Most standard forms of contract used in tunnelling will contain what can be termed as a stepped dispute resolution procedure. An example is the dispute resolution provisions contained in clause 66 of the ICE Conditions of Contract 7th Edition (1999). Leaving aside its use of adjudication to comply with UK statutory requirements(1), Clause 66 calls for matters which are termed ‘matters of dissatisfaction’ to be referred to the Engineer for his decision. It says:
“(2) If at any time;
the Contractor is dissatisfied with any act or instruction of the Engineer’s Representative or any other person responsible to the Engineer or
the Employer or the Contractor is dissatisfied with any decision opinion instruction direction certificate or valuation of the Engineer or with any other matter arising under or in connection with the Contract or the carrying out of the Works
The matter of dissatisfaction shall be referred to the Engineer who shall notify his written decision to the Employer and the Contractor within one month of the reference to him.”
Engineer’s decision
The ‘matters of dissatisfaction’ terminology arises out of the statutory use of the word ‘dispute’ under UK statute[2] and the ICE 7th edition’s attempts to circumvent those statutory provisions so as to preserve the Engineer’s role as the first tier of dispute resolution. Whether the wording has been successful in this regard has not been fully tested in the courts.
Referring a matter for an Engineer’s decision stems in the first instance from the practice in this and other standard engineering forms which allows the Engineer to delegate certain responsibilities and authority under the contract to the ‘Engineer’s Representative’ or ‘any other person’, most often referred to as the Resident Engineer (RE) and sometimes called the Engineer’s delegate (ICE 7th Clause 2(4) refers). It will be the delegate that will deal with most day-to-day matters during the course of the project including dealing with matters such as valuation of variations, and additional payments arising out of losses for prolongation, disruption and the like. But, it is noted, not the granting of an extensions of time itself. That is, those matters which habitually give rise to disputes.
In this way the Engineer, as opposed to his delegate, can sit at arm’s length from these decisions so that when they are referred to him he can then bring a measure of objectivity and impartiality in reaching his decision in matters put to him under Clause 66.
This first tier of the dispute process has the advantage of concentrating the mind of, what is often the contractor, but could equally be the employer, as to what issues are to be presented in this quasi-formal procedure. Pens may be sharpened and arguments honed so that the issues are narrowed to those which really will stand the scrutiny of the Engineer’s deliberations.
When it is issued, it is recommended that the Engineer’s decision should be presented in a relatively formal manner, ‘I hereby give my decision as follows’, or some such. In the body of the decision it is best if the Engineer sets out what matters he has considered, those which he accepts and those which he rejects. Importantly the decision is issued to both the Contractor and the Employer.
As can be seen from the citation above the Engineer’s decision must be given within one month of the referral of the matter of dissatisfaction to him. In the event that he fails to issue within that timeframe or if, upon its issue, the Employer or the Contractor finds the decision unacceptable, or further the decision has not been implemented, then either, or both, parties should issue a Notice of Dispute (ICE 7th Clause 66(3)(a) refers).
Notice of dispute
It is at this point that a ‘dispute’ can be said to have ‘crystallised’ and ICE 7th is very particular in defining that the word ‘dispute’ shall only have the meaning of those matters which have gone through the described process of an Engineer’s decision on a matter of dissatisfaction and the issue of a Notice of Dispute. It says at Clause 66(3):
“ … and the dispute shall be that stated in the Notice of Dispute. For the purposes of all matters arising under or in connection with the Contract or the carrying out of the Works the word “dispute” shall be construed accordingly … ”
It is also at this point, as we will see, that the trap for the unwary may start to be sprung. In a departure from previous editions of the ICE form there is no time limit in the 7th Edition within which the Engineer’s decision becomes final and binding on the parties, instead it simply says that;
“ (4) (b) The Employer and the Contractor shall give effect forthwith to every decision of the Engineer on a matter of dissatisfaction given under Clause 66(2) …”
Whether the words ‘shall give effect’ have the same meaning as the previous ‘final and binding’ provisions has yet to be tested.
So, with the ‘dispute’ crystallised and the requisite Notice of Dispute served the aggrieved party, or indeed parties, have three options; conciliation, adjudication or arbitration. For our purposes we will consider the last of these, arbitration.
Note that the ICE 7th arbitration clause 66(9) begins, “All disputes arising under or in connection with the Contract …”. Remember also the contractual definition of that word ‘dispute’, that is, only those matters which have gone through the process of Engineer decision on a matter of dissatisfaction and for which a Notice of Dispute has been served, so that the Engineer’s decision and Notice of Dispute are conditions precedent on an issue-by-issue basis to starting an arbitration.
