Under FIDIC forms of contract, the Engineer is a third-party administrator

This means that the Engineer is not a party to the FIDIC construction contract, which is between the Employer and the Contractor. Nonetheless, the Engineer plays a major role in the FIDIC construction contract, including making determinations as to the Employer’s or the Contractor’s entitlements.

The Red Book, Yellow Book and MDB forms of FIDIC contract all provide for an Engineer. The Gold Book provides for a third-party contract administrator, much like the Engineer but called the “Employer’s Representative”. These differ from the Silver Book, in which contract administration is the responsibility of the Employer.

For simplicity, this article considers the 1999 Red and Yellow Books as being broadly representative of those FIDIC forms of contract which include an Engineer. References in this article to the “FIDIC construction contract” are to contracts based on the 1999 Red and Yellow Books.

The appointment of the Engineer

The Engineer is appointed by the Employer under a contract which is separate from the FIDIC construction contract (which will be referred to in this article as the “Engineer’s contract”). The Engineer’s contract can be based on standard form conditions published by professional bodies, including the FIDIC ‘Client/Consultant Model Services Agreement’. This is currently in its 5^th edition (known as the “2017 White Book”) which is commonly considered to be an improvement on the 4^th edition (known as the “2006 White Book”), although it is not perfectly aligned with the FIDIC forms of construction contract and still contains some oddities.^[1]

The Employer may appoint the Engineer to carry out many different services in relation to the project including (but not necessarily limited to) acting as the Engineer under the FIDIC construction contract. The Engineer’s contract should set out details of the Engineer’s appointment, such as: the scope of services to be performed by the Engineer, the standard of care to be applied by the Engineer when carrying out those services, the payment to be made by the Employer for those services, the duration of the Engineer’s appointment (including the extent to which it should mirror the duration of the FIDIC construction contract – to the Final Payment Certificate or beyond?), and how disputes arising out of the Engineer’s contract are to be settled.

The Engineer’s contract should, as far as possible, be consistent with and reflect the duties of the Engineer under the FIDIC construction contract. Amendments to standard form conditions used for the Engineer’s contract, including the FIDIC White Book, will be required to achieve this.

The Engineer’s competing interests

The Engineer is highly involved in and important to the smooth-running of the FIDIC construction contract. For example, the Engineer is required to supervise the Contractor’s work, may give instructions and issue variations, is required to value and certify works, and is required to make determinations including in respect of claims for additional payment and extensions of time. The Engineer has competing interests, however.

On the one hand:

• The Engineer is appointed and paid by the Employer under the Engineer’s contract.
• The Engineer is deemed to act for the Employer under the FIDIC construction contract ‘whenever carrying out duties or exercising authority, specified in or implied by the Contract’ (Sub-Cluse 3.1(a)).

On the other hand, the Engineer is required under the FIDIC construction contract:

• To make a ‘fair determination’ in respect of numerous issues which affect both the Employer and the Contractor (Sub-Clause 3.5).
• To ‘fairly determine’ the amount due to the Contractor in each Interim Payment Certificate (Sub-Clause 14.6) and potentially in respect of the Final Payment Certificate (Sub-Clause 14.13).
• To reach decisions and make assessments on other issues which are not expressly subject to ‘fairness’ but which also affect the parties’ respective entitlements.^[2]

Parties from a common law background may be relatively comfortable with the concept of a third-party contract administrator, who is appointed, acts for and is paid by the Employer, since this type of arrangement is a common law tradition. Parties from a civil law background, without such tradition, may understandably be uncomfortable with this concept.

The identity of the Engineer

The FIDIC construction contract will not run smoothly if the parties and the Engineer do not have knowledge and experience of this concept in general and FIDIC forms of contract in particular. The identity of the Engineer is accordingly a very important consideration for the Employer (when appointing the Engineer) and the Contractor (when considering the identity of the Engineer as part of the tender process).

Who can be the Engineer?

The Engineer is defined in the 1999 Red and Yellow Books as the:

“person appointed by the Employer to act as the Engineer for the purposes of the Contract and named in the Appendix to Tender …” (Sub-Clause 1.1.2.4).

The Engineer is thus a ‘person’, which can include a firm (of consulting engineers, for example) or an individual. There are no particular provisions about the experience and qualifications of the Engineer itself, although the law in certain jurisdictions may require that if the Engineer is a company, it must hold a certain licence or be a particular class of company. There are no requirements for the Engineer to be fluent in the language for communications specified in Sub-Clause 1.4.

