Introduction

In December 2016, at its International Users Conference in London, FIDIC issued a "pre-release" second edition of the Yellow Book (Conditions of Contract for Plant and Design-Build) and indicated that it would issue a final second edition during the course of 2017 as part of a wider update to its 1999 Rainbow Suite. We looked at some of the anticipated changes in Issue 21 of International Quarterly. This article focuses on the changes to the role of the Engineer under Clause 3 found in the proposed new Yellow Book.

One of the main intentions behind the new amendments, as FIDIC explained, is to facilitate better project management so that disputes between parties are less likely to escalate. The changes made to Clause 3 of the Yellow Book relating to the Engineer, such as an increased focus on his obligation to encourage the agreement of claims and the requirement that he act "neutrally", reflect this approach. The more notable amendments to Clause 3 are reviewed below.

Qualification Requirements

New Sub-Clause 3.1 introduces certain qualification requirements for anyone acting as the Engineer. Under the new Sub-Clause, the Engineer must be a professional engineer with suitable qualifications, experience and competence in the main engineering discipline applicable to the works (if there is more than one discipline, then in at least one of those). There is no equivalent requirement for the Engineer under the 1999 Yellow Book, although Sub-Clause 3.1 mandates that the Engineer's staff should include suitably qualified engineers and other professionals who are competent to carry out the duties assigned to the Engineer under the Contract.

Under new Sub-Clause 3.1, there is also a new requirement that the Engineer must be fluent in the language of the Contract as defined in Sub-Clause 1.4. The 1999 Yellow Book does not contain any specific language requirement.

If used in their unamended form, these new provisions may, for example, pose difficulties for employers who would ordinarily seek to appoint project managers in that role. The principle behind these new requirements is to ensure that the selection of firms for the role of Engineer by an Employer is made on the basis of qualifications and demonstrated competence, and is perhaps of particular relevance to public works contracts where the provisions may act as an exception to a government's approach of awarding contracts to the lowest bidder. Where the contract is tendered by a government or other public authority, FIDIC suggests that basing the selection of the Engineer on quality may have an impact on return of investment and project life cycle costs.

Introduction of an Engineer's Representative

Under new Sub-Clause 3.3 the Engineer can appoint an Engineer's Representative to whom he can delegate the authority necessary to act on his behalf on site. The Engineer's Representative must be a natural person and remain on site for the whole time that the works are being executed. There is no equivalent provision in the 1999 Yellow Book. This change reflects FIDIC's focus on increased project management to avoid disputes arising in the first place.

Variations

Under new Sub-Clause 3.5, which relates to the Engineer's instructions, a new provision is added to address circumstances where the Contractor believes an instruction constitutes a Variation but the Engineer has not expressly stated this in the relevant instruction. The new provision gives the Contractor a mechanism under which he can give a Notice to the Engineer that the instruction constitutes a Variation. If the Engineer does not respond within 7 days of receiving the Notice (by giving a Notice confirming, reversing or varying the instruction), then the Engineer is deemed to have revoked the instruction.

Sub-Clause 3.3 of the 1999 Yellow Book states that if an instruction constitutes a Variation then it shall be subject to the Variation procedure set out in Clause 13. Clause 13 of the 1999 Yellow Book does not expressly deal with a situation where the Contractor believes that an Engineer's instruction constitutes a Variation but where the Engineer has not stated that it is a Variation. In such circumstances, the Contractor could pursue a claim for additional payment under Sub-Clause 20.1.

The addition of this provision in new Sub-Clause 3.5, on the face of it, adds some welcome clarity from a Contractor's point of view. On the wording of the new provision, the Engineer has the power to confirm, reverse or vary such an instruction after the Contractor gives the appropriate Notice. The position however may be less clear where there is a genuine dispute between the parties as to whether that instruction amounts to a Variation. In those circumstances, the Engineer has the power to confirm his original instruction, which may mean that the Contractor finds himself in no better position than he was under the 1999 Yellow Book.

