THE INTERNATIONAL CONSTRUCTION LAW REVIEW

[1993] ICLR 153-245

Volume 10, Part 2, April 1993

CONTENTS

Introduction

Articles:

Disputes Review Board and Adjudicators - ANDREW PIKE

The Certifiers Duty of Care to the Contractor Pacific Associates v. Baxter

Reconsidered DUNCAN MILLER

Chamber of National and International Arbitration of Milan STEFANO AZZALI

Note on Arbitration Award T J. RALPH, S J JOHNSON, R M FITZGERALD

French Supreme Court Nullifies ICC Practice for Appointment of Arbitrators

In Multi-party Arbitration Cases CHRISTOPHER R. SEPPALA

News of the New Engineering Contract DR MARTIN BARNES

Correspondents Reports:

Australia R H B PRINGLE, QC

Reasonableness as well as Honesty Required of a Principal in Exercising

Powers on Default of Contractor

Acceptance of Repudiation Quantum Meruit

Commercial Arbitration Leave to Appeal Recent Legislative Intervention

Singapore PROFESSOR VINCENT POWELL-SMITH

Direct Payments to Nominated Sub-Contractors and the Insolvency Laws

Book Review

INTRODUCTION
Amongst the changes to the fourth edition of the FIDIC Conditions were alterations to
clause 67 to provide, amongst other things, for an attempt to settle the dispute amicably
before final reference to arbitration. Provision was also made for arbitration other than
under the ICC Rules of Arbitration. At the time of the publication of the Conditions in
1987 there was already considerable discussion about alternative means of resolving
disputes quickly without having to resort to formal arbitration. Indeed the World bank
now requests employers to consider having a Disputes Review Board instead of recourse
to the engineer under clause 67 of the FIDIC Conditions. Mr. Andrew Pike who is a
partner of Simmons & Simmons, a leading firm of London solicitors, has been considering
whether it would be possible to incorporate a provision as to a Dispute Review Board or
some other person such as an adjudicator in the FIDIC Conditions. At page 157 he sets
out the result of his thoughts in a stimulating article which is particularly valuable since it
is accompanied by a set of suggested alternations to the FIDIC Conditions to give effect
to this proposals. Of necessity these proposed conditions have had to be printed in small
type but we hope that they will be read carefully since they provide a fertile source not
only for discussion but also for adaptation and implementation (but bearing in mind that
the copyright in the proposals is vested in the author and Simmons & Simmons!).

Our next contribution is equally thorough. In the common law world, at least, there is still
discontent amongst those who believe that they have been injured by what is thought to
be a lack of care on the part of the engineer but who are advised that a claim against the
engineer cannot succeed in law. A not untypical situation was considered by an English
Court of Appeal in the case of Pacific Associates v. Baxter [1989] 3 WLR 1150; 44 BLR
33. That arose out of the administration of a contract, one of whose terms made it clear
that the engineer was not owed a duty of care to the contractor. To that extent the
decision is of limited assistance in establishing a clear principle. Mr. Duncan Miller, an
Australian lawyer, has now fully analysed the present position in his contribution which is
to be found on page 172: "The Certifiers Duty of Care to the Contractor Pacific
Associates v. Baxter Reconsidered". It will provide the readers with a comprehensive
summary of the present position and may cause others to ponder whether justice is
really being done.

There then follow two accounts of awards by arbitrators. The first has been made
available to use by Mr. Stefano Azalli, the Secretary General, Chamber of National and
International Arbitration of Milan (at page 201). Like most published arbitration awards it
is anonymous in that the parties are not named: both came from Italy but the contract
was concerned with work in Iraq. The note is essentially an extract from the award in
summary form and it provides a useful review of the circumstances in a claim for
compensation arising from the suspension of a contract.

