The Engineer is deemed to act for the Employer and is essentially the Employer’s agent under the FIDIC Red Book 1999. He is not a wholly impartial intermediary, unless such a role is specified in the Particular Conditions, and there is no general obligation under the FIDIC Red Book 1999 for the Engineer to act independently or impartially. However, when he is required to make a determination under Sub-Clause 3.5, he is obliged to make it a fair determination and when he is obliged to issue an Interim Payment Certificate under Sub-Clause 14.6, or a Final Payment Certificate under Sub-Clause 14.13, he must fairly determine the amount due.

The Engineer is deemed to act for the Employer and is essentially the Employer’s agent under the FIDIC Red Book 1999. He is not a wholly impartial intermediary, unless such a role is specified in the Particular Conditions, and there is no general obligation under the FIDIC Red Book 1999 for the Engineer to act independently or impartially. However, when he is required to make a determination under Sub-Clause 3.5, he is obliged to make it a fair determination and when he is obliged to issue an Interim Payment Certificate under Sub-Clause 14.6, or a Final Payment Certificate under Sub-Clause 14.13, he must fairly determine the amount due1.

But, what does “fair” and “fairly” mean and does it compromise the Engineer’s role as Employer’s agent?

The key things to note about the Engineer

• The Engineer is appointed by the Employer.

• The Engineer is paid for by the Employer.

• The Engineer is deemed to act for the Employer.

• The Engineer may be one of the Employer’s salaried employees.

• The Employer may replace the Engineer (without giving reasons)².

• The Engineer must carry out the duties assigned to him in the Contract.

• If the Engineer fails to perform his duties, this may be a breach of the Employer’s obligation under the Contract to have appointed an appropriate person.

• The Employer may impose a requirement that the Engineer obtains specific approval before exercising a particular power.

• Whenever the Engineer exercises a particular power for which the Employer’s approval is required, then the Employer shall be deemed to have given approval.

The Engineer is the Employer’s Agent

Agency occurs where a party is authorised to act as the representative of another. An agent may be appointed either expressly or impliedly by consent. Under Sub-Clause 3.1 of the 1999 FIDIC forms of contract, the Engineer is deemed to act for the Employer and thus authorised to act as the Employer’s representative, i.e. he is the Employer’s agent.

Therefore, (unless there is a Particular Condition to the contrary), when an Engineer makes a “fair determination” under Sub-Clause 3.5 or “fairly determines” the amount due in an Interim Payment Certificate under Sub-Clause 14.6, or Final Payment Certificate under Sub-Clause 14.13, he remains the Employer’s agent.

This is supported in the FIDIC’s Contract Guide (1st edition, 2000) which states (with emphasis added): “Under [the FIDIC Red Book 1999] or [the FIDIC Yellow Book 1999], the Employer is required to appoint the “Engineer”, who is to be named in the Appendix to Tender. The Engineer does not represent the Employer for all purposes. The Engineer is not authorised to amend the Contract, but he is deemed to act for the Employer as stated in subparagraph (a). The role of the Engineer is thus not stated to be that of a wholly impartial intermediary, unless such a role is specified in the Particular Conditions. If [the FIDIC Red/Yellow Book 1999’s] Engineer is an independent consulting engineer who is to act impartially, the following may be included in the Particular Conditions: At the end of the first paragraph of Sub-Clause 3.5, insert: “The Engineer shall act impartially when making these determinations.””

In the FIDIC Red Book 1999, FIDIC removed the express requirement for the Engineer to act impartially found in the previous form, and made a conscious and deliberate attempt to distance itself from the Anglo-Saxon concept that the Engineer’s duty to be impartial should be implied to reflect the fair and unbiased role of the Engineer as explained in the English House of Lords decision of Sutcliffe v Thackrath³ (considering the R.I.B.A. standard form of contract). This concept has been followed in subsequent English decisions such as those of Mr Justice Jackson in Costain v Bechtel⁴ (considering the N.E.C.2 form of contract) and Scheldebouw v St. James Homes (Grosvenor Dock) Ltd⁵. However, it is a concept that is not thought to be well understood or accepted internationally. In civil jurisdictions it is often asked how someone paid by one party (and therefore not independent) can act impartially as between Employer and Contractor.

Determinations

So, under the FIDIC Red Book 1999, must the Engineer maintain his role as the Employer’s agent when making a “fair determination” under Sub-Clause 3.5 or when he “fairly determines” the amount due in an Interim Payment Certificate under Sub-Clause 14.6 or Final Payment Certificate under Sub-Clause 14.13 and, if so, how? What do the words “fair” and “fairly” mean and do they compromise the Engineer’s role as Employer’s agent?

“Fair” is defined widely in the Oxford English Dictionary and includes (with emphasis added) at number 14(a): “Of conduct, actions, methods, arguments, etc.: free from bias, fraud, or injustice; equitable; legitimate, valid, sound.”

“Fairly” is also widely defined and includes (with emphasis added):“1. In a fair manner, so as to be fair….4. (a) By proper or legal means; legitimately; in accordance with rules or laws… (b) In accordance with what is right or just; equitably; without bias, impartially. Also: with good reason, rightfully….5. In a proper or suitable manner; appropriately, fittingly; (also) proportionately…6. Clearly, distinctly, plainly; frankly, openly….”

Reference is made to the Oxford English Dictionary as it is a well-regarded and accepted authority on the English language, which is the official language of the FIDIC forms of contract. Obviously, not everyone will accept this source. However, from these definitions, it is logical to conclude that the Engineer is obliged to act without bias and impartially when making determinations under Sub-Clauses 3.5, 14.6 and 14.13, notwithstanding his role as Employer’s agent.