Engineer's Determinations under New Sub-Clause 3.7

Sub-Clause 3.5 in the 1999 Yellow Book has been replaced by a much longer new Sub-Clause 3.7 called "Agreement or Determination". The amendments to the determination Sub-Clause are significant and, as the renaming suggests, are made in part to try and resolve disputes between the parties at an earlier stage, so as to avoid the need for a DAB decision and/or an arbitral award.

Obligation to consult and endeavour to reach agreement

Under Sub-Clause 3.5 of the 1999 Yellow Book, the Engineer is under an obligation to consult with the parties in an endeavour to reach agreement. This obligation is retained and expanded upon substantially in new Sub-Clause 3.7.

New Sub-Clause 3.7 imposes a more detailed procedure as well as additional time limits on the Engineer when agreeing or determining any matter or Claim. In relation to seeking early agreement under Sub-Clause 3.7.1, new requirements include:

  • a positive obligation to consult with the parties jointly and/or separately;
  • to encourage discussion between the parties in an endeavour to reach agreement;
  • to commence any such consultation promptly so as to allow adequate time to comply with a new 42-day time limit for seeking agreement under new Sub-Clause 3.7.3; and
  • to provide the parties with a record of the consultation (unless the Engineer proposes otherwise and the parties agree).

New Sub-Clause 3.7.3, as referred to above, imposes an initial 42-day time limit by which the Engineer must give a Notice of agreement to the parties, if agreement is reached. Under new Sub-Clause 3.7.1, this Notice must state that it is a "Notice of the Parties' Agreement" and must describe the agreement in detail, with supporting particulars.

This initial 42-day time limit can be amended if an alternative is proposed by the Engineer and accepted by the parties. It is worth noting that the changes to this time limit, as with changes to the provision of the Engineer's record of the consultation under Sub-Clause 3.7.1, on the face of it can only be agreed by the parties on the back of an Engineer's proposal.

If no agreement is reached in the initial 42-day period, the Engineer is given a further 42 days by which to make a fair determination of the matter or Claim. The practical effect of these changes is that the time in which the Engineer must make a determination has doubled to 84 days. Under the 1999 Yellow Book, the Engineer was obliged to both consult the parties and make his decision within a single 42-day period. The extension of this period may arguably be grounds for criticism if a party takes the view that ultimate resolution of its claims in practice could now take significantly longer than under the 1999 Yellow Book. However, such a view would ignore the fact that the aim of these changes is to increase the likelihood of a matter or Claim being resolved without recourse to the dispute resolution provisions under new Clause 21. Whether in fact these changes have FIDIC's desired effect remains to be seen.

Duty to act "neutrally"

New Sub-Clause 3.7 retains the wording of the 1999 Yellow Book in that the Engineer must still make a fair determination of the matter or Claim. Under Sub-Clause 3.1 of the 1999 Yellow Book the Engineer is deemed to act for the Employer. The equivalent provision found in new Sub-Clause 3.2 does not change this, only adding that the Engineer does not have to obtain the Employer's consent prior to making a determination.

However, the first sentence of new Sub-Clause 3.7 imposes an additional, separate obligation on the Engineer to act "neutrally between the Parties when carrying out his duties under this Sub-Clause", which applies both to the Engineer's attempts to agree the matter or Claim, and the process by which he comes to a determination. The term "neutrally" is not defined in the new Sub-Clause or in the new Yellow Book generally.

As a matter of English law, the generally accepted position is that in performing his contract administration duties, the Engineer must act in a fair and unbiased manner.1 This view is not, however, commonly recognised in civil law jurisdictions and has been an issue for FIDIC in the past. It is worth noting that the edition of FIDIC's Yellow Book published in 1987, which preceded the 1999 version, incorporated an express duty of impartiality on the Engineer when carrying out certain functions, including when giving decisions.2 This provision did not make it into the 1999 Yellow Book, which said only that the Engineer must make a fair determination under Sub-Clause 3.5.

