FIDIC Conditions Third Edition / Dispute between the Contractor and Employer / Jurisdiction of the Arbitrators under Clause 67 / Bearing of Clauses 51, 52 and 93 on Clause 67

'To ground the jurisdiction of the Arbitrators under Clause 67, to determine a dispute or difference, such dispute or difference must first be referred to the Architect for decision. On 20th April, 1988, the Claimants wrote to the Architect in these terms:

[…]

In accordance with Clause 60(13), the Contractor submitted its Final account to QS, the Quantity Surveyor, on 9th November, 1986. Additional information relating to certain of the Nominated SubContractors was supplied a little later as it became available.

The Final Account consisted of the Contract Sum, the Variation Account and Claims for reimbursement to which the Contractor considered himself entitled; The Final Account includes the Claims as submitted and referred to Arbitration and which, accordingly, now fall to be dealt with quite separately from the "Contract Sum/Variation Account" (hereinafter for convenience called "the Final Account").

Throughout the period following submission of the Final Account until October, 1987, QS checked the Final Account and where they deemed it appropriate, negotiated certain elements of the Final Account with the Contractor.

During negotiations with the Quantity Surveyor, the Contractor reviewed the items and amounts claimed as Variations to the Works in the Final Account as originally submitted and following that review revised the items and amounts claimed and these figures are now incorporated in this Claim as summarised in Column "A" of Schedule "A", which is enclosed with this letter.

Following the review and negotiations, QS issued its Final Valuation to the Contractor on 28th October, 1987. The Quantity Surveyor's value of variations to the Works are summarised in Column "B" of Schedule "A". Item 1 of Column "B" represents the value of Variations agreed by the Quantity Surveyor and the Contractor.

By its letter ref. XXX dated 19th April 1988 to the Quantity Surveyor, the Contractor has disputed the Quantity Surveyor's Final valuation in respect of Variations included in item 2 of Column "B". The Value of Variations in dispute between the Contractor and the Quantity Surveyor is summarised in Schedule "C", which is also enclosed in this letter.

The Quantity Surveyor has taken the view that he cannot issue the formal Bill of Valuations until Clause 93 approvals have been received for each Variation. This he has stated in his letter dated 28th October, 1987.

The Architect and the Employer each received a copy of the Quantity Surveyor's proposed Final Valuation, but neither has taken any steps to provide such further approvals (if any) or as may be required to enable the Quantity Surveyor to proceed to issue the formal Bill of Valuations.

A dispute or difference has therefore arisen between the Contractor and the Employer and/or the Quantity Surveyor, in connection with the Contract. The said dispute or difference arises from the persistent failure to produce a proper Bill of Valuations which fully recognises the Contractor's entitlement to be paid the Contract Sums properly adjusted in respect of all Variations carried out during the course of the works on the instructions of the Architect (which said instructions were, or ought to have been, approved by the Employer).

We now refer the above dispute or difference, to the Architect for his decision in accordance with Clause 67. The Architect is requested to decide that a Bill of Valuations ought to have been issued in accordance with the figures summarised in Column "A" of Schedule "A" and to issue any and all certificates which may be necessary to facilitate payment of the outstanding balance by the Employer to the Contractor […]

The first point taken on behalf of the Defendants is that there was not in fact a dispute about the Final Account or about payment of the Balance of the Contract revenues to the Contractor before 20th April, 1988. It is contended that the only dispute capable of reference to the Architect in existence before 20th April, 1988, was of more limited scope. The second point advanced on behalf of the Defendants comes to this: there cannot be a dispute over the socalled Final Account or the payment or discharge of any balance due to the Contractor unless or until the employer has given his approval for the purpose of Clause 93 of the Conditions of Contract or has improperly refused to give such approval.

To understand these arguments, it is necessary to refer to some of the provision in this Contract.

Clause 51 of the Conditions concerns variations to the Works. The material part of Clause 51(1) is in the following terms:

1) The Architect shall, subject to the provision of clause 93 hereof, make any variation of the form, quality or quantity of the Works or any part thereof that may, in his opinion, be necessary and for that purpose or if for any other reason it shall, in his opinion be desirable, he shall have power to order the Contractor to do and the Contractor shall do any of the following […]

Clause 52 sets out the rules for the valuation of variations; The application of the rules stipulated in subclauses (1), (2) and (3) is, in each case, expressed to be 'subject to the provisions of Clause 93'.

