The construction market is governed by two sources of law: legislation and common law. English cases and cases from the wider commonwealth (primarily Australia and Canada) are influential, but non-binding, in New Zealand.

Key legislation applicable to the New Zealand construction industry includes the following.

The Building Act 2004

The Building Act 2004 (the “Building Act”) sets out the rules for the construction, alteration, demolition and maintenance of new and existing buildings in New Zealand. Its purpose is to provide for the regulation of building work and set performance standards to ensure that buildings are safe, durable and healthy for people to use.

The Building Act is aimed at improving regulatory control over, and encouraging better practices within, the building design and construction industry. The Building Act attempts to assure building owners that their buildings will be safe, durable and weathertight, without creating undue barriers to construction.

The Building Code

The Building Code (the “Code”) is contained in regulations under the Building Act. The Code is a set of performance-based standards that buildings must meet. It is not prescriptive in how work is done, but sets out performance criteria that buildings must meet, such as structural stability, fire safety, access, moisture control, durability, services and facilities, and energy efficiency.

Under the Building Act, all building work must comply with the Code, even if it does not require building consent.

The Construction Contracts Act 2002

The Construction Contracts Act 2002 (CCA) was introduced to reform the law relating to construction contracts. The stated purpose of the CCA is to:

• facilitate regular and timely payments between the parties to a construction contract;
• provide for the speedy resolution of disputes arising under a construction contract; and
• provide remedies for the recovery of payments under a construction contract.

As is the case with similar legislation in other Commonwealth jurisdictions, the CCA mandates a “pay now, argue later” scheme to encourage prompt payment of funds, with disputes to be resolved later. The “pay now, argue later” regime in the CCA is intended to prevent cash-flow issues throughout a project, reduce project delays and encourage swift dispute resolution. The CCA also includes strict rules on the retention of money provisions. These rules are designed to protect subcontractors and other parties lower in the contractual chain, by ensuring that retention money (money withheld by a principal or head contractor as security for the performance of a subcontractor’s obligations) is held safely and can be recovered if needed.

The CCA has undergone several changes since its inception. These include:

• the Construction Contracts Amendment Act 2015 updated the CCA to protect retention monies, increase the fairness of the payment regime and streamline the dispute resolution process;
• the Regulatory System (Commercial Matters) Amendment Act 2017 made further changes to the retention money provisions to support the construction industry’s ability to comply with the new retention money regime, which began in 2015; and
• the Construction Contracts (Retention Money) Amendment Act 2023 made changes to the CCA’s retention regime to ensure that subcontractors would still be paid in circumstances where the head contractor becomes insolvent.

Arbitration Act 1996

The Arbitration Act 1996 governs the process of arbitration in New Zealand and provides a framework for resolving disputes through arbitration, a form of alternative dispute resolution. The Arbitration Act applies a structured and enforceable approach to resolving disputes outside the traditional court system, with a particular focus on commercial and contractual matters, including construction contracts. See 10.2 Alternative Dispute Resolution.

The Resource Management Act 1991

The Resource Management Act 1991 (RMA) encourages sustainable use of the environment by the construction industry, through the use of natural resources and regulation of land use and infrastructure where this use could otherwise result in harm to the environment. The RMA governs the process by which consent to use a resource is granted for a construction project, if the construction project will use natural resources or carry out environmentally impactful activities.

The Health and Safety at Work Act 2015

The Health and Safety at Work Act 2015 (HSWA) applies to all workplaces and is aimed at improving health and safety outcomes. It does not specifically target the construction industry but is particularly relevant, as construction is the highest-risk sector with respect to workplace injuries, illnesses and fatalities.

The HSWA aims to ensure safer working conditions, prevent harm and clarify responsibilities on complex and hazardous sites. The HSWA also controls how health and safety standards are measured and how breaches of the HSWA are enforced.

New Zealand has several standard industry contracts. Use of standard contracts is not mandatory.

New Zealand Standard Contracts

New Zealand Standard (NZS) construction contracts are the most common standard contracts and are provided by Standards New Zealand. Parties often include special and specific conditions that amend and clarify the general conditions, to tailor the contracts to their specific needs.