FIDIC explained that the choice of the word "neutrally" for the upcoming 2017 edition, as opposed to independent or impartial, is a deliberate one which seeks to make clear that in the context of making a determination, the Engineer is non-partisan and does not act for the Employer. This is perhaps because the use of the word "neutrally" seeks to avoid the conceptual difficulties that lawyers in civil law jurisdictions have commonly encountered in reconciling independence or impartiality with the Engineer's role as the Employer's agent.

In addition to the above, parties should be aware that the fact that the position must be filled by a "professional engineer" under new Sub-Clause 3.1 means that a duty to act impartially in such circumstances could also be implied under the governing standards of a professional institution applicable to any appointed Engineer. This, and the specific inclusion of the requirement that the Engineer act "neutrally" in new Sub-Clause 3.7 could be said to be indicative of a move by FIDIC towards the common law position under which the Engineer, notwithstanding that he generally acts as the Employer's agent, must act fairly and without bias in his role as contract administrator.

It is, however, arguable that a duty to act fairly in the context of making a determination is analogous to one that compels the Engineer to act "neutrally". It is not yet certain whether such a change will, in practice, result in fewer claims being brought before the DAB and/or arbitration under new Sub-Clause 21.

What happens if the Engineer does nothing?

Under new Sub-Clause 3.7.3, if the Engineer fails to give a Notice of agreement or determination within the relevant time limit, this will amount to a rejection of the matter or Claim.

The addition of this provision is helpful, because it clarifies that an Engineer acting for an Employer cannot use a lack of response as a stalling tactic to delay resolution of a Contractor's otherwise valid claim. Contractors, however, may take the view that the changes do not go far enough, and that failure to respond by the Engineer should amount to an acceptance of a Claim. However, in circumstances where there is a question mark over the neutrality of the Engineer, conversely there is a risk that such an amendment may also work against a Contractor if the Engineer remains silent on matters or Claims brought by the Employer.

A new Notice of Dissatisfaction

As mentioned above, under new Sub-Clause 3.7.2, the Engineer must give a Notice to both Parties of his determination within a further 42 days if no agreement is reached within the first 42-day period. In addition to the supporting particulars previously required under Sub-Clause 3.5 of the 1999 Yellow Book, the Engineer must also expressly give reasons under new Sub-Clause 3.7.2.

If either party is dissatisfied with the Engineer's determination, under new Sub-Clause 3.7.4, it may, within 28 days of receiving the determination (or if the Engineer does nothing, within 28 days of the expiry of the relevant time limits), give the other party a "Notice of Dissatisfaction with the Engineer's Determination" (copied to the Engineer) which must set out its reasons for dissatisfaction. It is important for parties to note that failing to give this Notice within the 28-day period means that the Engineer's determination shall be deemed to have been accepted finally and conclusively by both parties. There is no equivalent provision in the 1999 Yellow Book. Under Sub-Clause 3.5 of the 1999 Yellow Book, the Engineer's determination is said to be valid unless and until revised under Sub-Clause 20 – there is no risk that a party may lose its right to make a claim further up the line.

Conclusion

In addition to the changes highlighted above, the parties and the Engineer are under a proactive duty to endeavour to advise the others of any known or probable future events or circumstances which may adversely affect the Contractor's work, increase the Contract Price or cause delay.3 This advance warning mechanism, together with the updates to Clause 3 of the 1999 Yellow Book, is part of a broad approach to clarify and expand the role of the Engineer, and is made in keeping with FIDIC's expressed desire to increase project management and prevent disputes from escalating unnecessarily. Whether these changes meet that objective in practice remains to be seen, but the emphasis on the early resolution of potential disputes is certainly a step in the right direction.

Footnotes

1. See Sutcliffe v Thackrah [1974] AC 727, Costain Ltd v Bechtel Ltd [2005] EWHC 1018 (TCC) and Amec Civil Engineering Ltd v The Secretary of State for Transport [2005] CILL 2288.

2. Sub-Clause 2.4.

3. New Sub-Clause 8.4, Advance Warning.

International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.

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