UK: FIDIC Contracts: Time Bars Limitation And Good Faith

Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016

The Dubai International Finance Centre ("DIFC") Court of Appeal has recently handed down a judgment in which it considered issues such as notices as conditions precedent, limitation and good faith in the context of FIDIC Sub-Clauses 20.1 and 3.5. We summarise the case and review its potential implications below.

The Facts

On 11 July 2017, the Employer, Panther Real Estate Development LLC ("Panther"), entered into a contract (the "Contract") with Modern Executive Systems Contracting LLC ("MESC"), the Main Contractor, for the construction and completion of a residential tower building in Dubai. The Contract was based on the FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (First Edition, 1999), as amended by the Particular Conditions and other detailed provisions. The governing law of the contract was DIFC law and disputes were subject to the exclusive jurisdiction of the DIFC Courts.

The project experienced delays and MESC made three applications for an extension of time pursuant to Sub-Clause 8.4 of the Contract, all of which were rejected by the Engineer. MESC also eventually made a fourth EOT application for the period after termination.

Pursuant to Sub-Clause 8.7 of the Contract, if MESC failed to comply with Sub-Clause 8.2 [Time for Completion], MESC was liable for delay damages calculated at a daily rate of AED 42,500, capped at 10% of the contract price. The parties were unable to resolve their issues and Panther liquidated the Performance Guarantee and the Advance Payment Guarantee on 28 October 2019. The Contract was subsequently terminated by Panther with immediate effect on 6 November 2019.

The Issues

In the claim, at first instance, Panther sought liquidated delay damages, other delay damages, damages for the cost of completion and damages for the loss of the opportunity to rent or sell the residential units within the period of 16 December 2018 to 1 May 2020. In addition, Panther sought a declaration that it was entitled to encash the guarantees and retain the proceeds.

MESC denied liability primarily on the basis that it was entitled to an extension of time for a period of 292 days, which would deprive Panther of its alleged right to terminate because it had exhausted the maximum amount of delay damages under the Contract.

In response to MESC's claims for an extension of time, Panther argued that MESC had failed to comply with the conditions precedent in Sub-Clauses 20.1 and 3.5 of the Contract, and was, therefore, not entitled to an extension of time.

The judge, at first instance, found that the project was delayed by 325 days, only 19 of which MESC was responsible for. However, he held that:

1. Compliance with the provision in Sub-Clause 20.1 that requires the Contractor to give notice to the Engineer of their claim to an extension of time, with reference to the event or circumstance giving rise to the claim, not later than 28 days after they became aware or should have become aware of the event or circumstance (the "28-day notice requirement") is a condition precedent to the Contractor's entitlement to an extension of time.
2. Compliance with the requirement in the fifth paragraph of Sub-Clause 20.1 that the Contractor must, within 42 days after it became or ought to have become aware of the event or circumstances giving rise to the claim, send to the Engineer a fully detailed claim with supporting particulars of the basis of the claim and the extension of time and/or the additional payment claimed (the "42-day detailed claim requirement") was also a condition precedent to the Contractor's entitlement to an extension of time.
3. Sub-Clause 3.5 amounted to a promise not to challenge an adverse determination (by the Engineer) if that determination was not challenged within 14 days of its issuance; combined with an agreement that, if a compliant 14-day notice is given, then the determination may be challenged but only in accordance with the dispute resolution provisions of Sub-Clause 20.
4. The Court of Appeal considered, amongst other issues, whether each of these provisions were a condition precedent to MESC's entitlement to an extension of time and point from which the 28-day period in Sub-Clause 20.1 starts to run. The Court also considered whether DIFC law on limitation and good faith could be used to circumvent the need for giving timely notices under the Contract.

Decision

Sub-Clause 20.1: the 28-day notice requirement and timing

The Court of Appeal agreed with the judge, at first instance, that the 28-day notice requirement was a condition precedent to the Contractor's entitlement to obtain an extension of time.

The judge confirmed that a failure to serve a notice in time meant that the claim for an extension of time (and/or additional payment) would fail, because this is made absolutely clear in the language of the second paragraph of Sub-Clause 20.1, which states:

MESC did not dispute this, save for a point concerning timing and the Court of Appeal, therefore, considered when time begins to run for the purposes of the 28-day and 42-day periods. The Court of Appeal agreed with the interpretation of the judge, at first instance, that the 28-day notice requirement is triggered when the Contractor becomes aware (or ought to have become aware) not of the delay or likely delay, but of the event or circumstance giving rise to the claim for an extension of the Time for Completion.

