FIDIC forms: Engineering anxiety

A client called me. She was frustrated that the words “fair”, “impartial”, “independent” are easy to spell and sprinkle into a variety of contract terms but are much harder to understand and implement when the contract terms are being used. 

It transpired that her frustrations were focused primarily with how an engineer makes a determination under the FIDIC forms of contract. Typically, it is Clause 3.5 of the FIDIC based contracts that deal with the engineer’s obligation to make determinations. This states: “Whenever these Conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

Improper, inadequate, slow or defective engineer’s determination can cause real problems during the currency of a project – this is not just because the FIDIC contract requires the parties to comply with the determination pending ultimate resolution, but, because a determination can often be a prerequisite to entitlement under related documents such as bonds, guarantees or letters of credit.

This was highlighted in J Murphy & Sons Ltd vs Beckton Energy Ltd [2016], albeit in that case, due to the bespoke amendments, it was held that the engineer’s determination was not required before a call on a bond could be made. So what is all the fuss about? The words in clause 3.5 appear to be clear and the FIDIC forms typically set out that twenty five clauses require the engineer to make a determination.

The engineer was seeking to act like an arbitrator, adjudicator or judge. This cannot be right the client said – I agreed

As the client put it there is a lot to cause anxiety. Why? Firstly, there is a risk that the engineer may not be impartial or fair – this is because Clause 3.1 of FIDIC says that the “Engineer shall be deemed to act for the Employer”, thet they are included in the definition of “Employer’s Personnel” and because the current FIDIC forms have removed the previous clause that expressly required an engineer to exercise discretion impartially.

Secondly, there is an irresistible anxiety that the engineer will always decide things in favour of the employer where the engineer itself has caused the delays, design errors, late approvals and so on. While, in Semco Salvage Marine Pte Ltd v Lancer Navigation Co Ltd [1996] the Court of Appeal held that “fair” meant “fair to both parties”, there is a residual anxiety that the engineer will seek to avoid culpability.

Thirdly, my client’s concern was that the employer was “controlling” the engineer such that determinations were being delayed or simply improper. The latter word was interesting - what did she mean?

She explained that the engineer in her claim had simply decided not to use “Step 1” of Clause 3.5 - in other words there was no consultation with each party in an endeavour to reach agreement. She considered this to be an opportunity missed since such consultations allow the contractor and the employer to negotiate, agree an amicable way forward and avoid the claim becoming a dispute. She asked whether a “determination” given in the absence of consultation was invalid and of no effect - to which the answer must be “yes”.

In practice this means that the “determination” does not bind the parties. The inclusion of a dispute resolution procedure does not allow the engineer to “duck” his obligations. The Court in the case of Costain Ltd & Ors vs Bechtel Ltd & Anor [2005] refused to accept a similar argument that inclusion of a dispute resolution procedure means that the project manager (under an NEC3 form of contract) did not actually have to act impartially during certification because the courts could simply step in and fix the problem. The duty is on the engineer to follow the express words in Clause 3.5.

The client’s second difficulty was equally troubling - the engineer appeared to assume that he had no knowledge of any facts, progress, instructions, decisions, and circumstances related to the project, and was only prepared to consider facts that were presented or “pleaded” in the claim – in other words the engineer was seeking to act like an arbitrator, adjudicator or judge.

This cannot be right the client said - I agreed.    All things pointed to the conclusion that the client was not holding a valid engineer’s determination and that she needed now to trigger the next stage in the dispute resolution process.  She agreed, but, then asked “What is the point of asking the engineer to make determinations on at least twenty five clauses - why not simply go directly to a decision maker?”

Clients often make excellent points.

Hamish Lal is a partner in the international arbitration practice at Akin Gump