[…]

[…] the Arbitrators are satisfied and find as a fact that there was indeed a dispute or difference about nonpayment before 20th April, 1988, that all parties appreciated that there was such a substantive dispute and had done so for a considerable period of time.

As a variant of the first point, the Defendants then argue that the only dispute referred to the Architect for a decision under Clause 67 was a dispute over the valuation of variations. The Arbitrators do not accept that submission. The letter of 20th April, 1988, clearly seeks "payment of the outstanding balance by the Employer to the Contractor".

In answer to the first two of the questions put forward by the Defendants at paragraph 3.5 of their written submissions, the Arbitrators conclude that there was a dispute or difference over the alleged nonpayment of the balance of the adjusted Contractor Sum and such dispute or difference was referred to the Architect. They are fortified in this conclusion by the fact that the Architect does not appear at the time to have expressed the view to anyone, least of all to the Contractor, that the letter of 20th April, 1988, was premature.

[…]

The Defendants in their pleadings also denied that the Arbitral Tribunal could consider the merits of the Claimants' claims on the grounds that the provisions of Clause 93 of the Conditions of Contract has [sic] not been complied with. […] This point was developed by Leading Counsel for the Defendants during his able and cogent argument on 31st August 1990. We refer, in particular, to pages XX of the transcript of the proceedings on that day. One passage, at page 2 of the transcript is worth setting out.

In particular, the question of the final account or the final certificate, we say, was not in issue for a variety of reasons, one is that it was not raised by the letter of the 19th April. Second, because it couldn't have been in issue until the bill of valuations question had been cleared up. Again, see our submissions; And thirdly, the difficult question of the effect of Clause 93 and those approvals. And one has to ask the question, what is the effect of Clause 93 which is, on the face of it, a fairly simple [clause] but the effect it may have is far from simple in relation to disputes. And we say that on one view there couldn't be a dispute at all relating to variations until approvals under 93 B and C had been obtained unless the dispute is of a different kind, namely whether approvals under 93 should have been given. Now, that would be a difficult dispute to raise because Clause 93 apparently gives the Employer a complete discretion, [it] might be that it could be alleged that he had to act reasonably. One could formulate disputes of that sort. But of course that wasn't the dispute. What the Claimants did was to ignore Clause 93.

In our opinion, Counsel-wholly innocently and understandably-misstated the position. The Claimants did not ignore Clause 93. As early as February 1987-if that be early-the Claimants had rejected Mr X's proposition that it was their obligation to secure and produce approvals for the purpose of Clause 93. Furthermore, the Claimants' letter of 20th April, 1988, which requested the Architects' Clause 67 decision, read:

The Quantity Surveyor has taken the view that he cannot issue the formal Bill of Valuations until Clause 93 approvals have been received for each variation; This he has stated in his letter dated 28th October, 1987.

The Architect and the Employer each received a copy of the Quantity Surveyor's proposed Final Valuation, but neither has taken any steps to provide such further approvals (if any) or as may be required to enable the Quantity Surveyor to proceed to issue the formal Bill of Valuations.

The Claimants then proceeded to formulate the dispute. It seems to us that one element of the referred dispute was a failure by the Defendants, and their agents, to act reasonably in obtaining Clause 93 approvals.

Accordingly, we hold that there was, before 20th April, 1988, both in law and in fact a dispute over the nonpayment of the balance of the Contract revenues and that the dispute, with all its constituent parts was referred to the Architect for decision.

The next question is whether the Architect in fact decided the dispute referred to him.

On 1st June, 1988, Mr Y wrote, not to the Claimants but to their principal subcontractors, Z, in the following terms:

Dear Sirs,

Final Account Dispute

We refer to your letter XXX dated the 20th April 1988.

[…]

In the Employer's letter you are informed that all decisions have been taken on the Final Account data sheets (Contracts Sum/Variation Account) and Clause 93b approval is given except where noted. We have no cause to amend the Quantity Surveyors valuations.

