Delay claims under the FIDIC form: Obrascon challenged

A recent decision of the Court of Appeal of the Dubai International Financial Centre has adopted a stricter interpretation of the requirements for notifying delay claims under the FIDIC form, disagreeing with earlier caselaw from the English courts. A failure to notify claims on time results in a loss of entitlement under the FIDIC form. The Court of Appeal decision will therefore be of great importance to those dealing with extension of time claims under the FIDIC form.

Claims notification under FIDIC and the rule in Obrascon

Clause 20.1 of the FIDIC 1^st Edition contracts (clause 20.2 in the 2^nd Edition) require a Contractor who considers itself entitled to an extension of time or any additional payment to give a notice describing the “event or circumstance giving rise to the claim.” The notice must be given within 28 days after the Contractor “became aware, or would have become aware, of the event or circumstance.”. The clause also makes clear that if a notice is not given within this period the “Time for Completion shall not be extended [and] the Contractor shall not be entitled to additional payment”.

Clause 20.1 also requires a fully detailed claim to be provided within a further 14 days (56 days under the 2^nd Edition), but there is no express indication that a failure to do so will invalidate the claim.

In Obrascon Huarte Lain SA v A-G for Gibraltar, the English Technology and Construction Court was required to consider the application of these provisions on claims for extension of time under clause 8.4 of the FIDIC 1^st Edition (clause 8.5 of the 2^nd Edition). That clause sets out various events for which an extension of time is claimable if “completion … is or will be delayed by any of” those causes. Mr Justice Akenhead decided that the relevant “event or circumstance giving rise to the claim” for the purpose of clause 8.4 was the incurring of actual or prospective delay to completion, rather than the underlying event for which an extension was claimed. This was said to reflect the “is or will” wording of clause 8.4. For a more detailed review of the Obrascon decision, please see our Law-Now on the case here.

The decision in Obrascon was considered to be lenient for Contractors, as it permitted delay notifications under clause 20.1 to be deferred until a delaying event had actually impacted the progress of the works. This could be many months after the event itself. This lenient approach has now been challenged by an appellate decision of the Dubai International Financial Centre (“DIFC”) Courts.

Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC

In July 2017, Panther Real Estate Development LLC (“Panther”) and Modern Executive Systems Contracting LLC (“MESC”), entered into a contract for the construction of the East 40 Building in Al Furjan, Dubai, a residential tower building consisting of 112 residential units (the “Project”) (the “Contract”) with completion scheduled for 16 December 2018.

The Contract was based on the FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (First Edition, 1999) (the “FIDIC Red Book”), as amended by the Particular Conditions and other detailed provisions. The governing law of the contract was DIFC law, and any disputes were to be resolved within the exclusive jurisdiction of the DIFC Courts.

During the course of the Project, MESC issued three extension of time (“EOT”) applications between February 2018 and June 2019, all of which were rejected by the engineer. Eventually, on 6 November 2019, Panther terminated MESC, citing sub-clause 15.2 (which provided that Panther was entitled to terminate the Contract with immediate effect if, amongst other things, the maximum amount of delay damages was exhausted, as Panther asserted it was). The Project was ultimately completed by an alternative contractor on 1 May 2020.

Panther commenced proceedings for delay liquidated damages (“LDs”) and other damages arising from MESC’s failure to complete the Project on time, and MESC counterclaimed for prolongation costs and asserted that Panther had no right to terminate the Contract on the basis that MESC was entitled to an EOT such that the maximum amount of damages had not been exhausted (and the condition of termination was therefore not satisfied).

Decision of DIFC’s Technology & Construction Division

At first instance, the DIFC Court found that Panther was indeed responsible for 306 out of 325 days of delay and only 19 days were attributable to MESC. However, MESC’s claims for EOT and prolongation costs were dismissed, on the basis that the Court found that, in contravention of sub-clause 20.1 of the Contract, MESC failed to:

1. notify the relevant delay events within 28 days of the time when it became aware (or should have become aware) of the delay event or circumstance relied upon for the claimed EOT; and
2. send a fully detailed claim with supporting particulars of the basis of the claims and the EOT within 42 days after it became aware (or ought to have become aware) of the event or circumstances giving rise to the claim.

In this regard, the time for notification was said to run from the date when MESC was aware (or ought to have been aware) of an event or circumstance that could give rise to a claim for an EOT, regardless of whether there was likely to be or had been any actual delay by that time.

As a result, the Court held that Panther was entitled to terminate the Contract, as the cap on LDs had been reached, and Panther was further awarded LDs up to the contractual cap of 10% and its additional costs of completing the Project post-termination.

