Are time bars a draconian regime?

The DIFC Court’s decision in Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC and a comparison between the DIFC and onshore UAE position

Contractors and employers in the Middle East and beyond are all too familiar with delays to construction projects. As a result, it is common for construction contracts to include detailed provisions requiring the contractor to issue timely notice of a delaying event. But when does the clock start running for giving this notice and can the court/tribunal look beyond a notice that is late? On 12 May 2023, the DIFC Court of Appeal considered these and other interesting issues, in handing down its judgment in Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016.

In this blog post, we dissect this recent Court of Appeal decision and compare the DIFC’s common law approach to the onshore UAE position on the points addressed in the judgment.

Background to the dispute

 In 2007, Panther Real Estate Development LLC (Employer) entered into a contract with Modern Executive Systems Contracting LLC (Contractor) to construct a residential tower in Dubai. The contract took the form of an amended FIDIC 1999 Red Book. Various delay events ensued and, ultimately, the Employer terminated the contract (claiming that the cap on delay damages had been exhausted) and engaged a third party to complete the works.

The primary issue before the Court of First Instance was delay, with the Court holding that of the 325 delay days claimed by the Contractor, 306 of these were attributed to the Employer. Therefore, the majority of the Employer’s claims, which included a claim for damages for the loss of opportunity to sell or rent units for the period between the contractual completion date and the actual date of completion, were unsuccessful. However, the Court also rejected the Contractor’s claim for an extension of time on the basis it had failed to comply with various conditions precedent requiring the notice/issuance of such a claim and awarded the Employer liquidated damages, up to the cap (10 per cent of the contract price).

The Contractor appealed and the Employer cross appealed.

Key takeaways from the judgment of the Court of Appeal 

Notification requirements

 The Court of Appeal held that there was no doubt that the requirement under Sub-Clause 20.1 to give notice of a claim within 28 days after the Contractor became aware, or should have become aware, of the event or circumstance giving rise to the delay, is a condition precedent. Failure to serve that notice in time means the Contractor’s claim is time barred and would fail. Importantly, the Court distinguished itself from the position taken in the English case of Obrascon Huarte Lain SA v Attorney General for Gibraltar [2014] EWHC 1028, holding that the delay need not have actually occurred for the clock on the notice period to start running, rather time ran from when the contractor was aware (or ought to have been aware) of the relevant event. This view is notably more restrictive than the English position, where it was held that time ran from when delay actually started to be incurred.

Sub-Clause 20.1 also contains a requirement for the Contractor to submit a fully detailed claim within 42 days of when it became aware, or should have become aware, of the event or circumstance giving rise to the initial notice. The Court clarified that unlike the initial notification, this is not a condition precedent to making a claim (unless the contract stipulates otherwise), however the Engineer is at liberty to consider such failure when making its determination.

The ‘Gaymark principle’

The Gaymark principle is based on a judgment of the Supreme Court of the Northern Territory of Australia (Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 14), which is often discussed in common law judicial proceedings but rarely (if ever) applied. The principle is as follows: if the employer was responsible for critical delay but the contractor failed to submit its notice on time such that its extension of time claim is time barred and there is no other basis on which the completion date can be extended in those circumstances, the prevention principle applies to bar the employer’s claim for liquidated damages. Otherwise, there would be ‘an entirely unmeritorious award of liquidated damages for delays of [the employer’s] own making’ (at para 69 of Gaymark). The Court of Appeal in Panther Real Estate confirmed that the Gaymark principle did not represent DIFC law, ie, the Contractor’s failure to comply with the notice condition precedent did not enliven the prevention principle.

Good faith

The Contractor argued that it was ‘unconscionable’ for the Employer to claim liquidated damages for a period of delay for which it was largely responsible, relying on the principles of good faith and cooperation embodied in Arts 57 and 58 of the DIFC Contract Law. The Court held that where clear words in the contract permit liquidated damages (as was the case here in Sub-Clause 20.1), there is ‘no scope for the postulated implied term or obligation of good faith.’