The second award is the subject of a note by Messrs Theodore J. Ralph, Stephen J.
Johnson and Robert M. Fitzgerald to whom we are indebted. They all acted as Counsel for
the claimant in a case which was referred to arbitration under the ICC Rules. Their note
(at page 212) describes the nature of the contractors claim and summarises the findings
of the tribunal. The contract incorporated the FIDIC Conditions 3rd edition. The law
applicable was Roman-Dutch law but the arbitrators apparently decided to follow
decisions from other jurisdictions. One of the questions was whether the employer was
liable because the engineer was not granted an extension of time the result of which the
contractor had to accelerate. It is not however clear from the tribunals reasoning why
they decided that the employer should be held liable for the consequences of the
engineers failure to grant the extension of time (other than on the basis, which appears
to be the case, that there was some instruction or direction to accelerate). If the
engineer is an independent consultant then, for reasons discussed by Mr. Duncan Miller in
the article referred to above, there are considerable difficulties in imputing to an
employer the liability of errors of judgment on the part of the engineer. Both parties
under typical construction contracts incorporating FIDIC Conditions have to accept that
since the engineer is not perfect there is a risk that the engineer will not arrive at the
"right" decision or do so at the "right" time. It seems odd that the employer should be
the guarantor of the engineer. In England an employer does not make any promise that
an engineer is competent or that his decision will be reasonable: Neodox v. Swinton &
Pendlebury [1958] 5 BLR 34. Hence clause 67 provides for the power to open up review
and revise the engineers opinions etc. and to do so, in certain circumstances, without
having to wait for completion of the works. In the common law systems however if the
engineer were an employee of the employer the employer might be liable if the engineer
failed to do what he was employed to do: Perini Corporation v. Commonwealthof
Australia [1969] 2 NSWLR 530; 12 BLR 82. Similarly the tribunals conclusion that the
contractor was entitled to financing charges at first sight is startling as apparently their
reasoning was simply that financing charges are an integral part of the contractors
additional cost incurred to perform disputed work. Yet it is generally accepted that it is
not possible to interpret the powers such as those in the FIDIC Conditions which exist to
fix rates so as to enable a new rate to be established which includes financing charges
which were actually incurred from the engineers failure to inability to fix a rate
reasonably soon after the work was done. Unfortunately the tribunals reasoning does not
help to overcome this difficulty. In particular the reference to two English decisions which
concerned a completely different contracts seems to be completely misplaced. These
decisions were not about rate fixing but the meaning of an express contractual provision
for the recovery of "direct loss and/or expense". We have taken the exceptional course of
commenting on this award as we consider that it should be treated with reservation. Our
contributors clearly achieved a great success for their clients and we are most grateful to
them for allowing us to publicise an award which may be regarded by some as seminal.

In arbitration systems such as those used by the International Chamber of Commerce,

problems arise because they are not apt to accommodate multi-party arbitrations. Such
arbitrations not only embrace the situation of employer-contractor-sub-contractor but
also cover situations in which the claimant or defendant parties have joint but differing
interests. Are they entitled to representation? Can they each choose their own arbitrator.
The cat has been set amongst the pigeons by a decision of the Cour de Cassation in
France in which it held that two defendants who were supposedly liable severally (in
unusual circumstances) each entitled to nominate their own arbitrator. Mr. Christopher R.
Seppala, our Correspondence on French matters, gives a full account of and comments
on this decision in his article at page 222.

The great interest generated by the draft New Engineering Contract (see [1991] 8 ICLR
247) should now be satisfied in full since it was to be published at the end of March. Dr.
Martin Barnes provides news of this at page 228.

Next we have two Correspondents reports. At page 229 Mr. R H B Pringle QC, writes
about a most interesting case relating to the exercise of powers to take over work on the
default of a contractor. He most usefully sets out the decision and (at page 236) goes on
to discuss the outcome in financial terms by award of a Quantum Meruit. Mr. Pringle adds
a further note of the application of section 38 of the Uniform Commercial Arbitration Acts.

At page 240 Professor Vincent Powell-Smith reports on a recent decision of the Singapore
Court of Appeal in which it was held that direct payments by an employer to sub-contract
are ineffective as they offend against the general principle of insolvency law that a
particular creditor (the sub-contractor) should not obtain priority over other creditors.