The Engineer may have:

• Staff: Sub-Clause 3.1 provides that the Engineer’s staff ‘shall include suitably qualified engineers and other professionals who are competent to carry out these duties’. This is a restriction of sorts, since in jurisdictions where engineering is a regulated profession, ‘suitably qualified engineers’ may mean engineers that are licenced or regulated in that jurisdiction.
• Assistants: Sub-Clause 3.2 provides that the Engineer may from time to time assign duties and delegate authority to assistants (subject to certain procedures) although the Engineer may not delegate the authority to determine any matter under Sub-Clause 3.5. It further provides that assistants are required to be ‘suitably qualified persons’ and ‘competent to carry out these duties and exercise this authority’ as well as being fluent in the language for communications specified in Sub-Clause 1.4.

Can the Employer appoint itself as the Engineer?

In principle, there is nothing to stop an Employer from appointing itself or one of its employees as the Engineer. This will not be without problems, however.

The FIDIC Contracts Guide notes that when tenderers consider the role of the Engineer, they may take account of the ‘degree of independence indicated by the status of the appointed Engineer, namely whether he is an independent consulting engineer’.^[3]

A tenderer is unlikely to consider that the Employer (or an employee of the Employer) has a sufficient degree of independence, and may price the related risk accordingly. Commentators note that if the Employer is also the Engineer, this will likely ‘influence the Contractor’s perception as to the way in which the Contract will be administered’ ^[4]. Further, the Engineer’s duty to act fairly ^[5] may not be compatible with duties the employee may owe to the Employer.^[6]

That all said, it is worth noting that in the 1999 Silver Book (in which the Employer is responsible for contract administration), FIDIC assumes that the Employer is able to make a ‘fair determination’.^[7]

It is possible that an Employer will not appoint itself as Engineer at the outset, but may give the Contractor notice of intention to replace the Engineer with itself, or an employee, part-way through the FIDIC construction contract. The Contractor would have the opportunity to raise ‘reasonable objection’ as noted below.

What if the Employer decides to replace the Engineer?

A procedure for replacement is set out in Sub-Clause 3.4. The Employer must give notice to the Contractor (not less than 42 days before the intended date of replacement) with details of intended replacement. The Employer may not replace the Engineer with a person against whom the Contractor raises ‘reasonable objection’, having provided ‘supporting particulars’. The FIDIC Contract Guide says that what would suffice as a ‘reasonable objection’ depends upon the circumstances:

‘including the representations originally made to the tenderers, the details of the replacement Engineer’s experience, and the duties and authority necessary to administer the Contract and supervise the full scope of the Contractor’s execution of the Works’.^[8]

It seems that the Employer decides whether the objection is reasonable – but the Contractor may not be content with a decision by the Employer that the objection is unreasonable. Ultimately, it would be for a court or arbitral tribunal to determine whether the objection was reasonable and, if so, the effect of that finding on the validity of determinations and certificates issued by the replacement Engineer.

No Engineer

The Employer is required by Sub-Clause 3.1 to ‘appoint the Engineer who shall carry out the duties assigned to him in the Contract’.

What if there is no Engineer?

This situation may arise if the Employer fails to appoint an Engineer from the outset of the FIDIC construction contract or because the Engineer ceases to act part-way through it. If the Employer does not appoint an Engineer or fails to replace the Engineer if the Engineer ceases to act, the Employer will be in breach of the obligation in Sub-Clause 3.1 to appoint the Engineer and the FIDIC construction contract – at least in its unamended form – will probably not be workable, given the Engineer’s major role in its administration.

What if the Engineer ceases to act part-way through?

The Engineer may cease to act part-way through the FIDIC construction contract. The Engineer may resign or become ill, or the Engineer’s contract may expire before the end of the FIDIC construction contract (the duration of the Engineer’s contract may originally align with that of the FIDIC construction contract, but may expire before the FIDIC construction contract if that contract is delayed).

If the Engineer’s contract is to expire (and possibly be renewed) before the end of the FIDIC construction contract, the Contractor may become concerned about the Engineer’s ability to make ‘fair’ determinations. There may be a real or perceived risk (either way potentially damaging to the smooth running of the FIDIC construction contract) that the Engineer’s determinations may be rushed immediately before the expiry of the Engineer’s contract, or that the Engineer will make determinations which unduly favour the Employer, either to avoid claims by the Employer under the Engineer’s contract (see further below) or because of the Engineer’s desire to agree terms with the Employer to renew the Engineer’s contract (and thereby earn additional fees). ^[9]

Limits on the Engineer’s authority

Can the Employer limit the Engineer’s authority?

Yes. There are limits on the Engineer’s authority in the FIDIC construction contract. Limits may also be set out in the Engineer’s contract, but problems will arise if they do not match those in the FIDIC construction contract.

