Arbitration- United Kingdom

When exercising a dispute resolution function under a construction contract, an engineer or architect is not bound by the rules of natural justice in circumstances where the parties have a contractual right subsequently to refer the decision to arbitration. The role of the contract administrator can be likened to walking a tightrope: he or she is bound to act in accordance with the employer's instructions whether he or she agrees with them or not, but must act in an impartial, unbiased and fair manner when making valuations or certifying the date of practical completion (for further details please see "Contract Administrators: As Impartial As You Like"). However, in many construction contracts the contract administrator is called on to play an even greater role - that of the interim settler of disputes. For example, Clause 66 of the standard form Institution of Civil Engineers (ICE) Conditions of Contract requires that all disputes and differences between the contracting parties be referred to and settled by the engineer in the first instance. Only once the parties have received the engineer’s written determination or the engineer has failed to provide such a decision within the specified time period may a party refer the dispute or difference to arbitration.

Facts

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. The court was required to determine whether the engineer, acting in the role of 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 appellant, 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. The works were substantially completed on December 23 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 December 23 2002, which left the secretary of state little time to embark on a detailed process of investigation and negotiation with AMEC and other relevant subcontractors. Having taken steps to resolve the issue commercially, the agency sent AMEC a formal letter of claim on December 6 2002, outlining the background to the dispute and the technical position as it was then known. The letter explicitly held AMEC responsible for the defects. AMEC replied to the letter on December 10 2002, indicating that it was not in a position to comment on liability without first being provided with sufficient particulars of the alleged defects. On December 11 2002 the agency referred the dispute or difference to Pell Frischmann pursuant to Clause 66 of the contract.

The agency did not send a copy of its December 11 letter to AMEC. On that date - apparently in an attempt to protect itself in light of the upcoming expiration of the statutory limitation period - the agency also sent a letter of claim to Pell Frischmann, alleging that it was also liable for the viaduct defects.

Engineer’s Decision

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

AMEC challenged the arbitrator's jurisdiction on the grounds that:

there was no dispute or difference to be referred to the engineer under Clause 66 and therefore nothing to be referred to arbitration;

the engineer's decision was invalid because the engineer had not reached it by a fair process; and

the arbitrator's jurisdiction was limited to the three matters expressly identified in Subparagraphs (a), (b) and (c) of the engineer's decision.

The arbitrator and, subsequently, the Technology and Construction Court rejected all three contentions. However, the court granted AMEC leave to appeal.

Application of the Principles of Natural Justice

The Court of Appeal dismissed AMEC's appeal and 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. AMEC claimed that, in acting under Clause 66, the engineer was in the intermediate position of a quasi-arbitrator. This submission was rejected at first instance and by the Court of Appeal, with Lord Justice May 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 a certifier, not that of a quasi-arbitrator.

May held - and Lords Justice Rix and Hooper agreed - that the rules of natural justice are formalized requirements of those who act judicially. Compliance with them is required of judges, arbitrators and those in equivalent positions, but not of an engineer giving a decision under Clause 66 of the ICE contract. May also considered the issue 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 indicated that the concept of fairness can be imported into the obligations of an engineer exercising a dispute resolution function, provided that what is regarded as 'fair' is flexible and tempered to the particular facts and occasion. In the particular circumstances, perhaps surprisingly, May 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 time. Rather, May held that, provided that the decision was honest, independent and properly considered, it was valid pursuant to Clause 66.

Although he ultimately dismissed AMEC's appeal, Rix did not share May's view that, provided that the engineer had acted independently and honestly, the obligation did not encompass the requirement of giving AMEC an opportunity to respond to the letter of claim. Rix distinguished the present case 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, it related to the engineer's role as a settler of disputes under Clause 66. After considering past authorities (eg, Sutcliffe v Thackrah [1974] AC 727 and Hatrick (NZ) Ltd v Nelson Carlton Construction Co Ltd [1965] NZLR 144) and applying the various concepts therein, Rix was reluctant to agree that the engineer had been entitled to reach a decision on the basis only of the agency's complaints, especially as the engineer might have been responsible for the defects. Rather, Rix held that AMEC should have been given an opportunity to respond to the claims made against it in the letter of claim. In any event, Rix indicated that such views were not decisive in the present case as, notwithstanding the fact that the engineer had not obtained AMEC's representations in response to the letter of claim, the authority was entitled to refer the decision to arbitration.

Comment

The decision in this case is significant for two reasons.

First, it remains the definitive judgment regarding the obligations of an engineer or architect in carrying out its dispute resolution function. An engineer or architect is not bound by the rules of natural justice in this regard, provided that the contract provides for the parties to refer the decision to an arbitrator. In order for the decision to be valid, an engineer or architect need only act honestly, independently and with proper consideration.

Second, the decision provides a timely reminder of the difficulties which may arise with regard to limitation periods. It is vital that a 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 Rix's obiter dictum (ie, passing comment), it is likely that a prudent engineer required to make a decision pursuant to Clause 66 of the ICE contract will invite the respondent party to submit a response to the allegations in question. A 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 a decision, in which case any subsequent arbitral proceedings that the claimant may wish to bring will be time barred.

International Law Office