INT ERIM DET ERM INA T IONS

Time is up fo r t he ind ep end ent Eng ineer

Th i s p a p e r wa s p r e p a r e d f o r a n AMIN Z b r e a kf a st o n 1 1 Ma y 2 0 1 0, t h e n it grew a bit.

The quality of mercy is not strain'd, It droppeth as the gentle rain from heaven Upon the place beneath. It is twice blest: It blesseth him that gives and him that takes.
Portia to Shylock, The Merchant of Venice Act 4, scene 1, 180-187

1.

Role of the Engineer Since the time of Thomas Telford and Isambard Kingdom Brunel (both Fellows of the Royal Society), and latterly the engineers from NASA who opened up space exploration, engineers have earned a place on a pedestal in public opinion. It is hardly surprising, therefore, that they enjoy considerable professional esteem. It is this esteem, and their undoubted professional skills, which resulted in the development of the special role of the Engineer in civil contracting. The ambitious civil engineering and infrastructure development for which both Telford (roads, bridges and aqueducts) and Brunel (his railway bridges, tunnels and SS Great Britain) were justifiably famous carried with them significant risks technological and financial risks, and inevitably the disputes which flowed from each of them. Technological risks were matters for which engineers could provide design solutions. Financial risks needed to be balanced between the parties. Disputes were another issue altogether. Ultimately, the challenge was to maintain the momentum of the project, while giving a workable decision on disputes until the whole substantive issue could be dealt with in court, or later in arbitration.

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These projects were funded by commercial interests, and constructed by workmen, both of whom relied on the skills of these engineers to deal appropriately with these three issues design and construction of the work, maintaining project cashflow and keeping disputes from derailing the project. There is little surprise that these men were given significant powers to maintain the integrity of their vision.1 Hudson famously identified eight duties of an Engineer:2 (1) to advise and consult with the employer as to an limitation which may exist as to the use of the land (2) to examine the site, sub-soil and surroundings (3) to consult with and advise the employer as to the proposed work (4) to prepare plans and specifications having regard to all the conditions which exist and submit them to the employer for approval (5) to elaborate the plans and specifications as instructed (6) to consult with and advise the employer as to obtaining tenders (7) to supply the builder with copies of the contract drawings and specification and to supply further drawings and instructions as may be necessary, supervise the work and see that the builder performs the contract (8) to perform his duties to his employer as defined by any contract with his employer or by the contract with the builder, and generally to act as the employers agent in all matters connected with the work and the contract, except where otherwise prescribed by the contract with the builder, as, for instance, in cases where he has under the contract to act as arbitrator or quasi-arbitrator .3 From that list, we can see that, in the first six duties, the Engineer is providing professional advice to the employer pursuant to an agreement for professional services. For the 7 th and 8 th, we can see that the Engineer is engaging with the contractor first as the employers agent, and second in an independent

It must also be remembered that Brunels vision also very nearly bankrupted a number of his backers. Throughout this paper, I refer to the Engineer for ease of reference. The role is effectively the same for the Architect, under a traditional appointment. The references to the Engineer as he are only in quoted material, for which I take no responsibility. See Hudsons Building Contracts (7th Ed) at p. 9. The list provided here is a summary.

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capacity for example where the Engineer is acting as arbitrator or quasiarbitrator. This is commonly what is referred to as the dual role of the engineer. He is the employers agent throughout, but with additional responsibilities of impartiality. Keating summarises the role in this way: The [Engineer] is engaged by the employer to act as his agent for the purpose of securing the completion of the works in an economical and efficient manner. He must perform these duties properly and if he fails to do so may be liable to the employer in damages. But in performing them he must act fairly and professionally in applying the terms of the construction contract The [Engineer] is required to act independently and honestly These obligations extend to such of the [Engineers] duties as require him to use his professional skill and judgment in forming an opinion or making a decision where he is holding the balance between his client and the contractor.4 The curious thing about the Engineer is that it is not a party to the contract under which it is to act fairly and professionally, impartially and honestly . That is a contract between the employer and the contractor. The only contract to which the Engineer is a party is the appointment agreement, which may or may not include Hudsons eight duties. This raises the interesting question of who is liable, and on what basis, if the Engineer fails to properly perform the duties to the relevant standards. Certainly, if the employer interferes in the Engineers discharge of its duties, the employer will be liable to the contractor for breach of an implied term of the construction contract. Similarly, the employer will be entitled to seek damages from the Engineer under the appointment agreement if the Engineer fails to perform the duties imposed under that contract. Where a contractor suffers loss through a failure by the Engineer which is not attributable to the employer (ie, it falls outside of the liability of a principal for the actions of an agent), then the issue will be whether or not the failure is one for which the employer is liable as principal,5 or as part of

