From: Clifford Chance LLP at www.cliffordchance.com
Cameron Scholes

United Kingdom
February 27 2007

“When exercising his dispute resolution function under a construction contract, the engineer or architect is not bound by the rules of natural justice in circumstances where the parties have a contractual right to refer any such decision to arbitration.

As outlined in our Summer 2006 International Construction Newsletter, the role of the contract administrator can be likened to walking a tightrope. On one hand, the contract administrator is bound to act in accordance with the instructions of the employer, whether he agrees with them or not. On the other, the contract administrator must act in an impartial, unbiased and fair manner when making valuations or certifying the date of practical completion.

In many construction contracts, however, the contract administrator is called upon to play an even greater role: that of the interim settler of disputes. For example, clause 66 of the standard ICE (Institution of Civil Engineers) Conditions of Contract requires that all disputes and differences between the contracting parties be referred to and settled by the engineer at first instance. Only once the parties have received the engineer’s written determination, or the engineer fails to provide such a decision within the specified time period, can a party refer the dispute or difference to arbitration.

A clause of this type was at the centre of the Court of Appeal’s decision in AMEC Civil Engineering Ltd v Secretary of State for Transport [2005] EWCA Civ 291 in which the Court of Appeal (May, Rix and Hooper LJJ) was required to determine whether the engineer, acting in the role of the independent certifier under a standard form ICE contract, was obliged to follow the rules of natural justice when determining a dispute or difference between the parties.

The appellants, AMEC Civil Engineering Ltd (“AMEC”), had carried out major renovation works to the Thelwell Viaduct in Lancashire pursuant to a design and build contract with the Secretary of State as employer. These works were substantially completed on 23 December 1996. Pell Frischmann was the engineer appointed under the contract.

In June 2002, the Highways Agency, acting as agent for the Secretary of State, became aware of various defects in the viaduct. As the contract was not made under seal, the statutory limitation period of six years expired on 23 December 2002. This left the Secretary of State little time to embark on a detailed process of investigation and negotiation with AMEC and other relevant sub-contractors.

Having taken steps to resolve the issue commercially, the Highways Agency sent to AMEC a formal letter of claim on 6 December 2002, outlining the background to the dispute, the technical position as it was then known and explicitly held AMEC responsible for the defects. AMEC replied to the letter on 10 December 2002, indicating that it was not in a position to make any comment on liability without first being provided with sufficient particulars of the alleged defects.

On 11 December 2002, the Highways Agency referred the “dispute or difference” to Pell Frischmann pursuant to clause 66 of the contract. The Highways Agency did not send a copy of its 11 December letter to AMEC. Interestingly, on 11 December 2002 and apparently so as to protect itself in light of the upcoming expiration of the statutory limitation period, the Highways Agency also sent a letter of claim to Pell Frischmann, alleging that Pell Frischmann was also liable for the viaduct defects.

Engineer’s decision

Pell Frischmann gave its engineer’s decision pursuant to clause 66 on 18 December 2002, which found the defects in the viaduct resulted from AMEC’s failure to use materials and/or workmanship in accordance with the contract. Importantly, prior to issuing its determination, Pell Frischmann failed to invite AMEC to make any submissions as to the allegations set out in the letter of claim. On 19 December 2002, having given AMEC time to respond to the Treasury Solicitor’s request for confirmation that it accepted the engineer’s decision, the Treasury Solicitor gave AMEC notice of arbitration with reference to the claim advanced in its letter of 6 December 2002.

AMEC challenged the arbitrator’s jurisdiction on three grounds: (1) that there was no dispute or difference to be referred to the engineer under clause 66 and thus, nothing to be referred to arbitration; (2) the engineer’s decision was invalid because the engineer did not reach it by a fair process, and (3) the arbitrator’s jurisdiction was limited to the three matters expressly identified in subparagraphs (a), (b) and (c) of the engineer’s decision.

Both the arbitrator and subsequently Mr. Justice Jackson of the Technology and Construction Court rejected all three of these contentions. Despite this, Mr. Justice Jackson granted leave to AMEC to appeal.

