The difficulties in the role of the Engineer in NZS3910

Scott Thompson recently presented at the ADLS Construction Law: Contracts, Disputes & Proposed Law Reforms seminar. Below is a summary of the key takeaways from Scott’s presentation on the difficulties in the role of the Engineer.

Introduction

Practitioners have found the role of the Engineer in the standard form contract NZS3910 problematic. The Engineer performs a dual role under NZS3910. On the one hand, the Engineer acts as both the adviser to, and representative of, the Principal (6.2.1(a)), and on the other, as an independent and impartial decision maker (6.2.1(b)). There is clearly a potential conflict where the Engineer, while being required to perform certification roles impartially, is engaged by, and acts on behalf of the Principal as an agent in other administration roles under the contract.

Disputes commonly arise where an Engineer to the contract is acting in their capacity as a decision maker. Given that the Engineer is not a party to the contract, but instead separately engaged by the Principal, that relationship can often lead to contentious decisions. The dynamic created by the contractual framework often leads to issues (or at least the perception) of impartiality and unfairness in decision-making. The lack of accountability for the Engineer’s decision-making adds to these issues. While the Principal is required to ensure the Engineer fulfils their role reasonably and fairly, the incentive to do so invariably dissipates when the Engineer reaches favourable decisions.

Our Insights

Below, we offer insights into some of the practical difficulties experienced and suggest ways to address the contentious role of the Engineer in NZS3910.

Practical Issues

An area where an Engineer’s decision-making is often the cause of tension between a Principal and Contractor is where the Contractor requests that the Engineer suspend the contract for non-performance (default) by the Principal, and the Engineer refuses.

Several clauses require the Engineer to suspend the Contract because the Principal has defaulted in situations where:

  • The Principal’s Bond is not executed and delivered to the Contractor on time and the Contractor requests in writing for suspension (3.2.3);
  • The Principal has not given possession of the Site or any portion of the Site – unless the Contractor has defaulted (5.4.2); and
  • The Principal has defaulted and this has not been remedied after 10 working days of being given notice (14.3.3).

A truly independent decision is required given the ramifications of suspending or failing to suspend the contract.  Other decision-making roles that fall to the Engineer and often trigger dissatisfaction and accusations of partiality, include decisions granting or disallowing variations (9.2.4, 9.5.4); assessing the value of variations (9.3); granting extensions of time (10.3.1); assessing payment claims (12.2); and ruling on disputes (13.2).

Accountability

To incentivise impartial decision-making, the Contractor can pursue the Principal for indemnification for the acts or omissions of the Engineer (see 7.1.3 and 7.1.2(c)). However, given the practical difficulties in pursuing an indemnity – the time, cost, resources and inherent litigation risk that arise for this course – the Principal is unlikely to be motivated to hold an Engineer to account for breaching its 6.2.1(b) obligations or worry about its own compliance with 6.1.1.

Nevertheless, there is some precedent for holding Principals to account for Engineers breaching their duty to act fairly and impartially. In Brown & Doherty Ltd v Whangarei County Council [1988] 1 NZLR 33 the Engineer certified that the Contractor had progressed with the works slowly and inefficiently and its staff were incompetent, enabling the Principal to terminate the contract. The High Court held that the Engineer had not acted in a properly fair and impartial manner when viewed objectively from the perspective of a reasonable Contractor (at 49). Brown & Doherty relied on the previous decision of the Court of Appeal in Canterbury Pipe Lines Ltd v Christchurch Drainage Board [1979] 2 NZLR 347, where it was held that if an Engineer’s decision is objectively unfair, despite their subjective good intent, then the Engineer will be found to have breached their obligations. The judgment emphasises that it is the effect rather than intent, which is dispositive of unfairness.

 Potential Solution

There are various theories out there on how best to deal with issues of Engineer impartiality. However an appealing approach is to split the dual role of the Engineer – bifurcating the role of the Principal’s agent and the role of the impartial expert between two parties. The Contractor and Principal may then jointly appoint the impartial expert. Such an arrangement obviously comes with an upfront financial burden, but experience tells us that investment puts you on the right side of the ledger where the time and resources that are otherwise spent on resolving disputes concerning allegations of partial decision-making, are avoided. With respect, addressing the role of the Engineer is a key priority given how far reaching an Engineer’s influence on a project can be.

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