The fair Engineer – duty in the context of non-compliant extension of time claims

Construction lawyers will be familiar with the concept that, under standard form construction contracts, the Engineer typically performs a dual role (often referred to as the “two hats” approach, reflected for example in NZS 3910:2013 clause 6.2.1), which is separated into the following functions:

  • As the Principal’s agent acting as expert adviser to and representative of the Principal, including giving directions to the Contractor on behalf of the Principal; and
  • As independent certifier. To fairly and impartially make decisions entrusted to him or her under the Contract, independently of either contracting party, including valuing work and issuing certificates.

Stewart Gillies

In its independent certification role, the Engineer must fairly and impartially assess the merits of a Contractor’s validly made extension of time (EOT) claim and decide whether or not it should be granted. However, issues arise as to whether this duty to act fairly and impartially extends to circumstances where the Contractor has not followed the contractually prescribed procedure in making a claim and the Engineer has a discretion to decide whether or not to consider the EOT at all (i.e. where the EOT notification provisions are not expressed as a strict condition precedent to a claim).

This article examines whether, under an unamended NZS 3910:2013, this discretion must be exercised fairly and impartially, because in practice this does not always occur. Principals should be aware of the risk that this may cause to the outcomes of EOT claims given Australian authorities on the point. This is a timely reminder given the current state of New Zealand’s construction sector, which is undergoing a huge phase of growth coupled with a drastic shortage of skilled contractors. In this climate, where contractors are overloaded with work on numerous projects, issues around EOTs are more likely to arise.

Discretion to reject or accept out of time EOT must be exercised fairly and impartially

There is no direct New Zealand authority on this point, but there is Australian authority in support of the proposition that the Engineer may have an implied obligation to act in good faith and to extend time (where it has discretion to do so) if there has been a failure on the part of the Contractor to follow the contractually prescribed notification process when making an EOT claim (or where the Contractor has failed to make a claim at all).

In Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211 (Peninsula Balmian), the New South Wales Court of Appeal had to decide whether the Contractor was entitled to an EOT under an Australian standard form contract (AS2124-1992) which provided that the Superintendent (akin to Engineer under New Zealand standard forms and herein referred to as the “Engineer”) was under an obligation to act fairly, as well as having an express discretion to extend time “for any reason”. The Court found that this discretion was capable of being exercised in the interests of both Principal and Contractor, and that the Engineer was under an obligation to act honestly and impartially in deciding whether to exercise the discretion (at [79]). In this case, an EOT fairly ought to have been granted on the basis of the Principal’s act of prevention (which was to require variations to the scope of works).

The finding in Peninsula Balmain was contrary to the previously accepted view that this discretion was intended to be for the Principal’s benefit only to allow the date for completion to be extended in respect of Principal-caused delays, and preserve the Principal’s entitlement to liquidated damages by protecting it against the prevention principle (Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd [1970] 1 BLR 111 (CA)). However, Peninsula Balmain has been followed in subsequent Australian cases, for example Kane Constructions Pty Ltd v Sopov [2005] VSC 237 (Kane Constructions), where the Victorian Supreme Court held the Engineer was obliged to certify an EOT “where it may be fair and reasonable to do so, notwithstanding a plaintiff’s failure to make a claim or non-compliance with the relevant timing requirements for an extension of time claim” (at [660]).

Although there is no direct New Zealand authority on the point, the wording in NZS 3910:2013 is arguably consistent with the Australian approach. Clause 10.3.2 gives discretion to the Engineer to accept non-compliant EOT claims, by providing that the Engineer “shall not be bound to grant an extension” unless the Contractor gives compliant notice under the Contract. Arguably, the discretion under this clause is a “decision entrusted to [the Engineer] under the Contract” in accordance with clause 6.2.1, which must therefore be exercised fairly and impartially. The 3910:2013 guidelines expand on the principles behind this provision, stating that such discretion recognises that “there may be valid reasons for delay” and “cases where the lateness of a claim does not prevent a proper investigation”. Further, the Engineer should “not refuse to grant an extension on the ground of late application unless the lateness is such to cause real difficulty in making of a proper assessment”. This recognises that, within the framework of a “fair and impartial” decision, there may be legitimate reasons for the Engineer to reject a non-compliant claim. This is consistent with the findings of the Court of Appeal in Peninsula Balmain, where it was noted that the Engineer might fairly refuse an EOT where a late claim made it difficult to investigate and assess the delay (at [79]).

Principals should be wary of the Engineer not exercising this discretion fairly and impartially

Under NZS 3910:2013, the Principal is under an obligation to ensure that the Engineer fulfils all aspects of the role and functions reasonably and in good faith (clause 6.1.1). However, despite the above, it appears to be common industry practice for the Engineer to consult solely with the Principal on whether or not it should exercise the EOT discretion. Principals should be wary to ensure that any such communication is not infringing upon the concepts of “fairness and impartiality” in order to avoid an allegation of breach of contract on this basis, including an allegation of undue influence over the Engineer, as it is arguable that equal consultation should be given to the Contractor.

This was considered in Kane Constructions, where the Court commented on the circumstances in which interference with an Engineer could lead to a lack of impartiality, including where the Engineer allows his or her judgement to be influenced or controlled by the Principal, acts in the interests of the Principal at the Principal’s direction, considers the assent of the Principal to be necessary and does not give full disclosure of all communications with the Principal to the Contractor (at [623]). Similarly, the Court of Appeal, in the leading New Zealand case on the Engineer’s duty to act fairly (Canterbury Pipe Lines Ltd v Christchurch Drainage Board [1979] 2 NZLR 347), confirmed that this duty requires the Engineer to have regard to the rights and interests of both the Principal and the Contractor, and must treat both parties evenly and without favour. A breach of such obligations can occur even without any deliberate unfairness.

Drafting tips for Principals

If Principals do intend to remove the Engineer’s obligation to act fairly and impartially in the exercise of this discretion, they are of course free to amend 3910:2013, given that the role of the Engineer is essentially a creature of contract. For example, in Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd & Ors [2008] QSC 58, the parties had entered into an amended standard form contract (the same one used in Peninsula Balmain) which included a general provision that the Engineer could exercise discretions given to it in whatever way it decided, and a more specific provision that the Engineer’s decision whether to grant or reject an out of time or non-compliant EOT claim was in its “absolute discretion and without being under any obligation to do so”. The Court held that this amendment was enough to take away an obligation to extend time, even if it would be fair to do so (at [37]).

However, perhaps the most effective way that Principals can avoid any argument in this area is to make compliance with the notification provisions a strict condition precedent to a claim. Although there has been contradictory authority in overseas jurisdictions on the effectiveness of such provisions, the New Zealand courts have made it clear that it will take a strict approach to timeliness and contractual procedures as a condition precedent to a claim if the words of the contract are clear and unambiguous (H & H Contractors Ltd v Leighton Contractors Ltd & Or [2013] 1 NZHC 2225 at [37]). Such an approach would mean that the Engineer would have no discretion to grant a claim where the contractual procedure has not been followed.

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