This conclusion is supported in other parts of the FIDIC Red Book 1999 General Conditions of Contract. If it were not the case:

• Why would the Engineer (as Employer’s agent) need to consult with both parties before reaching a determination?

• Why would the Employer be entitled to dispute the Engineer’s determination and refer it to the Dispute Board under Sub-Clause 20.4 (particularly if the Employer’s specific approval has been sought prior to issuing the determination)?

• How could the determination be disputed under the FIDIC form if the Contractor and the Engineer (as Employer’s agent) agreed? Ordinarily, if a principal does not like something his agent has done which was properly within the agent’s authority, the principal would take it up with the agent under the agency agreement.

The conclusion is also supported in the FIDIC Code of Ethics which states: “The consulting engineer shall: – Be impartial in the provision of professional advice, judgement or decision…”

The wording of the FIDIC Contracts Guide might be interpreted to compliment such a view. On one reading, the phrase “The role of the Engineer is thus not stated to be that of a wholly impartial intermediary…” could allow room for the Engineer to act as an impartial intermediary in limited situations, such as when making fair determinations under Sub-Clauses 3.5, 14.6 and 14.13.

An Engineer’s professional codes of conduct could also be relevant in establishing the way in which he is expected to behave. For example, the Guidance Notes on the Interpretation and Application of the Rules of Professional Conduct of the Institution of Civil Engineers state (with emphasis added): “Rule 1: All members shall discharge their professional duties with integrity and shall behave with integrity in relation to all conduct bearing upon the standing, reputation and dignity of the Institution and of the profession of civil engineering. The manner in which members can fulfil this Rule includes, but is not limited to, the following: -Carry out their professional duties with complete objectivity and impartiality.”

The FIDIC White Book 2006 goes further and refers to independence, although the obligation is not mandatory. Sub-Clause 3.3.2 states: “Where the Services include the exercise of powers or performance of duties authorised or required by the terms of a contract between the Client and any third party, the Consultant may: … (b) if authorised to certify, determine or exercise discretion to do so fairly between the Client and third party not as an arbitrator but as an independent professional exercising his judgement with reasonable skill, care and diligence;…”

The problem has been recognised in the pre-release version of the FIDIC Yellow Book 2017. In Sub-Clause 3.2 of the FIDIC Yellow Book 2017 (as in Sub-Clause 3.1 of the FIDIC Yellow Book 1999), the Engineer is still deemed to act for the Employer, i.e. he remains the Employer’s agent, except as otherwise stated in the Conditions. However, to remove any ambiguity as to how the Engineer should act when brokering agreements or making determinations, Sub-Clause 3.7 states, “The Engineer shall act neutrally between the Parties when carrying out duties under this Sub-Clause”. Siobhan Fahey of the FIDIC Contract Committee acknowledges that the words “fair” and “fairly” are causing problems around the world and she hopes that the new obligation on the Engineer to act “neutrally”, when making a fair determination under Sub-Clause 3.7, will resolve this issue. However, there is a risk that neutrally may be seen as a synonym for impartially used in previous editions which could see the opening up of old arguments⁶.

Note also that in the pre-release version of the FIDIC Yellow Book 2017, Sub-Clause 14.6.1 obliges the Engineer to issue an Interim Payment Certificate (“IPC”) stating the amount which he “fairly considers to be due” to the Contractor (and not the amount which he “fairly determines to be due” as in the FIDIC Red Book 1999). A similar change has been made in Sub-Clause 14.13 in respect of the Final Payment Certificate (“FPC”). This takes the issue of IPCs and FPCs outside the scope of Sub-Clause 3.7 and the Engineer’s obligation to act neutrally in the first instance. However, if the Contractor is not satisfied with an IPC, he may refer it to the Engineer for a determination. There seems to be no corresponding provision in respect of FPCs.

Unfortunately, the pre-release version of the FIDIC White Book 2017 is difficult to reconcile with the pre-release version of the FIDIC Yellow Book 2017 as it obliges the Engineer to act independently. Mandatory language is now used. Sub-Clause 3.9.3 states, “…If the Consultant is authorised under the Works Contract to certify, determine or exercise discretion in the discharge of its duties then the Consultant shall act fairly as go between [sic] the Client and the [C]ontractor, exercising independent professional judgement and using reasonable skill, care and diligence”.

Employer’s approval

The position is further complicated where the Engineer is obliged to obtain the Employer’s approval before, for example, agreeing or determining an extension of time and/or additional costs, or issuing Variations (under the FIDIC Red Book 1999 Particular Conditions or as set out in Sub-Clause 3.1 of the FIDIC Pink Book 2010). Under Sub-Clause 3.5 the Engineer is obliged to make a fair determination, but if the Employer does not approve that fair determination, the Engineer cannot make it. This leaves the Engineer in a very difficult position. He should not make a determination he thinks unfair but as the Employer’s agent he ought to do as he is told by his principal.

In practice, what appears to happen is that the Engineer does nothing and the matter is referred to the Dispute Board to resolve where a Dispute Board is provided for. Sub-Clause 20.1 of the FIDIC Pink Book 2010 states that “If the Engineer does not respond within the timeframe defined in this Clause⁷, either Party may consider that the claim is rejected by the Engineer and any of the Parties may refer to the Dispute Board in accordance with Sub-Clause 20.4”.

However, it is arguable that, by failing to approve the fair determination, the Employer has interfered with, or prevented, the Engineer from carrying out the duties assigned to him in the Contract .  If done unreasonably, this may be considered a breach of contract by the Employer.  Further, if the contract machinery for extending time for Employer risk and shared risk events is rendered inoperable by such an act of prevention, time may be set at large, entitling the Contractor to a reasonable time within which to complete the Works and defeat any claim for liquidated damages.  This may happen if, for example, there is no recourse to a Dispute Board because one has not been appointed by the date stated in the Appendix to Tender (under the FIDIC Red Book 1999) or Contract Data (under the FIDIC Pink Book 2010).

