Baker & O'Brien, Inc.

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When “Manifest Error” May Not be “As Plain as the Nose on One’s Face”

International Arbitration, Latin America

July 1, 2013

A large international engineering/construction firm contracted to upgrade and modernize an oil refinery and associated pipelines in Latin America.  The contract was for an amount in excess of US$1 billion.  To avoid undue delays associated with potential technical issues that might arise during project execution, the contract called for the appointment of a well-recognized specialty technical firm (the independent engineer or “IE”) to resolve such matters.  The parties agreed that the IE’s decisions would be “final and binding” except in the event of “manifest error” on the IE’s part.  During the course of the project, over 250 technical disputes (including many change orders) were submitted to the IE for resolution.  The IE investigated and ruled on each item—some decisions favored the owner, some the contractor, and some were “split decisions.”

As the job approached completion, despite many supporting IE resolutions, the owner had failed to make payment for many millions of dollars of agreed change orders—both design modifications and extra work.

The contractor filed a claim for arbitration—but the owner counterclaimed, alleging, among other matters, deficient work product, off-specification materials, and incomplete work scope.  Many of the counterclaims involved “re-opening” of previously resolved IE resolutions, claiming the IE had committed manifest error.  Colloquially speaking, manifest error is often described as an error “as plain as the nose on one’s face.”  The owner pleaded that the IE had, in many cases, ruled on legal—rather than technical—issues and that this constituted manifest error.  The arbitration panel had to determine, for each IE resolution, whether the IE had exceeded its contractual authority, and if not, whether the ruling contained manifest error.

Baker & O’Brien was engaged to review the evidence supporting the claims and counterclaims.  Specifically, had the IE considered all the available evidence and had it ruled correctly based on that evidence?  Had it exceeded its contractual limits of responsibility?  Was there manifest error?   Over a period of years, our consultants analyzed all key resolutions, issued reports in both Spanish and English, and testified in three separate arbitration hearings.  Opinions were provided on the contractual provisions, the technical specifications, the work performance, and the quantum values.  In formulating our opinions, we often had to apply our expertise and knowledge regarding standard industry practice.  The arbiters relied on both our reports and our oral testimony—as well as the advice of their own self-appointed consultant—in reaching their decisions.