4 5

See Keating on Construction Contracts (8th ed) at 13-012. See Sutcliffe v Thackrah [1974] AC 727.

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the Engineers independent capacity leaving a claim in tort, to which the issues of proximity discussed by Justice Glazebrook must then be applied.6 The more critical issue examined in this paper is whether that duty to act impartially when holding the balance between his client and the contractor under the construction contract is still realistic or if it is time to move on. 2. Interim determinations There are two specific areas where the Engineer may be required to act beyond the specific instructions of its principal, the employer: (1) when using professional skill and judgment certifying entitlements under the contract (eg achievement of completion, entitlement to progress payments and additional cost and time), and (2) when providing an interim decision on disputes. In each case, the courts have consistently held that these are not roles where the Engineer should be swayed by the interests of the employer alone; the Engineer must balance those interests. It should also be understood at the outset that this role is purely one of contract. There are, of course, construction contracts where there are simply two parties the employer and the contractor and there is no independent role for an Engineer certifier, disputes resolver.7 2.1 Certifications Due to the innate uncertainty of construction projects, there is the potential for considerable disagreement as to whether or not the contractor: (a) is entitled to be paid the claimed proportion of the contract sum, assuming that the contract allows for progress payments,

(b) has encountered some unforeseen even which may give rise to an entitlement to further time and/or payment, and (c) has completed the work, and what liquidated damages are payable, if any.

See Rolls-Royce New Zealand Limited v Carter Holt Harvey Limited & Genesis Power Limited CA259/02, Court of Appeal, 23 June 2004. Sutcliffe v Thackrah , referred to above, is also authority for such liability. See the FIDIC EPC/Turnkey form of contract ( the Silver Book) in which the Employer makes all such determinations.

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The perceived wisdom is that this is not simply a matter of applying the wording of the contract, but far murkier territory in which the Engineer has some element of discretion which must be exercised wisely. This also gives rise to an interesting question, not the subject of this paper, as to whether or not the exercise of such discretion is capable of subsequent review. Most dispute resolution clauses extend the arbitrators the power to open up and reconsider certifications by the Engineer,8 which rather calls into question whether or not these are genuinely discretions, or simply a neutral opinion of an existing contractual entitlement, capable of objective determination. 2.2 Dispute resolution Most standard forms of construction contract contain tiered dispute resolution processes, of varying complexity. Typically in the construction industry, this will start with a notice of dispute, which is then followed by a binding determination by the Engineer. If the parties are dissatisfied with the Engineers determination, the dispute may then be referred to mediation, and if that is unsuccessful, the entire matter may then be referred to arbitration. In some more complex processes, there is a separation between disputes over payment, which are determined through expedited adjudication, and other disputes which follow the default route.9 As the process is tiered, the parties cannot proceed directly to adjudication, mediation or arbitration without first referring the dispute to the Engineer, and similarly, no active steps may be taken in arbitration until the dispute has been at least referred to mediation. The critical issue for us is that first referral to the Engineer. 2.3 Project uncertainty From a practical perspective, construction contracts are generally expensive, complex (they can go on for a number of years) and uncertain. With the best will in the world, the design cannot be so detailed as to remove all uncertainty, and nor can it take account of every eventuality. Most construction contracts therefore contain frameworks to deal with these issues; for example, variation procedures to allow for changes to the
8 9

See, for example clause 20.6 of the FIDIC Red Book and clause 13.4 of NZS3910:2003. See clause 92 of the Government of Hong Kongs Conditions of Contract for the Airport Core Programme Civil Engineering, 1992 Edition.

