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May 17, 2023

Claim Notices and Liquidated Damages - The DIFC Court of Appeal Provides Useful Guidance

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Claim Notices and Liquidated Damages - The DIFC Court of Appeal Provides Useful Guidance

Two of the most common arguments that arise on construction projects in the Middle East are (i) whether a failure to notify a claim within the contractual time for doing so is fatal to the claim; and (ii) whether the employer can claim liquidated damages in circumstances where it has caused the delay in question and in the absence of the contractor being granted an EOT.

The recent decision of the DIFC Court of Appeal in Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016 provides useful guidance as to how such matters are addressed under DIFC law, with specific reference to the DIFC Contract Law (DIFC Law No 6 of 2004).

The case relates to a contractor's claims for EOTs and associated prolongation costs and the employer's claims for liquidated damages and further costs arising from termination of the contractor's contract, which was an amended FIDIC 1999 form. The claims on appeal were already the subject of findings at the DIFC Court of First Instance level, including that as a factual matter the employer had caused significant delay, but also that the contractor had not complied with the contractual time periods for notifying its claims in respect of those delays.

While a number of grounds of appeal and cross-appeal were advanced before the DIFC Court of Appeal, four points are worth noting.

First, the Court of Appeal confirmed that the requirement under Sub-Clause 20.1 for notice of a claim within 28 days after the Contractor became aware, or should have become aware, of the event or circumstance was a condition precedent to the contractor having any claim (at [37]). That is to say, if the contractor fails to issue its notice within 28 days, it loses its right to seek an EOT and/or additional costs.

Moreover, the DIFC Court of Appeal made clear that the delay need not have actually occurred in order for time to start running on the contractor's notification obligation - the contractor need only be aware (or should be aware) of the event and its potential to cause delay to completion.

Second, the DIFC Court of Appeal rejected the Gaymark argument (taken from a judgment of the Supreme Court of the Northern Territory of Australia in Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 14). That argument is to the effect that that even if no EOT had been granted to the contractor, if the employer is found to have caused the delay in question as a matter of fact, the prevention principle should apply such that the contractor will no longer be held to his agreement to complete by the contractual completion date, such that time for completion would be "at large" and no liquidated damages would apply.

The DIFC Court of Appeal confirmed that the approach in Gaymark does not represent DIFC law for a number of reasons, including that such an argument would effectively allow the contractor to "pick and choose" whether to comply with its contractual notice provisions or not [53 to 57].

Third, the DIFC Court of Appeal upheld the decision at first instance level rejecting the proposition that the employer should be disentitled from applying liquidated damages by operation of principles of good faith and cooperation that are embodied in DIFC Law by Articles 57 and 58 of the DIFC Contract Law. In summary, the contractor argued it would be unconscionable for the employer to levy liquidated damages in circumstances where as a factual matter it had caused the delays in question. The DIFC Court of Appeal saw Sub-Clause 20.1 as being clear in its words and effect, such that there was no scope to imply an obligation of good faith in respect of it [58].

Fourth, the contractor raised a new argument on appeal based on Article 122 of the DIFC Contract Law, which states as follows: "(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm. (2) However, notwithstanding any agreement to the contrary the specified sum may 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 Contractor appears to have argued that insofar as the alleged breach was its failure to issue timely notices under Sub-Clause 20.1, the liquidated damages claimed by the employer were grossly excessive in comparison to the harm arising from that breach.

The DIFC Court of Appeal rejected that argument, noting that the liquidated damages were not levied in respect of a failure to notify under Sub-Clause 20.1, but rather a failure to complete by the contractual date for doing so.

Interestingly, the DIFC Court of Appeal indicated that Article 122(2) might well have offered a path for the contractor to challenge the liquidated damages against it had its case been put differently, stating as follows: "There has been no attack on the amount of liquidated damages payable for that failure, nor could there be without detailed investigation into and evidence of the cost of that delay to the Employer." [62]

In that regard, the DIFC Court of Appeal appears to have left open the door to arguments of a type that are common in disputes governed by UAE law and other laws of the Gulf jurisdictions against application of liquidated damages, though precisely how Article 122 will ultimately be applied by the DIFC Courts remains to be seen.

Authors and Contributors

David Hume

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