• The NZS 3910 contract (the “3910”) is a “build-only” contract used when the design is provided by the employer/principal and the contractor is responsible for the construction element only. Most contracts of the 3910 form are procured on a lump-sum, fixed-price basis.
• In late 2023, the 3910 was updated to the NZS 3910:2023 version. There are a number of differences but the most significant one is the removal of the “engineer to the contract” role and the restructuring of the contract administration responsibilities into two roles:
1. a contract administrator, who manages day-to-day instructions on behalf of the principal; and
2. an independent certifier, who handles neutral functions like certifying payments and assessing extensions of time.
• NZS 3915:2005 – this contract is similar to the 3910 but is used where no person is appointed to act as the engineer to the contract. NZS 3915:2005 was developed to provide a standard contract form for the situation where the principal administers the contract directly.
• NZS 3916:2013 is a design-and-build contract that is currently under review by Standards New Zealand and undergoing public consultation. Many of the proposed changes to NZS 3916 reflect the changes made to NZS 3910.
• NZS 3902:2004 – a housing, alterations and small buildings contract is used for smaller projects and renovations.

Other Standard Contracts

Other standard contracts include the following.

• Conditions of Contract for Consultancy Services (CCCS), which is used for procuring and providing professional consultancy services. The CCCS conditions can be adapted to each project.
• SA-2017: This is the most widely used form of subcontract and is endorsed by both the Registered Master Builders Association and the Specialist Trade Contractors Federation. It was drafted to compliment the NZS standard forms of main contract.
• The Certified Builders Association and the Registered Master Builders Association both have standard forms that are widely used by builders for residential construction projects.
• The New Zealand Institute of Architects (NZIA) forms of contract are also commonly used. The NZIA has developed two common forms of contract:
1. the Standard Construction Contract (SCC), for use between a consumer and an architect where the architect is engaged to administer the contract – the SCC has two versions, namely a longer version and a short form (intended for smaller, less complex projects); and
2. the National Building Contract (NBC), for use where the architect is not contractually involved in the administration or control of the construction contract 0; as with the SCC, the NBC has two forms, namely a longer version commonly used for bigger projects and a short form for less extensive work.

International Standard Contracts

Some projects may use internationally recognised standard contracts. These are useful as they have a proven track record internationally and may be utilised in New Zealand where overseas parties are involved. They may also be required by financers or where cross-border financing or supply chains are involved. Examples include the following.

• The International Federation of Consulting Engineers (Fédération Internationale Des Ingénieurs-Conseils – FIDIC) suite of contracts. The most commonly used FIDIC contracts in New Zealand are the Red Book (for building and engineering works designed by the employer) and the Yellow Book (electrical and mechanical works, and building and engineering works, designed by the contractor as opposed to the employer).
• The New Engineering Contract (NEC) suite of contracts. These have not been widely adopted and tend to be used where there is an international element to the project.

The employer, often referred to as the “principal”, may be one of a number of different types of entity. The most common employers in New Zealand for large projects are limited liability companies, limited partnerships and the Crown (central government). Other examples include territorial authorities, educational institutions, charitable organisations, incorporated societies, family trusts and individual person/s.

The primary responsibilities of an employer are:

• setting out the project deliverables (often including the design, although this depends on the form of contract);
• paying the contractor;
• securing any consents required for the project (eg, resource and building consent);
• providing access to the site; and
• not preventing or hindering the contractor from completing its work.

The primary rights of the employer are as follows:

• to have the works completed to the standards set out in the contract and the Code;
• to have the works completed free of defects and/or to have defects remedied within the specified timeframe; and
• to have the works completed within the agreed timeframes, subject to any variations or adjustments allowed for in the contract.

The employer will have a contractual relationship with the contractor. Most contracts allow the contractor to subcontract some of its work, and the contractor and subcontractor will be parties to a subcontract agreement. Contractors are not relieved from their responsibilities to the employer if they subcontract works to third parties.

Contractors in New Zealand can vary in size. There are large, listed companies (national and international) operating in New Zealand, along with much smaller private companies and individual builders. 

The primary responsibilities of the contractor are to complete the works:

• to the standard set out in the contract, ensuring they comply with the Code;
• such that they are free from defects, which may include remedying defects within a reasonable timeframe; and
• within the agreed timeframe, subject to any extensions of time allowed for by the contract.

The primary rights of the contractor are as follows:

• to be paid for their works within the agreed timeframes, including payment for variations and extensions of time (in accordance with the contract); and
• to be able to complete the works without hindrance from the employer or third parties.

As set out in the foregoing, contractors are not relieved of their responsibilities to the employer if they subcontract some of their work. There is normally a clause to this effect in the contract. Further, in Body Corporate 189855 v North Shore City Council (Bianco Apartments) [2014] NZHC 612, the court held that, where a contractor agrees to be responsible for acts or omissions of its subcontractors and has sufficient control over and capacity to influence the quality of the construction, the contractor will owe a non-delegable duty of care to ensure that the building work complies with the Code and is free from defects.