Application of the principles of natural justice

The Court of Appeal dismissed AMEC’s appeal and in doing so made several important statements of principle in relation to the obligations imposed on an engineer when exercising its dispute resolution function pursuant to clause 66 of the standard form ICE contract.

Mr. Ramsey QC submitted on behalf of AMEC that, in acting under clause 66, the engineer was in the intermediate position of a quasi arbitrator. This submission was rejected both at first instance and by the Court of Appeal, with May LJ in particular making it clear that as clause 66 expressly provided for the engineer’s decision to be susceptible to review by an arbitrator, the engineer was in the conventional position of certifier and not that of a quasi arbitrator. May LJ (with whom both Rix and Hooper LJJ agreed) held that the rules of natural justice are formalised requirements of those who act judicially and compliance with them was required of judges and arbitrators and those in equivalent positions, but not of an engineer giving a decision under clause 66 of the ICE conditions.

The other important issue which May LJ considered was that of fairness. Adopting the position of the New Zealand Court of Appeal in Canterbury Pipe Lines v The Christchurch Drainage Board (1979) 16 BLR 76, May LJ indicated that the concept of fairness could be imported into the obligations of an engineer when exercising his dispute resolution function, provided that what is regarded as fair is flexible and tempered to the particular facts and occasion. In the particular circumstances, and perhaps surprisingly, May LJ did not consider that the engineer’s failure to invite AMEC to make submissions in response to the allegations included in the letter of claim was unfair, nor was the fact that the engineer’s decision was made in such a short period time. Rather, May LJ held that provided the decision was made honestly, independently and was a properly considered decision, it was a valid decision pursuant to clause 66.

Whilst ultimately dismissing AMEC’s appeal, Rix LJ did not share May LJ’s view that, provided the engineer acted independently and honestly, the obligation did not encompass the requirement of giving AMEC an opportunity to respond to the letter of claim. Rix LJ differentiated the current case from all of the previous cases on the basis that, unlike previous authorities which considered the duties of architects or engineers in connection with their work as certifiers or notice givers, this decision related to the engineer’s role as the settler of disputes under clause 66.

After considering past authorities such as Sutcliffe v Thackrah [1974] AC 727, Hatrick (NZ) Ltd v Nelson Carlton Construction Co Ltd [1965] NZLR 144 and applying the various concepts as enunciated therein, Rix LJ was reluctant to agree that the engineer was entitled to come to his decision on the basis only of the Highway Agency’s complaints, especially given that the engineer himself might be responsible for the defects. Rather, Rix LJ held that AMEC ought to have been given an opportunity to respond to the claims made against it in the letter of claim.

In any event, Rix LJ indicated that the views expressed above were not decisive in the present case as, notwithstanding the fact that the engineer did not obtain AMEC’s representations in response to the letter of claim, the engineer’s decision remained a decision that the Highway’s Authority was entitled to refer to arbitration.

Conclusion

The decision in the AMEC case is important for two reasons. First, it remains the definitive judgment regarding the obligations of an engineer or architect in carrying out its dispute resolution function. In this regard, an engineer or an architect is not bound by the rules of natural justice, provided that the contract provides for the parties to refer the decision to an arbitrator. An engineer or architect merely needs to act honestly, independently and come to a properly considered decision for it to be valid.

Second, the AMEC decision provides a timely reminder of the difficulties which may arise with regard to limitation periods. It is of vital importance that any party seeking to bring arbitral proceedings is aware of any prerequisite steps, such as first referring the dispute to the engineer. In addition, having regard to the obiter of Rix LJ, it is likely that a prudent engineer required to made a decision pursuant to clause 66 of the ICE contract will invite the respondent party to submit a response to the allegations put before him. Any miscalculation by the Claimant of the time required to obtain such a decision from the engineer may result in the prescribed limitation period expiring before the engineer has reached his decision. In these circumstances, any subsequent arbitral proceedings that the Claimant may wish to bring will be time-barred.”