Decision of DIFC’s Court of Appeal

The decision at first instance was appealed by MESC, challenging among other things: (1) the status of 42-day detailed claim requirement as a condition precedent; and (2) when the 28-day notice had to be given.

A condition precedent?

The DIFC Court of Appeal agreed with the interpretation of the judge, at first instance, that the 28-day notice requirement is a condition precedent to MESC’s entitlement, noting that “the language could not be clearer”.

With regard to the 42-day detailed claim requirement, the Court of Appeal found that although the “Contractor must keep records necessary to substantiate its claim, it must permit inspection of such records, and it must comply with the 42-day detailed claim requirement[, t]he penalty for failing to do some or all of this is spelled out in the last paragraph of Sub-Clause 20.1: “any extension of time and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim, unless the claim is excluded under the second paragraph of this Sub-Clause.”

On that basis, the Court concluded that the 42-day detailed claim was not a condition precedent to MESC’s entitlement. A failure to comply with the requirement would, however, entitle an engineer to “reduce the period of extension of time to take account of the difficulties of investigating the claim caused by the Contractor’s failure to comply with its obligations”.

When does time begin to run?

With regard to the 28-day notice period, the Court of Appeal agreed with the judge at first instance that the obligation to give notice was triggered when the MESC became aware (or ought to have become aware) not of the delay or likely delay, but of the event or circumstance giving rise to the claim for an EOT.

The Court of Appeal refused to follow the reasoning in Obrascon, noting that:

“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. That would render Sub-Clause 20.1 – which is designed to ensure that claims are notified and dealt with swiftly – entirely ineffective for its purpose.”

This conclusion appears to be based on a misreading of Obrascon. In that case, Akenhead J provided an example to illustrate his reasoning. The example involved a variation instruction given to widen a road. At the time of the instruction, the road works were not on the critical path and it was not foreseeable, therefore, that there would be any delay to completion. When the road works are started some 4 months later it becomes clear that they are on the critical path and the variation instruction will delay completion. However, only a further month later do the widening works take place and begin to cause actual delay. In those circumstances, it was said that:

“Notice does not have to be given for the purposes of Clause 20.1 until there actually is delay [i.e. 5 months after the instruction] although the Contractor can give notice with impunity when it reasonably believes that it will be delayed [i.e. 4 months after the instruction]. The "event or circumstance" described in the first paragraph of Clause 20.1 in the appropriate context can mean either the incident (variation, exceptional weather or one of the other specified grounds for extension) or the delay which results or will inevitably result from the incident in question.”

The Obrascon decision does not, therefore, suggest that a contractor could wait until the Time for Completion had been missed before giving its notice under clause 20.1. The confusion appears to stem from differing views as to what is meant in clause 8.4 by “completion … is … delayed”. Does that mean that the Time for Completion has actually been missed (as per the Court of Appeal in Panther) or only that a delay has occurred to the critical path (as per Obrascon)?

Conclusions and implications

The Court of Appeal’s decision is a highly significant one for users of the FIDIC form. Given the express time-bar language used in clause 20.1, arguments commonly arise as to whether or not a Contractor has given notification in time. The Obrascon decision had allowed a reasonably flexible approach to be adopted for this question where extension of time claims were concerned. By contrast, the DIFC Court of Appeal decision requires that notice be given in all cases within 28 days of the Contractor’s awareness (or when it ought to have become aware) of the event on which the claim is based, regardless of when any delay arising from that event is likely to impact the works.

Broader arguments can be made in favour of each of these opposing approaches. Proponents of the Obrascon approach may note that the DIFC’s approach will require events to be notified under clause 20.1 which are not expected to impact the critical path and cause any delay to completion. This is because the critical path may change in the future and it may subsequently be shown that critical delay had been caused by the event (as per the example cited in Obrascon), but without an earlier notification within 28 days any entitlement to an extension of time will have been lost. Those in the DIFC corner might counter that, even if the wording of clause 8.4 permits a delay to the critical path to be equated with a delay to completion, the approach in Obrascon still undermines the purpose of the notification regime by allowing a Contractor to defer notification until a delay as impacted the works. By that time, the Employer will have much less scope for considering mitigation options and for investigating the events claimed for, both of which are key reasons for the notification of extension of time claims in the first place.

It remains to be seen whether the DIFC Court of Appeal’s reasoning will support a direct attack on the Obrascon decision under English law. In this regard it is notable that the DIFC judges included an ex-English Commercial Court judge (Justice Sir Richard Field) and a former Privy Councillor and Scottish Appellate judge, Lord Glennie. Regardless of the applicable law, both the Obrascon and Panther judgments are likely to be influential in any dispute over the proper notification of EOT claims under the FIDIC form.

References:

Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar [2014] EWHC 1028 (TCC)

Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016