Subcontractors, like contractors, can vary in size. Subcontractors typically specialise in a specific trade.

The primary responsibilities of the subcontractor are similar to the obligations of the contractor – ie, it must complete the works:

• to the standards set out in the contract and the Code;
• such that they are free from defects, which may include remedying defects within a reasonable timeframe; and
• within the agreed timeframes, subject to any extensions of time allowed for in the subcontract.

The primary rights of the subcontractor are to:

• be paid for its works, including any variations or extensions of time allowed for under the subcontract; and
• complete the works without hindrance or interference by the principal or contractor.

Subcontractors generally have no contractual relationship with the employer; however, depending on the trade, subcontractors are sometimes required to provide a warranty to the employer for their works or for materials used.

Subcontractors are generally engaged via a subcontract agreement through the contractor. While the contractor is not relieved of their obligations to the employer if they subcontract, the contractor will often try to pass risk on to the subcontractor for its relevant works.

It is rare for funders and subcontractors to have any direct contractual relationship. See 2.4 The Financiers.

Typical financiers in New Zealand may be national or international banks, private equity firms, private individual funders or central and local government. Financiers may accept a share in the land on which the project is based, or in any building work done thus far, as a guarantee of any loans made for the project.

The rights and obligations of a financier will be set out in the finance and security documents. Generally, the primary obligation of the financier is to provide the funding to the employer. The financier may have a right to take security over the land and/or building. They may also receive the benefit of a guarantee for repayment of financing provided by a parent and guaranteeing company.

While the funder will not be party to the construction contract, tripartite deeds are relatively common. A tripartite deed will be between the employer, contractor and financier. It aims to protect a funder’s security by creating a contractual relationship between the lender and contractor. It may include provisions for resolving disputes and ensuring completion of the project. 

It is rare for funders and subcontractors to have any direct contractual relationship. See 2.3 The Subcontractors.

Architects, architectural draftspersons and engineers are commonly professional designers in New Zealand – they may be operating as incorporated companies, partnerships or individuals. They are responsible for preparing the design (via plans and specifications) for the building work.

A designer has a primary responsibility under the Building Act to ensure that their design will result in works that are compliant with the Code. Generally, their contract will include a clause requiring the designer to prepare a design using reasonable care and skill. A designer also owes a duty of care to undertake its design work with the reasonable care, skill and diligence expected of its profession.

The relationship between the designer, the employer and the contractor will depend on the contract. Using 3910, the designer would be party to a consultancy contract with the employer (eg, using the CCCS agreement discussed in 1.2 Standard Contracts) and not party to any contract with the contractor.

Under 3916, the designer will have a direct relationship with the contractor. Either the contractor has an in-house design capability, or it will subcontract the design to someone else. In these scenarios, the employer and designer do not have a direct contractual relationship. However, the designer still owes a duty of care to the owners and subsequent purchasers.

In construction contracts, the scope of works outlines the building work to be completed. This will vary depending on whether the contract is build only or design and build. The scope of works is more detailed for build-only contracts, generally including detailed drawings, plans and specifications for materials, and sometimes bills of quantities.

In accurately determining the scope of works, parties should be conscious of any order of precedence clauses setting out which documents supersede others. This is helpful in scenarios where there is an inconsistency between documents that set out the scope of work.

A variation is a change to the scope of works and could be an addition, substitution or omission, or a change to the quality and type of materials used.

Most contracts will include specific processes for instructing and valuing variations.

Normally, variations will be at the discretion of the principal, and the contract often requires all variations to be ordered by the principal in writing. This is helpful to avoid disputes about what is and is not a variation. Most contracts will include specified events or circumstances that are deemed to give rise to a variation (even within an order in writing). The most common example is unforeseen ground conditions.

Parties should be wary of clauses that limit a contractor’s ability to claim variations, such as time limits or other conditions that are “conditions precedent” to the contractor’s right to a variation. 

The process for valuing variations will depend on the contract. Valuation will normally be by agreement, by referring to a schedule of prices or by assessing the net cost (ie, the amount actually paid by the contractor). Often, there will be an allowance for overheads and profit.

The allocation for design responsibility is determined by the contract.

As discussed in the foregoing, the 3910 is the most used build-only contract, which means that the employer (not the contractor) is responsible for any errors in the design. There may be some exceptions where the contractor will have some design responsibility, but this is normally limited to temporary works – eg, the design of scaffolding or propping. Even where a contractor is not responsible for design, it usually assumes the buildability risk in relation to the design. 