Sub-Clause 3.1 of the 1999 Red and Yellow Books provides that:

• The Engineer has no authority to amend the FIDIC construction contract (except by issuing Variations).
• The Engineer may exercise the authority attributable to the Engineer as specified in or necessarily to be implied from the FIDIC construction contract.
• If the Engineer is to be required to obtain the approval of the Employer before exercising a specified authority, the requirements shall be stated in the Particular Conditions. Importantly, the Employer undertakes not to impose further constraints on the Engineer’s authority except as agreed with the Contractor.
• If the Engineer exercises a specified authority for which the Employer’s approval is required, then (for the purposes of the FIDIC construction contract) the Employer ‘shall be deemed to have given approval’.

The Particular Conditions may provide that the Engineer is to obtain approval of the Employer before taking action under specified Sub-Clauses, or that the requirement to obtain approval only applies beyond certain financial or other limits. Sample wording is provided in the Guidance to the 1999 Red and Yellow Books. It is relatively common to see a limit on the Engineer’s authority to issue variations beyond a certain financial limit, but whether the limit applies per variation or in aggregate is not always clear and careful drafting is required. Disputes may arise as to whether an instruction issued by the Engineer is in fact a variation for which the Employer’s approval is needed.

If the Engineer acts without the Employer’s approval when approval is required, the Engineer may be in breach of the Engineer’s contract, but the Contractor is not obliged to find out whether the Engineer did in fact obtain the Employer’s approval. On the other hand, if the Employer imposes constraints (for example in the Engineer’s contract) on the Engineer’s authority which are not set out in the Particular Conditions and not otherwise agreed with the Contractor, the Employer will be in breach of the undertaking in Sub-Clause 3.1.

What happens if the Engineer’s contract does not fully or accurately reflect the Engineer’s duties and obligations under the FIDIC construction contract? Can the Contractor see the Engineer’s contract?

If the Engineer’s contract does not fully or accurately reflect the Engineer’s duties and obligations under the FIDIC construction contract, the Engineer may be unable properly to carry out those duties and obligations, with the result that claims and disputes may arise under the FIDIC construction contract.

The Contractor may wish to see the Engineer’s contract, perhaps to confirm suspicions that the Engineer’s scope of services is not sufficient, or that there are limits to the Engineer’s ability to act which are not set out in the FIDIC construction contract or otherwise agreed with the Contractor. The Engineer’s contract will likely be commercially sensitive (for example in relation to payment terms and amounts) and it may contain confidentiality provisions. It therefore seems unlikely that the Employer or Engineer would agree to provide the Contractor with a copy of the Engineer’s contract so that the Contractor can satisfy itself on this point.

Remedies if the Engineer fails to perform

There are numerous ways in which an Engineer may fail to perform its obligations under the FIDIC construction contract. This may include failing under Sub-Clause 3.5 to agree or determine a matter, failing under Sub-Clause 3.5 to make a ‘fair determination in accordance with the Contract, taking due regard of all relevant circumstances’ (in which case the Employer or the Contractor may argue that the determination is invalid), failing under Sub-Clause 14.6 to ‘fairly’ determine amounts due to the Contractor in Interim Payment Certificates, and failing in the many other respects in which the Engineer is required to make decisions or assessments which are not expressly subject to Sub-Clause 3.5.

In respect of certain acts required by the Engineer, the damage that may be caused if the Engineer fails to perform that act is minimised by a deeming provision.^[10]

For other acts or omissions, where there is no deeming provision, the Employer or the Contractor will need to seek recourse.

What recourse is available to the Employer if the Engineer fails to perform?

The Employer will potentially have recourse under:

• The FIDIC construction contract. For example, if the Employer considers that it is entitled to payment under or in connection with the FIDIC construction contract, or to an extension of the Defects Notification Period, the Employer should follow the claims procedure in Sub-Clause 2.5 [Employer’s Claims] which calls for an Engineer’s determination under Sub-Clause 3.5. If the Employer does not agree with the Engineer’s determination (or certificate issued under different Sub-Clauses), the Employer would challenge the Engineer’s determination or certificate in an action against the Contractor under or arising from the FIDIC construction contract, in accordance with the dispute resolution provisions in that contract (usually the process is: dispute board; attempt at amicable settlement; and finally international arbitration).
• The Engineer’s contract. For example, if the Employer considers that it has suffered loss due to an act or omission by the Engineer, or a failure by the Engineer to carry out its duties and obligations under the FIDIC construction contract in accordance with any standard of care set out in the Engineer’s contract. The Employer would bring a claim against the Engineer under the Engineer’s contract and should follow the dispute resolution procedure in the Engineer’s contract (which may provide for contractual adjudication, attempt at amicable settlement, and finally arbitration or court litigation).