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design instructed by the owner (either because the requirements have changed, or to deal with errors or omissions in the original design documents which the contractor priced); and claims procedures to deal with unforeseen events which impact on the contractors ability to carry out the work. In each case, instructions will be issued by the Engineer, and additional funds and extensions of time granted. This is undoubtedly the greatest source of construction dispute. In order to maintain the momentum of the works, and to keep costs and disruption to a minimum (and to maintain a positive relationship between the parties), some form of prompt and effective dispute resolution is required to prevent disputes from getting out of hand. Traditionally, the Engineer has been the first port of call for determining such disputes principally to take advantage of familiarity with the project and professionalism which transcends commercial interest, notwithstanding that it is the Engineers own decisions which are typically being questioned. 3. The standard forms The role of the Engineer is covered in varying detail in all standard forms of construction contracts. 3.1 Consultants appointment agreements The appointment agreements tend to vary as the standard forms are drafted, in the main, by the Engineers own professional organisations (eg, the Institute of Civil Engineers, the Federation of Consulting Engineers and ICENZ/APENZ); not surprisingly, these tend to be slanted in favour of protecting the Engineers interests, rather than providing for a fair or balanced allocation of responsibility.10 Most competent owners tend to draft their own forms of appointment, which specifically set out the duties of the Engineer, and the limits on their authority and any independent roles they may have.

10

More egregious examples are the obligations on the client to provide information and to co-operate with the Consultant in clause 3.4 of the CCCS form of consultants appointment favoured in New Zealand. This rather overlooks the fact that it is the clients project for which the Consultant is employed to provide services. The FIDIC Model Services Agreement (the White Book) goes a step further by including an indemnity by the client in favour of the consultant against the adverse effects of all claims including such claims by third parties which arise out of or in connection with the appointment agreement, regardless of how they might arise.

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The general discomfort in which infrastructure owners and developers hold the traditional dual role of the Engineer is evidenced by the practice of appointing an in-house employee to the role of Engineer,11 relegating the external consulting engineer to the subsidiary role of Engineers Representative, with only specific delegated powers from the Engineer.12 The growth in the use of EPC/Turnkey and Design and Construction forms of contract, which tend to do away with the traditional role of the Engineer, is also a case in point. 3.2 ICE 7th Edition The traditional approach is taken in the Standard Form of Civil Engineering Contract (7 th Ed) published by the Institution of Civil Engineers, which provides that the Engineer is to carry out the duties and exercise the authority specified or to be implied in the contract, save where the appointment agreement requires the employers approval.13 Interestingly, clause 2(1)(b) of the ICE conditions recognises that the Engineers duties and authorities can be constrained by the appointment agreement. Where there are such constraints, they are identified in the construction contract, so the contractor is well aware that the overall obligation to act independently has been modified in certain respects. The critical point to note, however, is that the impartial and independent dual role of the Engineer is one which is either expressed in the contract or implied by the common law, if appropriate. It may, of course, be modified by the express terms of the appointment agreement and the construction contract, or excluded altogether. Under earlier editions of the 7 th Ed of the ICE conditions of contract, the traditional first point of binding determination by the Engineer was retained. The introduction of a statutory right to adjudication at any time under Part II of the appallingly misnamed Housing Grants, Construction and Regeneration Act 1996 fundamentally changed that position. Initially, the

11

See Canterbury Pipe Lines v Christchurch Drainage Board (1979) 16 BLR 76, CA (NZ) for a discussion of the role of the Engineer discharged by an employee of the client. Not surprisingly, the Court of Appeal held that the Engineer must still be impartial and independent, notwithstanding his employee status. A difficult role on any estimation. See clause 2(2) of the Ice Conditions of Contract for an example of this subsidiary role. Any delegation of wider powers (eg to instruct variations) must be specifically delegated in writing in terms of clause 2(4). Clause 2(1)(a) & (b) of the ICE 7th Ed.