The most used design and construct contract is the 3916, under which the contractor is responsible for the design and construction, and design risk lies with the contractor.

The employer’s role during construction is limited to making payment of scheduled amounts on time, providing unimpeded access to the site and providing further information to the contractor upon request. 

As is the case with other commonwealth jurisdictions, responsibility for completing construction lies with the contractor and subcontractors who are responsible for procuring materials, deciding how to undertake the works and then performing the works.

The principal is generally responsible for the site conditions, although the contractor will owe obligations to the employer to take care of the works and the site during their possession. This will depend on what has been agreed by the parties in the contract.

For geotechnical risks, the employer will generally have the risk of unforeseen ground conditions, but this can vary significantly depending on the contract. This is similar for pollution/contamination and archaeological finds. Rules regarding pollution and contamination are governed by the RMA and the local authority’s district plan. Rules regarding archaeological finds are governed by the Heritage New Zealand Pouhere Taonga Act 2014.

All building work in New Zealand is required to comply with the Code. Most building work also requires building consent confirming that the work proposed complies with the Code, although some “low-risk” work is exempt from requiring building consent. Obtaining building consent is usually the employer’s or the designer’s responsibility, but the contractor may need to obtain its own consent for temporary works.

Other common permits are:

• resource consent, which is normally obtained by the employer;
• the certificate of public use (CPU), which allows the public to use a building until a code compliance certificate (CCC) is given; and
• the CCC, which is issued once the work is complete to confirm that the work complies with the building consent.

The party responsible for obtaining the CPU and/or CCC will vary based on the terms of the contract.

An employer is generally responsible for maintenance after the works are complete. The employer may either maintain a building themselves or enter into maintenance contracts with third parties. 

Various functions, such as operation, finance and transfer, can be directed by the employer to the contractor or third parties, depending on the specific contractual agreements and the nature of the project – see 2.4 The Financiers and 3.7 Maintenance.

Materials and or equipment may need to be tested as part of the commissioning and completion process to ensure that they function and meet requirements. Depending on the contract, testing will normally be the contractor’s responsibility, although the employer and/or the employer’s representative will be able to attend. 

Under the 3910, the engineer to the contract can require that any materials or work forming part of the contract works be tested or inspected. The engineer may exercise this power at any time until the end of the defect notification period.

Testing is often undertaken throughout the works and on completion. Where works are required to be inspected and tested, the contractor will need to ensure that these are not covered up or out of view.

Most contracts will include provision for determining when a project is complete. A common completion process will have two stages:

• practical completion, which means that all building work is completed with the exception of minor defects or snags that do not prevent the property from being used; and
• final completion, which is when all works are complete, and defects are remedied or otherwise agreed.

These stages are normally accompanied by the issuing of a certificate.

The defects liability period, also referred to as the “defects notification period”, will be specified in the contract. During this period, a contractor is required to remedy any defects (at its expense) that are notified to it by the employer (or employer’s representative). The period generally starts running from practical completion.

Defects liability periods commonly range from three months to one year. During this period, the contractor also has the first right of remedy, meaning the employer cannot do the works themselves and then ask the contractor to pay for them (unless the contractor has failed to do the work within a reasonable period).

Contractors are often incentivised by the application of a retentions regime, where the employer holds back some of the contract price until the defect notification period expires.

Beyond the contractual defect liability period, there are also compulsory statutory periods. The Building Act has a “longstop period”, whereby building work is covered by a ten-year warranty that the work is carried out with reasonable care and skill. During this time, the employer cannot compel the contractor to return to the site to remedy defects, but it is able to bring proceedings against a contractor where the contractor has not carried out work with the requisite skill and care.

The Supreme Court in Beca v Wellington City Council [2024] NZSC 117 has now confirmed that the Building Act’s ten-year longstop period does not apply to third-party contribution claims. This means that:

• a building owner has ten years from the date of the building work to bring a claim against a defendant in respect of that building work;
• the defendant who is the subject of that claim has a further two years to bring a contribution claim against others who are alleged to have caused or contributed to the same damage – the two years runs from either (i) the date of the settlement between the plaintiff and defendant, or (ii) the date of judgment; and
• the absolute 15-year longstop period provided by the Limitation Act should prevent third-party claims being brought more than 15 years after the building work was carried out. However, the Beca decision did not expressly address this issue.

The method of establishing the contract price will vary on a contract-to-contract basis, but the two most common structures are as follows.

