termination include:

• an insolvency event;
• abandoning the contract;
• material breach of contract; or
• persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract.

Termination for principal default traditionally results in the contractor being entitled to payment for completed works and under-recovered costs, as well as an allowance for lost profits.

Termination Pre-requisites and Wrongful Termination

Most construction contracts in New Zealand require the terminating party to notify the defaulting party of the default and to provide an opportunity for the defaulting party to remedy the default within a contractually mandated period of time. If the default is not remedied, then the terminating party may proceed with termination.

New Zealand also recognises the concept of wrongful termination if a party purports to terminate the contract without a valid basis for doing so or without following the contractually required process, which can result in damages.

Courts

In New Zealand, four tiers of court may hear construction disputes. In descending order, they are:

• the Supreme Court;
• the Court of Appeal;
• the High Court; and
• the District Court.

Adjudication

In New Zealand, parties may not contract out of the adjudication process, which is set out in the Construction Contracts Act. Adjudication is a relatively swift but interim dispute resolution process that takes place entirely by way of written submissions. There are no hearings.

Adjudication decisions are binding and any awards must be paid within two working days of award. Notwithstanding the obligation to pay, parties may then proceed to litigation or arbitration for final determination of the dispute. Adjudications are determined by a single adjudicator from a recognised institution.

Recognised Institutions

In New Zealand, there are several institutions recognised as competent to appoint persons to hear construction disputes as adjudicators or arbitrators. These include:

• the Building Disputes Tribunal;
• the New Zealand Dispute Resolution Centre; and
• the Arbitrators and Mediators Institute of New Zealand.

The following private and alternative dispute resolution options are recognised in New Zealand.

• Arbitration – this binding form of dispute resolution is often used in New Zealand contracts and is included in the NZS forms of contract. This form of dispute resolution has its statutory basis in the Arbitration Act 1996.
• Mediation – this non-binding form of dispute resolution is common in New Zealand contracts and is included in the NZS forms of contract.
• Expert recommendation/determination – referrals to experts for either binding decisions or non-binding recommendations are relatively frequent in New Zealand.
• Dispute review boards – these tend to be limited to major projects, owing to the cost. The extent of their authority varies from contract to contract.