12

13

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right to adjudication was preconditioned in the conditions of contract by a determination by the Engineer. But this was ultimately acknowledged as being of questionable value and legality. The final form of the 7 th Ed allows for amicable negotiation, statutory adjudication and arbitration, with no role for the Engineer as disputes resolver. 3.3 NZS3910:2003 The most commonly used form of construction contract in New Zealand, Conditions of Contract for Building and Civil Engineering Construction (NZS3910:2003) published by Standards NZ takes a slightly contrary view, providing in clause 6.2.1 that the Engineer undertakes a dual role as (a) expert adviser to and representative of the Principal and (b) independently of either contracting party, fairly and impartially to make decisions entrusted under the contract and to value the work and to issue certificates. Somewhat lazily (and expensively for the Principal), NZS3910 treats all the contractors entitlements to claims as variations. This brings with it an automatic assumption that every claim carries rights to additional time, on-site and off-site overhead and profit by applying the relevant percentages. Where any dispute arises, NZS3910 recognises that the dispute may be the subject of adjudication under the Construction Contracts Act 2002, but continues to provide for tiered dispute resolution: (1) Engineers review, involving a formal decision (clause 13.2), followed by (2) mediation with the provision of a binding decision if agreement cannot be reached (clause 13.3 ), followed by (3) arbitration (clause 13.4 ). Somewhat surprisingly to many, notwithstanding that the reason for the dispute will frequently arise from the Engineers own actions (whether in the design or the administration of the contract), the Engineer determines disputes over all instructions, decisions and certificates made under the contract. 3.4 FIDIC Red Book The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer published by the International Federation of Consulting Engineers (FIDIC) in 1999 (affectionately known as the Red Book )

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reinforces that the Engineer is deemed to act for the Employer when carrying out duties or exercising authorities under the contract.14 However, in each case where the Engineer is to determine cost, make allowance for profit or grant an extension of time under the contract, the Engineer is first to consult with the parties (ie, the Employer and the Contractor) in an endeavour to reach agreement, failing which the Engineer is to make a fair determination in accordance with the contract, taking due regard of all relevant circumstances.15 There is no explicit requirement for the Engineer to be independent or impartial, though this almost certainly comes with the concept of a fair determination. Where there is a dispute, which will almost certainly arise out of such a fair determination, the matter is referred to a disputes adjudication board, followed by amicable settlement and arbitration.16 In practice, as with arbitration, a disputes adjudication board is unlikely to discourage a referral to adjudication, making the process rarely, if ever, used. 3.5 NEC3 The Engineering and Construction Contract is the third version of the New Engineering Contract (NEC3 ), published by the Institution of Civil Engineers in June 2005. The contract is an entire suite of forms of contract, all using the same terminology and a consistent approach to drafting and allocation of risk, for all aspects of construction from consultants appointments, to traditional employer design construction, design and construct, management contracts, short forms of contract for minor works, term contracts and forms of subcontract. The NEC3 suite of contracts has been accepted by the Office of Government Commerce for all public sector procurement, and it is being used for the development of the facilities for the London Olympics in 2012. It is fair to say that NEC3 has displaced the Joint Contracts Tribunal forms of contract as the most commonly used form of construction contract in the UK.

14 15 16

See clause 3.1. See clause 3.5 See clause 20. The disputes adjudication board (DAB) is independent, permanently sitting and informed throughout the project. The procedural rules set out in the Appendix provide for reasonably flexible processes, and the DAB is to provide a binding decision within 84 days.

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In New Zealand, NEC3 is important. Its minor works form of contract has been adopted by a number of network operators and infrastructure developers and it is only a matter of time before the full Engineering and Construction Contract form gains wider acceptance here. This is primarily due to the way in which the form of contract promotes partnering and fair dealing between the parties, and the wide range of options available in the one form of contract. Perhaps somewhat surprisingly for a contract published by a professional body representing the interests of engineers, NEC3 does away with the traditional role of the Engineer. This is split three ways. First, design is undertaken either for the Employer or the Contractor by a designer appointed independently from the contract. There is no reference to the designer in NEC3. Second, the project manager manages the contract for the employer, with the Supervisor ensuring that the works are carried out in accordance with the contract. Both the project manager and the Supervisor are employed and paid by the employer, and either or both may be in-house employees. In practice, the project manager is typically in-house, with the Supervisor being appointed from the consultants staff. Third, dispute resolution is primarily through interim adjudication by a jointly appointed adjudicator. Final determination is either in court or by arbitration. Mediation is, of course, available at any time. The introduction of statutory adjudication in the UK, and in New Zealand, has meant that the contractual adjudication is displaced by the statutory procedure. While adjudication is prompt, cost effective and usually right, it is a significantly more serious step than simply referring a disagreement to the Engineer for a decision. Notwithstanding the numbing expense of a recent, discontinued, High Court action, the construction industry in New Zealand is not particularly litigious. Most of us like to think that disputes can, and should be capable of being negotiated away, rather than litigated to the profit of others. Using the Engineer as a first port of call for dispute resolution is, in many ways, consistent with this informal approach. Instructing lawyers and issuing formal notices under statutory adjudication is certainly ratcheting up the dispute. Yet, NEC3 is actually achieving the reverse, in my view. The contract is one based on good faith, cooperation and mutual interest in the success of the project. Good faith obligations are entrenched in the core clauses, and they appear prominently. If the parties are unable to