• Lump sum contracts, sometimes called “fixed price” contracts: The contract price is fixed based on the scope of works. Prime cost sums and provisional sums are sometimes utilised by contractors where certain elements of the price cannot be fixed for some reason or the scope of work is not completely determined. Further, the price may also change when the employer changes the design or scope of works, resulting in variations, or when unexpected circumstances arise that also result in variations.
• Measure and value contracts, sometimes called “remeasure contracts”: In measure and value contracts, the parties agree a schedule of prices, and the quantity of work is then measured and paid in accordance with the agreed schedule of prices. Measure and value contracts may be useful for projects where the scope of works is not fully defined or where the quantity of work may vary significantly.

Payment structures are based either on progress or milestones. Progress payments are based on the amount of completed work (including claims for variations) whereas milestone payments are made at specified stages of a project. Milestone payment structures are common in residential build or simple projects where there are discrete phases (eg, consent approved, foundation works complete, framing, exterior works, interior works, practical completion and final completion).

Indexation is the process by which the pricing of assets is adjusted based on a financial index. In construction contracts, indexation typically refers to adjusting the prices of goods and/or services in line with inflation, reflecting the changing purchasing power of the New Zealand dollar.

NZS contracts all include a “Cost Fluctuation Adjustment by Indexation” appendix. The default indexation structure makes an adjustment of 40% against the Labour Cost Index, and 60% against the Producers Price Index. These indexes are published by Statistics New Zealand on a quarterly basis.

This provision in NZS contracts is stated to apply “unless otherwise specifically provided in the Special Conditions”, allowing parties to opt out of the cost fluctuation provisions (which is common).

Cost fluctuation provisions may be more common during periods of high-cost volatility and where the price of material may vary significantly due to national or international factors. If the contract does not expressly allow claims for cost fluctuation under the contract, then the contractor cannot recover the costs it incurs where there are increases in costs (unless there is a variation).

The contract will likely include provisions regarding late or non-payment, including whether interest is payable and any rights and obligations of the contractor in the event of non-payment.

The CCA includes a default regime for payment claims that are not disputed via a payment schedule, or where a payment schedule is late/unpaid. This allows the contractor to suspend works after giving notice to the employer or to issue a statutory demand for the unpaid amount.

Advance payments may be used to provide cash-flow support to a contractor before work starts. They are commonly used to cover high initial costs or where there is a long lead time to the project, but the employer wants to lock in the costs of materials. Delayed payments might be used where the employer needs more time due to financial constraints or disputes.

Interim payments or progress payments are more common and are made throughout the project based on the amount of work completed, often at regular intervals (eg, monthly or bimonthly).

Typical means of invoicing in construction projects include issuing normal invoices/tax invoices or issuing payment claims under the CCA.

A tax invoice will generally include a date, a description of the work (goods and/or services) and a date for payment.

To be a valid payment claim under the CCA, a claim needs to:

• be in writing;
• identify the construction contract;
• identify the construction work and the relevant period to which the payment relates;
• state a claimed amount and a due date for payment;
• indicate the manner in which the payee calculated the claimed amount;
• expressly state that the payment claim is made under the CCA; and
• be accompanied by Schedule 1, Form 1 of the Construction Contract Regulations – “information that must accompany all payment claims”.

The responsibility for planning and programming usually rests with the contractor. A programme is often prepared by the contractor at the outset of the project, and some contracts include requirements for the contractor to update and report on the programme at regular intervals throughout the works.

A construction programme will set out the intended start and finish dates, a proposed sequence of works (with start and end dates for each part of the work) and the critical path. 

Contracts will generally specify a process for where/if delays occur. Generally, the contractor will need to notify the employer, and the employer will assess the cause and the extent of the delay and determine whether an extension of time is appropriate. 

Common grounds for a valid extension of time include:

• where variations have an impact on time;
• adverse weather;
• strike, lockout or industrial action;
• damage to the site;
• flood, volcanic or seismic events;
• any event not reasonably foreseeable by an experienced contractor at the time of tender and not due to the fault of the contractor; and
• any default by the principal (or a person for whom the principal is responsible).

If the contractor has caused a delay, then contracts commonly provide for damages to be paid for the period of delay, with contracts often specifying the liquidated damages per calendar day or working day of delay.

Conversely, where the employer is responsible for the delay, the contract will normally include provision for the contractor to have more time to complete the works and also to receive payment for costs (if the delay gives rise to time-related costs). See 5.4 Extension of Time.

As set out in 5.2 Delays, contracts normally include provision for circumstances that will qualify the contractor for an extension of time, such as:

• the net effect of any variation;
• weather sufficiently inclement to interfere with the progress of the works;
• any strike, lockout or industrial action;
• loss or damage to the contract works;
• flood, volcanic or seismic events;
• any circumstances not reasonably foreseen by an experienced contractor at the time of tendering and not due to the fault of the contractor; and
• default by the principal or any other person for whose acts or omissions the principal is responsible, which is not a variation.

