Fairness and the FIDIC Silver Book

The FIDIC General Conditions of Contract, contained in the Silver Book version, requires the Employer to act in the “traditional” role of the Engineer. The purpose of this article is to examine the Employer’s power to make determinations in respect of the Contractor’s claims in terms of Clause 3.5 of the Silver Book Contract, and the manner in which he/she is to make same.

The clause in question reads as follows:

“Whenever these Conditions provide that the Employer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Employer shall consult with the Contractor in an endeavour to reach agreement. If agreement is not achieved, the Employer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.

The Employer shall give notice to the Contractor of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination, unless the Contractor gives notice, to the Employer, of his dissatisfaction with a determination within 14 days of receiving it. Either Party may then refer the dispute to the DAB in accordance with Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision].”

The Employer is thus required to consult with the Contractor, hear the Contractor’s side and attempt to come to an agreement with same regarding the Contractor’s claim against him or her. At this stage it is abundantly clear that this process may cause some tension between parties. Should such an agreement not be reached the Employer must proceed to make a “fair determination” regarding the Contractor’s claim. However, in doing so he/she becomes the judge of his/her own case.

E Baker et al in FIDIC Contracts: Law and Practice 2009 at page 292 alludes to the fact that the duty of the Employer to act fairly may not be a “meaningful duty” as the position is clearly conflicting. However, it is concluded that whilst it may be difficult for the Employer to act fairly in these circumstances it is still, in fact, possible. They rely on English authority (the Sheldebouw BV v St James Homes (Grosvernor Dock) Ltd 2006 BLR 124) to reach this conclusion. In the aforementioned matter counsel argued that it was impossible for the Employer to act fairly as a contract administrator, however, the Court found that this was not the case, but conceded that it would be more difficult for him/her to do so.

E Baker et al further argues that the protective measures provided in the Silver Book safeguards the Contractor’s interests from the Employer’s potential failure to act fairly. They refer to the portion of Clause 3.5 which provides that the Employer’s determination shall not be enforceable if the Contractor notifies the Employer of his/her dissatisfaction with the determination within 14 days of same being made. While this safeguard does allow the Contractor an easy mechanism to escape the enforceability of an unfair determination, this safeguard does not cure the internal conflict that arises when the Employer is empowered to make such determinations.

The interpretations of the word “fair” requires that a determination must be bona fide, professional, honest and arguably impartial. Whether the Employer will be able to act in such a manner when determining a claim which affects his/her own rights and position is almost unimaginable. Even where the Employer acts honestly, his/her position as Employer alone jeopardizes his ability to act bona fide toward the Contractor and to take all relevant considerations into account. There is also risk that he/she will naturally treat his/her own circumstances with more gravitas simply because he/she views same from his/her own perspective. As stated by the Court in Sheldebouw: “it is more difficult for the organisation itself to make a decision which is contrary to its own interests”.

Furthermore, the likelihood of the Contractor ever accepting the Employer’s determinations as satisfactory where it is negative towards him/her seems slim. The process of making determinations in terms of the Silver Book is thus inherently somewhat flawed. It is submitted that negative determinations by the Employer will be submitted for endless review by way of adjudication– rendering the process inefficient, time-consuming and potentially costly.

In practice, the removal of the “independent” Engineer creates a contract where the Employer holds the power and the Contractor stands to be prejudiced. It also creates a determination process wrought with potential inefficiency and which may prove difficult to navigate.

That being said, the Silver Book does allow for contract administration without the “middle man” (the Engineer) which in some circumstances may allow for the parties to work together more efficiently and directly. In some circumstances the conduct of the Engineer may hinder the progress of a project or complicate the channel of communication. In circumstances where the Employer and Contractor are comfortable with the Silver Book determination procedure, the Silver Book is certainly workable. Thus with the right parties – it could work.

In conclusion, Contractors should give due consideration to the impact of the Silver Book and whether it is comfortable with the Employer taking on the role of the Engineer before entering into such a contract. All parties should be aware of the pitfalls contained therein in order to ensure that the Silver Book Agreement is the appropriate contract choice.

Claire Roux