The Christchurch Earthquake – Legal Implications

New Zealanders are generally well prepared for earthquakes, even earthquakes such as the one which rocked the sleepy residents of Christchurch in the early morning of 4 September 2010. This article reviews the various legal implications arising from the earthquake.

The latest estimate bill for the recovery process in Christchurch is $4 billion. This figure includes $2 billion worth of damage to private dwellings and their contents, $1 billion worth of damage to commercial property, and $1 billion worth of damage to public infrastructure. However, most of that bill will be covered by private sector insurers and the Earthquake Commission (EQC).

According to the Minister of Transport, Steven Joyce, the damage to the state highway network has been relatively light, with the estimated repair bill around $6–$10 million. It will cost an estimated $2 million to repair the rail system. The larger proportion of the repair bill will be channelled to local roads, which have been extensively damaged – the cost estimate for these repairs is not yet available. The NZTA is providing initial funding assistance for the reinstatement of local roads, with $94 million available for the current financial year.

Canterbury Earthquake Response and Recovery Act 2010 and the Recovery Commission

The government has enacted The Canterbury Earthquake Response and Recovery Act 2010 (CERRA) which is focused on providing fast-tracked relief to deal with the specific circumstances arising from the Canterbury earthquake (including all aftershocks). It expires on 1 April 2012.

CERRA creates an Order in Council mechanism whereby compliance with a wide range of legislation can be relaxed or waived, without first being approved by Cabinet. Orders may include amendments and suspension to or exemptions from a wide range of legislation to enable a speedy response to necessary rebuilding and recovery after the quake. An Order in Council is made by the Executive Council (all ministers) and presided over by the Governor-General.

As expected, the Building Act 2004 was amongst the first legislation to be relaxed. In particular, Schedule One of the Building Act 2004 (which sets out works for which a building consent is not required) has been extended to include, among other things, demolition of a standalone damaged building that is less than three storeys high, works related to a retaining wall in a rural area, and construction of any platform or bridge less than 1.5 m high.

As well as the above, the definition of ‘dangerous building’ has been extended to include buildings that could collapse or cause injury as a result of an earthquake. The three local councils (Christchurch, Selwyn and Waimakariri) can require repair work to be done on dangerous buildings if the property owner refuses to comply with a remedial works order.

The remedial costs are to be borne by the owner and will become a charge over the land. However, the owner may challenge such an order in the District Court within five working days of the work being carried out for relief from making payment.

The Recovery Commission has the power to waive compliance with any provisions of the Building Act 2004. While wholesale waiver is unlikely, it is quite possible that on a case-by-case basis, urgent remedial work will be able to be undertaken without needing to first have a building consent. Building consent (and possibly a code compliance certificate) could be given retrospectively under the CERRA. In our view you would first need written waiver from the Recovery Commission or the Building Recovery Office.

Standard of repair work for earthquake-prone buildings

Christchurch City Council held an extraordinary council meeting on 10 September 2010 to amend its Earthquake-prone, Dangerous and Insanitary Buildings Policy. It is worthwhile to note that this policy is particularly focused on earthquake-prone buildings such as unreinforced masonry buildings, not residential homes. Therefore, the likes of chimney repairs are not affected by this policy.

The initial policy required buildings to be strengthened to 33% of the Building Code as part of the repair process. The new policy will require those earthquakeprone buildings that were damaged in the quake to be strengthened to 67% of Building Code levels in any repair work. Strengthening works involve seismic strengthening and compliance with other code requirements, such as providing means of escape from fire and installing disabled access. This could potentially add a further 20–100% increase in repair costs.

Insurance and subsidy

Insurance payouts will come from two sources for those with eligible claims. Firstly, EQC’s maximum cover is $100,000 per dwelling (plus allowance for GST at 15%) and $20,000 (plus GST, also at 15%) for contents. EQC does insure land, but is limited to residential property only.

The standard cover is for the land under the dwelling, the land within 8 m of the dwelling, and the land of the main accessway up to 60 m from the dwelling. EQC will pay the value of the damaged land as it was before the earthquake, or the repair cost of the land, whichever is the lower.

The remainder of the reconstruction costs will be borne by the homeowner’s own insurance policy. For those who are uninsured, the situation is yet to be clarified by the government, and those dwellings may be assessed on an individual case-by-case basis.

For those due to settle a sale and purchase transaction during this period, it is advisable to check with lenders as some are not advancing funds due to insurance companies unwilling to provide cover. The flow-on effect is that purchasers will be unable to meet the loan agreement requirement and uplift the funds to complete settlement. A suggested option is for the purchaser to take an assignment of the vendor’s existing insurance policy, subject to the approval of the insurance companies and the scope of the policy.