Conclusion

The lack of clarity concerning the Engineer’s role in the FIDIC form has been criticised since 1999, and it is obvious to see why. Employers generally wish to have full control over their agents, whilst Contractors are concerned that the Engineer’s determinations will naturally favour the Employer. As currently drafted, this can cause problems for all concerned. Whilst the problems have been recognised in the pre-release version of the FIDIC Yellow Book 2017, the requirement upon the Engineer to act “neutrally” when making a determination is likely to raise many more questions. Further, an increase in payment disputes is to be predicted where the Engineer is obliged to issue Interim Payment Certificates and Final Payment Certificate fairly but not neutrally.

¹There is no express obligation of fairness in any other contractual provision including, for example, Taking-Over under Sub-Clause 10.1.
²Although the Employer may not replace the Engineer with a person against whom the Contractor raises reasonable objection.
³[1974], AC 727. Lord Reid at page 737: “The building owner and the contractor make their contract on the understanding that in all such matters the [Engineer] will act in a fair and unbiased manner and it must therefore be implicit in the owner’s contract with the [Engineer] that he shall not only exercise due care and skill but also reach such decisions fairly, holding balance between his client and the contractor”. Lord Morris at pages 740-741: “Being employed and paid by the owner [the Engineer] unquestionably has in diverse ways to look after the interests of the owner. In doing so he must be fair and he must be honest. He is not employed by the owner to be unfair to the contractor”.
⁴[2005] EWHC 1018 (TCC).
⁵[2006] EWHC 89 (TCC).
⁶“Neutral” is defined in the Oxford English Dictionary as “Not belonging to, associated with, or favouring any party or side”.  “Impartial” is defined similarly in the Oxford English Dictionary as “Not partial; not favouring one party or side more than another; unprejudiced, unbiased, fair, just, equitable. (Of persons, their conduct, etc.)”.
⁷42 days.
⁸Roberts v Bury Improvement Commissioners [1870] L.R. 5 C.P. 310 – Blackburn J. “…it is a principle very well established at common law, that no person can take advantage of non-fulfilment of a condition the performance of which has been hindered by himself …; and also that he cannot sue for a breach of contract occasioned by his own breach of contract…”.

In this article Corbett & Co. Director Andrew Tweeddale addresses whether sub-clause 20.5 is a condition precedent to the commencement of an arbitration or whether it is an obligation, the breach of which will not affect the jurisdiction of the arbitral tribunal to resolve the dispute.

This article addresses whether sub-clause 20.5 is a condition precedent to the commencement of an arbitration or whether it is an obligation, the breach of which will not affect the jurisdiction of the arbitral tribunal to resolve the dispute.

Click here to read the full article originally published in The International Construction Law Review in 2016.

How important is it for an Employer to give a Sub-Clause 2.5 notice of a set-off or cross-claim under the FIDIC Red Book form of contract? Very, according to the Privy Council in NH International (Caribbean) Limited v National Insurance Property Development Company Limited . It found that: o Sub-Clause 2.5 applies to any claims the Employer wishes to make. o The Employer must make such claims promptly and in a particularised form. o Where the Employer fails to raise a claim as required, the back door of set-off or cross-claims is firmly shut. The case also serves as a warning to Employers who take a relaxed view towards their obligation under Sub-Clause 2.4 to provide reasonable evidence of the financial arrangements they have made and are maintaining to pay the Contract Price. It doesn’t matter how wealthy or important the Employer is (it may be a Government, company or individual with very substantial funds) detailed financial information must still be provided.

How important is it for an Employer to give a Sub-Clause 2.5 notice of a set-off or cross-claim under the FIDIC Red Book form of contract?  Very, according to the Privy Council in NH International (Caribbean) Limited v National Insurance Property Development Company Limited[1].  It found that:

• Sub-Clause 2.5 applies to any claims the Employer wishes to make.
• The Employer must make such claims promptly and in a particularised form.
• Where the Employer fails to raise a claim as required, the back door of set-off or cross-claims is firmly shut.

The case also serves as a warning to Employers who take a relaxed view towards their obligation under Sub-Clause 2.4 to provide reasonable evidence of the financial arrangements they have made and are maintaining to pay the Contract Price.  It doesn’t matter how wealthy or important the Employer is (it may be a Government, company or individual with very substantial funds) detailed financial information must still be provided.

The key facts

• The case concerned two appeals from the Court of Appeal of the Republic of Trinidad and Tobago.
• On 6 March 2003 a contract based on the FIDIC Red Book for the construction of a hospital in Tobago had been entered into by National Insurance Property Development Company Limited (the “Employer”) and NH International (Caribbean) Limited (the “Contractor”) for an original Contract Price of TT$118 million.
• The works commenced in March 2003 with an original completion date of March 2005.
• The Contractor first suspended work in September 2005 and then terminated the contract in November 2006.
• The disputes were referred to arbitration.
• Dr Robert Gaitskell QC was appointed as sole arbitrator in October 2005 and made five awards.
• Two issues were challenged (i) the Contractor’s entitlement to terminate (which was decided in his second award), and (ii) quantum (which was decided in his third award).

The Contractor’s entitlement to terminate

Sub-Clause 2.4 states:

“The Employer shall submit within 28 days after receiving any request from the Contractor, reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price (as estimated at that time) in accordance with Clause 14 [Contract Price and Payment]….”.

