At a glance: construction contracts and insurance in New Zealand

Contracts and insurance

What standard contract forms are used for construction and design? Must the language of the contract be the local language? Are there restrictions on choice of law and the venue for dispute resolution?

NZS 3910, NZS 3915, NZS 3916 and NZS 3917 are the most common construction contracts. Other well-known contracts (such as the International Federation of Consulting Engineers contract and NEC3/NEC4) are also used, albeit not as frequently.

NZS 3910 (with an engineer) and NZS 3915 (without an engineer) are intended for traditional procurement arrangements involving only construction work. NZS 3916 is similar to NZS 3910, although tailored for a design-and-build context. NZS 3917 is intended to be used for the provision of services over a defined period of time rather than a fixed scope of work.

Each of NZS 3910, NZS 3915, NZS 3916 and NZS 3917 can be tailored to specific projects and contain special conditions to allow for this.

In addition to the NZS contracts, certain other bodies have produced contracts tailored for New Zealand construction works.

The New Zealand Institute of Architects (NZIA) has produced a series of standard-form construction contracts, some of which are designed for use where the contract is administered by an NZIA architect, others of which may be used when the architect is not contractually involved in the administration of the contract.

The Association of Consulting Engineers New Zealand, Engineering New Zealand, the Auckland Regional Contracts Group, the Institute of Public Works Engineering Australasia New Zealand and the New Zealand Transport Agency have developed standard conditions of contract for consultancy services. These can apply to a wide range of consulting services and for most types of project.

The Registered Master Builders Association and New Zealand Specialist Trade Contractors Federation jointly provide a standard form of subcontract (informally known as SA-2017).

There is no requirement that English must be the language of the contract, although it is the predominant language used.

There are no restrictions on choice of law or venue for dispute resolution in the NZS suite of contracts. If not contractually specified by the parties, established private international law rules will need to be invoked to determine the venue and governing law.

How are contractors, subcontractors, vendors and workers typically paid and is there a standard frequency for payments?

Contractors, subcontractors and vendors of prefabricated, customised components for construction projects have a statutory right to progress payments under the Construction Contracts Act 2002. ‘Pay when paid’ arrangements are barred and have no legal effect.

Contracting parties may agree the number and frequency of progress payments. In the absence of any express agreement, payment claims can be made at the end of each month. Standard construction contracts generally provide for monthly claims, although the due date may vary. There are strict time requirements for responding to, and discharging, payment claims.

The method of payment can be agreed between the parties, although cash payments should be treated with caution and not used as a method to avoid payment of goods and services tax or other tax. Cheques are being phased out by banks as electronic transfers become the norm.

What is the typical contractual matrix for a major project in your jurisdiction in terms of the contractual relationships among the various construction project participants?

Owners and developers typically contract directly with a construction company, rather than through construction managers or trade contractors. For example, under NZS 3910, while a construction manager (the engineer to the contract, but not necessarily a chartered professional engineer) is appointed as the principal’s agent to manage the contract, the contractual relationship is directly between the principal and contractor. The contractor then subcontracts directly with specialist subcontractors.

An area that is continuing to develop is the use of alliance contracting, typically for large PPP infrastructure projects. In this regard, major construction companies with local expertise will frequently form joint ventures with foreign companies possessing specialist expertise, which, along with design consultants and key specialist subcontractors, form an ‘alliance’ of parties that contract with the pertinent public authority for the project.

Is there a formal statutory and regulatory framework for PPP and PFI contracts?

There is no specific legislative or regulatory framework for PPPs, which are typically only used for large-scale infrastructure projects. Examples include the construction of the Wiri Prison (completed in 2015), and the development and construction of the Transmission Gully highway near Wellington (scheduled to open to traffic in late 2021).

The Treasury’s National Infrastructure Unit provides guidance and advice on PPPs (including project agreement forms) on its website: www.infrastructure.govt.nz. PFI contracts are not typically used.

Are all members of consortia jointly liable for the entire project or may they allocate liability and responsibility among them?

In New Zealand, the term ‘joint venture’ (JV) has no precise legal definition and is not a recognised legal entity in its own right. A JV will generally be formed using one of the following legal structures:

• a limited liability company (a company);
• a limited partnership (LP);
• a partnership; or
• a contractual agreement.

The liability of each member of a JV will be determined by the legal structure chosen and the commercial arrangements between its members.

Where a company is established to form a JV, it is this entity that undertakes the project and assumes the legal liability, not the members individually. This allows the members to limit their exposure to liabilities and project losses. Liability for company directors will only arise in circumstances where directors have breached certain duties in the Companies Act 1993.

The situation is similar for LPs registered under the Limited Partnerships Act 2008. In the case of a company or LP, members may nevertheless become liable where they are required to provide guarantees on behalf of the company or LP.

