Background of Panther v. MESC¹

The project was delayed, the contractor's applications for extensions of time (EOTs) were rejected, the parties attempted (but failed) to agree an MOU, the employer liquidated the security guarantees, the contractor suspended its works and the employer terminated the contract. Sound familiar? Unfortunately, this set of facts is pretty common on projects across the GCC.

The DIFC Court considered various issues that have a wider relevance to interpretation of the 1999 FIDIC Red Book when governed by DIFC law, particularly relating to notice provisions. The court's views on the impact of implied obligations of good faith and cooperation in the context of reliance on contractual notice provisions will also be of interest to parties with contracts governed by the laws of the UAE or other GCC states that impose obligations of good faith.

What do contractors and employers need to know?

The DIFC Court decision contains a number of interesting points – particularly for us lawyers – but what do contractors and employers actually need to know?

The 28-day notice requirement in Sub-Clause 20.1:

This is a condition precedent to the contractor's entitlement to obtain an EOT, however strong the contractor's claim to an EOT might be otherwise. Failure to serve that notice in time means that the claim for an EOT (and/or additional payment) will fail.

This notice can be short and to the point – it just needs to give notice that there is or may be a claim and "describe the event or circumstance giving rise to the claim" so that it can be investigated.

Time starts to run from when the contractor is aware or ought to have been aware of an event or circumstance that could give rise to an EOT claim (i.e. awareness of an event that may delay the contractual completion date). It does not run from the date that the delay to completion in fact starts to occur.²

The 42-day notice requirement in Sub-Clause 20.1:

Failure to comply is not a condition precedent to a claim, but the Engineer can take account of the extent to which any failure to comply has prevented or prejudiced proper investigation of the claim when making its determination.

This notice is intended to be a claim ready for determination by an employer. The contract requires "a fully detailed claim which includes full supporting particulars…". The amount of information required to satisfy this will vary in each case and is likely to be a matter of degree.

Sub-Clause 3.5 – Amendments providing a time limit for issuing a notice of dissatisfaction:

This contract amended FIDIC Sub-Clause 3.5 to say that: "Each Party shall give effect to each agreement or 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]." (emphasis added). Such amendments are fairly common, so this element of the decision may also have wider application.

The requirement to issue a notice of dissatisfaction within 14 days of having received the Engineer's Decision was a condition precedent to being able to challenge the Engineer's Decision in court. This was largely due to the word "then" as emphasised in the quote above which highlights the importance for contractors of carefully scrutinising and understanding the impact of proposed changes to standard form contracts. Parties considering using the 2017 form of FIDIC Contracts will note that the General Conditions now make it clear that giving a Notice of Dissatisfaction on time is condition precedent to being able to challenge the determination in subsequent court or arbitral proceedings.

Other arguments raised by the contractor, and rejected (for those interested in the more academic points)

The contractor attempted a number of arguments to get around these strict contractual requirements, each one of which was rejected by the DIFC Courts for the reasons summarised below.

Limitation

Q: Isn't the enforcement of the 14-day period for the notice of dissatisfaction at odds with Article 123(1) of the DIFC Contract Law on Limitation, which provides that an action for breach of any contract must be commenced within six years after the cause of action has accrued?

DIFC Court's decision: No. Sub-Clause 3.5 is not related to breach of contract, but simply limits the time within which a party may challenge an Engineer's Decision.

Prevention principle

Q: If the EOT clause is disabled due to the contractor's failure to comply with the notification provisions, shouldn't the prevention principle apply?

Explanation: Under common law, there is a basic principle that a party should not benefit from its own wrongdoing. In construction contracts, this means that if the contractor's failure to complete by the contractual completion date is caused, even in part, by some action or inaction of the employer, then the contractor is no longer held to his agreement to complete by the contractual completion date and is instead required to complete within a "reasonable time". The liquidated damages (LDs) clause no longer applies (because the LDs clause is dependent on a fixed completion date) and damages for a failure to complete on time are "at large". An EOT clause can displace the "prevention principle" because it provides for a new revised completion date for the purposes of the LDs clause.

DIFC Court's decision: No , for three main reasons:

• First, the clause is effective and capable of providing an EOT. The clause is not "disabled" by a contractor's failure to operate it – it simply has not been operated.
• Second, if the contractor's argument was accepted, the contractor would then be able to pick and choose whether to comply with the notification provisions in the EOT clause, which does not make commercial sense and is at odds with the carefully formulated structure of the contract.
• Third, the wording makes it crystal clear to the contractor what he has to do to be awarded an EOT and thereby reduce or eliminate the LDs payable by him in the event of delay.

Good faith

Q: Isn't it unconscionable, and contrary to Articles 57 and 58 of the DIFC Contract Law which implies an obligation of good faith and co-operation, for the employer to claim liquidated damages for a period of delay for which the employer was largely responsible?

DIFC Court's decision: No. The contractor was a willing party to the contract and agreed clear wording. The overriding principle of pacta sunt servanda should not be circumscribed in this way.

"Reformulated prevention principle"

Q: Even if there is no EOT, shouldn't the employer be debarred from claiming LDs for such part of the delay as was attributable to the employer's own actions?

Explanation: The contractor argued that, as a result of the good faith requirements in Article 57 and 58 of the DIFC Contract Law, even if the contractor is not entitled to an EOT due to a failure to comply with the notice provisions, he should not be subjected to LDs. Under Article 122 of the DIFC Contract Law, the court may reduce the amount of LDs to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance. The contractor argued that the LDs are grossly excessive in circumstances where the employer was responsible for the delay and the contractor simply failed to comply with the notice provisions.

DIFC Court's decision: No³, for the following key reasons:

• First, good faith does not mean the court should rewrite the contract. Parties should be held to their bargain.
• Second, Article 122 starts by confirming that, in general, an LDs clause will be enforced "irrespective" of the actual loss suffered by the aggrieved party. The ability to reduce the LDs in the second limb of that clause applies if the LDs are "grossly excessive in relation to the harm resulting from the non-performance" of the contract. In this case, the court's view was that the non-performance is the failure to complete by the contractually agreed completion date, not the failure to comply with the notice provision. There was no attack on the level of LDs payable for the failure to complete on time.

The fact that an employer may be entitled to levy liquidated damages for a delay of its own making may come as a nasty surprise for many contractors, and again emphasises the importance of the project team having a detailed understanding of the contract and putting in place robust project-specific procedures to ensure compliance with the administrative provisions.

Other issues raised

There were also various cross-appeals from the employer, relating to general damages for delay (in addition to LDs), professional costs incurred before and after termination, legal costs incurred in obtaining relief from the onshore Dubai courts due to the contractor's attempts to force its way back onto site, and quantum for loss of the warranty for work carried out by replacement contractors after the contractor's termination. However, these issues are not of such wide application and so we have not summarised them in this article.

This case is a timely reminder from the DIFC Courts that the terms of a construction contract should be enforced, even where it may be perceived as giving rise to a harsh result. If you are facing any similar issues on your projects, or would like assistance in putting in place robust processes to protect your rights, please contact us without delay.

1. Panther Real Estate Development LLC v. Modern Executive Systems Contracting LLC↩
2. Note for the lawyers – this differs from the decision in Obrascón Huarte Lain SA v. Attorney General for Gibraltar [2014] EWHC 1028 (TCC)↩
3. Note for the lawyers – the DIFC Court confirmed that Gaymark Investments Pty Ltd v. Walter Construction Group Ltd [1999] NTSC 143 does not represent the law in the DIFC↩