On the 12th of May 2023, the DIFC Court of Appeal dismissed an appeal brought by Modern Executive Systems Contracting LLC (“MESC”) in relation to a Judgment rendered by Justice Sir Richard Field (sitting in the DIFC Court of First Instance) on 26 September 2023 in respect of a claim brought by Panther Real Estate Development LLC (“Panther”).
The Appeal Judgment reiterates and clarifies the DIFC Courts’ position when it comes to extension of time (EOT) claims and the significance placed on the preconditions to claims made under FIDIC ‘99 contracts.
Brief Factual Background
Panther (as Employer) and MESC (as Contractor) entered into a Contract, based on FIDIC ’99, for the construction of a residential property. MESC had provided a performance guarantee which could be liquidated by Panther if there was a failure to comply with the time for completion outlined in the Contract.
Amidst numerous ongoing delays, the Claimant liquidated the performance guarantee, which resulted in MESC slow-walking its works and then ultimately suspending its works. This caused Panther to terminate the Contract on the grounds that the cap on liquidated damages had been reached.
Panther initially approached the DIFC Court of First Instance and sought payment of the liquidated damages. MESC, however, bolstered by expert evidence, claimed that Panther’s termination of the Contract was wrongful as a majority of the delays were caused by Panther, and therefore, the primary reason for the termination was fundamentally wrong and the Claimant was not owed any damages.
Justice Sir Richard Field concluded that the termination of the Contract and liquidation of the performance guarantee was indeed proper and that MESC was liable to compensate Panther for any additional costs of completing the Project arising from the termination. However, even though the Judge had found that Panther was responsible for 304 out of the 325 days of delay, MESC’s claims were dismissed primarily due to its failure to fulfill the relevant preconditions and delay notice timelines as set out in clause 20.1 of FIDIC ‘99.
The key pre-conditions considered in relation to MESC’s claims were:
- MESC was to provide a notice to the Engineer of any extension of time or additional payment claim no later than 28 days after it became aware of (or should have been aware) of a circumstance giving rise to such claim.
- MESC was to provide the entire detailed claim including all supporting documents within 42 days after it became aware of (or should have been aware of) a circumstance giving rise to such a claim.
The Judge found that because MESC failed to satisfy these fundamental criteria, it was not entitled to an EOT, regardless of the merits of the claim.
Court of Appeal
MESC appealed Justice Field’s Judgment to the DIFC Court of Appeal on the following grounds:
- The Judge erred in applying the relevant parameters of the 42-detailed notice period.
- The Judge erred in identifying when the 28-day notice period began and what such a notice should entail when considering the context of the case.
- The judge erred in failing to apply the prevention principle when he should have done so.
- The Judge erred in his application of Sub Clause 3.5 (14-day notice period.)
The judge erred in failing to apply the good faith principle when he should have done so The Court of Appeal rejected all but one of the grounds of appeal, specifically, that the 42-day detailed notice period is not a condition precedent. However, since this had no financial consequences on its own without the fulfilment of the other conditions precedent, the Appeal was dismissed.
Panther, for its part, brought a cross-appeal on the following grounds:
- The Judge erred in his consideration, or lack thereof of MESC’s failure to disclose programme material (only applicable if MESC was successful in their appeal)
- The Judge erred by failing to award Panther general damages for MESC’s delay.
- The Judge erred in his decision not to award professional fees, incurred both prior to and after termination and also for the legal costs incurred by Panther due to MES’ breach of contract.
- The Judge erred in assessing the value of the loss of the guarantee or warranty that would have been provided by MESC had it completed the contract;
- But, in the event was not provided due to the Contract’s termination.