A JV may also take the form of a legal partnership, either created expressly by the members or as deemed by the Partnership Law Act 2019. In contrast to a company or limited partners of an LP, the members of a legal partnership are jointly and severally liable and each member may bind the others subject to the laws of partnership.

Alternatively, a JV may be formed purely on a contractual basis between members. Under this form, the liability of each member will be subject to the provisions contained in the JV agreement together with any other agreements entered into with external third parties and the general law of contract.

Do local laws permit a contracting party to be indemnified against all acts, errors and omissions arising from the work of the other party, even when the first party is negligent?

The law permits a contracting party to indemnify the other party against acts, errors and omissions arising from the work of the indemnifying party. Normally, a head contractor indemnifies a principal for losses arising from acts, errors and omissions in the performance of the contractor’s scope of work (including the work of subcontractors). Commonly, subcontracts contain back-to-back indemnity provisions mirroring those provided to the principal by the head contractor.

However, to the extent a party’s loss is caused by its own negligence, it may not be able to recover that loss from the indemnifying party. A contractual clause that indemnifies a party against loss that it has caused is enforceable (in the absence of fraud), but contracts do not normally contain such provisions. To the contrary, provisions for apportionment of loss are increasingly being incorporated into the more common forms of construction contract.

Where a contractor constructs a building that will be sold or leased to a third party, does the contractor bear any potential responsibility to the third party? May the third party pursue a claim against the contractor despite the lack of contractual privity?

Although the law recognises the common law doctrine of privity of contract, there are significant exceptions, both statutory and at common law.

For example, the Contract and Commercial Law Act 2017 permits a person who is not a party to a contract, but upon whom the contract was intended to confer a benefit, to enforce the contract as if that person were a contracting party.

In the specific context of building contracts, the Building Act 2004 implies certain warranties relating to proper performance of contract works into every residential building contract (the warranties are not implied into non-residential building contracts, and subcontracts with the head builder in a residential project are also excluded). A person who is the owner of a building or land to which the provisions apply may bring proceedings for breach of warranty even if that person is not a party to the building contract. Parties cannot contract out of these consumer protection provisions.

For the past several decades, New Zealand has experienced a significant problem with leaky buildings. In response, the law has recognised an extra-contractual duty of care on the part of contractors, subcontractors, suppliers and consultants (among others) to owners and subsequent purchasers of properties to ensure that building design, materials and construction work comply with applicable weather tightness requirements. While this principle was originally developed in the residential context, the duty of care has been extended to cover the design and construction of non-residential properties. Accordingly, consultants, contractors, subcontractors and others can be sued in tort by owners and subsequent purchasers for breach of this duty of care. Additionally, there are proposed changes to building laws in relation to products and materials that are likely to come into force near the end of 2021. 

To what extent do available insurance products afford a contractor coverage for: damage to the property of third parties; injury to workers or third parties; delay damages; and damages due to environmental hazards? Does the local law limit contractors’ liability for damages?

There is a variety of insurance products available to contractors, including the following.

• Contract works insurance (either project-specific or annual).
• Tools, plant and equipment insurance (generally for market value only).
• Public liability insurance (protection against legal liability to third parties for damage, loss or injury caused by an act or omission of the contractor arising out of the performance of the contract works). Compensation for bodily injury is covered by the Accident Compensation Corporation (ACC).
• Employers’ liability insurance (cover for personal injury to employees of the insured, that is not covered by ACC).
• Professional indemnity (PI) insurance (cover for liability costs arising from faulty professional advice or design; used by contractors where design components are the responsibility of the contractor). Most domestic PI (and errors and omissions) insurance policies now exclude coverage for leaky building liability.
• Errors and omissions insurance (similar to PI insurance if a contractor is held liable for third-party loss resulting from an error or omission in performing the contract works, such as failure to follow a design specification or use of the wrong materials). Historically, this type of insurance was difficult for contractors to obtain, but there is now some availability from some specialist insurers and in bespoke policies.
• Statutory liability insurance (cover for legal costs and fines under certain legislation). Fines for breaching health and safety laws cannot be insured but the policy will normally cover legal costs and reparation payments if the contractor is taken to court for breaching health and safety laws.

Contractors’ pollution liability insurance is available from some specialist insurers and provides protection against third-party liabilities arising from pollution releases. There are policy exclusions, particularly in relation to pre-existing environmental contamination.

Although not standard, consequential loss insurance may be available from specialist liability insurers to cover financial losses resulting from a contractor’s act or omission covered under a liability insurance policy (eg, downtime owing to delays resulting from a contractor’s act or omission). Consequential loss insurance, specifically for delays arising from accidental damage to any part of the contract works, is another specialist product available.

Normally, policies exclude liability for liquidated damages. New Zealand’s no-fault accident compensation law bars claims for compensatory damages for personal injury or death if cover is available from the ACC. New Zealand law does not generally limit liability for damages, although the parties may agree to a contractual cap.

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5 May 2021