 DIFC Contract Law

The Contractor relied on Article 122(2) of the DIFC Contract Law, which provides that liquidated damages may be reduced where they are ‘grossly excessive’ in relation to the harm resulting from the non-performance. The Contractor argued the specified liquidated damages met this test when compared against the limited harm resulting from the Contractor’s failure to issue timely notice. The Court rejected this argument noting that liquidated damages were levied due to the Contractor’s failure to complete the works on time (rather than a failure to give notice).

How would these arguments have been concluded under onshore UAE law? 

 There is often a perception that, as compared to common law jurisdictions like the DIFC, civil law systems like onshore UAE permit remediation of the harsh consequences of the strict application of a contract, such as time bars. Parties to disputes in the UAE (usually contractors or subcontractors claiming up the supply chain) commonly rely on UAE Civil Code provisions such as Article 106 (abuse in the exercise of a right), Article 246(1) (good faith in the performance of a contract) or, under the guise of ambiguity, Articles 257-266 (interpretation of contracts) to seek to escape time bars for late notice. That raises the question of whether the above arguments would have been more readily received under onshore UAE law.

Of course, every situation is factually unique, and it is not possible to make sweeping statements about the applicability of these provisions in any given case in defending a claim for liquidated damages where timely notice relevant to an extension of time claim was not given by the Contractor. However, a few points are worth noting:

• Article 267 of the UAE Civil Code emphasises that a party to a valid and binding contract cannot resile from or vary it other than by mutual consent.
• Article 265(1) of the UAE Civil Code expressly states that ‘[w]hen the wording of a contract is clear, it cannot be deviated from in order to ascertain by means of interpretation the intention of the contracting parties.’ Hence, unambiguous terms that clearly convey the parties’ intention must be applied in a straightforward manner and cannot be rewritten under the guise of interpretation.
• The obligation to perform contracts in good faith under Article 246 of the UAE Civil Code focuses on performance and, in many respects, is akin to the English law implied term that each party must act reasonably to not hinder the other party’s performance and to assist the achievement of the object of the contract (which has similar sentiments to Article 58 of the DIFC Contract Law). An employer enforcing a time bar (rather than waiving a non-compliance) may not hinder the contractor’s performance. Accordingly, Article 246, like Article 58 of the DIFC Contract Law, is not an open-ended release from clear contractual risk allocation.
• Notice provisions with attached time bars have significant benefit to an employer and are commonly enforced. Therefore, often, reliance on a time bar provision cannot be an unlawful abuse of a right under the UAE Civil Code.

Articles 106, 246(1) and 257-266 in the UAE Civil Code therefore should not be seen as a panacea for a contractor who finds itself on the receiving end of a liquidated damages claim where it has failed to issue timely notice relevant to its extension of time claim.

As to the Contractor’s attempt to reduce the amount of liquidated damages when compared to the harm suffered, Article 390 of the UAE Civil Code, while setting a different standard, has similar sentiments to the DIFC Contract Law. Courts / tribunals considering Article 390 likely would be equally alive to the nature of the employer’s prejudice under consideration in that provision, namely that arising out of the delay to completion of the works as opposed to because of the contractor’s failure to issue timely notice.

Consequently, it may be that had the Panther Real Estate case been considered under onshore UAE law, rather than DIFC law, there may have been a similar outcome on the arguments summarised above.

Conclusion

Contractors working in the UAE (and other Middle Eastern jurisdictions) need to be mindful of the application of time bars attached to contractual mandatory notice provisions and establish systems to ensure compliance (including swift escalation up the supply chain as appropriate). Whether DIFC law or onshore UAE law governs the enforceability of that contractual mandatory notice provision, a contractor will be in a defensive position where it failed to comply and, depending on the precise circumstances, may ultimately find itself paying delay liquidated damages because of its non-compliance.

The authors would like to thank Grace Kettle, trainee associate, for their contribution.