Jordan … a closer look at Good Faith.
Good Faith addressed in DIFC Courts
STUART JORDAN* provides an insight into a recent DIFC Courts decision, where the court upheld a time bar in a construction contract dispute, rejecting the argument that Good Faith required that the agreed-upon terms be disregarded.
01 November 2024
If we could point to one thing that encapsulates the difference between Middle Eastern legal principles and common law principles, it is the central importance of ‘Good Faith’ in the former. Some common law jurisdictions acknowledge a version of it but English Law, in particular, is a long way from that position in its recognition only of narrow principles of waiver and estoppel.
So, it was interesting to see the way this question was dealt with recently in a dispute brought to the DIFC Courts, as DIFC Law contains elements of both traditions. And to make it even more interesting, the Good Faith argument was deployed in connection with enforcement of a contractual time bar on presentation of claims for extensions of time and additional cost.
Here’s the background: In 2017, Panther Real Estate Developments LLC (Panther) entered into a contract with Modern Executive Systems Contracting LLC (MESC) as main contractor for the construction and completion of a residential tower in Dubai. The contract was on an amended version of FIDIC Red Book (Construction Conditions for Building and Engineering Works Designed by the Employer) First Edition 1999. The governing law was DIFC Law and disputes were agreed to be resolved under the exclusive jurisdiction of the DIFC Courts.
The required completion date for the works was December 16, 2018 and the contract provided for delay liquidated damages to be paid at a rate of AED42,500 ($11,570), capped at 10 per cent of the contract price.
What could go wrong? Well, everything. Completion was delayed and the reasons for that delay were disputed. By June 2019, MESC had submitted three claims for extensions of time and additional cost, all based on late provision (and late finalisation) of design information from Panther’s designers. The engineer had rejected all of these claims in full. MESC threatened to slow progress of the works and Panther pointed out that this would be a fundamental breach of the contract. Panther called the performance security and eventually terminated the contract, on the basis that the 10 per cent cap on delay liquidated damages had been reached.
MESC brought all this to the DIFC Court, seeking judgment in terms that their time extension and additional cost claims were meritorious, making all of the above Panther actions (taking liquidated damages, calling the bonds and terminating) unlawful. The Court substantially agreed that Panther were, indeed, responsible for most of the delays but crucially, they also found that MESC had failed to meet time limits for submission and for later detailing of their claims – and that, since those time limits were set up in the contract as time bars, MESC had lost its entitlements in those claims. On that basis, MESC remained liable for the liquidated damages, and the cap on those liquidated damages had been reached.
So far then, the DIFC Court had taken a conventionally English Law approach in upholding a properly stated time bar. That is: a provision which makes clear that on-time action is a condition precedent to entitlement, and that failure to meet the time limit will result in losing that entitlement.
MESC appealed to the DIFC Court of Appeal (CA) and we’ll look at two main aspects of MESC’s submissions:
1. Good Faith. Although DIFC Contract Law is based largely on English Law, there are (in Articles 57 and 58) implied duties on parties relating to the exercise of Good Faith and fair dealing. MESC will have felt that their case here was strengthened by the finding of the lower court that Panther was substantially at fault for the delays; and
2. Liquidated damages. Although DIFC Contract Law expressly upholds agreed liquidated damages provisions, Article 122 also provides that these can be reduced to a “reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances”.
The CA, however, did not agree.
On Good Faith, the CA said: “Nowhere does [the statute] 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”
On liquidated damages, the CA viewed MESC’s argument as being that the liquidated damages were a “grossly excessive” remedy for failing to meet the time limits. The CA said that these damages were for failing to meet the completion date, and that MESC had, therefore, not attacked the rate as an excessive rate for that failure.
We have looked before at both time bars and liquidated damages from Middle Eastern and common law perspectives but, because of the way DIFC Contract Law straddles both worlds, it is interesting to see the DIFC Courts’ approach. In this case, it was more in line with the English Law: the CA recognised the implied Good Faith obligation but did not see that it should (in this situation anyway) override the terms that the parties freely agreed.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. He relocated to the group’s Dubai office last month, to better develop its construction offering in the Gulf. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries.
