Engineer’s failure to give a decision under FIDIC and the contractor’s right to invoke arbitration

A common problem that arises in construction contracts is the Engineer’s failure to give his determination or decision within the time stipulated in the contract. Under FIDIC’s 1999 Red Book, a contractor can file a claim under Sub-Clause 20.1 of the GCC for extension of time and/or additional payment.

In Pakistan, contractors are often faced with a situation where the Engineer fails to render a decision in time which blocks the ability of the contractor to go to the Dispute Adjudication Board (DAB) or to invoke arbitration under Sub-Clause 20.6 of the GCC. Recent developments suggest that the contractor cannot be prevented from initiating arbitration where the Engineer fails to give a decision under Sub-Clause 20.1 of the GCC within the contractually prescribed time period. This alert attempts to summarize the latest legal position and will be helpful for contractors and employers alike.

Sub-clause 3.5 of the 1999 FIDIC (“1999 Red Book”) deals with the determinations of the Engineer and provides:

“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. The Engineer shall give notice to both Parties of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration.”

Hence, it empowers the Engineer to agree or determine both Contractor’s claims (Sub-Clause 20.1) and Employer’s claims (Sub-Clause 2.5). But what are the consequences of the Engineer’s failure to give his determination under Sub-Clause 20.1. It can be indicated from Sub-Clause 3.5 of the 1999 Red Book, that there were no time constraints imposed on the Engineer in regard to determinations. This allowed Engineers to adopt a wait-and-see approach to claims, much to the frustration of the Contractor. However, according to Sub-Clause 1.3 determinations shall not be unreasonably withheld or delayed. Hence, notice must be given in writing and must not be unreasonably withheld or delayed in accordance with Sub-Clause 1.3. Under the FIDIC Red Book 1999 a notice need not be identified as such and need not include a clause reference.

Arguably, it is the duty of the Engineer to give determinations. Since, the Engineer is not party to the contract, in case the Engineer fails to carry out his duties, the Employer will be held to be in breach of his obligation under the Contract.

Under the FIDIC Red Book 4th edition (“Red Book of 1987”), the Engineer also had responsibility for deciding all those matters which in  the1999 Red Book is subject to the procedure in Sub-Clause 3.5. Under Red Book of 1987, Clause 67 was provided for such purposes. Under Clause 67 to decide the dispute, the Engineer was supposed to make “decision” after “due consultation” with both parties. A party dissatisfied with the Engineer’s decision could refer the matter back to the Engineer as a dispute for a decision within 84 days after such referral.

In Man Enterprise Sal v AL-Waddan Hotel Limited [2013] EWHC 2356 (TCC), the claimant in this arbitration claim (“MAN”) entered into an agreement with Al-Waddan Hotel Limited, the defendant (“Al-Waddan”) dated 1 April 2007 (“the Contract”). The Contract was subject to the FIDIC conditions, fourth edition 1987, reprinted 1992 with editorial amendments. It was held by the Queen’s Bench Division (Technology & Construction Court) that:

“The second provision to which I have been referred is the well-known provision in clause 67 of these FIDIC conditions. That provides in section 67.1 for the Engineer to give a decision within a period and for the consequences if a decision is given or if the Engineer fails to give a decision. There is then provision under clause 67.2 for amicable settlement leading to arbitration, with arbitration being dealt with by clause 67.3…

A second matter which then arises and was raised by Herbert Smith LLP initially, was the need to go through the process of obtaining an Engineer’s decision under clause 67 before notice of arbitration could be given. In many cases under the FIDIC conditions, there are arguments based upon the date of seeking a decision from the Engineer, whether the Engineer then gives or does not give a timely decision, the time which then has passed before notice to commence arbitration is given and what steps are taken after that to commence arbitration. On the documents it is not evident that any such arguments would arise here and no point taken in the documents as to those matters and the latest letter from Herbert Smith Freehills LLP appears to accept, at least in principle, that there should be an arbitration where arbitrators might be appointed.”

On the material before me this is a case where there is a good arguable case that the provisions of clause 67 have been complied with. There is a good arguable case that the letter from the Engineer is in fact to be treated as a notice of decision. If that is wrong, there is a good arguable case on the construction of the Contract that clause 67 does not apply if, as is indicated by the Engineer’s letter of 19 June, there is no Engineer. Alternatively in circumstances where the Engineer is not acting, it is arguable that the absence of an Engineer’s decision is not a point which could be relied upon by the party who employed the Engineer. I have been referred to the two articles written by Mr Christopher Seppälä in [1986] ICLR 315 at 324, which clearly supports arguments along those lines where there has been, as appears may have occurred in this case, some form of termination of an Engineer’s appointment.