Scenario
Let us take a scenario where a contractor makes claims for the valuation of certain variations; extension of time and additional costs arising. These are put to the Engineer for his decision on a matter of dissatisfaction. The Engineer’s decision finds more time and money than has been previously certified but the Contractor remains dissatisfied, serves its Notice of Dispute and begins arbitration proceedings. In its statement of claim in the arbitration the Contractor sets out its position in the same manner that it did to the Engineer. In its defence the Employer sets out a position which says, ‘actually we disagree with the Engineer and we believe that the Contractor has in fact been overpaid and that is our defence’.
This is what I describe as the Bullseye approach. With apologies to non-UK readers, you may remember the TV game show Bullseye and the presenter’s catchphrase to unsuccessful contestants of, ‘Look, this is what you could have won!’. This is an approach which one often sees taken by those assessing and certifying monies. If a contractor disagrees with an assessment made by an RE or Engineer’s delegate the response is, ‘well if you don’t agree with me I may have to re-visit my assessment and the chances are it will be lower than what is on the table now,’ i.e. ‘This is what you could have won!’.
It is submitted that it is in carrying through such an over-zealous approach to the arbitration that the trap will be sprung on our Employer. The stepped resolution processes are contractually binding, if the Employer had wanted to disagree with the Engineer, which is in effect what he is now doing, then he should have done so at the time of the issue of the Engineer’s decision on a matter of dissatisfaction. The Employer has not fulfilled the condition precedent for bringing, what in effect are new issues into the arbitration, he is not therefore entitled to raise his objections to the Engineer’s decision in the arbitration at this late stage.
Cases considering these points
These matters were considered in English cases in the context of earlier editions of the ICE form. Clause 66 of the ICE conditions, then as now, says that parties are not limited in the arbitration to the, “… evidence or argument…” , which was put before the Engineer. In the case of Morgan Grenfell -v- Seven Seas Dredging[3] the court drew a distinction between new arguments on the one hand and new issues on the other.
In the case of Monmouthshire County Council -v- Costelloe and Kemple[4] Lord Denning MR held that for there to be a dispute there must first be a claim by the contractor and a rejection of it. Applying that principle to the very clear definition of the word ‘dispute’ in ICE 7th as set out above, it is clear that that claim and rejection must be through the process of the Engineer’s decision.
Returning to our scenario therefore it is submitted that our Employer falls foul of the principles set out in the above cases. Firstly, the Employer’s late introduction of a disagreement with the Engineer’s decision is clearly a new issue and not simply a matter of making new arguments. And secondly, they are new issues which were not put before the Engineer for his decision under clause 66, it follows that they are not therefore disputes referable in the arbitration.
Escape route
There is one escape route for the Employer here though, it is in the above noted departure in ICE 7th from the finality of the Engineer’s Decision, ICE 7th requiring that the decision is given effect to rather than becoming final and binding. Previous editions gave a time limit of 28 days from the giving of a decision to giving a notice to refer the matter to arbitration, failing which the decision became final and binding. That said, even under the new ICE 7th wording there will be considerable procedural difficulties in bringing our Employer’s new issues into the arbitration. They will still be able to serve, an albeit belated, Notice of Dispute and then start their own arbitration on those issues, which in all likelihood would then be joined with the existing arbitration started by the Contractor. However, the scope for delay, procedural wrangling and expense are obvious.
Further, there are still many jurisdictions that use engineering contracts, which have as their basis earlier editions of the ICE form that will include the rather stricter guillotine on any party dissatisfied with the Engineer’s decision raising those objections within the 28 day window following its issue, by starting an arbitration. Whilst the noted English cases might not have strict application in those other jurisdictions it is submitted that the time limits are clear within those contracts and similar principles would likely apply.
FIDIC provisions
Similar stepped dispute resolution provisions can also be found in the 1999 FIDIC forms of contract. As has been noted in previous articles, FIDIC, in a departure from its previous reliance on the ICE as the basis of its drafting, have abandoned the notion of an ‘independent’ Engineer. At Clause 20 of the FIDIC Conditions of Contract for Construction (‘Red Book’), instead of the Engineer’s decision process the first tier of dispute resolution is for reference of matters in dispute to be referred to a Dispute Adjudication Board (DAB), its members being drawn from outside the contractual matrix.
In contrast to the ‘shall give effect’ wording of ICE 7th, FIDIC Clause 20 does have definite time limits after which a decision of the (DAB) becomes final and binding. It too has procedures whereby if either party is unhappy with the decision of the DAB, or indeed where the DAB does not deliver its decision within the required 84 days from the reference to it, then the parties have 28 days in which to issue a ‘notice of dissatisfaction’. This notice of dissatisfaction is again a condition precedent to proceeding to the next tier of dispute resolution, being arbitration.
It is submitted that similar principles as outlined above would apply in the case of arbitrations under the FIDIC forms, that is if a party wishes matters to be included in an arbitration then a proactive approach at the time of the issue of the decision of the DAB is required.
If as in our scenario an Employer considers that the Contractor has been over-paid then he must raise a notice of dissatisfaction, not wait for the Contractor to do so then plead the reduction as a defence in the arbitration.
Contract Law