This approach was distinguished from Akenhead J's judgment in Obrascon where he appeared to say that time could start to run from the moment that delay to completion of the works, in fact, occurred or started to occur, which is usually later. This analysis was problematic because it meant that, for example, if, in a three year project, an event that occurred in the first year eventually resulted in the works overrunning by a month or two after the Time for Completion in year three, then the 28-day notice would only have to be given in year three after the Time for Completion had passed and the works remained unfinished. The judge concluded that such an outcome would defeat the primary purpose of Sub-Clause 20.1, which is to ensure that claims are notified and dealt with quickly.

Sub-Clause 20.1: the 42-day detailed claim requirement

The Court of Appeal disagreed with the judge, at first instance, and held that the 42-day detailed claim requirement was not a condition precedent to the Contractor's entitlement to obtain an extension of time.

The judge noted that Sub-Clause 20.1 sets out the consequences of a failure to give the 28-day notice, but the wording made it clear that that same draconian regime does not apply to the 42-day detailed claim requirement.

It was noted that Sub-Clause 20.1 states that the Contractor must keep the necessary records to substantiate its claim, permit inspection of such records and that it must comply with the 42-day detailed claim requirement. The consequence of a failure to comply with these requirements is set out in the last paragraph of Sub-Clause 20.1, which states:

The judge's view was that the purpose of the two notices under Sub-Clause 20.1 is different. The 28-day notice is designed to give the Employer notice that a claim for an extension of time and/or additional costs will or may be made and to identify the event or circumstances on which it is based. No precise form of notice is specified, so it can be short and to the point. The purpose of the 42-day detailed claim, however, is to provide sufficient information to enable the Engineer to determine the claim. The judge noted that the amount of information given in the 42-day detailed claim is likely to differ from case to case, and he concluded that it was neither necessary nor appropriate to construe the provision in a way that results in the Contractor losing its right to a claim on the basis that insufficient detail has been provided.

Finally, the judge drew attention to the wording at the end of Sub-Clause 20.1 ("unless the claim is excluded under the second paragraph of this Sub-Clause") which makes a clear distinction between the regime applying to the 28-day notice period and remainder of Sub-Clause 20.1.

The judge concluded that the 42-day detailed claim requirement was not a condition precedent to EOT entitlement, and that any failure or delay in complying with the detailed claim provisions can be taken into account by the Engineer in arriving at his determination.

Sub-Clause 3.5: Notice of Dissatisfaction requirement

The Court of Appeal agreed with the judge, at first instance, that Sub-Clause 3.5 contains a condition precedent that the Contractor must issue a notice of dissatisfaction within 14 days of the date of the Engineer's determination before it can proceed in accordance with the dispute resolution mechanism under Clause 20.

Sub-Clause 3.5 states that each party is required to give effect to a determination "unless one party notifies the other of his dissatisfaction with a determination within 14 days of having received it". Either party "may then refer the dispute to be settled in accordance with Clause 20 [Claims and Disputes]". The judge highlighted the key word "then" in this context as both having a sequential and conditional meaning. It is sequential in that the party wishing to dispute an Engineer's determination in accordance with Clause 20 can do so only after a party has already issued a notice of dissatisfaction within 14 days of having received the determination. It is conditional because the right to refer a dispute to be resolved in accordance with Clause 20 is conditional upon the 14-day notice provision having been complied with. The judge confirmed that, if no notice of dissatisfaction was given within 14 days of a determination, the determination stands.

MESC had sought to argue that it was entitled to challenge a condition precedent under Article 123(1) of the DIFC Contract Law on limitation pursuant to which an action for breach of contract must be commenced within six years after the cause of action has accrued. The judge rejected this argument on the grounds that Sub-Clause 3.5 is not concerned with breaches of contract as it simply limits the time in which a party can challenge an Engineer's determination.

MESC's arguments based on the prevention principle

At first instance, MESC had sought to argue that the prevention principle applied, pursuant to which Panther was not entitled to benefit from its own wrongdoing by way of the application of liquidated damages. MESC argued that time was at large because the extension of time provisions in the Contract could not be operated in the absence of strict compliance with the notice provisions. MESC relied on the Australian judgment in Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 143. Both the judge, at first instance, and the Court of Appeal rejected this argument. The Court of Appeal noted that the judgment in Gaymark had not been greeted with universal approval and MESC did not refer to any authority in which it had been applied or approved.

