DIFC case update: Extensions of time, good faith and liquidated damages In construction contracts

The Dispute

The facts will sound familiar. The dispute arose from an amended FIDIC contract for a residential tower building in Dubai, under which Panther Real Estate Development LLC ("Panther") was the employer and Modern Executive Systems LLC ("MESC") the contractor.  The contract, which was governed by DIFC law and gave the DIFC courts the jurisdiction to hear any disputes, provided that:

• Under sub-clause 20.1, (i) MESC must give notice of an EOT claim within 28 days of becoming aware of the event(s) giving rise to it; and (ii) within 42 days of that same date, MESC must provide a fully detailed claim with supporting particulars.
• Under sub-clause 3.5, if the parties could not agree an EOT, the matter would be determined by the project's engineer. If either party disagreed with the engineer's determination, they were required to submit a notice of dissatisfaction within 14 days.
• If MESC failed to meet the agreed time for completion, it was liable to pay liquidated damages at an agreed daily rate of AED 42,500 (approximately USD 11,600), to a capped total of 10% of the contract price – an arrangement that is typical in construction contracts in the MENA region.

Works began in July 2017 and were due to be completed by December 2018. Delays subsequently  arose and disagreements between the parties ensued. MESC submitted three claims for an extension of time ("EOT"), each of which was rejected. In November 2019, with the project almost a year delayed, Panther exercised its right to terminate the contract on the ground that the delay damages cap was exhausted, and filed proceedings shortly after.

Panther argued that the EOTs were rejected because MESC failed to comply with the time limits under sub-clauses 3.5 and 20.1.  As a result, Panther’s position was that MESC was not entitled to any EOT, was not entitled to raise the delay events in its defence and was liable for liquidated damages.

MESC submitted that approximately 300 days of the delay were attributable to Panther. Consequently, it argued that it was not responsible for the delays, that the delay damages cap had not been surpassed and thus Panther's termination of the contract was wrongful.

Court of First Instance

The Court of First Instance judge attributed 306 days of delay to Panther.  However, he accepted Panther's argument that compliance with the 28-day time limit for giving notice of the delay event was a condition precedent to MESC's entitlement to an EOT.  In addition, he held that the 42-day time limit for providing the detailed claim was similarly a condition precedent.  The judge also found that the 28-day period began to run regardless of whether any actual delay had occurred by that time, such that notice should be served if delay had not yet occurred but was foreseeable.  Consequently, as MESC had failed to meet the conditions precedent, it was not entitled to the EOTs and was liable to pay liquidated damages for the delay to completion. MESC appealed the decision.

Court of Appeal

The Court of Appeal upheld the decision of the Court of First Instance. Its judgment discusses several issues of note:

1. Conditions precedent for EOT claim

The Court of Appeal reiterated the First Instance judge's finding that the 28-day time limit at sub-clause 20.1 for giving notice of an EOT is a condition precedent of a contractor's entitlement to an EOT and that failure to comply will be fatal "however strong his claim to an extension of time might be otherwise". 

By contrast, however, as a matter of contractual interpretation, the Court of Appeal held that the 42-day time limit is not a condition precedent.  This was on account of the specific wording of the provision, which notes that “any [EOT] and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim”, rather than any objections against conditions precedent per se.  MESC had made this argument in its appeal and effectively succeeded on this ground, although its case was not advanced overall due to the Court of Appeal's other findings, as set out below.  

Through a process of contractual interpretation, the Court of Appeal attributed the difference in approach to the purposes of the two notices.  It noted that the 28-day notice is intended to identify the event or circumstances giving rise to an EOT claim and can be short, with no specified form, on the basis detailed analysis and supporting evidence is intended to follow.  Conversely, the purpose of the 42-day notice is to add sufficient detail to the claim such that it can be determined.  It therefore follows that the consequence of failing to observe the 28-day notice is more severe so as to encourage strict and timely compliance, given it is a lesser burden for a contractor to meet.

In our experience, it is not uncommon for there to be a perception that courts or tribunals in the region will be reluctant to uphold a condition precedent, notwithstanding the clear terms of the contract.  The DIFC Court of Appeal's rejection of that notion is therefore welcome (albeit, we appreciate the DIFC is a common law jurisdiction more readily following English and other common law jurisprudence).