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resolve the dispute in that context, then it seems to me that adjudication is the appropriate next step. Certainly, that seems to be the practice here. If the principal officers of the contracting parties cannot negotiate a settlement, and typically the principal officers are keen in this country to retain that level of control of any settlement negotiations, then the dispute is almost certainly better considered and an interim determination given by a genuinely disinterested third party. 3.6 Overall position of standard forms The standard forms in New Zealand have stuck with the traditional, dual role approach for the Engineer. Looking at the international forms, the dispute determining role is largely dead, mostly as a result of statutory adjudication. The independent certifying role is, perhaps, not so clear. 4. Can the Engineer genuinely be impartial? Looking at Hudsons duties, the Engineer inevitably juggles three competing interests, usefully set out in chronological order: (1) as designer under its appointment agreement, the Engineer prepares the designs for the works. These will be for the employers approval, consents (both resource and building consents), for tender and for construction. (2) as employers agent overseeing the work, and ensuring that the completed work meets the contractual requirements. (3) as impartial certifier and disputes determiner as already mentioned, the Engineer is to use appropriate professional judgment independently, and without fear or favour. The potential for conflict of interest is plain. The Engineer is first, designer. Then in the capacity of contract administrator, and employers agent, the Engineer issues instructions to deal with ambiguity, and makes determinations as to the liabilities of the parties where there is misunderstanding. Where there is an argument that such ambiguity, or even error, arises as a result of a failure in the Engineers design or contract administration, then the Engineer is in the unenviable position of issuing an instruction under the contract to deal with its own failure; at the cost of one or both of the parties. It may also then determine any dispute which arises from that instruction.

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Add to that mix the fact that the Engineer is paid by the employer, and on any estimation of conflict of interest, the Engineers ability to be impartial is hopelessly compromised. Two further factors have to be considered in this discussion; the first is that the Engineer insures for breaches of professional duty under professional indemnity insurance; and the second is that the trend has been for the design and supervision roles to be separated. On the first issue, most insurers will include in their exclusions any admission of liability on the part of the Engineer. So, if the Engineer becomes aware of potential liability, its obligations to the insurer require full disclosure and avoidance of any admission of liability. This puts the Engineer into a difficult position where it issues an instruction to rectify defective design and certifies additional time and payment to the contractor under the construction contract. The employer then enquires how the added cost and delay has occurred, to which the Engineer responds that the certification and decisions are ones for which the Engineer must act impartially. This leaves both the Engineer and the employer in a difficult position. To avoid the temptation for Engineers to design away their errors at the cost of the employer, either in the design development phase or through variations during the construction process, many owners separate the design function from the other two roles. This is principally by appointing an employee to the role of Engineer. The difficulty with this approach is that the designers are typically retained in the role of Engineers Representative, which simply presents the same issue hidden in a different role. The designers will still be issuing detailed designs, and will still be undertaking the bulk of the work in reviewing and recommending certifications to the Engineer. In my view, the potential for conflicts of interest are too significant to be waived away by professional niceties. Engineering consultancies undertake significant and complex projects which put their balance sheets and their insurances at risk. They are also increasingly appointed under fixed price consultancy agreements, which only add to the risk. To then suggest that they will overlook their own interests and the interests of their clients, who not only pay them but who will also look to them for any failure in the design, to then balance the interests of the parties in a way which is independent and impartial is wildly optimistic.