For all those reasons, I consider that there is a good arguable case that any necessary process under clause 67 has been complied with. There is a good arguable case, as I have indicated, that there is an arbitration clause under the agreement of 1 April 2007 and that this agreement is still an operative agreement for the purpose of the current disputes.

Therefore there shall be a direction that the arbitrator in the dispute between MAN and Al-Waddan shall be a sole arbitrator to be appointed by the President or a Vice-President for the time being of the LCIA.”

However, the above case was  then referred to the High Court of Justice Queen’s Bench Division Technology & Construction Court, which is cited as Al-Waddan Hotel Ltd v Man Enterprise Sal (Offshore) [2014] EWHC 4796 (TCC), In  the case, it was held that an Engineer’s decision could not be given because Al-Waddan had ended the Engineer’s retainer and took no steps to re-engage or replace the Engineer. In the circumstances, the court allowed the dispute to be referred directly to arbitration. In reaching this conclusion the court considered the Employer’s breach of an implied term not to hinder or prevent performance of the FIDIC Red Book 4th edition. The Court held in following words:

“There is then reference to the Engineer acting impartially, in clause 2.6, and the notes indicates the Engineer’s determination can be challenged by either party in accordance with the procedures for disputes laid down in clause 67. However, in order to avoid delay or interruption of the works, the Engineer’s determination must be adhered to by both Al-Waddan and MAN unless and until it is varied by the Engineer himself or an arbitral tribunal as provided by clause 67. Again that gives an indication of how the Engineer should act and how these rights in this particular form permitted things to take place.

Turning to the Guide, to clause 67 itself, this is what the notes indicate to assist users of this particular modern standard form: “The term ‘decision’ in the FIDIC Conditions, has been reserved for use in Clause 67. If there is a difference of opinion between the parties to the Contract that is, between the Employer and the Contractor, it is probable that such difference of opinion will have arisen as a result of an instruction given by the Engineer. If the matter cannot be clarified to the satisfaction of both parties, either may in the first instance refer the dispute to the Engineer for a decision, stating the reference is made under Clause 67.

Any such reference to the Engineer must be copied to the other party. In this respect, it should be noted that generally when the reference of a dispute is made to the Engineer, under Clause 67, it is dealt with by a senior person in the Engineer’s firm and preferably one who has not been involved in the day to day administration of the Contract. The Engineer’s decision, which is given under Clause 67 for settlement of the dispute, will not be final and binding upon either of the two parties if one of the parties disagrees with it and gives notice within 70 days of an intention to commence arbitration. This is a shorter period for challenging a decision than in the third Edition where the period was 90 days.

The action necessary to prevent the decision becoming final and binding is a notification by one party (no longer to the Engineer) to the other party of his intention to commence arbitration as to the subject matter of the decision. The notification shall be copied to the Engineer for information but the legal effect lies in the notice to the other party, which establishes the entitlement of the party giving the notification to arbitrate the matter in dispute.

So far as this court is concerned, there is no doubt at all as to the workings of the FIDIC form of contract and that the procedure under clause 67 is a condition precedent to the process of arbitration and therefore jurisdiction of the Arbitrator.”

However, FIDIC 2017 introduced a number of significant changes from FIDIC 1999. A new Sub-Clause 3.7.3 was introduced under which if the Engineer fails to give a notice of agreement or determination within the relevant time limit, this will amount to a rejection of the matter or Claim. In other words, Engineer has to make a fair determination under Sub-Clause 3.7.3 [Time limits]. There are now two separate 42-day periods in this clause: (i) 42 days for the Engineer to give Notice of the Parties Agreement if agreement is achieved, and if no agreement is reached (ii) a further 42 days for the Engineer to give Notice of the Engineer’s Determination. Consequently, the time in which the Engineer must make a determination is now 84 days. If the Engineer does not give the Notice either (i) where there is a Claim, that Claim is rejected, i.e. it is resolved against the claiming Party, or (ii) where there is a matter to be agreed or determined, that matter is deemed to be a Dispute which may be referred by either Party to the DAAB for its decision under Sub-Clause 21.4 [Obtaining DAAB’s Decision] without the need for Notice of Dissatisfaction (NOD).

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