A recent case, involving a project in North Africa, has analysed the contractor’s right to arbitrate under the FIDIC Red Book.

In this case, the court implied terms into the FIDIC Red Book1 to prevent an employer from relying on a condition precedent to deny the contractor’s right to arbitrate.

In Al Wadden Hotel Ltd v Man Enterprise Sal (Offshore)2 the employer, Al Wadden, challenged the jurisdiction of an arbitrator appointed to determine a dispute under a contract for refurbishment of a hotel in Tripoli. The contractor (Man) had referred the dispute to arbitration when the original engineer under the contract advised that it had ceased to be the engineer under the contract (the Engineer) and would not determine the dispute.

Clause 67.1 of the Red Book required Man to refer any dispute to the Engineer, who was obliged to issue a decision within 84 days. Clause 67.1 allowed Man to refer the dispute to arbitration only after the Engineer had issued his decision or after 84 days had expired. The court held it to be well established law, in relation to arbitration clauses such as this, that the Engineer’s decision (or expiry of the requisite period) is taken to be a condition precedent to the arbitrator’s jurisdiction.

The original Engineer’s response to Man’s notice was that he was no longer retained as Engineer and would not issue any decision. Man asked Al Wadden to appoint a replacement Engineer. Al Wadden did not, and Man referred the dispute to arbitration before the 84 days had expired.

Al Wadden contested the arbitrator’s jurisdiction on the basis that, even though there would be no Engineer’s decision, Man was still required to wait for the requisite period of time for a decision before commencing an arbitration. The court therefore had to construe the contract to determine if this was really the effect of clause 67.1.

When construing the contract the judge adopted the firmly established approach in Attorney General of Belize v Belize Telecom3 in which Lord Hoffman said:

“There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

The judge held that, in accordance with the Belize approach and other authorities, certain terms are often implied into construction contracts to determine what the contract could reasonably be understood to mean. Those include implied terms that:

  • The parties will cooperate in the performance of the contract.
  • Each party will do whatever is necessary to enable the other to perform its duties under the contract.
  • No party can take advantage of non-fulfilment of a condition, the performance of which has been hindered by himself.

By failing to appoint a replacement Engineer, Al Wadden had breached the first two implied terms. Al Wadden had also breached express terms of the contract, which required it to engage the Engineer and ensure he performed his obligations.

In accordance with the third implied term, Al Wadden could not take advantage of Man’s failure to obtain a decision from the Engineer to deny its right to refer the dispute to arbitration. Al Wadden could not enforce the condition precedent and Man was entitled to arbitrate without waiting for the requisite 84 days to expire.

This situation could not arise under the current suite of FIDIC contracts because clause 20 now provides for disputes to be referred to a dispute adjudication board (DAB), and expressly states the consequences of the DAB’s refusal to act. Nevertheless, this case remains relevant because the 1987 suite is still preferred by many employers, especially in the Middle East and North Africa.