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To my mind, the independent and impartial certifier role should follow the independent Engineer as disputes resolver into the dustbin of history as an interesting relic of 19 th century thinking that just went on for too long. Unfortunately, that doesnt seem to be happening any time soon. 5. Is the Project Manager under NEC3 required to be impartial? The role of the Project Manager has come under judicial consideration in the Technology and Construction court in the UK on two occasions over the last five years. These decisions, both by Mr Justice Jackson, warrant closer examination. 5.1 Costain Ltd v Bechtel Ltd17 This case concerned the development of St Pancras Station in London as part of the Channel Tunnel High-Speed Rail Link. The contract selected for the project was NEC3, with provision for the parties to share in cost savings and overruns (what is commonly referred to as painshare/gainshare). The contractor was a consortium, lead by Costain. Bechtel was the lead partner in a consortium fulfilling the role of project manager. Somewhat interestingly, Bechtel was also subject to painshare/gainshare under its appointment by the employer, Union Rails (North) Limited. It is important to note that Union Rails was not a party to the litigation. Following a cost review of the project, Bechtel became concerned that it was becoming exposed to financial losses resulting from cost overruns under the painshare/gainshare arrangements. The project director for Bechtel, a Mr Bassily, called a meeting of all Bechtel staff at which he outlined the risk to the project, and more particularly Bechtel, if costs were not brought into check. Mr Bassily observed that there was a gap between the target cost and project outturn cost which needed to be reduced. Mr Bassily was not instructing his staff to disregard the express terms of the contract. It seems he was quite explicit on this point. However, he stressed the need to keep costs under control, and to disallow unjustified costs. As project managers, Mr Bassily commented, we had a right to challenge costs if it was right to do so. The instruction was given in the belief that it was the project managers role to act in the interests of the employer, and not to act impartially. That is not to say that the project

17

[2005] EWHC 1018 (TCC), 20 May 2005

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manager was to act otherwise than in accordance with the contract, or in good faith; simply that they represented the interests of the employer, and had no independent role to play. Inevitably, Costain got wind of the meeting, and sought an injunction requiring Bechtel to instruct its staff to disregard Mr Bassilys instructions and to discharge the functions of the project manager impartially and in good faith. The case reduced itself to the single issue of whether or not the project manager is to act impartially, or in the interests of the employer, when certifying payment under NEC3. The application for an injunction failed, but Mr Justice Jackson came to the conclusion (obiter dicta) that, while he could not decide the matter as Union Rail was not a party to the proceedings, it was at least arguable that the project manager was under a duty to act fairly and impartially between the employer and contractor.18 In expressing this view, Mr Justice Jackson started with the House of Lords decision in Sutcliffe v Thackrah,19 in which Lord Reid commented, in the context of the RIBA conditions of contract:20 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 owners contract with the [engineer] that he shall not only exercise due care and skill but also reach such decisions fairly, holding the balance between his client and the contractor. Mr Justice Jackson was not convinced that the NEC3 form of contract differed sufficiently from what he called conventional forms, and therefore the duty still applied. In the judges view, there were residual areas of discretion where the project manager was to exercise his judgment. To hold that he was not required to be impartial meant, in the judges view, that he would then favour the employer in every circumstance. Having established that there were these residual areas of discretion, his honour expressed the view that he was unable to find anything which militates

18

This approach was endorsed by Humphrey Lloyd QC, Some thoughts on NEC3 [2008] ICLR 468 at 476. [1974] AC 727. at p 737.

19 20

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against the existence of a duty upon the project manager to act impartially in matters of assessment and certification.21 The problem with this analysis is that Justice Jackson overlooked a number of issues: (i) while it may be appropriate to imply a duty to be impartial where the contractual circumstances require, the judge instead took the view there is a presumption that such an implied term applies. the RIBA conditions of contract, the contract in question in Sutcliffe v Thackrah, adopted a traditional role for the Engineer, including design, supervision, certification and dispute resolution. The same cannot be said for the project manager under NEC3; that is a significantly different role from the traditional Engineer.