As at the time of writing, the Law Society has proposed that the government establish an assurance system to insurance companies to allow the transaction to go ahead.

Licensed building practitioners

Although some of the remedial building work will not need a building consent, the councils are urging homeowners to employ qualified contractors to ensure that the work is compliant with the Building Code. This is a situation where homeowners should engage licensed building practitioners (LBPs) to undertake and carry out such works.

The Building Act includes an LBP scheme. Builders are to be licensed in order to carry out or supervise work on homes and small to medium-sized apartment buildings that are critical to the integrity of the building.

This ‘restricted building work’ includes work that is undertaken on foundations, framing, roofing or cladding, which is essentially the same work that will be required to repair and rebuild quake-damaged properties. Originally, the scheme was due to become mandatory on 1 November 2009; however, continuing delays have meant that the scheme will not come into force until 1 March 2012.

A public concern is that the rebuilding work might be carried out by ‘cowboy builders’, and that if future problems arise, the owners would have no recourse. If the Recovery Commission and the local councils require that all remedial building work be carried out by an LBP, this will minimise the occurrence of substandard building work and help to ensure that a code compliance certificate can be issued retrospectively.

Homeowners should keep a detailed record of the tradesmen who carry out repair work, as any problems may prevent future building consents from being issued and complicate any insurance and property transactions.

Was NZS 3910:2003 prepared for the earthquake?

A problem for contractors in the middle of a building project in Christchurch is that, how does the earthquake affect their rights and obligations under an NZS 3910:2003 contract? Unfortunately, NZS 3910 does not have a force majeure clause under the general conditions that expressly enable the contract to be terminated in an event such as an earthquake. However, it does provide that contractors are entitled to an extension of time if the contract works are delayed by a seismic event (clause 10.3.1(e)) and the principal is deprived from claiming liquidated damages.

It is arguable whether contractors will be entitled to costs that arise from the additional work required as a result of the earthquake. Time-related costs are excluded from clause 10.3.7, and other additional costs will only be claimable as a result of a variation.

Delay on the part of the principal is deemed as a variation under the contract. Examples include delay in issuing instructions, and delay due to a shortage of materials and other trade supplies after the earthquake. Late supply by the principal is a variation under clause 5.16, and the principal is also obligated to grant an extension of time. In this instance, the contractor will be entitled to time-related costs as a result of 10.3.1(a).

NZS 3910:2003 sets out a notice period for all extensions of time claims. Fortunately, the notice period is somewhat flexible. As long as there are valid reasons for delay in providing the notice (and the earthquake may well be a valid reason), the engineer should not refuse to grant an extension of time in those instances. Nevertheless, the contractor should, where it can, give adequate and timely notice of a claim for an extension of time.

The contractor may also request the engineer to suspend some or all of the work under clause 6.7 if suspension becomes necessary. In such cases, the suspension would be a variation and the costs arising from the suspension would be claimable from the principal. However, the contractor must ensure the site is in a secure and safe condition so that it does not cause injury to any person. This is especially important in relation to earthquakedamaged buildings which may have become unsafe.

If the suspension remains in place in excess of three months, the contractor can request the engineer to extend the suspension for a further one month or longer by agreement between the parties. If the engineer does not grant an extension, the uncompleted works may be deleted as a variation, or, if the uncompleted works is substantial, as an abandonment of the contract. The contractor is then entitled to sue for damages and loss of profit.

Is an earthquake an excepted risk under clause 5.6.6?

It is unclear whether an earthquake is an excepted risk as defined under clause 5.6.6. If successfully argued, the additional costs will be deemed a variation (clause 5.6.5), and so the principal will have to bear the insurance risk and the associated additional project costs. However, given the geology of New Zealand, it is arguable that earthquakes are something that an experienced contractor should have allowed for and, accordingly, an earthquake would more likely fall outside the ambit of an excepted risk. If earthquakes are not an excepted risk, then the contractor is liable for any additional costs which are not covered under the contractor’s insurance policy.

If the fallout from the earthquake is so significant as to render contractual performance impossible, then arguably the contractor should notify the principal and express that it considers the contract terminated (clause 14.1.1). This is the doctrine of frustration. Frustration will apply where the contract works after the earthquake are radically different from the works that were originally contracted between the parties.

Recovery from the earthquake and its aftershocks, and the associated rebuilding effort, is going to be a long and difficult process. Where possible, the contracting parties should be willing to engage in realistic negotiation and agree the best way forward to achieve certainty and fairness in the process.