As the works were executed the cost of the project was rising and so in September 2004 the Contractor quite sensibly requested that the Employer provide evidence of its financial arrangement under Sub-Clause 2.4 of the contract, and this further evidence was provided in December 2004.  A further request was made by the Contractor in April 2005 and this was provided in July 2005 but on a rather unusual “without prejudice” basis.  The Contractor understandably queried the “without prejudice” nature of the response and asked whether the Employer had obtained Cabinet approval for payment of the sums under the contract (as other contracts showed that Cabinet approval was needed, for public policy reasons, before money could be paid).  No response was received and so the Contractor suspended work in September 2005.

In October 2006 (over a year later) the Employer wrote stating that it would meet the contractual financial requirements for completion of the project. The Contractor patiently requested confirmation that the Cabinet had approved the funds but again no response was received.  So, in November 2006 the Contractor terminated the contract for a failure by the Employer to provide reasonable evidence that financial arrangements had been made and maintained. The Employer disputed the termination.

In April 2007, the arbitrator found that the Contractor had been entitled to terminate as there was no “reasonable evidence that financial arrangements had been made and maintained” to pay the sums referred to in the documentation provided.  Of Sub-Clause 2.4 the arbitrator wrote in his second award:

“The mere fact than an Employer is wealthy is inadequate for the purpose of Sub-Clause 2.4.  Similarly, the mere fact than an Employer has good reasons for wanting a project completed does not itself mean he has made and maintained the necessary financial arrangements.  Accordingly, the evidence given at the hearing to the effect that the [Employer] has very substantial funds is, prima facie, insufficient by itself for satisfying 2.4. Does the mere fact that the [Employer] has funds in general mean it has “made arrangements” enabling it to pay? The answer emerging from the evidence … as regards the significance of cabinet approval, is that (quite properly, and for very good public policy reasons) the [Employer] cannot pay large sums of public money in respect of cost overruns on construction contracts unless cabinet approval is given in advance or, perhaps, retrospectively. The issue of cabinet approval cannot simply be ignored. It is, at some point, an essential element of any “arrangement” to pay.

What was required was evidence of “positive steps” on the part of the Employer which show that financial arrangements had been made to pay sums due under the contract.

The High Court[2] agreed but the Court of Appeal[3] did not on the basis that the arbitrator had been demanding the “highest assurance” of evidence rather than mere “reasonable evidence” and accused the arbitrator of giving too little weight to certain evidence.

However, the Privy Council found that the arbitrator had made no error in law.  The arbitrator’s conclusion that insufficient evidence had been provided was one of fact not law, and therefore it was not open to a court to interfere with, or set aside, his conclusions on such an issue.  It stated:

“Where parties choose to resolve their disputes through the medium of arbitration, it has long been well established that the courts should respect their choice and properly recognise that the arbitrator’s findings of fact, assessments of evidence and formations of judgment should be respected, unless they can be shown to be unsupportable. In particular, the mere fact that a judge takes a different view, even one that is strongly held, from the arbitrator on such an issue is simply no basis for setting aside or varying the award. Of course, different considerations apply when it comes to issues of law, where courts are often more ready, in some jurisdictions much more ready, to step in.”

The Contractor’s termination for the Employer’s breach of Sub-Clause 2.4 was therefore upheld.

As an aside, the obligation under Sub-Clause 2.4 relates to the Contract Price which is defined as “the price defined in Sub-Clause 14.1 [the Contract Price], and includes adjustments in accordance with the Contract”.  Often the Employer and Contractor will have differing views on the amount of the Contract Price, as is apparent in this case where the Contractor requested evidence of the ability to pay TT$286 million, and the Employer wrote back with reference to its estimate of TT$224 million.  The Privy Council agreed with the Court of Appeal who ruled that TT$224 million was the correct sum as this had been certified by the Engineer and ultimately verified by an Independent Quantity Surveyor.

Financial claims

Whilst the matter of the termination was being appealed the arbitrator heard submissions on quantum and issued his third award.

The Contractor claimed its financial losses arising out of the termination; in response the Employer submitted various counterclaims.  The Contractor argued that the Employer’s counterclaims were barred for a lack of notice under Sub-Clause 2.5.  In fact, the first the Contractor had heard of the counterclaims was during the arbitration proceedings!

Sub-Clause 2.5 states:

“If the Employer considers itself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract … the Employer or Engineer shall give notice and particulars to the Contractor… 

The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim …

The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount … to which the Employer considers himself to be entitled.  The Engineer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor …

This amount may be included as a deduction in the Contract Price and Payment Certificates.  The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this sub-clause”.”

In November 2008 the arbitrator found that notice was not required for the Employer’s counterclaims because “clear words are required to exclude common law rights of set-off and/or abatement of legitimate cross-claims and” and (by implication) the words of Sub-Clause 2.5 were not clear enough.  The High Court[4] and the Court of Appeal[5] agreed with the arbitrator.

The Privy Council took a different view.  It found the words of Sub-Clause 2.5 couldn’t be clearer.

• Sub-Clause 2.5 applies to any claims the Employer wishes to make (whether or not they are intended to be relied on as set-offs or cross-claims).
• The Employer must make such claims “as soon as practicable” and in a particularised form. If the Employer can rely on claims which were first notified well after that, there would be no point to the first two parts of Sub-Clause 2.5.  Further, if the Employer’s claim is allowed to be made late, there is no method by which it could be determined, as the Engineer’s function is linked to the particulars, which in turn must be contained in a notice, which in turn has to be served “as soon as practicable”.
• Where the Employer fails to raise a claim as required, the back door of set-off or cross-claims is firmly shut in accordance with the final words of the Sub-Clause which read “The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this sub-clause”.

