Danger - contractor warningThe importance of timely notices for EOT or additional payment
The enforceability of time bar provisions is a frequent theme in disputes in the Middle East. In the DIFC Court of Appeal decision of Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC (DIFC Court of Appeal) the court helpfully clarified how it views the notice provisions in the FIDIC General Conditions. In doing so it departed from the reasoning in the English case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar, a decision widely considered to be favourable to contractors.
The DIFC Court of First Instance judgment, handed down on 26 September 2022, was the first major construction judgment rendered in the DIFC’s Technology & Construction Division (TCD). Established in 2017, the TCD deploys specialist judges to hear technically complex cases, particularly in the construction sector.
MESC (Contractor) was appointed by Panther (Employer) to construct a residential tower in Dubai, UAE, under a FIDIC contract (Red Book, First Edition, 1999, as amended). The contract was governed by DIFC law and subject to the exclusive jurisdiction of the DIFC Courts. The project was delayed, and a dispute arose concerning delay, termination, and compliance with the contractual notice provisions.
At first instance, the TCD found that Panther was responsible for 306 out of 325 days’ delay and that only 19 days were due to MESC’s failings. However, because of MESC’s failure to comply with the contractual notice requirements, its claims for EOT and prolongation costs were dismissed. As a result, Panther was held to be entitled to terminate the contract, as the cap on liquidated delay damages had been reached. Panther was awarded liquidated delay damages up to the contractual cap of 10%, plus its additional costs of completing the project post-termination.
MESC challenged the TCD’s interpretation of clauses 20.1 (notices) and 3.5 (Engineer’s determination).
Clause 8.4 provides that, if MESC considers it is entitled to an EOT for a delay to completion, it must give notice to the Engineer in accordance with clause 20.1. Clause 20.1 has two parts:
- if MESC considers it is entitled to any EOT (and/or any additional payment) it must give notice to the Engineer, describing the event or circumstance giving rise to the claim. Notice must be given as soon as practicable, and not later than 28 days after MESC became aware, or should have become aware, of the event or circumstance. Failure to comply means that the time for completion will not be extended, MESC will not be entitled to additional payment, and Panther will be discharged from all liability in connection with the claim; and
- within 42 days after becoming aware of the circumstances giving rise to the claim, MESC must send the Engineer a fully detailed (though interim) claim including full supporting particulars of the basis of the claim and of the EOT claimed. Within 28 days after the end of the effects resulting from those circumstances, MESC must send its final claim.
The DIFC Court of Appeal agreed that there was “no doubt” that the 28-day notice requirement was a condition precedent to MESC’s entitlement to an EOT. This meant that failure to serve the first notice in time would be fatal to any EOT or additional payment claim, no matter how strong MESC’s entitlement. In the DIFC Court of Appeal’s view, this notice did not have to be in any particular form. It could be succinct, provided it adequately described the event or circumstance giving rise to the claim so the Engineer can investigate. There was no need to provide any analysis or even to specify the amount of EOT or additional payment claimed. That detail could be provided later.
When does time begin to run for the first notice?
Interestingly, the DIFC Court of Appeal applied a more stringent test than Mr Justice Akenhead in the English case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar . Mr Justice Akenhead decided that the notice may be served “either when it is clear that there will be delay (a prospective delay) or when the delay has been at least started to be incurred (a retrospective delay).” Relying on the wording of clause 8.4, which states that entitlement to an extension of time under clause 20.1 arises when completion “is or will be delayed” by any of the listed causes, he observed that clause 8.4 did not expressly say “is or will be delayed whichever is the earliest…” Therefore, the question was not which of these two moments arose first. He also noted that the “serious effect on what could otherwise be good claims” justifies interpreting clause 20.1 broadly.
Mr Justice Akenhead gave the following example: a variation was instructed in June, but it was not until October that the contractor became aware that it would delay completion and not until November that there was actual delay. In this scenario, there was an argument that the contractor did not have to serve the notice until November, although it could have done so earlier, in October. Mr Justice Akenhead provided that, where the event and the delay were separated in time, the contractor had two opportunities to serve the notice: (1) when it became aware of a prospective delay, and (2) when the delay actually occurred.
The DIFC Court of Appeal however argued that the only starting point for the 28-day period is when the contractor becomes aware or should have become aware of the event or circumstance giving rise to the claim for an EOT. This was not necessarily the date of a variation instruction; it may be when an updated programme incorporates the variation and puts the additional work on the critical path.
Arguments against enforcement of time-bar provisions
MESC argued that the time bar provisions in the first part of clause 20.1 should not be enforced for the following reasons:
- The time bars contradicted the statutory limitation period under Article 123 of DIFC Contract Law. The Court of Appeal dismissed this argument, holding that Article 123 of the Contract Law was unrelated to the notice provisions in the contract.