It is common for contracts to require contractors to issue notices for extensions of time, setting out the contractual basis for the extension of time claim.

Measuring an extension of time is normally done with consideration for the impact the delaying event has on the critical path. There are a number of different methodologies, and contracts do not normally specify which methodology should be used. The Society of Construction Law – Delay and Disruption Protocol provides helpful guidance for delay analysis experts, but ultimately an extension of time claim will rely on evidence such as the programme, site reports, progress reports and other evidence of delay (eg, instructions, correspondence, photos or timesheets). 

A force majeure event is an unforeseen, extraordinary event that is beyond anyone’s control. They are unpredictable, unavoidable and normally outside the parties’ control. Common examples are natural disasters, war, terrorism, trade restrictions and pandemics.

It is possible to contractually limit or exclude certain circumstances from being qualified as force majeure. In NZS contracts, force majeure clauses are not commonplace but there is relief for events that would be considered force majeure events (eg, weather, strikes and natural disasters are all grounds for an extension of time in 3910 and 3916).

The typical legal consequences of a force majeure will depend on the contract but may include the suspension of obligations, award of extensions of time and possible financial compensation, depending on the provisions.

In extreme cases, and if there are no applicable clauses in the contract, the law of frustration of contract may apply. See 5.6 Unforeseen Circumstances.

Whether relief for unforeseen circumstances is available will be determined by the contract. 

A contract may be frustrated if performance of the contractual obligations becomes impossible or radically different from what was contemplated, provided neither party is at fault. Frustration will only apply where the main purpose of the contract can no longer be achieved. This is a high threshold. It will not apply if performance of the contractual obligations merely becomes more difficult or expensive. If a contract is frustrated, it will terminate immediately. The Contract and Commercial Law Act 2017 sets out certain consequences if a contract has become impossible to perform or has been otherwise frustrated, including matters relating to payment.

In a construction context, disruption refers to a disturbance or interruption to the planned sequence or progress of work, resulting in delays or inefficiencies in the execution of the project. Unlike force majeure, which typically involves external events beyond the control of the parties, disruption often involves interference or changes that are caused by the contractor, employer or other project stakeholders (eg, designers or subcontractors).

Disruption is different to delay; see 5.2 Delays. Because of the difficulty in assessing potential productivity and efficiency, entitlements for contractors under disruption claims can be hard to quantify.

Disruption is generally not a contractual ground for an extension of time, and disruption claims will commonly be excluded in construction contracts. 

Proving and measuring disruption requires establishing a clear link between the disruption and the delay or cost increases. Contractors need to show that the disruption caused a deterioration in productivity and that it led to either a delay in project completion or additional costs.

Contractors cannot contract out of the implied warranties in the Building Act for residential building work (whether there is a contract or not). Parties also cannot contract out of obligations owed under the Consumer Guarantees Act 1993, Fair Trading Act 1986 and the HSWA. These non-excludable liabilities are typically related to public policy, consumer protection and fairness in trade.

Wilful misconduct and gross negligence are not terms unique to the construction industry in New Zealand. Negligence is a foundational tort in New Zealand, and the phrases “gross negligence” and “wilful misconduct” are used to describe increasingly bad behaviour. “Wilful misconduct” is used to describe instances where a wrongdoer acts with full awareness of their actions and, often disregarding consequences, behaves with full awareness of their actions.

Where contracts include clauses seeking to limit a party’s liability, the clause will generally specify that it cannot apply to misconduct or gross negligence.

It is possible for parties to contractually limit their liability. This was not a common feature of construction contracts until recently – ie, with the introduction of the new form of 3910 in 2023, which introduces a new provision enabling contractors to limit liability. This is a welcome development in the construction industry in New Zealand.

Consultancy agreements often include contractual terms limiting a consultant’s liability. A common example is a clause that limits a party’s liability to “[…] five times the fee, with a minimum amount of $500,000 and maximum liability of $2,000,000 […]” ($ being NZD). For design consultants and their insurers, limitation-of-liability clauses are a crucial component of risk allocation and are often relied on in defending claims.

The High Court Tauranga City Council v Harrison Grierson Holdings Ltd & Constructure Auckland Ltd [2024] NZHC 714 determined that the limitation of liability clauses in the CCCS agreement and the Association of Consulting and Engineering New Zealand/Institution of Professional Engineers New Zealand (ACENZ/IPENZ) Short Form Agreement operated to limit an engineer’s liability arising under the Building Act 2004 and the Fair Trading Act 1986 (FTA), and for negligent misstatement.