However, with reference to Hobhouse LJ in Mellowes Archital Ltd v Bell Products Ltd.[6] the Privy Council did concede that Sub-Clause 2.5 does not preclude the Employer from raising an abatement – e.g. that the work for which the contractor is seeking a payment was so poorly carried out that it does not justify any payment, or that it was defectively carried out so that it is worth significantly less than the contractor is claiming.

The third award was therefore remitted to the arbitrator with a recommendation that any sums which (i) were not the subject of appropriate notification complying with the first two parts of Sub-Clause 2.5 and (ii) cannot be characterised as abatement claims as opposed to set-offs or cross-claims, must be disallowed.

Conclusion

In summary, there is no excuse for poor contract administration.  Employers should ensure that notices are given on time and, when asked to do so, provide evidence that financial arrangements to pay the Contract Price have actually been made and are being maintained.  If there is in any doubt about the Contract Price ask the Engineer to certify the sum and if necessary seek an independent opinion.

[1] [2015] UKPC 37

[2] Claim No. CV2007-02224

[3] C.A. No. 281 of 2008

[4] Claim No. CV2008-04998

[5] Civil Appeal No. 246 of 2009

[6] [1997] 58 Con LR 22, 25-30

On 27 May 2015, the 160-page reserved judgement of the Singapore Court of Appeal (“CA”) was handed down in Persero 2 - PT Perusahaan Gas Negara (Persero) TBK (“PGN”) v CRW Joint Operation (“CRW”)[1]. It will be regarded a triumph for contractors wishing to enforce DAB decisions. The CA ruled that the interim award issued by the arbitral tribunal ordering enforcement of the DAB’s decision should stand. Using the concept of an “inherent premise”, the CA made two important findings: 1) it was not necessary for the Contractor to refer the failure to pay (the secondary dispute) back to the DAB; and 2) it was not necessary for him to refer the merits (the primary dispute) in the same single arbitration as his application to enforce.

On 27 May 2015, the 160-page reserved judgement of the Singapore Court of Appeal (‘CA’) was handed down in Persero 2: PT Perusahaan Gas Negara (Persero) TBK (‘PGN’) v CRW Joint Operation (‘CRW’)[1]. It will be regarded a triumph for contractors wishing to enforce DAB decisions. The CA ruled that the interim award issued by the arbitral tribunal ordering enforcement of the DAB’s decision should stand. Using the concept of an “inherent premise“, the CA made two important findings:

• it was not necessary for the Contractor to refer the failure to pay (the secondary dispute) back to the DAB; and
• it was not necessary for the Contractor to refer the merits (the primary dispute) in the same single arbitration as his application to enforce.

The 64-page judgement of Chief Justice Sundaresh Menon (with whom Justice Quentin Loh agreed) forms the majority judgement of the CA (‘CA Majority’). Justice Chan Sek Keong (‘CA Dissenting Judge’) delivered a 96-page dissenting judgement. The CA Majority upheld:

• the interim award ordering PGN to pay CRW c.US$17m (‘the Adjudicated Sum’); and
• the lower court’s order granting CRW leave to enforce the interim award in the same manner as a court judgement.

By way of background, the DAB in November 2008 made a decision ordering PGN to pay CRW the Adjudicated Sum. PGN served a notice of dissatisfaction (‘NOD’). In 2009, CRW sought to enforce the Adjudicated Sum without referring the merits to arbitration. The arbitral tribunal, by a majority, issued a final award enforcing the Adjudicated Sum. The High Court set aside the award and the Court of Appeal upheld that judgement with an endorsement that it would be permissible to enforce provided the merits were also referred in the same arbitration. In 2011, pursuant to the CA’s guidance in Persero 1, CRW started arbitral proceedings again, this time seeking to enforce the DAB’s decision in an interim award as well as referring the merits to arbitration. Again, there was a majority award enforcing the DAB’s decision. This time, both the High Court and the CA Majority agreed with the arbitrators.

Interpretation of Sub-Clause 20.4 of the 1999 Red Book

The CA Majority emphasised that “it may be vital that parties promptly comply with a DAB decision” and that “it is of general importance that contractors are paid promptly where the contract so provides“. It summarised its interpretation of the effect of a NOD on a DAB decision by holding:

• a DAB decision is immediately binding once it is made;
• the parties are obliged to give effect to it promptly until such time as it is overtaken or revised by either an amicable settlement or a subsequent arbitral award;
• a NOD does not and cannot displace the binding nature of a DAB decision or the parties’ concomitant obligation to promptly give effect to and implement it.

These conclusions were also reached by the South Gauteng High Court in South Africa in two recent cases.[2] While this author agrees with all three points, they do not help with the next stage of enforcing that decision nor with resolving the issues in Persero 2 or any other similar situation.

Point 1: Is it necessary to refer the secondary dispute back to the DAB?

In order to get around the drawn out process of the necessity of a re-referral to the DAB (which arguably arises as a result of the first sentence of Sub-Clause 20.6), the CA Majority drew upon two strands of support:

• an article written by Christopher Seppälä[3] (one of FIDIC’s contract draftsmen) and
• the FIDIC Guidance Memorandum[4] dated 1st April 2013 (‘FIDIC Guidance’).

The CA Majority concluded that:

• there was an inherent premise embedded within a DAB decision that a sum to be paid was payable forthwith; and
• here the dissatisfaction expressed in the NOD inherently extends to the requirement that payment of the Adjudicated Sum be made forthwith and so there is nothing further to be referred back to the DAB.

