As many contractors will be aware, the New Zealand Standards Review Committee has been undertaking a review of the NZS3910:2013 standard form construction contract. Following this review, an updated version of the standard form contract has been released to the market in its final form as NZS3910:2023. This version has seen multiple changes to the previous version.

One of the most significant changes, especially for contractors, is the change to section 7, where the indemnity owed by contractors to principals has been changed to a fault-based indemnity. A new provision for an aggregate cap on the Contractor’s liability has also been added to section 7.2. The changes to section 7 have also changed the indemnities owed by the Principal to the Contractor.

Contractor’s Indemnity

Clause 7.1.1 requires the Contractor to indemnify the Principal against various forms of loss or cost. In the 2013 version, clause 7.1.1(a) has a very broad indemnity where the Contractor indemnifies the Principal for:

“Loss suffered by the Principal which may arise out of, or in consequence of the construction of, or remedying of defects in, the Contract Works.”

This clause is reproduced in the 2023 version. However, new subclauses are added which limit the Contractor’s liability to loss which:

• Arises out or in the course of or by reason of the Contractor’s execution of or failure to execute the Contract Works, and
• Is attributable to any negligence or breach of the Contract by the Contractor.

These additional clauses are significant. They narrow the scope of the indemnity and thus the liability of the Contractor to the Principal significantly. In the 2013 version the Contractor’s indemnity would extend to any loss suffered by the Principal regardless of whether the loss arose from any default by the Contractor. In the 2023 version, the Contractor only indemnifies the Principal for loss suffered as a result of the Contractor’s acts or omissions in executing the Contract Works where it has breached the contract or acted negligently. In short, this indemnity is now fault-based whereas before the contractor was liable even if not at fault.

This change comes as a result of the NZS Review Committee recognising that this clause was regularly tagged by Contractors, in favour of a fault-based indemnity.  In our experience, while some contractors certainly requested this change, it was not a universal or standard change. The 2023 version is therefore helpful in setting this up as the default standard position.

None of the other indemnities owed by the Contractor to the Principal in the 2013 version are altered in the 2023 version, including:

• Clause 7.1.1(b) for liability arising from injuries to persons or damage to property, due to undertaking the Contract Works (including remedying defects); and
• Clause 7.1.1(c), for costs the Principal incurs arising out of the matters covered by the Contractor’s indemnities in clauses 7.1.1(a) and (b).
• Clause 4.2.7, for cost, loss or delay arising from termination of a Nominated Subcontractor’s subcontract due to the Contractor’s breach; and
• Clause 5.12.2 (of the Old Version, which becomes 5.15.2 in the New Version), for consequences of infringing intellectual property rights.

Principal’s Indemnity

Under the 2013 version, the Principal indemnifies the Contractor for the circumstances provided in clauses 7.1.2 (a) to (c). Specifically, clause 7.1.2(c) provides for:

(c) Any act or omission of the Principal or of the Engineer, or his or her assistants, or of any other Persons for whose acts or omissions the Principal is as between it and the Contractor responsible.

This has been removed from clause 7.1.2 in the 2023 version.

While the Contractor is not liable to indemnify the Principal for the loss occurring as a result of these circumstances, the Principal is now not required to indemnify the Contractor either. This creates a potential gap in the mutual indemnities NZS3910 is premised on – while the Contractor indemnifies the Principal for loss it causes as a result of its negligence or breach of contract, the Principal is not indemnifying the Contractor for loss or costs that arise from the acts or omissions of the Principal or those it is responsible for. 

Contractors may want to consider a tag that reintroduces 7.1.2(c) from the 2013 version into clause 7.1.2 and refer to it in 7.1.3.

Contractor’s Liability Cap

Over the last 4-5 years, it has become increasingly common for some contractors to insist that limits on their liability be included in construction contracts. However, it has been by no means a universal or standard position and many contracts continued to be agreed where contractors assumed unlimited liability to the Principal. This is in stark contrast to the position overseas or with others involved in the construction industry (e.g. design consultants), where limits on liability were and are the default position.

The 2023 version changes this, by setting up as the default position for the parties to agree on a limitation of the contractor’s liability and thus a discussion about what such a limit should be. All contractors should be looking to agree and include in the Specific Conditions a limit on their liability. What that limit should be will depend on the nature of the job and its value. We have seen limits typically agreed to between 25% and 100% of the Contract Price where contractors have insisted on including provisions limiting their liability.

Clause 7.2.2 in the 2023 version provides a series of matters to which the liability cap does not apply. These include the Contractor’s liability:

(a) To indemnify the Principal under 5.15.1 (for infringing intellectual property rights);

(b) To indemnify the Principal under 7.1.1(b) in respect of any liability incurred by the Principal to a third party;

(c) In the case of fraudulent conduct, illegal act or omission, wilful or reckless misconduct, or wilful default by the Contractor in the performance of its obligations under the Contract;

(d) If the Contractor has repudiated or abandoned the Contract; or

(e) In respect of any penalties applicable under any statute, secondary legislation, instrument, bylaw, or Consent.

Insurance proceeds are not expressly excluded from the Contractor’s liability cap; however, clause 7.2.3 of the 2023 version sets out how insurance proceeds interact with the Contractor’s liability cap. It provides that, where the Contractor is required to hold insurance for a sum that is more than the liability cap, the Contractor’s liability for any loss covered by the insurance, will be the level of cover under the applicable insurance policy. This applies whether the policy responds, or, due to some failure or breach by the Contractor, fails to respond.

With one exception, the new clause in 7.2 reflects what we have typically seen Contractors and Principals agree by way of a special condition under the 2013 version. In that regard, the clause is a good reflection of what part of the market (typically in contracts with the major contractors) had been agreeing.

However, the exception is notable. In our experience, limitation of liability clauses being agreed also typically included an exclusion of liability (of both parties) for consequential or indirect losses between the parties, including loss of profit, loss of revenue and similar. It remains important for contractors to exclude liability for such losses if they can. So, this is a tag that contractors should consider including where the 2023 version is used.

Conclusion

Overall, the 2023 version should help set a new market standard of fault based liability and limited liability for contractors. The 2013 version will undoubtedly continue to be used for some time but contractors can point to the revised clause 7 in the 2023 version as setting a new market standard to insist on fault based liability and on their liability being limited and should aim to make sure each contract they enter into includes these terms.

This article was written by Brendan Cash (Partner) in Dentons’ Major Projects and Construction team in New Zealand, and was originally published by Contractor Mag.