The Consumer Guarantees Act 1993 also provides limits on limitation-of-liability clauses, and a contractor cannot limit its liability for completing works with reasonable skill and care. This only applies to “consumers”, not commercial parties.

Indemnities are common in New Zealand and are used to manage and limit risk between the parties. Parties are free to negotiate indemnities as they see fit.

Typical subjects for indemnities are:

• third-party claims (eg, breach of contract, negligence, remedying defects, injury to persons);
• infringement of intellectual property;
• breaching environmental regulations and non-compliance; and
• loss or damage to property.

However, there are public policy reasons preventing indemnities for fines or court imposed penalties. For example, the HSWA prevents a person from paying to another person, or receiving from another person, an indemnity for a fine or an infringement fee under the HSWA.

Like indemnities, guarantees are a common tool in construction contracts in New Zealand, allowing parties to allocate risk as they see fit. They are not mandatory.

Common guarantees are performance guarantees, like a bank guarantee or a parent company guarantee. The guarantee ensures that if a party fails to meet its performance obligations, the guarantor will compensate the other party.

The insurances typically taken out are:

• construction insurance/contracts works insurance for loss and damage to the works – this is generally obtained by the contractor;
• public liability insurance for legal liability to third parties – this is generally obtained by the contractor; and
• professional indemnity insurance, which protects professionals against claims of negligence or errors in their professional advice or designs that result in financial loss – this will generally be obtained by both the contractor and any designers.

When a party to a construction contract becomes insolvent, the other party is typically entitled to terminate the contract or suspend work.

If a contractor becomes insolvent, the employer generally has the right to take over the project or hire another contractor to complete the work. The employer may also be entitled to claim on performance bonds to mitigate any losses incurred.

If the employer becomes insolvent, the contractor may be entitled to claim for unpaid amounts. Provisions for employer insolvency in contracts usually allow the contractor to suspend work or terminate the contract if payments are not made. Additionally, the contractor may have rights against the funder under a tripartite deed.

Payment clauses in construction contracts may also address non-payment in the event of insolvency, often permitting the suspension or withholding of payments to the insolvent party.

Through guarantees and indemnities, parties can redistribute risk under construction contracts as they see fit. As discussed, these guarantees and indemnities are subject to certain statutory limits. Since the publishing of the Abrahamson principles in 1973, risk in the New Zealand construction industry has been shared on the principle that “risk should be allocated to the party best placed to bear it”. In many cases, this meant that principals attempted to shift risk to contractors, as principals argued that the risks were within the contractor’s control, and that it was more efficient to place this risk with the contractor, as they would be responsible for remediating any issues.

In more recent years, the construction industry has attempted to take a broader approach than that encouraged by the Abrahamson principles, and to allocate risk in an accurate, realistic and transparent way. Contractors are also entitled to charge premiums in their fees for any risks allocated to them that are above the statutory minimums.

It is common for construction contracts to include key personnel clauses whereby a party agrees to retain key personnel and obtain consent from the other party to change any of the defined key personnel. These clauses are included to ensure consistency across a project. Breach of any key personnel clause may result in damages.

Under NZS contracts, contractors are prohibited from entering into subcontracts that “wholly or substantially” outsource all of the works to a subcontractor without written consent from the principal. Subcontracting generally requires the employer’s consent. 

As set out in the foregoing, subcontracting any of the contract works does not relieve the contractor from their liabilities and obligations under the contract.

See 2.2 The Contractor and 2.3 The Subcontractors.

Typically, each party will retain their intellectual property rights. 

The 3910 includes indemnities from the employer to the contractor against any claims arising from a breach of intellectual property law by the principal or engineer.

Similarly, the 3910 includes indemnities from the contractor to the principal and the engineer to the contract against any breach of intellectual property law.

General damages are available for breach of contract in New Zealand.

Common remedies for the employer include:

• liquidated damages for delay;
• remedy of defects;
• damages for non-performance; and
• suspension or termination of the contract.

Common remedies for the contractor include:

• payment for variation;
• payment for extension of time claims;
• payment of claims (invoices or payment claims); and
• suspension or termination of the contract.

Common remedies for the designer include:

• payment of claims (invoices or payment claims); and
• payment for loss of income/loss of profits.

Specific performance may also be sought where a contract includes clear obligations and compensation by way of damages is insufficient. This requires the party in breach to perform their obligations under the contract as originally agreed.