Whilst at first sight the concept seems an ingenious and neat mechanism to avoid the nonsense, there are some difficulties with the logic underlying it. Both the FIDIC Guidance and the publications by Mr Seppälä explain that it was FIDIC’s intention that “binding” but not “final” DAB decisions should be capable of reference to arbitration under Sub- Clause 20.6 – without Sub-Clauses 20.4 [Obtaining a DAB’s decision] and 20.5 [Amicable Settlement] being applicable. The author considers that to be irreconcilable with the “black and white” of the 1999 Red Book contract, because the only clause in the General Conditions concerning the enforceability of DAB decisions which disapplies Sub-Clauses 20.4 and 20.5 is Sub-Clause 20.7.

The author considers that, properly analysed, neither of the above strands relied upon by the CA Majority support their judgement. Whatever was intended by FIDIC is irrelevant. It is the wording of the contract itself that needs to be interpreted by reference to the intentions of the parties at the time of entering into the contract.

So where does the concept of an inherent premise come from?

The CA Majority have not adequately explained the concept of the “inherent premise“. It is not clear whether this is a rule of law or construct particular to Singapore. Is it akin to an implied contract term at common law? In England, there will be no implied term unless that term is necessary and would have been obviously so to an independent observer at the time when the parties entered into their contract.

There are said to be two inherent premises – one in the DAB’s decision and one in the NOD. Is that something that both parties would have assumed to be so at the time of entering the contract? Are they so obvious that they should be implied? This author believes that the answer is no. The CA Majority’s concept that the inherent premise is generated at the time of the DAB decision therefore appears to be entirely novel.

However, a much more cogent objection to the CA Majority’s finding is the fact that Sub-Clause 20.4 expressly requires that the NOD shall set out the matter in dispute and the reason(s) for the party’s dissatisfaction. If the NOD does not do so with respect to the payment term, then no inherent premise should be implied.

Point 2: Is it necessary for there to be a single arbitration dealing with both the merits and non-payment of the DAB’s decision?

In Persero 1, the CA held that the 1999 Red Book:

“requires the parties to finally settle their differences in the same arbitration, both in respect of the non-compliance with the DAB’s decision and in respect of the merits of that decision…consistent with the plain phraseology of Sub-Clause 20.6 which requires the parties” disputes in respect of any binding DAB decision which has yet to become final to be “finally settled by international arbitration”. Sub-Clause 20.6 clearly does not provide for separate proceedings to be brought by the parties before different arbitral panels even if each party is dissatisfied with the same DAB decision for different reasons.”

The CA Majority, disagreeing with the CA in Persero 1, found that a paying party’s failure to comply with a binding but not final DAB decision is itself capable of being directly referred to a separate arbitration under Sub-Clause 20.6. The Majority CA reasoned that as the NOD (through the implied premise above) addressed the need to make prompt payment of that sum:

“the dispute over the paying party’s failure to promptly comply with its obligation to pay the sum that the DAB finds it is liable to pay is a dispute in its own right which is capable of being “finally settled by international arbitration”.

In order to resolve this issue, it is necessary in the first place to resolve the issue of whether enforcement of a binding but non-final decision can be “finally settled” by arbitration. In this author’s 2012 paper “Mind the Gap“[5], it was argued that following a NOD, a DAB decision will amount only to interim relief because the decision must be referred to arbitration to finally resolve the dispute. This author further argued that it follows that an arbitral tribunal should not issue a final award in relation to interim relief. Accordingly, this author disagrees with the judgement of the CA Majority that it is appropriate for a final award to be given (for the purposes of enforcement only) in a separate arbitration.

The Dissenting Judgment

The CA Dissenting Judge considered that the interim award should have been set aside because:

• The secondary dispute is not a dispute that was referable to arbitration under 20.6;
• The arbitrators had no mandate to issue the interim award;
• Even if they did have the mandate, the interim award was, and was intended to be, a provisional award that fell outside the ambit of an “award” as defined in s.2 of the Singapore International Arbitration Act (‘IAA’) and therefore was not enforceable under s.19 of the IAA in the same manner as a judgement.

The length of this article does not permit a detailed examination of this extensive but minority judgement.

Conclusion

The international construction community most likely agrees that, as a matter of policy, it is desirable for a DAB’s decision to be enforceable. Many commentators have gone into print with arguments to fit this policy desire. The CA Majority have clearly been influenced by much of this literature. Whilst those same commentators (and indeed anybody wishing to enforce a DAB’s decision) may be rejoicing, this author finds that Persero 2 offers a CA Majority judgement that lacks intellectual rigour. Whilst it may be the last word from Singapore; it certainly does not represent the last word in this debate.

Please get in touch at joanne.clarke@howardkennedy.com or victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] [2015] SGCA 30.

[2] Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd JV v  Bombela Civils JV (Pty), SGHC Case No. 12/7442 which was then affirmed in the case of Tubular Holdings (Pty) Ltd v DBT Technologies (Pty) Ltd, Case No. 06757 / 2013.

[3] “Sub-Clause 20.7 of the FIDIC Red Book does not justify denying enforcement of a ‘binding’ DAB decision” (2011) 6(3) CLInt 17

[4] FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract dated 1st April 2013

[5] 5 [2012] Int ALR 4 153.

Rumour reaches us that the Multilateral Development Banks (MDBs) behind the Pink Book, FIDIC’s harmonised version of the 1999 Red Book, will discontinue the experiment. Should we be sorry to see the back of the Pink Book? We think not.

Rumour reaches us that the Multilateral Development Banks (MDBs) behind the Pink Book, FIDIC’s harmonised version of the 1999 Red Book, will discontinue the experiment. Should we be sorry to see the back of the Pink Book? We think not.

