DIFC court of appeal offers guidance on common issues in construction disputes
The DIFC Courts of course deal with other dispute such as banking and insurance claims, but construction cases are quite common, and the recent figures give some guidance as to the local legal landscape. The Courts are an independent English language ‘offshore’ common law judiciary. Whereas the onshore civil courts conduct proceedings in Arabic under the terms of the Federal Civil Procedural Law. For a number of years by consent of the parties a case can be heard before the DIFC even where the claimant/ respondent is not based in the DIFC special economic zone.
In Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 106/2022 the DIFC Court of Appeal confirmed that the 28-day notice requirement, under Sub-Clause 20.1, the FIDIC Red Book suite of contracts, triggers once 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 an Extension of Time claim. It should be noted that it does not run from the date that the delay to completion actually starts to occur. The DIFC Court’s decision distinguishes the well-known decision in Obrascon Huarte Lain S.A. v. Attorney General for Gibraltar [2014] EWHC 1028 (TCC).
The Court of Appeal considered the decision in Obrascon and noted that it appeared to say that time can start to run from the moment, usually later in time, which delay to completion of the works in fact occurred or started to occur. The Court of Appeal was troubled by this analysis. It concluded that the Obrascon approach was not in keeping with the intent of Sub-Clause 20.1 when the said Sub-Clause looks to ensure that claims are notified and dealt with swiftly. Specifically at paragraph 45 the Court of Appeal noted:
‘We see difficulties with this analysis. Delay to the contractual Time for Completion only occurs in fact when the works are not completed by the contractual completion date. The construction advanced by Akenhead J would mean that in, say, a three year project, if an event occurred during the first year which resulted ultimately in the works overrunning by a month or two after the Time for Completion in year three – and there would be no actual delay to the Time for Completion until then – then the 28-day notice under Sub-Clause 20.1 would only have to be given within 28 days of the moment in year three when Time for Completion passed without the works being completed.’
GOOD FAITH UNDER DIFC CONTRACT LAW
The Respondent in Panther, Modern Executive Systems Contracting LLC (‘MESC’) sought to rely on Article 57 and 58 of the DIFC Contract Law which provides for implied obligations of good faith and fair dealing and cooperation. They contended that it would be unconscionable for the Claimant to seek to recover liquidated damages for a period of delay when it was largely responsible for that delay. In considering this argument the Court of Appeal considered that Sub-Clause 20.1 and the 14-day notice of dissatisfaction in Sub-Clause 3.5 are clear provisions in their effect; specifically, the Court of Appeal commented at paragraph 58:
‘Those provisions are clear in their words and in their effect. They admit of no scope for the postulated implied term or obligation of good faith. There is no reason why the overriding principle of pacta sunt servanda should be circumscribed in this way.’
The Court of Appeal went on to state at paragraph 61:
‘The obligation of good faith in Articles 57 and 58 of the DIFC Contract Law is concerned with the implication of terms into a contract and the mode of performance by the contracting parties. Nowhere does it suggest that the contracting parties should not be held to their bargain, as set out in the Contract, or that the courts should get involved in re-writing the Contract for the parties so as to achieve some balancing or re-balancing of equities between them or to redress what one party claims to be an unfair consequence of the terms which have been agreed.’
This argument seems to flow from the approach in the ‘onshore’ jurisdiction as seen in Article 246(1) of the United Arab Emirates Civil Code. Contractors based in the Gulf Co-operation Council (‘GCC’) are used to local civil codes referring to an overarching statutory duty to perform contracts in good faith. In that context Contractors are used to raising good faith arguments so as to look to defeat the strict application of time bar notice provisions.
LEVEL OF LIQUIDATED DAMAGES UNDER DIFC CONTRACT LAW
The Respondent MESC further argued that Panther should be debarred from claiming liquidated damages for such part of the delay as was attributable to their own actions based on Article 122 of the DIFC Contract Law which provides that whilst liquidated damages are as a matter of principle enforceable the sum may be reduced to a ‘reasonable amount where it is grossly excessive in relation to the harm resulting from non-performance.’
The Court of Appeal rejected the argument noting that MESC’s argument appeared to assume that the “non-performance” was its own failure to give the required notice. However, the Court of Appeal stated this mischaracterised the position. The liquidated damages are payable not for the failure to serve the required notices within the required time but for failing to complete by the agreed completion date. The Court further noted that there had been no attack by MESC on the amount of liquidated damages payable for that failure. This left the door open for an application under Article 122(2) of the DIFC Contract Law if the contractor can demonstrate that there have been grossly excessive liquidated damages. However, the Court of Appeal noted that this could be problematic due to the necessity for investigation into and evidence of the cost of the delay to the employer.
CONCLUSION
Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 106/2022 provides useful guidance on the DIFC Courts’ approach to common issues in construction disputes in the region. It is clear that the DIFC Courts in common with other jurisdictions will enforce the terms of agreed construction contract clauses notwithstanding that harsh outcomes may follow.
