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Court held that Employer could not rely on a pre-condition to arbitration not being fulfilled when it had prevented its fulfilment

In the case of Al-Waddan Hotel Ltd v Man Enterprise SAL (Offshore) [2014] EWHC 4796 (TCC), the issue before England’s High Court was whether the Employer in a construction contract could rely on his own failure to appoint an engineer, to prevent the main contractor commencing arbitration proceedings, where the contract contained a term requiring an engineer’s decision as a condition precedent to commencing arbitration.

The Claimant employer (the “Employer”) and Defendant contractor (Contractor) entered into a contract (Contract) under the Conditions of Contracts for Works of Civil Engineering Construction, Part 1, 4th Edition 1987 (FIDIC) and the Employer appointed an engineer. Clause 67.1 of the Contract stipulated that in the event of any disputes between the parties in connection with or arising from the Contract or execution of works, the parties shall first refer such dispute to the Engineer who shall give notice of his decision to the parties within a period of 84 days. If either party was dissatisfied with the Engineer’s decision or if the Engineer failed to give notice of his decision within the prescribed period, then either party could apply within a specified time for arbitration.

The Contractor applied to the Engineer in respect of non-payment of certain contractual items, who replied by letter saying that its own contract with the Employer had expired and he would not therefore act on the application. Correspondence between the Contractor and Employer followed, but there was no evidence of any intention on the Employer’s part to reappoint or replace the Engineer. An arbitrator was subsequently appointed who ruled in the Contractor’s favour. The Employer disputed the arbitrator’s jurisdiction, arguing that:

  1. An Engineer was in place and therefore a notice of decision from the Engineer was required before the Contractor could take any steps in arbitration, but the letter from the Engineer did not constitute such notice.
  2. There was nothing to hinder or prevent the Contractor from waiting for the agreed 84 days, when no decision would have been given, and after which it could proceed to arbitration as of right.

The Court dismissed the Employer’s appeal and confirmed the arbitrator’s jurisdiction. The Court held that it was well established that under the FIDIC form, Clause 67.1 was a condition precedent to arbitration. However, in this case, the dispute could be referred to arbitration directly (despite that condition precedent not being fulfilled) because both the “refusal approach” and “hindrance or prevention approach” had come into play, as follows:-

  1. The Refusal Approach: Even though the Engineer’s letter could not be properly construed as a notice of decision within the meaning of Clause 67.1, it did have contractual importance as a clear and absolute refusal by the Engineer to give notice of a decision within 84 days under Clause 67.1. The Court said that if an engineer clearly and absolutely states that they will not perform a contractual function assigned to them (in this case, making a decision under Clause 67.1 of the Contract) then both parties could proceed in the certain knowledge that they were no longer bound by such a contractual requirement. In these circumstances, the Court said, the parties would have a clear choice of either accepting that or attempting to obtain another engineer, but that would be a question of fact to be tested in the individual case. If, the Court said, an independent decision maker appointed by the parties refuses to carry out the agreed function, then the parties are entitled to come before the court to seek relief or a remedy they would otherwise have obtained from that appointed independent decision maker.
  2. Hindrance or Prevention Approach: Where, as here, there was no provision in the Contract for appointing a replacement engineer, the Court would, it said, readily imply certain terms into the contract, namely (i) where it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing that, it will be implied that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, even though there may be no express words to that effect; and (ii) if a party enters into an arrangement which can only take effect by the continuance of a certain set of existing circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative. The Court referred to the well-established common law principle that no person can take advantage of non-fulfilment of a condition, the performance of which has been hindered by himself.
  3. It was clear, the Court said, from the express terms of the Contract, that the employment of an engineer was the duty of the Employer and that if the Engineer’s employment ceased and there remained contractual obligations to be performed by the Engineer, it primarily lay with the Employer to either appoint another engineer or re-engage the existing Engineer. It was therefore wrong for the Employer to assert that a period of 84 days had to elapse before the Contractor could commence arbitration proceedings, when the Employer had all along made no attempt to reappoint or replace the Engineer.

Whilst the conclusion of the Court is not a surprise, given the specific facts of this case, as a matter of interpretation of Clause 67.1, it is difficult to see why the Contractor could dispense with the agreed 84 days waiting period before proceeding to arbitration. To err on the side of caution, strict compliance with the contractual timetable is preferred, unless there is some urgency in commencing arbitration.

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Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427

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