Finally, we conclude with a book review of the latest edition of the leading up to date text
book on English construction law; Keating on Building Contracts. We thought it might be
interesting if it were reviewed by someone who knows much about but is not a
practitioner in the common law systems; Dr. Christian Wiegand.
HUMPHREY LLOYD QC
DAVID WIGHTMAN
Editors-in-Chief

NOTE ON ARBITRATION AWARD

THEODORE J. RAPLH, STEPHEN J. JOHNSON, ROBERT M. FITZGERALD

Recovery of acceleration costs

The employer under a FIDIC contract is responsible for the additional costs incurred by
the contractor to "speed up" its performance in an attempt to meet the original contract
completion date when time extensions have been requested and either wrongfully denied
or not acted upon by the employer in a timely fashion. Contractors recovery can be
supported under either the theory of directed acceleration or construction acceleration.

Duties of engineer under FIDIC contract

The FIDIC contract is structured on the premise that the engineer will act in a timely, fair
and independent manner when discharging his duties. The engineer must exercise his
authority with fairness and responsibility and in a manner that ensures that the
contractual interests of both contracting parties are equally observed.

Recovery of interest

Financing charges should properly be considered an aspect of the contractors direct cost
for undertaking additional work and expense.

Award made in 1991.

BACKGROUND OF CONTRACT AND DISPUTE

By contract dated 29 May 1982, in the amount of $91,864,374, a joint venture of two
American construction companies (the contractor) contracted with an agency of a
national government (the employer) to construct 125 km of concrete-lined main and
branch irrigation canal. The project was part of an overall government program to irrigate
more than 40,000 hectares. The work was funded by the United States Agency for
International Development (USAID) by means of loan and grant agreements with the
government. The conditions of the contract for the work were the FIDIC (Fdration
Internationale Des Ingnieurs-Conseils) standard form with some modifications. The
employer engaged a separate American joint venture of two engineering firms to act as
engineer on the project.

The contractor commenced work on 24 June 1982 and was required by the contract
documents to complete portions of the work in accordance with designated interim and
final completion dates. The first section of work was to be completed with 14 months
of commencement of work on the contract. The second segment of work was to be
completed within 25 months of the commencement of the contract work and the final
phase was to be completed 45 months after the start of work. Substantial liquidated
damages were payable on failure to meet each interim completion date and the final
completion date.

From the outset of performance, the contractor experienced significant delay-causing

factors in the performance of what should have been an efficient excavation and paving
process. As a result, the first section of work was not completed until nearly a year (339
calendar days) after the original required contract completion date. The second section of
canal work was delayed in its completion for over one year (392 calendar days) as the
problems with the construction intensified. The final contract completion date also was
not met by the contractor; however, that delay (153 calendar days) was significantly less
than had been incurred on the first two sections of the canal. This reduction of the
ongoing performance delay was the result of somewhat better ground conditions in the
final segment of the canal, and more importantly, the investment by the contractor of
substantial additional labor and equipment resources into the project at the direction of
the employer. The delay factors encountered gave rise to claims by the contractor for
additional compensation and time extensions. These claims initially were rejected by the
employer/engineer, leading to the direction to devote additional resources to the project.
The employer/engineers improper handling of the delays incurred on this project caused
the amounts in dispute between the parties to increase dramatically and makes this
award in favor of the contractor significant to the international construction community.
The award defines the responsibilities of the contractor and the engineer in requesting
and administering time extensions on a project utilizing the FIDIC contract.

The slightly modified version of the FIDIC contract utilized on the project in question
contained the standard variations, adverse physical conditions, time for completion,
extension of time for completion, claims and settlement of dispute arbitration clauses.
The majority of the contractors claims for over US $56,000,000 fell into two distinct
categories. The first category was for additional costs incurred to deal with adverse
physical conditions which impacted canal excavation and lining operations. The contractor
argued that the acute physical conditions encountered were not adequately described in
the tender and therefore the additional costs and time incurred in dealing with these
adverse physical conditions should be reimbursed. The second claim element, by far the
larger of the two, was the request for additional costs incurred by the contractor in a
futile and misdirected effort to complete the project within the original contract
performance period in spite of the adverse physical conditions encountered. This portion
of the contractors claim accounted for 78% of the damages requested.

The adverse physical conditions encountered on the project included unforeseen

groundwater levels, much higher than anticipated, which required extensive additional
dewatering efforts and slowed canal excavation. Another of the adverse physical
conditions encountered was unforeseen rock within the prism of the canal which required
blasting and seriously slowed construction progress. The other major adverse physical
condition which slowed canal excavation progress was the excessive amount of
unsuitable material excavated from the prism of the canal. The engineers geotechnical
report estimated that 60% of the canal excavation would be suitable for required
embankment construction. During construction less than 30% of the material was
actually suitable for embankment use.