The idea would be to return to the Red Book with each MDB developing its own particular conditions.

The fragile consensus between the banks was already unravelling: the 2010 edition already had six bank-specific versions of clauses 15.6 to 16.2 on the subject of bribery and corruption.

The creations of committees are notoriously odd. The more independent and strong-willed the representatives of the committees, the odder will be the result. MDBs – and there were nine of them involved in the first version in 2005 – can be notoriously stubborn. So it would be no surprise to learn that their amendments to the Red Book produced some oddities.

However, to be fair, the Pink Book also gave birth to some interesting ideas which FIDIC would do well to consider when drafting the 2^nd editions of the Red, Yellow and Silver Books, a process now under way.

Below we consider a sample of both MDB oddities and also some it its good ideas.

Oddity #1: Contractor Control of the Commencement Date

The “stand-out” oddity relates to the Commencement Date. The amendments to clause 8.1 effectively put the Contractor in charge of when both work and the Time for Completion start. The Commencement Date can only be given when both parties have agreed that four precedent conditions have been fulfilled. Two of these are under the control of the Contractor, namely the signature of the Contract Agreement by the Contractor and the payment of the advance payment which depends on the provision by the Contractor of the advance payment guarantee.

The result is that if it benefits a Contractor to delay the start date – for example to give himself additional mobilisation time or in order to avoid a winter period – he can do so simply by delaying provision of the guarantee.

Better still for the unscrupulous, if the notice and instruction to commence are not provided within 180 days, the Contractor can terminate for Employer default and claim his lost profit on the job! This is apparently so even if the delay was due to the Contractor withholding his guarantee.

Of course, legal systems would resist this extraordinary result. Good faith doctrines would no doubt be mobilised in the civil law world to try to prevent a windfall result. Prevention principles might help out the Employer.

The question is: what were the draftsmen thinking when they added this to the MDB form? It was not in the original 2005 edition. And: who was lobbying the MDBs on behalf of contractors? They plainly did a very good job.

Good Idea #1: Define the Term “Profit”

The Pink Book defines as 5% the profit to which the Contractor is entitled as part of “Cost plus profit”. This avoids the 10 instances of “reasonable profit” that appear in the Red Book with all the accompanying room for uncertainty and argument. (Should “reasonable profit” be based on any profit figures in the contract, or the Contractor’s tender calculations, or current market profit levels or the Contractor’s own average historical profitability or indeed the profitability of the particular project?)

There are 71 “reasonables” and “reasonablys” plus two “unreasonablys” still left to argue about but the MDBs have taken a step in the right direction.

Oddity #2: The Contractor Chooses his Bonding Bank

The contractors’ lobby appears to have succeeded regarding bonds and guarantees. Clauses 4.2 and 14.2 have been amended so that contractors can provide performance and advance payment guarantees from any “reputable bank or financial institution selected by the Contractor”. The same applies to retention bonds which, by clause 14.9, the Contractor is entitled to substitute for a cash retention on taking-over.

As the MDBs know better than most, the value of bonds does not depend only on the repute of the bank but also on the attitude of the courts. The courts appear to be very willing to intervene on behalf of a contractor to block payment. Other countries have the same problem – or safeguards – depending on your point of view.

The fact is that if the point of the bond is to provide security nearly equivalent to cash in hand, or at least security obtainable “on demand”, then it matters where it comes from. Employers should be careful to ensure that the bond will be readily cashable. These amendments effectively prevent that. It is particularly odd that amendments made by funders for their client Employers should insist on bonds in lieu of cash retention; and then undermine the value of those bonds.

Good Idea #2: A Timescale for the Engineer’s Determination

The obligation on the Engineer to make determinations promptly is specified in clause 3.5. He has 28 days. The consequence of not making a determination in relation to a claim within 42 days is spelt out in clause 20.1: the claim may be treated as rejected and the matter may be referred to the dispute board. This is a welcome clarification: it was generally understood that silence could be treated as a rejection; but there was much room for argument as to the required length of the silence and the effect of a late determination.

Oddity #3: Contractor Receives Profit if Project Cancelled

It is odd that the MDBs should volunteer that Employers who cancel the project and terminate for convenience under clause 15.5 should have to compensate contractors for their lost profit as if the termination were a default.

The 1999 editions – and, I would imagine, the 2^nd editions will do the same – require Employers to refund to Contractors their costs and pay for their demobilisation but they do not award profit. It was accepted that Contractors signing FIDIC contracts took the risk that their clients might cancel the project for one reason or another. An omission is a cancellation of part only of the project: however, here the Pink Book does not award lost profit on the omitted work.

Clause 16.4 no longer refers expressly to loss of profit but there can be little doubt that a right to be paid “the amount of any loss or damage suffered by the Contractor as a result of this termination” would include profit.

Good Idea #3: Time Limit for Employer’s Claims

The Red Book imposes tough time-limits and draconian sanctions on Contractor claims; but imposes neither on the claims of Employers. It seems right and a little more balanced to impose a time-limit on the Employer’s notices of claim. Even though there is no express sanction attached to a failure to notify, the 28-day obligation reduces the contrast between the regimes applying to Contractors and Employers.

Conclusion

Whether the Pink Book continues to a new edition or not, it has certainly produced some good ideas as well as some curiosities. Harmony may be desirable in general but perhaps not when it comes to standard forms.

For a full list of the differences between the Red Book 1999 and the Pink Book 2010,click here

What is the point of a variations clause? It is almost inevitable that, however well thought through a construction project is at design stage, when it comes to be built, there will be a need for some variations. The FIDIC

What is the point of a variations clause?