(ii)

(iii) he assumed that the project manager was an Engineer, to which the implied terms applied he commented that the implied obligation of a certifier to act fairly, if it exists, arises by operation of law not as a consequence of custom. Applying this approach, regardless of what the Engineers appointment may say, if there is a certifying role by a third party, unless the contract provides otherwise,22 the certifier must always act impartially. It is not at all clear why the Engineer cannot simply apply the terms of the contract. In most construction contracts of any size, the contractors entitlements are spelled out with some clarity and at length. There is no discretion the contractors entitlements could as easily be applied by the employer, with no involvement from the Engineer.23 The difficulty is the starting point that, as a role has been identified, the implied terms of impartiality automatically apply. The alternative could as easily be that the role has been identified for clarity. The employer has already specifically undertaken in NEC3 to act in the spirit of mutual cooperation and good faith. (iv) he took no cognisance of the fact that Bechtel was itself subject to a painshare/gainshare obligation. Bechtel had a direct interest, indistinguishable from the employers, in the final cost of the work. Any assumption of partiality on the part of the employer in that case applied equally to Bechtel.

21 22 23

at para 46. as in the case of clause 2(1)(b) of the ICE Conditions of Contract. as in the case of the FIDIC EPC/Turnkey contract ( the Silver Book).

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There is, of course, the converse interpretation of the contract available; both Becthel and Union Rail had direct financial interests in keeping costs down. Bechtel, in its capacity as agent for Union Rail, was under a duty to act in good faith, and to apply the terms of the contract. If they failed to do so, whether of their own volition or under instruction from Union Rail, then that would be a matter for resolution at adjudication. To imply an obligation for impartiality, in circumstances where the project manager has a similar direct financial interest in reducing costs as the employer, seems to stretch a point. Had the contract referred simply to the Employer undertaking the certification roles referred to by the judge, one is left with the lingering suspicion that the obligation to act impartially would also be implied, which is difficult to see as commercially realistic. 5.2 Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd24 In this case, St James was a developer, using a construction management form of contract for a large residential development on the banks of the Thames. Under a construction management contract, the employer contracts directly with each trade, and those contracts are then managed by a construction manager. Unlike traditional head contract arrangements, there is a direct commercial relationship between the employer and what would traditionally be supply and specialist subcontractors. Scheldebouw had been appointed to design and install cladding systems on a number of buildings. Before the work had been completed, the employer wrote to Scheldebouw advising that it had discontinued the appointment of the construction manager, and that the employer would be fulfilling that role itself. Scheldebouw challenged this action, claiming that the employer had repudiated the contract by failing to appoint an impartial and independent construction manager. Mr Justice Jackson summarised the case law as follows:25 In many forms of building contract a professional person retained by the employer, and sometimes a professional person directly employed by the employer, has decision-making functions allocated to him ... Three propositions emerge from the authorities concerning the position of the decision-maker:
24 25

[2006] EWHC 89 (TCC), 16 January 2006 At paras 33 & 34.

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(1) The precise roles and duties of the decision-maker will be determined by the terms of the contract under which his is required to act. (2) Generally the decision-maker is not, and cannot be regarded as, independent of the employer. (3) When performing his decision-making function, the decision-maker is required to act in a manner which has variously been described as independent, impartial, fair and honest. These concepts are overlapping but not synonymous. They connote that the decisionmaker must use his professional skills and his best endeavours to reach the right decision, as opposed to a decision which favours the interests of the employer. It is interesting to note that the judge changed tack slightly between Costain v Bechtel and the Schledebouw cases. In the first, he spoke of residual discretion implying a contractual vacuum which was to be filled by the Engineers professional expertise and judgment, whereas in the second, he speaks of reaching decisions on matters where, at least potentially, the contractor and the employer have opposing interests. With respect, any interpretation of the contract which does not favour the contractors best case has the potential to give rise to opposing interests. The critical issue is, surely, whether or not it can reasonably be implied that the parties intended for the Engineer to have an independent role. In considering this issue, the relevant consideration is whether or not the employer could fulfil a similar function, as in the case of the FIDIC Silver Book and other forms of contract. The issue is, what does the contract provide, and in identifying a specific person to carry out certain functions, is that person simply acting as the employers representative, or is something additional necessarily to be implied? In the third point of his summary, Justice Jackson recognises that it is the right decision which is to be reached; not a partial one. Similarly, I would argue that it is not a subjective one, reached by applying a discretion. In my view, the judge completely overlooks the underlying commercial reality that parties to commercial contracts (particularly ones with significant obligations and benefits) mostly do the right thing. That is the point of binding contracts.