The much larger and possibly avoidable claim for acceleration costs came about as a
result of directives of the employer and inaction by the engineer when the project first
fell significantly behind schedule due to the above described adverse physical conditions
and two record-breaking monsoon seasons. Although time extensions had been
requested by the contractor, the employer, through the engineer, refused to grant any
extensions and assessed over $1,000,000 in liquidated damages against the contractor.
In addition, both the employer and the engineer demanded that the contractor take all
necessary steps to bring the project back on schedule. In spite of repeated additional
requests for additional time extensions, some of which were finally granted late in the
project, the engineer generally refused during contract performance even to rule on the
contractors requests for additional time and instead continued to direct the contractor to
speed up its performance to meet the original contract completion date(s). Faced with no
alternative, the contractor purchased approximately $12,000,000 of additional equipment
in order to allow work to proceed in more areas of the canal at one time. The contractor
also invested over $2,000,000 in additional expatriate and third country national
engineers and supervisors in an effort to gain back as much time as possible. Throughout
the ensuing 28 days a month, two shifts a day acceleration effort, the contractor
continuously notified the employer and engineer that the total additional costs associated
with this effort were the responsibility of the employer.

Late in the project, the engineer recommended and the employer approved, time
extensions for the contractor which equalled or exceeded the actual dates when each
phase of the canal system was completed. As a result, no liquidated damages were
assessed and all previous liquidated damages withheld by the employer were returned to
the contractor. Inconsistently, however, the engineer denied substantially all of the
contractors adverse physical condition claims and denied the contractors acceleration
claim in its entirety. Intermediate appeals to the employer were also denied and the
contractor exercised its right under the contract to arbitrate its disputes. That process
occurred during 1989 and 1990 with the result being the 1991 award to the contractor of
over 95% of the amount it had requested.

OBSERVATION

Due both to the amount in controversy and the complexity of the numerous issues
involved, the arbitration process was lengthy. A highly qualified arbitration panel
composed of a leading construction attorney from Singapore, a retired judge of the
English Court of Appeal and a consulting engineer and former international construction
executive from the US were selected to hear the dispute. The hearing took place over a
period of 18 days and the parties submitted over 10,000 pages of documentary evidence
and witness testimony. The tribunal took over 200 pages to write its unanimous findings
in the final award. Although there were countless individual issues discussed and
analyzed by the tribunal, our purpose here is to share the significant and more generally
applicable elements of this important award with the international construction
community.

The most significant element of the award is the panels unqualified acceptance of the
right of a contractor to recover the costs it incurs to speed up its work, whether those
costs are incurred in direct response to an employer directive or because the contractor
has been denied proper time extensions. As will be discussed below, the tribunal clearly
enunciated the elements necessary for recovery of such "acceleration" costs. In addition,
the tribunal accepted the legal proposition that an employer is responsible for additional
costs expended by a contractor to speed up its performance when the engineer has
wrongfully denied the contractor time extensions or even when the engineer has failed to
respond to the contractors time extension requests in a reasonably prompt manner. The
second significant and generally applicable element of the award the finding that
financing charges to perform additional work should be included as an element of a
contractors direct cost for the additional work. Finally, the award contains well-reasoned
findings describing the duties and responsibilities of an engineer under a FIDIC contract.
These findings should be helpful to any party performing construction in the future under
FIDIC terms and conditions or to any engineer seriously concerned with his rights and
responsibilities under a FIDIC contract.

EXTRACTS FROM THE AWARD

Acceleration

The tribunal began its consideration of the contractors acceleration claim by adopting as
its baseline the following requirements necessary to find a valid claim for acceleration.
(These requirements were taken almost verbatim from US legal precedent cited by the
contractor in his pre-hearing submissions.):

1.
 2. entitlement to time extension(s);
3. time extensions were requested;
4. failure by the engineer to grant some or all of the time extensions to which the
contractor was entitled, or a material delay in making grants of time extensions;
5. an express or implied directive to "accelerate", meaning to complete prior to a
properly adjusted completion date; and
6. the incurrence of acceleration costs.