An interesting situation arises if the Engineer is required to and does obtain the Employer’s approval before exercising a specified authority, but the Employer then wishes to challenge the Engineer’s exercise of that authority (for example in a determination or certificate) at a later point in time, including before a dispute board or arbitral tribunal constituted to consider claims brought by or against the Contractor under the FIDIC construction contract. In some jurisdictions the Engineer will, as a matter of law, be the Employer’s ‘agent’ (and the Employer will be the ‘principal’). Whether the Employer can complain under the FIDIC construction contract (as opposed to under the Engineer’s contract) about the actions of its agent, regardless of whether it gave prior approval, may be governed by the law of agency in the relevant jurisdiction. Regardless of any agency point, the Contractor may argue that the Employer is estopped from challenging the determination or certificate because that challenge would contradict the prior approval. Whether an estoppel argument would succeed would depend on the facts and the law in the relevant jurisdiction.

What recourse is available to the Contractor if the Engineer fails to perform?

The Contractor will also potentially have recourse under the FIDIC construction contract. For example, if the Contractor considers that it is entitled to any extension of the Time for Completion or additional payment under or in connection with the FIDIC construction contract, the Contractor should follow the claims procedure in Sub-Clause 20.1 [Contractor’s Claims], which also calls for an Engineer’s determination under Sub-Clause 3.5. The Contractor would challenge the Engineer’s determination (or certificate issued under different Sub-Clauses – or lack of determination or certificate, etc.) in an action against the Employer under or arising from the FIDIC construction contract, in accordance with the dispute resolution provisions in that contract (usually dispute board, attempt at amicable settlement, and finally international arbitration).

Unlike the Employer, the Contractor will not have recourse against the Engineer under the Engineer’s contract because the Contractor is not a party to the Engineer’s contract. In some jurisdictions, the Contractor may nonetheless have an extra-contractual right of action in court against the Engineer (for example in negligence or deceit), but such action is relatively rare (at least in common law jurisdictions).

Subcontracts

Can the Engineer under the main contract also be the Engineer under a subcontract?

Yes, in principle; the Engineer under a subcontract may be the Engineer under the main contract but may also be another person. Either way, the parties to the subcontract (the main Contractor and the subcontractor) will need to consider, for example:

• whether instructions and determinations issued by the Engineer under the main contract should flow down to the subcontractor,
• who certifies payment under the subcontract,
• how subcontractor claims are dealt with,
• how claims of the ultimate Employer are dealt with, and
• what action (if any) the main Contractor is required to take under the main contract to protect or advance the rights of the subcontractor.

Careful drafting will be required. If the FIDIC forms of subcontract are used, they may require amendment to reflect the FIDIC construction contract or other specific circumstances.

Conclusion

The Engineer is not a party to the FIDIC construction contract but, nonetheless, the Engineer plays a major role in the FIDIC construction contract. The acts and omissions of the Engineer affect the rights, obligations and entitlements of the Employer (who appoints and pays the Engineer under the Engineer’s contract) and the Contractor (who has no direct contractual relationship with the Engineer). It is essential for the smooth running of the FIDIC construction contract that the Engineer has the knowledge and experience properly to administer it and that, where required to do so, the Engineer acts (and is seen to act) ‘fairly’ as between the Employer and the Contractor.

*Find more industry insights on Howard Kennedy International construction knowledge hub here.

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[1] ‘FIDIC White Book: A step in the right direction’, Richard Davies, Practical Law Construction Blog, 5 June 2017.

[2] For example, Sub-Clause 7.5 [Rejection] which requires the Engineer to assess whether Plant, Materials or workmanship is defective and Sub-Clause 7.6 [Remedial Work] which requires the Engineer to decide whether any Plant, Materials or wok is not in accordance with the contract.

[3] ‘The FIDIC Contracts Guide’, FIDIC, 2000, page 87. Two other factors are identified, namely the Engineer’s technical competence and the practical consequences of any constraints on the Engineer’s authority.

[4] ‘FIDIC Contracts: Law and Practice’, Ellis Baker, Ben Mellors, Scott Chalmers, Anthony Lavers, 2009, paragraph 6.24 footnote 18.

[5] Under Sub-Clause 3.5, Sub-Clause 14.6, Sub-Clause 14.13.

[6] ‘FIDIC Contracts: Law and Practice’, Ellis Baker, Ben Mellors, Scott Chalmers, Anthony Lavers, 2009, paragraph 6.24 footnote 18.

[7] The 1999 Silver Book provides at Sub-Clause 3.5 that ‘If agreement is not achieved, the Employer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances’.

[8] ‘The FIDIC Contracts Guide’, FIDIC, 2000, page 87.

[9] See also ‘The Employer’s Agent’, by Victoria Tyson, published on the Howard Kennedy Knowledge Hub.

[10] For example, pursuant Sub-Clause 10.1 [Taking Over of the Works and Sections], if the Engineer fails to issue the Taking Over Certificate in certain circumstances, it is ‘deemed to have been issued’ on a certain date.