Panther’s cross-appeal failed on all grounds except, initially, in regards to the awarding of professional fees after termination, where the Judge held that Panther should be compensated for Engineer supervision fees after termination. However, a few weeks later, the Court of Appeal amended its judgment to order that Panther’s cross-appeal be dismissed entirely. The Court of Appeal’s verdict therefore agreed with the Court of First Instance Judgment and provides the rationale behind, and considerations given to preconditions, and their application in the DIFC Courts. These are elucidated below:
Interpretation of the 28-day notice period
The 28-day notice period is a condition precedent and by default, MESC’s claims were considered to be invalid because it failed to satisfy that precondition. The DIFC Courts considered the judgment by Akenhead J in the case of Obrascon v AG (2014,) who lay down his ruling in regard to this precondition. Specifically, that the notice is to be sent – “either when it is clear that there will be a delay (a prospective delay) or when the delay has been at least started to be incurred (a retrospective delay).” The DIFC Court however, interprets that the notice period begins when the Contractor becomes (or should have become) aware of the event or circumstance giving rise to the claim for an EOT – essentially, the notice period starts when a contractor becomes aware of any delay event which could give rise to an EOT claim and not on the actual delay to the overall project. The rationale behind this is likely because an actual delay is often only identified after a delay event occurs which, in the Court of Appeal’s view, is an antithesis to the purpose behind this condition of contract; which is designed to ensure that claims are dealt with expeditiously.
Interpretation of the 42-day detailed notice period
The Court of First Instance found that the 42-day detailed notice period for the submission of a fully detailed notice (together with all relevant aspects to the claim) is a condition precedent and the failure to comply therewith will result in the dismissal of an EOT or cost claim. In contrast, due to their interpretation of clause 20.1 of FIDIC ‘99 and some of the principles from Obrascon, the Court of Appeal applied a less stringent approach, finding that the lack of a “fully detailed claim” does not constitute dismissal of the claim based on procedural grounds. This indicates that the Engineer should take into account the comprehensiveness, supporting documents, and detailed claim regime, or lack thereof within the notice period, but he does not have the right to dismiss the claim by applying clause 20.1 if the other conditions precedent is met.
Prevention Principle and Good Faith
Regardless of the existing preconditions to an EOT Claim and the failure by a party to abide by them, is it in good faith that a party can claim liquidated damages when a court finds that it contributed to a majority of the delays? Article 122 of the DIFC Contract Law grants the DIFC Court the discretion to refrain from awarding liquidated damages when an employer’s actions have contributed to the delay. The DIFC Court of Appeal interprets the good faith principle (in Articles 57 & 58 of the DIFC Contract Law) as being concerned with the implications of contract terms and mode of performance, but that the application of the good faith principle does not allow parties to circumvent the agreed-upon terms in a contract.
The Court further clarified that liquidated damages are generally enforceable notwithstanding the actual harm suffered. Accordingly, liquidated damages, in this instance, were found to be payable to Panther, solely because of MESC’s failure to complete its works by the agreed time for completion.
The prevention principle, derived from the common law principle that no party shall benefit from his own wrongdoing, was also considered. In Gaymark v Walter Construction (1999,) the presiding Judge ruled that if an employer causes delay and the contractor fail to give timely notice of that delay, thereby preventing an EOT claim, the employer’s liquidated damages claim should be barred. The DIFC Court of Appeal held that the contractual wording, which allows liquidated damages, leaves no room for implied terms of good faith when such damages are contractually permitted. The Court therefore rejected the application of the principle outlined in Gaymark as it does not represent DIFC law.
What are the takeaways from the DIFC Court of Appeal Judgment
Primarily, the principles of pacta sunt servanda, MESC’s failure to abide by the EOT preconditions, and the incongruity of MESC’s arguments raised with respect to DIFC Contract Law resulted in the dismissal of this appeal. The reiteration of the significance of the pre-conditions to an EOT Claim by the DIFC Court of Appeal clearly sets forth the rules to be followed by any contractor bringing an EOT or cost claim under FIDIC ‘99. These are:
- Strict adherence to the 28-day notice period of notifying the project engineer of the claim when a delay event arises. Failing to do so will result in the dismissal of the EOT claim. This can even be in the form of a short email (see, for instance, FIVE Real Estate Development LLC vs Reem Emirates Aluminium [2020] DIFC TCD 009).