As a secondary matter, unnecessary to the ultimate award, the tribunal also

accepted the

legal concept of constructive acceleration and declared that the baseline for its review of
the contractors acceleration claim would be as follows:

1.
2. entitlement to substantial time extension(s);
3. failure or refusal by the engineer to grant time extensions in a timely manner;
4. wrongful imposition of liquidated damages;
5. consistent pressure by the employer and engineer to "get back on schedule"; and
6. incurrence of acceleration costs.

Essentially the tribunal accepted, by adopting the above listed requirements to

recover the

acceleration and/consecutive acceleration, the standards initially set forth in the US case
of Fermont Division, Dynamics Corp. of America, ASBCA 15806, 75-1 BCA 11,139
(1975). The Tribunal also cited the opinion of the US Court of Claims in Continent
Consolidated Corporation v. the United States, 200 Ct.Cl. 737 (1972) wherein Trial Judge
Spector held that the government/owner could be liable for acceleration by simply
delaying for an inordinate period acting on a request for time extension by a contractor.
In discussing the implied/construction acceleration order resulting from an employers
demand for completion in accordance with the original contract time period coupled with
an employers delay in responding to legitimate time extension requests, the tribunal
cited two other US legal precedents. Pathman Construction Co., ASBCA 14285, 71-1 BCA
8905 was discussed by the tribunal as an example of an implied acceleration order
where the government/owner simply refused the contractors time extension request and
demanded prompt completion of the work under an express threat of liquidated
damages. The tribunal also cited Electronic & Missile Facilities, Inc., ASBCA 9031, 1964
BCA 4338 for the proposition that construction acceleration does occur where the
government/owner requires a contractor to adhere to the original progress schedule and
withholds liquidated damages when the government/owner knew or should have known
that the contractor had entitlement to legitimate time extensions.

With this legal framework established by the tribunal, the award then discussed whether
each element of the acceleration claim theory had been met by the contractor. Since the
engineer belatedly granted time extensions sufficient to cover the full period of
performance by the contractor, the tribunal accepted without question the contractors
entitlement to such time extensions when the work was actually being performed. It was
also a matter of undisputed record that the contractor had formally requested time
extensions on numerous occasions throughout the performance and therefore this
element of the claim was also met without serious dispute. The more difficult issues for
the tribunal concerned the engineers handling of time extension requests and the
employers direction to complete the project on the original schedule. Under Clause 44
the engineer argued that the contractor did not submit detailed particulars with its time
extension requests and that such a failure excused the engineer from granting the
requests. The tribunal rejected that argument by stating that the engineers
representative was already in possession of all relevant particulars and could not use that
portion of Clause 44 to refuse to grant legitimate time extensions. In discussing the
engineers 15-month delay in addressing the contractors initial time extension request
the panel simply labelled it "wholly inexcusable" based on the clear obligation of the
engineer under Clause 44.

"It is implicit in Clause 44 that the engineer must discharge his time extension
responsibilities timeously. Failure so to do would deprive the contractor of the
opportunity to reschedule his work in a systematic manner in order to achieve
completion by the properly extended completion date or dates."

The Tribunal then described the unacceptable quandary a contractor must face when its
time extensions are not dealt with in a timely manner.

"No contractor should have to contend with such a situation, as it effectively means
that the contractor is left without any means of knowing the proper completion date
he has to meet, thereby preventing him from organizing his work in such a manner
as would enable him to meet his contractual obligations as to completion."

In discussing the engineers after-the-fact recommendation not to impose liquidated

damages pending a decision on time extension requests, the tribunal stated that since
the engineer knew from the outset of the delays that the contractor was entitled to some
time extension, it should have given this recommendation to the employer before
liquidated damages were assessed and not 11 months later. Having satisfied itself that
the engineer was both dilatory and incorrect in its handling of the contractors time
extension requests, the tribunal looked then for the next required element of an
acceleration claim, an expressed or implied order to the contractor to meet the original
contract completion date(s). The tribunal found ample written support justifying the
contractors allegation that it was directed to accelerate and more importantly, the
tribunal also satisfied itself that even without such written directives, the contractor
would be entitled to recover its acceleration costs under the theory of constructive
acceleration.