As discussed in the foregoing, there are statutory time limits on bringing legal proceedings in New Zealand, and it is common for parties to introduce caps on damages that a party will pay in the event of a breach. See 6.1 Exclusion of Liability and 6.3 Limitation of Liability.

Parties may also seek to include time limits for liability in contracts. For example, the CCCS includes a general condition limiting liability for loss or damage after a period specified by the parties in special conditions.

Sole remedy clauses specify that, in the event of a breach or dispute, one party’s only recourse or remedy is limited to a specific action or form of relief, rather than allowing for a broad range of remedies.

The most common sole remedy clauses in New Zealand construction contracts are:

• liquidated damages for contractor delay; and
• a working day rate for a contractor’s time-related costs for an extension of time.

Forms of damage that are commonly excluded are as follows:

• consequential damages (also known as indirect damages) – these could refer to losses that do not directly arise from the breach but flow indirectly from it, such as loss of business opportunity, revenue loss, profit loss and reputational harm;
• punitive damages, which do not compensate a party but aim to punish the wrongdoer; and
• loss of profits arising from delays, defects or other breaches.

Retentions are common in construction contracts, and the requirements for retentions are governed by the CCA. The CCA’s retention provisions have been amended in recent years to give greater protections to subcontractors, and to introduce mandatory requirements and regular reporting. See 1.1 Governing Law.

Under the CCA, the contractor has a right to suspend works for non-payment. 

A party’s ability to terminate a construction contract will vary based on the contractual terms. Most contracts will set out a process for terminating a contract, including notification to the defaulting party and providing an opportunity to remedy the default before proceeding with termination.

Termination is generally permitted for frustration and default. See 5.6 Unforeseen Circumstances. 

Other examples of default giving rise to a right to terminate are:

• insolvency;
• non-payment;
• material breach of contract; and
• non-performance of or abandoning the contract.

If a party wrongfully terminates a contract (either without cause or without following the contractual process), it may be liable to pay damages.

In the event that the employer terminates the contract, as is the case in other Commonwealth jurisdictions, damages payable to the contractor are often quantified by reference to the contractor’s loss of profit on the unperformed portion of the remaining works.

In the event that the contractor terminates the contract, damages payable to the employer are often quantified by reference to the cost to the employer of having an alternative contractor complete the remaining works.

Construction contract disputes can be resolved at all court levels in New Zealand. The district court has jurisdiction to determine disputes quantified at up to NZD350,000, the High Court determines disputes exceeding NZD350,000, and the court of appeal and Supreme Court are appellant courts.

However, construction contracts commonly include dispute resolution provisions, which in turn include mediation followed by private arbitration as the agreed form of dispute resolution.

The CCA outlines a statutory adjudication process that is available to all parties to construction contracts in New Zealand. It has no monetary limits for claims, and it is a private and confidential dispute resolution process. The CCA is prescriptive, and failure to comply with the mandatory requirements can be fatal to a claim or defence. Decisions by adjudicators are binding, and the CCA sets out the requirements and timeframes for payment. Parties may ultimately proceed to litigation or arbitration for final determination of the dispute but there is still an obligation to pay an adjudication award.

There are several alternative dispute resolution options in New Zealand. Construction contracts commonly include dispute resolution clauses that dictate a process to be followed in the event of a dispute, including the steps that must be taken and the order in which they should be taken.

• Expert determination: The parties agree to refer a question or dispute to an independent expert (often with specialised knowledge or experience in a particular area) to make a binding or non-binding decision. This is most common where a dispute relates to a technical or complicated issue where specialist knowledge is required, and where a resolution may not easily be reached via traditional dispute resolution.
• Mediation: This is a non-binding form of dispute resolution that is common in New Zealand. It is not regulated by law but is often required by construction contracts. Mediations are overseen by a mediator, who helps facilitate discussion and negotiations between the parties. Mediation can be a cost-effective method of resolving disputes.
• Arbitration: This is a binding form of dispute resolution and is often used in New Zealand. Similar to mediation, construction contracts may specify arbitration as part of the dispute resolution process (rather than initial civil proceedings in the district court or High Court). Arbitrations are governed by the Arbitration Act 1996; see 1.1 Governing Law.

Even when construction contracts do not require arbitration to be used for dispute resolution, it may be favoured by parties due to the advantages it offers in terms of speed, cost-effectiveness, privacy, the expertise of the arbitrator (and the ability to agree to an arbitrator) and flexibility. Further, arbitration typically provides a final and binding decision, which means that the arbitral award is legally enforceable with limited grounds for appeal.