- The “prevention principle”, which derives from the common law principle that a party should not benefit from his own wrongdoing, applied. In the construction context, the “prevention principle” means that the employer cannot hold the contractor to a specified completion date, if the employer has by act or omission prevented the contractor from completing by that date. Construction contracts include EOT provisions to avoid the “prevention principle”. The court held that Panther had caused most of the delay. MESC argued that the “prevention principle” should apply because otherwise, MESC would be required to pay liquidated delay damages for Panther’s delays. The DIFC Court of Appeal rejected this argument, holding that the clause was effective to extend time for completion in the circumstances set out in the contract provided MESC gave the appropriate notices. If MESC failed to give notice in accordance with the clause, it must accept the consequences. It followed that, while the delay was due to Panther’s act or omission, MESC’s failure to comply with the notice provisions meant that MESC was not entitled to avail itself of the contractual remedy for that delay – so the “prevention principle” was not engaged.
- The court should not enforce the contractual time bars based on the principle of good faith (Articles 57 and 58 of the DIFC Contract Law), as it was unconscionable for Panther to claim liquidated delay damages for periods of delay for which Panther was largely responsible. The court rejected this argument because MESC was a willing party to the contract which included clear notice provisions, and recourse to an implied term of good faith could not be relied upon to avoid the agreed terms.
- It argued for a “reformulated prevention principle” by which the court had discretion not to award liquidated delay damages in circumstances where Panther was responsible for the delay, or to reduce the amount of liquidated damages if they were grossly excessive compared to the harm resulting from the non-compliance with the contractual notice provisions (Article 122 of the DIFC Contract Law). MESC was entitled to raise this argument on appeal although it had not done so at first instance - but the court gave it short shrift. The principle of pacta sunt servanda (agreements must be kept) took precedence and neither Article 122 nor the obligations of good faith under Articles 57 and 58 of the DIFC Contract Law suggested that the contracting parties should not be held to their contractual bargain, or that the courts should become involved in re-writing the parties’ contract to achieve some balancing of equities between them or to redress what one party claimed to be an unfair consequence of the agreed terms.
The second notice under clause 20.1
The court held that failure to comply with the 42 day or subsequent 28-day stipulations in the second part of clause 20.1 lacks such draconian consequences. Instead, the last paragraph of clause 20.1 states that any EOT shall account for the degree to which failure to comply with the notice requirements prevented or prejudiced proper investigation of the claim.
Compare this with another recent DIFC TCD judgment: Five Real Estate Development LLC -v- Reem Emirates Aluminium LLC. The employer (Five) alleged that the contractor (Reem) failed to give its initial notice of claim within the period set out in clause 20.1 and further failed to provide any second notice providing its fully detailed case. The TCD held that the contractor had provided numerous delay notifications to the Engineer that complied fully with the mandatory requirements of the first part of clause 20.1 of the FIDIC provisions, and that its failure to comply with the requirement in the second part of that clause by submitting a detailed claim did not result in the claim being time-barred; it was simply a matter which had to be taken into account when considering whether to grant an extension of time and, if so, for how long. In that judgment, there were no adverse effects for the contractor.
Clause 3.5 (Engineer’s determination)
Clause 3.5 had been amended so 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 receiving it.”
The TCD found that MESC had failed timeously to challenge earlier adverse determinations by the Engineer of its EOT and prolongation claims submitted during the project and, as a result, MESC was contractually bound by those decisions. The DIFC Court of Appeal agreed, stating that (as amended) the clause clearly stated that, unless notice of dissatisfaction was given within 14 days of the Engineer’s determination being communicated, then that determination would stand and could not be re-litigated through the dispute procedure contained in clause 20.
The importance of complying with contractual notice requirements
According to the DIFC Court of Appeal, the first part of clause 20.1 is clear: if the contractor claims any EOT (and/or additional payment), any failure to comply with the 28-day first notice requirement in clause 20.1 will result in its claims being struck out.
MESC’s arguments were all dismissed by the courts. The principles of freedom of contract and pacta sunt servanda prevailed, even where the outcome was arguably unfair, where the contractor was required to pay liquidated delay damages to the employer in respect of delays the employer caused.
The enforceability of time bar provisions is a frequent theme in disputes in the Middle East. While the approach to enforcement of time-bar provisions may differ depending on the jurisdiction and the governing law of the contract, the message to contractors is clear: always err on the side of caution and issue timeous notices in accordance with the contract. This will avoid time-consuming and costly disputes, and the possibility of good claims being denied.