The tribunal made it clear that it was not bound by US legal precedents discussing
constructive acceleration since the contract was, by its terms, subject to the Roman-
Dutch based law of the country within which the work was performed. Nonetheless, the
tribunal found itself in agreement with the rationale of the US decisions on acceleration
and could find no contrary case law and/or statutes in the host country.

"In this case, the tribunal is satisfied on the evidence that the contractor was clearly
entitled to substantial time extensions under Clause 44 for the many excusable
delays that had arisen, but none was granted despite several requests made and
reminders sent. Consistent pressure was exerted on the contractor to get back on
schedule. To aggravate matters, liquidated damages in excess of $1,000,000 were
imposed. Given these circumstances, the Tribunal is of the view that it was entirely
justifiable for the contractor to decide on an acceleration program, and the
consequent cost incurred is justly recoverable. Any other view will permit the most
serious injustice to prevail."

Although the damages recoverable under either a directed acceleration or a constructive

acceleration theory are essentially the same, this finding by the tribunal is important
since it approves of a theory of recovery for acceleration costs where no express order
has been given by the employer and/or the engineer. In other words, the tribunal found
that the belated and inadequate administration of time extension requests in and of itself
can subject an employer to significant liability for constructive acceleration costs.
The final element necessary to recover under an acceleration claim is the incurrence of
costs directly resulting from the acceleration. The tribunal had no difficulty in finding this
element of the contractors acceleration claim and spent most of its time dealing with
how the damages were calculated rather than whether they were actually incurred. The
tribunal specifically rejected the argument that Clause 52 of the FIDIC terms and
conditions required the additional acceleration costs to be computed as adjustments to
the contract rates or prices, and awarded damages by category of cost incurred.

Duties of the engineer under a FIDIC contract

The most universally applicable findings of the tribunal are their statements regarding the
rights and responsibilities of the engineer under a FIDIC contract. These findings fall into
two major categories. The first involves the responsibilities of the engineer under Clause
44 to deal with time extension requests in a timely and independent manner. The second
area is the responsibility of the engineer to exercise his expansive authority under a
FIDIC contract in a manner fair to both parties.

As was noted above in the discussion of the contractors acceleration claim the tribunal
unanimously found that the engineer must deal with time extension requests in a timely
fashion. In discussing the engineers duties under Clause 44, the tribunal specifically
stated that it was the engineers obligation to investigate all facts reasonably available to
it about alleged delays, whether or not provided by the contractor. The tribunal also
made it clear the engineers duties under Clause 44 should be exercise independently and
without the need for approval by the employer.

It was in the context of dealing with both the time extension requests and the adverse
physical condition claims of the contractor that the tribunal set forth in the clearest of
terms that the engineer under a FIDIC contract must act in a fair and independent
manner. It had become the practice for the engineer on this contract to respond to time
extension requests either strictly in accordance with the employers directions or in
accordance with the directions of a special committee including both the employer and
the lender. The tribunal found no contractual basis for the engineer to abdicate its
decision making responsibility on time extension requests to the employer and
furthermore found no contractual statutes whatsoever for a committee to deal with time
extension requests. The tribunal found it "particularly inappropriate" that the same
individual who was expressly designated under Clause 67 of the contract general
conditions to review the decisions of the engineer on all matters, including time extension
requests, was represented on the special committee. As a result of these concerns and
contractual irregularities, the tribunal found the engineer to be derelict in his
responsibility by allowing such a committee to entertain time extension requests under a
FIDIC contract.

Also quite instructive from the standpoint of the tribunals understanding of the
engineers responsibility under a FIDIC contract are the following specific findings.

1.
2. The tribunal found the engineers lack of candor regarding pre-tender geotechnical
information to be misleading and in some cases even misrepresentative of the
facts.
3. Attempts by the engineer to shift design responsibility to the contractor were also
rejected by the tribunal on the basis that Clause 8(2) expressly excludes the
contractor from design responsibilities.
4. The tribunal found the engineers attempt to have the contractor share in the cost
of an obvious design change to be outside of the meaning and intent of the
"variations" clause of a FIDIC contract.
 5. The tribunal consistently rejected as improper the repeated examples of the
engineers substitution of the employers judgment for his own when making
decisions required of the engineer under the contract.