It is almost inevitable that, however well thought through a construction project is at design stage, when it comes to be built, there will be a need for some variations. The FIDIC 1999 Red, Yellow and Silver Books, for example, devote an entire chapter to the subject (Clause 13 [Variations and Adjustments]).

At least under English law an employer is not entitled unilaterally to vary the original works unless the new work is of a kind contemplated by the clauses of the contract which provide for the ordering of extras. The purpose of a ‘variation clause’ is to enable an employer to avoid having to enter into a new contract with the same contractor, or perhaps another contractor, to have him perform the variation. If the employer were to approach a new contractor, he would face re-tendering costs, possible increases in prices, delay, and clashes between the original and new contractors on site. If on the other hand the employer is able to vary the original contract, costs and inconvenience may be kept to a minimum.

The contractor may argue however that the nature of the proposed varied works falls outside the scope of his original pricing mechanism, and he should be properly compensated for that. Therefore, arguably, a well-drafted variations clause will address the type of changes that that the employer may instruct and provide a clear mechanism for valuing them.

What does the FIDIC Variation Clause say?

A variation is defined in the FIDIC Red Book as meaning

“any change to the Works, which is instructed or approved as a Variation under Clause 13 [Variation and Adjustments].”

Sub-Clause 13.1 of the FIDIC Red Book provides that:

“Variations may be initiated by the Engineer at any time prior to issuing the Taking-Over Certificate for the Works, either by an instruction or by a request to the Contractor to submit a proposal.”

The Sub-Clause goes on to provide that the Contractor “shall execute and be bound by each Variation“. The only exception which enables the Engineer to cancel, confirm or vary the instruction is where the Contractor promptly gives notice and particulars to the Engineer stating that he “cannot readily obtain the Goods required for the Variation“. The Sub-Clause goes on to list what a Variation “may” include. From the wording it is not clear whether the word “may” is intended to mean that the list that follows is an exhaustive or non-exhaustive one although the latter is more likely. Sub-Clause 12.3 of the Red Book provides a mechanism to the Engineer to evaluate instructed Variations. The valuation clause is quite difficult to interpret but is not the subject of this short article.

Neither the FIDIC Yellow Book nor the Silver Book contains a list of possible Variations like the one provided in the Red Book. Nor do they make provision for the valuation of Variations in the same way that the Red Book does. However Sub-Clause 13.1 of both the Yellow and Silver Books picks up on one of the scenarios in the Red Book list referred to above, namely that a Variation shall not comprise the omission of any work which is to be carried out by others. Therefore, unless it is considered that Variations under the Red Book are restricted to the categories listed, all the FIDIC Red, Yellow and Silver Book contracts allow the Employer to instruct a variation which the Contractor is then bound to execute. On a strict construction of Clause 13, there is no restriction on the nature or scope of additional work that can be instructed as long as it is a “change to the Works“.

Is the FIDIC Variation Clause Sufficiently Comprehensive?

What, therefore, is a change to the works? The Concise Oxford Dictionary defines ‘change’ as: “Making or becoming different; substitution of one for another variety“. Does that definition help? How different can the change make the project? What if the change makes the project an entirely different proposition to that which was tendered for? So, to take the extreme example posed in the title, if the employer wished the contractor to build an airport as a variation to a road project, would that be permissible?

Back in 1876, Lord Cairns in the English case of Thorn v London Corporation distinguished between additional or varied work that was contemplated by the contract, and work that was not. He described work not contemplated by the contract as “additional or varied work, so peculiar, so unexpected, and so different from what any person reckoned or calculated upon, that it is not within the contract at all” and concluded that such work would not fall within the variation clause.[1] Other cases in England have followed this approach.

In the United states a ‘cardinal-change’ doctrine has developed. Initially it referred to the legal principle by which a contractor is released from the obligation to work under the terms of a government contract if the government has made a major or cardinal change to that contract by directing the contractor to perform work not within its general scope. In some states the doctrine is now also recognised in relation to private contracts. The law has developed to the point in the US where in some states the doctrine also covers circumstances where a large number of small changes are instructed which individually would fall within the ambit of the variations clause, but which collectively have the effect of completely changing the scope of works.

Under the doctrine, when a contractor claims that there has been a cardinal change, it is essentially an assertion that the employer has breached the contract. The purpose of the doctrine is to provide a remedy for the contractor who feels obliged to execute changed or additional work despite his protest that the change is cardinal. A court addressing the issue of ‘cardinal-change’ and the contractor’s claim for damages would be likely to consider:

• The individual and cumulative impact of changes;
• The degree of added complexity and difficulty of the work;
• Any disruption caused to the contractor’s performance;
• The overall impact upon contract cost and time of performance; and
• The effect of change on compensation or risk allocation.

The American courts (using a similar approach to the English courts) would in effect ask whether the employer has made changes to a project beyond what the parties reasonably could have anticipated at the time the contract was entered into.

Plainly it will be a question of fact whether a change falls within the Thorn test for a legitimate variation or whether it crosses the threshold of a cardinal change. It is suggested that it would be inappropriate to set out in the FIDIC General Conditions an exhaustive set of criteria to aid in that determination. The question however is whether the principles referred to in Thorn or that of a cardinal change should find expression in the FIDIC conditions at all.

Conclusion

Having witnessed the consequences of employers’ attempts to impose a ‘cardinal change’ on contractors, in the author’s view it would be sensible for the FIDIC standard forms of contract to include in their ‘variation clause’ greater clarity on what does constitute a change, perhaps adopting wording derived from the Thorn test, and for the concept of a cardinal change to be expressly recognised. Major disputes might thereby be avoided.

Please get in touch at joanne.clarke@howardkennedy.com or victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] 1 App Cas 120.