Please contact the Quantity Surveyor for further information.

(underlining is added)

Having argued that only a limited dispute could have been, and in fact was, referred to the Architect for a decision under Clause 67, the Defendants relied on the letter of 1st June, 1988, as a Clause 67 decision on that limited dispute.

The Arbitrators were referred to the judgment of Harman L.J. in Monmouthshire C.C. v. Costelloe & Kemple 5 BLR 83 at p. 91 and to the decision of the Court of Appeal in Token Construction v. Charlton 1 BLR 48. The Token case concerned inter alia, the form of a default certificate, but the Arbitrators accept the submission of the Claimants that the decision is helpful by way of analogy. A Clause 67 decision has potentially crucial consequences. Whether a document is or is not a Clause 67 decision must, in the Arbitrators' opinion, be determined on the basis of the document seeking the decision and the alleged decision alone. In the Arbitrators' opinion, it is essential that the language by which a Clause 67 decision is made be the clear, unambiguous and readily understandable expression of the discharge by the Architect of his Clause 67 functions.

In the Arbitrators' judgment, the letter dated 1st June, 1988, does not come near to meeting these requirements. It is true, as the Defendants' representatives were quick to point out, that the Claimants themselves in the Amended Request for Arbitration pleaded the letter of 1st June 1988, as a Clause 67 decision, although subsequently in Points of Reply the Claimants made it clear that the primary case was that the letter was not such a decision. If this issue were a jury question, the Defendants' comment on paragraph XX of the ReReAmended Request for Arbitration would, of course, have considerable force-but, it is not a jury question.

Even if, contrary to what we have found and held to be the case, the dispute referred to the Architect under Clause 67 had been limited to the value of certain variations, we would not have considered the Architect's letter of 1st June, 1988, to be the clear and unambiguous expression of a Clause 67 decision. When consideration has to be given to the status of the letter of 1st June as a potential Clause 67 decision, the fact that the letter was not addressed to the party by whom the dispute was referred is significant. Common sense alone dictates that. Furthermore, the Arbitrators accept the submission made by Mr K, leading Counsel for the Claimants, that on a true construction of Clause 67(1) and 68(1) of the Conditions, it is a contractual requirement that the Architect's written notice of his decision be served on the Contractor.

The Defendants seek to answer this point in paragraph 3.19 of their written submissions.

That paragraph reads:

3.19. The Claimant now seeks to contend that the letter of 1st. June, 1988 was not addressed to the Claimant. This is irrelevant. The Architect is required to give written notice of his decision to the Claimant. By 30th. June 1988 Mr. B a director of the Claimant had seen the decision as he sent a copy to the Quantity Surveyor […]

If the letter was sent inadvertently to Z not the Claimant C/o Z that does not matter. It need not be addressed to anyone. The requirement is for written notice to be given.

It seems to us, with respect, that this passage really begs the critical question, namely: whether the document is a decision at all.

Then, again, it is obvious that the principal purpose of the letter was to make available to the Claimants and their main subcontractor, Z, the advice tendered by the Architect to the Employer for the purpose of Clause 93. Furthermore, while it may not be a mandatory requirement of a decision that the document, in which it is expressed, refer to Clause 67, the Arbitrators consider that the text of the letter should make it clear that a decision is being made. In the Arbitrators' view, this letter does not do this.

The Arbitrators have held that the disputes or differences referred to the architect for decision on 20th April, 1988, were wider than contended for by the Defendants. On this basis, it is abundantly plain that the letter of 1st June, is not a Clause 67 decision, since many of the matters referred to the Architect are nowhere addressed.

The Arbitrators conclude therefore that the Architect gave no decision on the disputes referred to him. The alternative arguments advanced in the written submissions, and at the hearing do not therefore arise. At paragraph 3.25 of the written submissions, the Defendants concede that if the letter of 1st June, 1988, was not a Clause 67 decision, then "the matter of the valuation of variations was referred to arbitration by the ICC within 90 days of the expiry of 90 days from 20th April 1988". This concession must necessarily apply to the wider dispute which we have held to have been referred to the Architect by the letter of 20th April, 1988.

The Arbitrators for these reasons accept that they have jurisdiction over the Claimants' claims […]'