The judge rejected MESC's argument at appeal. The meaning and effect of a contractual provision must be capable of being ascertained at the time the contract was entered into. At the time the contract was entered into, it contained a clear provision entitling the Contractor to an extension of time if the appropriate notices are given, and there was nothing to say that these notice requirements were either unreasonable or incapable of being performed. The clause was, therefore, effective in allowing an extension of time and preserving the Employer's right to liquidated damages. The judge concluded that, if the Contractor failed to give notice in accordance with the clause, then they must accept the consequences.

Additionally, the judge noted that the effect of the argument advanced by MESC is that it would enable the Contractor to pick and choose whether to invoke the extension of time clause. If the Contractor chose not to give any notices, then they could argue that they are not obliged to complete the works by any specified date and no liquidated damages for delay can apply. Such an outcome made no commercial sense and was at odds with the purpose of the Contract.

MESC's arguments based on good faith

MESC argued that Articles 57 and 58 of the DIFC Contract Law required Panther to act in good faith, and that it was unconscionable for Panther to apply liquidated damages for a period of delay for which it was mainly responsible. The judge rejected this argument for primarily the same reason as that specified in relation to the prevention principle point, namely that MESC was a willing party to a contract which included clear notice requirements in Sub-Clauses 3.5 and 20.1. The judge concluded that there was no justification for using the implied terms in Articles 57 and 58 of the DIFC Contract Law to override the agreed terms of the Contract.

Separately, at appeal, MESC also argued that, where liquidated damages applied, Panther was not entitled to claim any such damages for any part of the delay for which it was responsible. In support of this argument, MESC relied on the Court's discretion based on the principles of good faith and Article 122 of the DIFC Contract Law, which provides that a pre-agreed sum for non-performance can be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance. The judge also rejected this argument.

In respect of the obligations of good faith, the judge held that Articles 57 and 58 of the DIFC Contract Law do not suggest that the contracting parties should not be held to the terms they have agreed in the Contract. Nor do they provide any basis for the courts to rewrite the Contract for the purpose of achieving "some balancing or re-balancing of equities between [the parties] or to redress what one party claims to be an unfair consequence of the terms which have been agreed".

In respect of Article 122 of the DIFC Contract Law, the judge noted that liquidated damages are payable for non-performance of MESC's obligation to complete by the contractually agreed completion date, and not, as MESC suggested, for the failure to serve the required notices. The judge noted that there had been no attack on the amount of liquidated damages for a failure to complete on time, and that this would not have been possible without detailed information concerning the cost of that delay to Panther.

Analysis

This case provides clear guidance that FIDIC Sub-Clauses 20.1 and 3.5 contain specific conditions precedent to which Contractors must strictly adhere or run a real risk of losing their right to claim for extensions of time and prolongation costs. It underscores the need for Contractors to always issue required notices on time because not doing so is likely to have serious consequences.

DIFC's approach to notices as strict conditions precedent is in line with the recent decision in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others [2022] EWHC 3275 (TCC),¹ which concerned a JCT contract, and where a Contactor's claims were rejected because it could not establish breaches of contract on part of the Employer that had caused delay. Although it proved academic in that case, the judge also found that the Contractor had, on a number of occasions, failed to give adequate notice, and that failure would have prevented the Contractor from being able to rely on those alleged breaches in its claim for an extension of time.

In our experience, there is a common misconception in the UAE that such provisions will not be enforced by the courts on the basis that their application may be contrary to various mandatory provisions of the law including the principle of good faith (which is codified in the DIFC Contract Law). This judgment, while not binding on UAE courts or other civil law jurisdictions in the Middle East, may go some way to dispel that view.

We have also seen submissions based on the decision in Gaymark deployed frequently in the UAE to argue that time is at large, so it is worth noting that the Court of Appeal has found that it does not represent the law as applied in DIFC² and that it cannot be used to circumvent the notice requirements in Sub-Clause 20.1.

The decision on Article 122 of the DIFC Contract Law does, however, leave the door open for Contractors to argue that any liquidated damages applied can be reduced, despite an express provision for a daily rate in a contract, provided that an Employer's costs can be determined and found to be unreasonable. This element does not sit easily with the court's approach to strictly holding parties to their agreed contractual terms, and we note that similar provisions to Article 122 are found in many other civil code jurisdictions in the Middle East.

This case is unusual in that it has been heard in the DIFC Courts. In the UAE, most construction disputes are either litigated in the local courts or in arbitration behind closed doors, so it is difficult to get hold of detailed well-reasoned judgments in English dealing with these issues. The court's approach to the 28-day notice condition precedent in Sub-Clause 20.1 could encourage other larger employers to refer their disputes to the DIFC Courts.

Footnotes

1. For more information on [2022] EWHC 3275 (TCC), see this article

2. Paragraph 57

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