The Infrastructure Transactions Unit looks at issues with the NZS Conditions of Contract.
A new report, titled ‘An examination of issues associated with the use of NZS Conditions of Contract’, was recently released by the Infrastructure Transactions Unit (ITU) of Treasury, and provides another perspective on the industry’s problems. The ITU commissioned the report as an independent review of the use of NZS standard conditions, such as 3910 and 3916, in public sector infrastructure projects.
The title and ostensible scope of the report are, arguably, selling it short. The report arrives amidst increasing publicity around the (poor) health of the construction industry and post the commitments in the Construction Sector Accord signed in April 2019. The report necessarily engages with that background.
So, while it may have been written with infrastructure and NZS Conditions specifically in mind, its findings and recommendations are of relevance to the construction industry as a whole.
ON THE NZS CONDITIONS OF CONTRACT GENERALLY
The report advocates for a full revision of the NZS contracts (e.g. 3910:2013). First, it notes that the 2013 updates were based on a limited scope review of the prior 2003 version; the point being that the current contracts are out of date. It further acknowledges a strong desire from industry for such a revision.
This is useful in adding further weight to the growing calls to revise the contracts. Pending such a revision, it suggests schedules to ensure the contracts reflect current legislation (e.g. in relation to health and safety). That advice reflects what many contracting parties are already doing.
Second, the report advocates for an ability to track changes directly into the general conditions, so you can read the contract as one concise document (instead of piecing together various schedules). Reading the contract can be a project on its own, and it can lead to unnecessary confusion and difficulty.
Because it would be clear what has been amended, the ability to track changes would also reduce the possibility of transfer of risk or onerous obligations ‘by stealth’.
However, if this idea is pursued, it will then be important that changes are tracked. Unscrupulous parties may simply change the general conditions without marking them up and thus parties may contract without realising that the general conditions have been changed.
So, this suggestion has potential downsides as well.
Often it seems that some contracts using the NZS conditions contain more amendments than they do native, standard-form provisions. The report suggests that this practice creates ‘misunderstanding, confusion, and ultimately, litigation’.
Nevertheless, the report also acknowledges, the truly ‘standard’ form of contract – one that could be universally applied without amendment – is a fantasy.
Specific special conditions will always be necessary to deal with particular matters facing the parties. However, the report notes that extensive, unnecessary special conditions are routinely imposed, and these obfuscate the necessary and appropriate conditions.
The report also suggests that a ‘standard’ set of special conditions is often being applied to NZS 3910:2013 contracts, whether the work is for $50,000 or $50 million.
You could conclude that issues with
special conditions merely reinforce the
need for revision of the NZS Conditions of
But that misses a crucial lesson – there is a culture of imposition of onerous special conditions (e.g. time bars and
aggressive risk transfer).
The irony of a standard set of special conditions is of course that special conditions are there to ensure that an otherwise standard contract fits a particular circumstance.
You could conclude that issues with special conditions merely reinforce the need for revision of the NZS Conditions of Contract. But that misses a crucial lesson – there is a culture of imposition of onerous special conditions (e.g. time bars and aggressive risk transfer).
The report identifies that this thwarts collaboration and feeds a growing sense of suspicion on the part of contractors. In this respect, a key issue that the report identifies is the lack of trust between the public sector and the industry. The report seeks to encourage more open collaborative drafting.
Other material from the public sector, such as the new Procurement Rules and Construction Procurement Guidelines, seem to be directed at addressing these issues; for example by seeking to limit the use of special conditions and promoting transparency and a shared understanding about who bears what risks.
The key now is that public agencies and the industry follow this guidance.
ISSUES WITH ENGINEERS
The report suggests that NZS 3910:2013 and 3916:2013 are not inherently collaborative, because the relationship between principal and contractor is filtered through the engineer. Moreover, collaborators to the report perceived engineers to have conflict of interest, given they are appointed and paid for by the principal.
Many of the issues canvassed in relation to engineers focused on their procurement. They are at times perceived as having inadequate specialist expertise for the particular project, or may be a public sector employee (furthering the perception of conflict above).
The new Construction Procurement Guidelines do not say anything substantive about the engineers to construction contracts.
The report is therefore right to recommend further guidance to public sector agencies around the obligations of the engineer.
The report has some comments on procurement generally. It notes the industry’s perception that procurement is not always done in accordance with the Procurement Guidelines or other relevant rules.
It also notes that the public sector follows a lowest price procurement practice in evaluating tenders, with little thought to quality or other aims, and comments on the impropriety of these practices.
In so doing, the report aligns itself with the purposes of the new Procurement Guidelines, which aim to move procurement models away from ‘lowest price’ and towards broader beneficial outcomes.
The construction industry has had a difficult period and the way parties are contracting has been part of the problem. The courts tend to uphold freedom of contract and avoid intervening for the sake of unfairness.
As a result, there is a growing perception that contracting practices need to change and the public sector is being encouraged to lead that. The report – along with the Accord, and new Procurement Rules and Guidelines – is part of the guidance to encourage new contracting practices.
The question is: Will practices actually change? Both the public sector and the industry now need to work collaboratively to ensure that change happens; that may require both sides (and their advisers) to be bold on occasion and to hold each other to account if parties are not meeting the standards and guidance being promogulated.
• Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members.