NZS3910 Review - 2 of 5 The Engineer

Two of Five – Role of the Engineer

In those jurisdictions which favour the English common law approach to construction, we have this curious (to the rest of the World) concept of the dual role of the Engineer.  

The implied roles of the Engineer, as outlined in 1946 in the 7^th Edition of Hudson’s Building and Engineering Contracts, are comprehensive extending from site investigation, project feasibility, design, tendering and contract supervision through to resolving disputes between the parties.  For all that, the Engineer must also serve faithfully as the owner’s agent (see Bowstead & Reynolds on Agency, PG Watts QC, 19^th Edition 2010).   However, when using a discretion under the contract, employing professional judgment, the law imposes on the Engineer an obligation to act independently and impartially of the interests of the parties (see Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd).

That approach is, however, more than a little optimistic when it comes to the Engineer exercising a discretion without regard for his or her own interests, let alone the perception of conflict of interest.

Clause 6.2 of NZS3910 recognises the dual role of (1) acting as agent of the owner and (2) “independently of either contracting party, to fairly and impartially make decisions entrusted to him or her under the Contract, to value work and to issue certificates.” 

There are two curious issues with this clause – the first, that even when acting in the second capacity, the Engineer is still the owner’s agent with no independent capacity outside of the contract between the owner and the contractor; and second, the fair and impartial role is expressly limited in clause 6.2 to valuing work and issuing certificates.  This rather begs the question as to whether or not making a “decision”, for example following a formal review in terms of clause 13.2, is a “certificate” for the purposes of clause 6.2.   

The Engineer’s responsibilities under NZS3910 broadly fall into two categories:

The Engineer is an individual, and not a firm.   Typically, however, the Engineer is a member of a firm of consulting engineers engaged for the project under a separate consultancy agreement with the owner. Under that agreement, the Engineer’s firm will be engaged for a number of purposes, including design, document preparation, tendering and generally acting as the owner’s agent in administering the construction contract.  That appointment agreement will carry rights and obligations of its own.

In order to support those obligations, the Engineer’s firm will carry professional indemnity insurance.  Bearing in mind the value of the work and the exposure to liability, in addition to the professional skill of the Engineer, it is the quality of the professional indemnity cover which owners ultimately rely upon.  Most engineering consultants guard their relationships with their insurers very jealously.

One of the core insurance terms is material disclosure, where the insured must disclose all information which might affect the decision to insure, the premium and the terms and conditions of such insurance.  In circumstances where the insured becomes aware of potential liability which may give rise to a claim, those circumstances must be disclosed, and the insured must follow the directions of the insurer when managing that possible claim if cover is to be maintained.  The Engineer’s behaviour may then be directed by the insurers, or their legal advisors.  The requirement for fairness and impartiality in such circumstances will be little more than a mirage.

In practical terms, the Engineer is in the centre of the project, liaising between the owner and the contractor, and providing designs and other documentation in the capacity as designer.  As will be apparent from the above summary, in some cases the Engineer is acting as little more than a mailbox and mouthpiece for the owner; in others, the Engineer may have regard to the parties interests, but must discharge those duties impartially.  In many cases, the Engineer’s interests are intermingled with the owner’s.

It is regrettable, but a fact of life, that most tenders are called on incomplete designs and documentation, and the detail must be worked through and the unexpected managed during the construction process.  In providing developed and for construction designs, it is not uncommon for errors and omissions to be corrected; consequently, certification of payments, granting of extensions of time and instructing variations can be opportunities to blur liability for such events.  Similarly, when an unforeseen event occurs, shortcomings in the design can become apparent.  Awkward conversations with owners, explaining design changes, cost overruns or delays, can also be avoided by declining contract claims on the basis that these were, or should have been, the contractor’s responsibility.

In most projects, such blurring of liabilities is hardly conscious if it happens at all.  However, the perception is real and the potential for actual conflict of interested is not to be under-estimated.  Most contractors are alive to such events, real or perceived and will raise a dispute if, in the context of the overall project, the claim is warranted that the impact on project relationships, and future workflows, make the claim worth it.

The first port of call for disputes is the Engineer’s review under clause 13.2.  On any estimation, where the Engineer, or the Engineer’s firm, has potential liability, requiring a fair and impartial assessment and decision, avoiding any perception of conflict of interest, would be superhuman.  In some cases, impossible if the insurer becomes involved.  Most disputes will arise out of entitlements to variations, instructed by the Engineer, or claims which the Engineer will have assessed.  On major projects, saying “just trust me, I’m a professional” isn’t enough.

Granted, the Engineer’s decision can be modified following mediation, adjudication or arbitration.  However, in the interim the decision is binding, and if it is not challenged within the time periods outlined in clause 13.4.2, it becomes genuinely final, with arbitration not being available.

The received wisdom is that an Engineer’s review is not an arbitration, to which the rules of natural justice and fair and equal treatment apply.   That is not a position cast in stone.  The distinction between arbitration and expert determination, or any other contract mechanism, is one of context considered by the courts on the particular circumstances of the case.  Where the Engineer gives a “decision” with reasons that has the potential at least to be final and binding, there has to be a considerable risk that the rules of natural justice which apply to arbitrations will apply to the Engineer’s review.

It is time to reconsider the independent role of the Engineer.  A professional engineer may, of course, be engaged to advise and represent the interests of the owner, but it is time to acknowledge the fiction of the impartial Engineer and move on to more robust project management and dispute resolution procedures.