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In the Scheldebouw case, the construction manager was appointed on the employers behalf to oversee the works, and to carry out the following duties (which the judge found determinative of the role of decision-maker): (a) receiving estimates of the contractors claims for delay or disruption by the employer or construction manager, and accepting or rejecting such estimates. If the estimate was rejected, ascertain and certify a fair and reasonable adjustment (clause 9.4)

(b) if estimates for the expense or loss suffered as a result of the construction managers instructions are not agreed, ascertain and certify a fair and reasonable adjustment by reference to the contractors rates and a fair and reasonable extension of time (clause 10.5) (c) certifying extensions of time, after consultation with the architect (clause 13.5)

(d) certifying practical completion and rectification of defects, in each case with the architect (clause 14) (e) (f) interim payment, with the architect and cost consultant (clause 16.2) final accounts and certificate, also with the architect and cost consultant (clause 17.2)

No doubt a decision against the contractor would potentially give rise to a dispute. But is that sufficient to bring with it the implication that the construction manager is more than simply the employers agent? The first two duties arise as a result of default by the construction manager itself, which is hardly encouraging. The third, (extensions of time) is usually covered in detail and with some care by clear drafting and in any event in this case involved co-certification by the architect. In my view, the balance of the certifications dont involve the exercise of any discretion or decision making. They simply turn on the proper application of the terms of the contract. The other curious issue about the judges conclusions is that, if the construction manager was to act impartially as between the parties, the contract should provide for the employer to be consulted, or to make submissions. In each case, it is solely the contractor who makes a claim, provides an estimate or make submissions. There is no provision for consultation with the employer at all.

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6.

Conclusion Historically, it certainly was the case that the Engineer brought a detailed understanding of the construction industry, unquestioned expertise and was generally disinterested in certifications and the outcome of any disputes. However, it is questionable whether that continues to be the case today. In the words of Lord Hoffman (also referred to by Mr Justice Jackson) in Beaufort Developments Ltd v Gilbert Ash NI Ltd:26 the [Engineer] is the agent of the employer. He is a professional man but can hardly be called independent. One would not readily assume that the contractor would submit himself to be bound by his decisions subject only to a challenge on the grounds of bad faith or excess of power. It must be said that there are instances in the nineteenth century and early part of this one in which contracts were construed as doing precisely this. There are also contracts which provided that in case of dispute the [Engineer] was to be the arbitrator. But the notion of what amounted to a conflict of interest was not then as well understood as it is now. On the issue of independent certifier, Mr Justice Jackson goes too far in trying to establish a presumption that any third party given an administrative role in a construction contract must, ipso facto be impartial and independent. That carries with it the suggestion that the employer or a person acting in their behalf, will not apply the contract fairly, honestly and in accordance with its express terms. That happens every day in contracts of far greater value or far greater complexity than most construction contracts. Even if I am wrong on this point, I question whether there is any benefit in retaining this anachronistic approach to contract administration. Certainly the case law has been slow to recognise the significant and frequently direct conflict of interest, and that the parties themselves are almost certainly better equipped to determine their own rights and obligations. Most major construction contracts are between experienced, competent commercial parties capable of negotiating and understanding complex projects. Entitlements to payment, time and certifications should be covered with clarity, and administered in accordance with the contracts clear terms. This is not difficult to achieve. Where there is disagreement, the contract terms should simply be applied, and if either party disagrees with that application, then the matter can be

26

[1999] AC 266, at 276

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taken to dispute. To introduce the judgment of a third party, who also has its own interests to protect and to then pretend that they will be impartial, seems to me to be misguided. To then imply such duties into standard forms like NEC3, which lack the slightest whiff of the traditional, paternalistic, Engineers design contracts of yore, strikes me as unhelpful. All the more reason, perhaps, to ensure that any such implication is removed by explicit drafting, allowing for the contract terms to simply apply. It is not a case for any discretion. The place for any disagreement to be aired is surely with considered submissions by both parties before an appropriately qualified and truly independent adjudicator.

John Walton Bankside Chambers 10 May 2010

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