In concluding its discussion of the rights and responsibilities of the engineer under
the contract, the tribunal restated Clause 2.1, "Authority of engineer", for the
purpose of highlighting the expansive and important responsibilities set forth
therein.

"The engineer shall decide all questions which may arise as to the quality or
acceptability of materials furnished and work performed and as to the manner of
performance and the rate of progress of the work; all questions which may arise as
to the interpretation of the plans and specifications; all question as to the acceptable
fulfillment of the contract on the part of the contractor; and all questions as to
compensation. Except as set forth in Clause 67 of the General Conditions, the
engineers decision shall be final and he shall have the authority to enforce and
make effective such decisions and orders which the contractor fails to carry out
promptly."

Directly after quoting this portion of the contract, the tribunal gave this summary
statement of what it consider to be the primary obligation of the engineer under a FIDIC
contract. "This enlargement of the Engineers authority serves to underscore the
necessity for the engineer to exercise his authority with fairness and responsibility and in
a manner that ensures that the contractual rights and interest of both contracting parties
are equally observed." {Emphasis supplied)

Financing Charge

Because of the length of time involved in resolving the disputes heard in this arbitration
and because of the significant amount of damages at issue, the financing charges
associated with the contractors claim were substantial. These financing charges were
primarily of two kinds. The first was interest paid on cash advances made by the joint
venture partners to finance additional work which the employer refused to pay for during
contract performance. The second type of financing charge was interest payments the
joint venture made to various banks from whom it also had to borrow funds to finance
additional work. Both types of financing charges were compiled in the contractors
damages as an element of each individual claim and treated as a direct cost of such
claims.

The employer did not dispute the recoverability of interest as a matter of principle;
however, the tribunal discussed the interest charges in some detail due to the fact they
amounted to approximately 40% of the contractors overall claim amount. In pursuing its
discussion of the contractors interest claim, the tribunal provided valuable insight into
the treatment of financing costs as an element of additional work under a FIDIC contract.
In discussing the forseeability of such costs, the tribunal stated that "it would be
unreasonable and wholly unrealistic to expect the contractor to provide the necessary
financing for the additional work and expense under claim without obtaining the
necessary funds from banking facilities." The importance of this logical, modern day
reality, in the eyes of the tribunal, is that financing charges are an integral part of the
contractors additional cost incurred to perform disputed additional work. In support of
this conclusion, the tribunal cited two recent English Court of Appeal decisions, F.G.
Minter v. WHTSO (1980) 13 BLR 1 and Rees and Kirby Ltd. V. Swansea City Council
(1985) 30 BLR 1.

Although the tribunal awarded the contractor essentially all of the financing charges it
claimed in connection with the additional cost found to be the responsibility of the
employer, the tribunal reminded all contractors of the need to initiate and pursue the
adjudication process under the FIDIC contact promptly in order to recover financing
charges. In this case, the tribunal found no delay by the contractor which would preclude
the recovery of interest; however, the tribunal left no doubt it would have ruled
differently if such delays had existed. Consistent with its decision to consider the
financing charges as a direct cost of the additional work, the tribunal allowed the use of a
compound rate of interest to reflect more accurately the true cost to the contractor.

COMMENT

The significance of the award in this case goes far beyond the large amount in
controversy and the overwhelming acceptance of the contractors claim positions. The
tribunals decision provides important guidance to future signatories to FIDIC contracts
concerning the applicability and the effect of the doctrines of acceleration and
constructive acceleration. In addition, the recoverability and treatment of financing
charges as a direct cost of performing additional work provides a clear statement of the
rule in this area and an unmistakable warning to employers of all of the possible
consequences of protracted disputes over variation orders. The most important aspect of
this award to the international construction community, however, is contained in the
tribunals interpretations of the duties and responsibilities of the engineer under a FIDIC
contract. It has long been understood that the engineer under a FIDIC contract is a
powerful and important figure. The clear message of this case is that tribunals
willcontinue to insist on the engineer exercising those powers in a fair and independent
manner.