- A comprehensive claim is to be sent within 42 days of identification of the relevant delay event. If circumstances limit the level of detail in the claim, it does not render the claim invalid, but these factors may be considered by the Engineer.
- If a notice is served on time but the detailed claim is untimely, the claim may still proceed unless its late submission causes a lack of a proper investigation. These factors may be considered by the Engineer.
- The pacta sunt servanda principle should always apply and therefore, defined notice periods and timelines in a contract cannot generally be superseded by non-contractual arguments.
- Similarly, good faith arguments do not circumvent clear contractual provisions.
- In general, because they are contractually-agreed, liquidated damages clauses are enforceable irrespective of the actual loss suffered by the aggrieved party.
- The contra proferentem rule rarely applies in the context of EOT claims as the DIFC Court allows for the judge’s discretion to interpret the rules to avoid any ambiguity. This includes what constitutes ‘harm,’ ‘benefit’ and ‘good faith,’ providing a wide scope for interpretation to be used by the Judges when considering the contra proferentem It is to be expected that unless absolutely necessary, such broad rules shall not be applied by the DIFC Courts.
FIDIC 2017
The preconditions for an EOT claim in FIDIC ‘99 have been modified in FIDIC 2017, with what seems to be an approach that aims to provide further support to a contractor and increased emphasis on the role of the Engineer. Clause 20.1 of FIDIC 2017 confirms that:
- Claims will be categorised differently based on their nature and as such, provides procedures and preconditions specific to the disputed matter.
- The notice period for both parties is now 28 days whereas in FIDIC ‘99, employer claims had no specific time limit.
- A positive obligation is placed on the Engineer to notify the claiming party within 14 days if he considers that the notice of claim was served out of time. The Engineer’s failure to do so deems the notice of claim timely served.
- Claiming parties are also allowed to provide justifications for their late submissions.
- Both Parties have 84 days to submit their fully detailed Claim.
FIDIC 2017 attempts to streamline the claims process while arguably creating a more equitable mechanism placing equal obligations on both parties and additional obligations on the Engineer. This is likely to extend the duration of the overall claim procedures but provides additional recourses and rights to the Contractor not generally afforded to them in FIDIC ‘99 and therefore, should be considered as an alternative to FIDIC ‘99 by parties negotiating new construction contracts.
UAE Onshore Law
UAE law, often perceived as providing more flexibility than common law, still enforces clear contractual terms and time-bar provisions. The UAE Civil Code provisions, such as Article 106 (abuse of right) and Article 246(1) (good faith), cannot easily be invoked to escape time bars, based on the similar principles found in the Sharia. Unambiguous contract terms in both the DIFC and onshore court systems must be adhered to and cannot be interpreted differently.
Therefore, while the onshore courts give credence to the good faith principles, it still seems likely that similar cases considering preconditions of an EOT claim may produce similar outcomes, at least regarding the importance of these preconditions to a claim, when there are unambiguous Contractual obligations set forth in the Contract.
Conclusion
While not a breakthrough case, the Judgment of the DIFC Court of Appeal is an important ruling that reiterates and provides a detailed, legal rationale for the interpretation of the preconditions to an EOT claim under FIDIC ‘99. In particular, the principle of pacta sunt servanda is applicable and therefore, a contractor should be aware that it may lose its right to claim if the notice periods in the contract are not adhered to. This is irrespective of the validity, veracity and contents of the claims or any other arguments of principle such as the good faith or prevention principles unless explicit remedies exist in the contract. Contractors may consider FIDIC 2017 as a viable alternative to FIDIC ‘99, insofar as it relates to preconditions to a claim submission due to the equal considerations given to both an employer and contractor, the obligations placed on the Engineer and the additional time-frame provided for the submission of a detailed Claim.
Disclaimer
This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Any reliance you place on such material is therefore strictly at your own risk.
Author: Nathan Baikie & Tony (Arbitration Intern)