2. Time for issuing notice of dispute

The Court of Appeal also upheld the First Instance judge’s finding that the time for giving the 28-day notice runs from when the contractor is aware, or ought to have been aware, of the events or circumstances giving rise to the EOT claim. 

In making this determination, the Court of Appeal acknowledged its departure from the English High Court case of Obrascon Huarte Lain SA v Attorney General for Gibraltar,1 which held that time only began to run from when the delay actually occurred or started to occur. The Court reasoned that this would render the 28-day notice period ineffective,  as in theory a notice of a delaying event occurring at the start of a project could be given many months later if the delay did not materialise immediately, which was contrary to the swift notification and addressing of EOT claims intended by sub-clause 20.1.

3. Liquidated damages and the ‘prevention principle’

The judgment is also of interest for its approach to liquidated damages and the ‘prevention principle’.

MESC argued that as the First Instance judge had found Panther responsible for the majority of the delay, under the ‘prevention principle’ it should not be entitled to benefit from its wrongdoing by seeking liquidated damages for MESC's late completion. MESC relied on arguments that are frequently raised in similar scenarios, namely:

1. 1. 1. Gaymark Investments Pty Ltd v Walter Construction Group Ltd,2 a judgment from the Supreme Court of the Northern Territory of Australia, which held that an employer forfeited its right to liquidated damages by causing the delay in question. MESC argued that in such circumstances, the EOT mechanism and time for completion should be abrogated, with the contractor instead obliged simply to complete the works within a reasonable time. It is a familiar submission.

The Court of Appeal criticised this notion, finding that if the Contractor was not required to give EOT notices, it would not be bound by a revised time for completion (or liquidated damages if that time was not met) and could effectively "pick and choose" when to complete the work.

1. 1. 2. Good faith. Similarly, MESC contended that Panther, having caused the delay, should be prevented from claiming liquidated damages for MESC's late completion due to the (i) implied obligations of good faith and fair dealing and (ii) duty of co-operation under Articles 57 and 58 of the Contract Law.

Again the Court dismissed this submission, holding that MESC had agreed to be bound by the contract's notice provisions, which were clear in their words and effect and gave no scope for the implication of good faith. The Court clarified that while the Contract Law is concerned with "the mode of performance by the contracting parties, nowhere does it suggest that the contracting parties should not be held to their bargain…or that the courts should get involved in re-writing the Contract…[so as to] redress what one party claims to be an unfair consequence of the terms which have been agreed.”

Although this is a DIFC law decision, our view is that the outcome should ultimately be the same if UAE law was applied, given that the obligation to act in good faith should not be used to override or circumvent the parties’ contractual bargain. 

1. 1. 3. Statutory reduction of liquidated damages.  Finally, MESC relied on Article 122(2) of the Contract Law, which permits the reduction of liquidated damages where they are "grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances."

Rejecting this argument, the Court of Appeal reiterated that it should not be re-writing the contract between the parties. It noted that while MESC claimed its breach was merely its failure to comply with the contractual notice provisions (for which the liquidated damages could be disproportionate), in fact the relevant infraction was its failure to complete on time. 

We are not surprised the DIFC Court of Appeal reached this decision.  However, and in contrast to the comments above in relation to good faith, it would be interesting to see the outcome of this issue if the matter had been subject to UAE (or other GCC laws), where parties are often required to demonstrate their losses notwithstanding a liquidated damages clause.

Key Takeaways

The Court of Appeal's judgment can be summarised into three key takeaways:

• Time limits for notices must be observed without exception. Contractors that suspect they may need to issue an EOT claim should do so without delay, as non-compliance with contractual time limits may be fatal to a claim. Given the Court's determination that delay need not have already occurred for an EOT claim to be issued, an early notice is far preferable to losing the right to seek an EOT entirely.
• Contract terms and in particular liquidated damages clauses should be given particular scrutiny. The DIFC Courts will not use the duty of good faith to override the parties' express agreement, notwithstanding the outcome.
• Although based on a common law system, the DIFC Courts will not follow English or other common law precedents indiscriminately, as shown by the Court of Appeal's departure from Obrascon and Gaymark. Whilst judgments from other jurisdictions may be persuasive, they cannot be relied upon to ‘fill in the gaps’ in DIFC law. The Court of Appeal was particularly clear on this point in last year's judgment in Industrial Group v El Fadil Hamid.³