The closure of the Strait of Hormuz and escalating conflict in the Middle East is increasing the risk of supply chain delays, disruptions and cost increases reminiscent of Covid-19.
The duration and impact of these events remains uncertain, but construction contracts for New Zealand projects could be affected in several ways.
Delays and extensions of time
Security concerns, route diversions, fuel shortages and other flow-on effects of the conflict may disrupt international shipping, while domestic fuel shortages could delay transportation within New Zealand.
Any contractual entitlement to an Extension of Time (EOT) depends on the specific grounds set out in each contract. NZS template contracts include a broad ‘catch-all’ EOT ground for circumstances not reasonably foreseeable by an experienced Contractor. The NZS3910:2023 and NZS3916:2025 contracts amended this wording to expressly include reference to “circumstances (including the consequences of a war or pandemic) not reasonably foreseeable…” [emphasis added].
Whether such delays were foreseeable, and the Contractor’s ability to demonstrate actual impact on the critical path, will be relevant to any entitlement.
Entitlement to time-related costs for delay also depends on the specific contract terms. Under the standard NZS 3910 and 3916 templates, Contractors are usually only entitled to time-related costs where delay is caused by the Principal or by a variation. However, during Covid-19, some Principals (particularly in the public sector) took a more facilitative approach, granting time-related costs even without strict contractual entitlement. A similar approach may be seen here, particularly if the government imposes restrictions on fuel.
Cost escalation
In addition to escalating transportation costs, supply chain disruption causing shortages could further escalate costs of materials. Who bears this risk depends on:
- the contractual pricing model – for example, under a cost-reimbursable model, cost escalation may be a Principal risk
- any price adjustment mechanisms in the contract – including cost escalation provisions or provisional sums, and
- for contracts that incorporate express risk-sharing models (e.g. Alliance contracts or contracts using a Target Outturn Cost pricing models), how the parties have allocated this risk, including any caps on Contractor ‘pain’.
Cost escalation alone will not usually amount to grounds for a Variation claim. However, if fuel, transportation or certain material costs have been agreed as provisional sums, these would be valued as Variations under the NZS3910 and 3916 templates.
Likewise, if any government regulations are made imposing restrictions on use of fuel, this could amount to change in law, which may entitle the Contractor to a Variation under NZS contract templates.
Force Majeure
The NZS3910 and 3916 templates do not include a ‘Force Majeure’ (FM) concept, relying instead on the broad extension of time grounds and suspension rights discussed in this note. However, FM clauses are sometimes added by Principals in the special conditions. NEC contracts include ‘Compensation Events’ with grounds similar to traditional FM claims. The FIDIC suite includes either ‘Force Majeure’ or ‘Exceptional Events’ regimes, depending on whether the 1999 or 2017 edition is used.
Force Majeure events often lead to contract suspension, relieving the Contractor from liability for failing to achieve completion by the due date. Depending on the drafting, a Force Majeure event may also trigger cost entitlements or termination rights if the FM event is prolonged.
Suspension
During the disruption caused by Covid-19, government and industry guidance recommended that Engineers to Contract under NZS3910:2013 and NZS3916:2013 contracts exercise their right to suspend works in response to lockdown orders.
Such suspensions are treated as Variations, entitling Contractors to extensions of time and certain costs (which during Covid-19 usually included site shutdown and securing costs, and sometimes additional time-related costs and/or costs for implementing new health and safety equipment and processes).
The NZS3910:2023 and NZS3916:2025 contracts retain this suspension right, now exercised by the Contract Administrator. This could be a useful tool depending on the impact of the current conflict. However, parties should note that a prolonged suspension (longer than three months) can trigger Contractor termination rights.
Recommendations
Contractors and Principals should:
- review their existing risk-sharing provisions to clarify their entitlements, and
- ensure that project teams are:
- complying with notice requirements
- documenting supply impacts as they arise
- assessing mitigation options early, and
- maintaining evidence of critical path effects and cost consequences.
For contracts not yet executed, parties should engage in open dialogue about high-risk elements of their projects, reasonable risk sharing regimes and potential mitigation strategies – including how usual contract positions may need to be amended to reflect current market conditions.
