The use of good faith arguments in time-bar disputes

Good faith obligations are often raised in international construction disputes to overcome time-bar defences raised by employers. This Law-Now considers the approach to enforcing time-bar clauses under English law and in civil law jurisdictions before considering a recent DIFC decision which arises under the unique combination of English and civil law contained in the DIFC’s Contract Law.

Time-bars under English law

The English courts have traditionally shown themselves to be supportive of enforcing time bar clauses if they are not strictly complied with. Such clauses are intended to promote certainty and finality, allowing claims to be investigated while events are still current and providing the employer with an opportunity to mitigate delays or reconsider instructions which have given rise to a claim.

An English court will not ordinarily require any special language to be used for a time-bar clause to be effective. To the contrary, English courts have generally ruled that “the words in a time-bar provision must be given their ordinary and natural meaning” (Waterfront Shipping Company Ltd v Trafigura AG).  A good example is Steria v Sigma Wireless Communications where the court found that an extension of time clause in an amended MF/1 subcontract, which gave the contractor certain entitlements “provided” a timely notice was issued, amounted to a condition precedent. Failure to serve the notice in time therefore debarred the contractor under that clause, despite the absence of express words to that effect.

Both the FIDIC 1^st and 2^nd Editions contain express wording stating that an entitlement will be lost if a Notice of Claim is not given within the required time under clauses 20.1 and 20.2 respectively. The time-bar in the 1^st Edition was upheld by the English Technology and Construction Court in Obrascon Huarte Lain SA v Gibraltar.

Good faith is of little relevance to the enforcement of time-bar clauses under English law. The doctrines of waiver and estoppel will in certain circumstances prevent a party from going back on a representation or common assumption that a time-bar provision would not be relied on. Short of this, and certain domestic legislation regulating the use of unfair contract terms, the English courts will not usually consider the fairness of a time-bar provision or whether the enforcement of the time-bar would be oppressive or abusive.

This position is unlikely to be changed much, if at all, by an express good faith clause in the contract. In Costain Ltd v Tarmac Holdings Ltd, a construction contract stipulated strict time periods for the referral of any dispute to adjudication and then to arbitration, failing which the disputed claim could not be pursued. The claimant failed to comply with these requirements but relied on a general obligation in the contract for the parties to act in “the spirit of mutual trust and co-operation” in an attempt to overcome the time-bar. The English Technology and Construction Court rejected the suggestion that such a clause required the parties to act fairly. In the Court’s judgment:

“Taking the obligation of mutual trust and co-operation (or even good faith) at its highest, it meant that, in the present case, the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar … was either non-operative or would not be relied … I am also prepared to accept that this obligation would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant … that the time bar provision was not going to be relied on. But beyond that, … there can have been no further obligation, because otherwise the provision would have required the defendant to put aside its own self-interest.”

On this view, an express good faith obligation does not add much to the existing doctrines of waiver and estoppel and has nothing to say about unfairness or injustice which might be caused purely by the application of the time-bar itself in any given case.

Time-bars in civil law jurisdictions

By contrast to English law, challenges are often made to the enforcement of time-bars in civil law jurisdictions based on the principle of good faith and rules against the abuse of rights. One or both of these norms are typically expressed as overriding and inviolate principles of law within the civil and commercial codes of such countries. In addition, civil law jurisdictions tend to allow for much broader scope in the interpretation of contract provisions than is the case in English law, with civil law tribunals more readily being able to moderate a clause according to broader notions of business purpose and the intention of the parties.

One example in an international construction arbitration setting is JV of American and EU Dredging Companies v Red Sea Public Authority (RSPA).  The parties in that case entered into a contract for the first stage of a new port project in North Al Sukhna in Egypt. The contract contained a time-bar in very similar terms to clause 20.1 of the FIDIC 1^st Edition contracts (the “Time-Bar Clause”). Claims for extension of time and delay damages were made by the contractor as a result delays from other contractors working on the project. These claims had not been made within the 28 day period provided by the Time-Bar Clause and the employer sought to reject them on this basis (among others).

Article 147 of the Egyptian Civil Code provides that the “contract makes the law of the parties” and Article 150 provides that where the wording of a contract is clear, “it cannot be deviated from in order to ascertain by means of interpretation the intention of the parties.” However, article 150 goes on to state that “when a contract has to be construed, it is necessary to ascertain the common intention of the parties and to go beyond the literal meaning of the words, taking into account the nature of the transaction as well as that loyalty and confidence which should exist between the parties in accordance with commercial usage.” Article 148 of the Egyptian Civil Code also provides that “A contract must be performed in accordance with its contents and in compliance with the requirements of good faith.”

With these principles in mind, the tribunal found that the Time-Bar Clause was “clear and unambiguous” and, as the contractor had not complied with the relevant notice provisions, “it is in principle time-barred from claiming additional payments in respect to the event giving rise to the claim”. 

Despite this finding, the tribunal was able to temper the strictness of the Time-Bar Clause by reference to the intention of the parties and the principle of good faith, concluding that the clause, “should be tuned down in the event the Employer and/or the Engineer were aware, without any doubt, of the Contractor's intention to claim additional payments.”

In addition to prior knowledge of a party’s intent to claim, or of the event giving rise to the claim, the principle of good faith has also been used to challenge reliance on a time-bar by a party who is responsible for the events giving rise to the claim. For example, in ICC case 23229 a majority of the tribunal found, under a FIDIC Red Book 1^st Edition contract, that where the contractor in that case had been delayed by events for which the employer was responsible (such as delays caused by other contractors of the employer), the principle of good faith provided for by the civil law system which applied to the contract meant that the employer could not recover delay damages despite the contractor’s failure to give notices of claim under clause 20.1.

The principle of good faith in the Egyptian Civil Code, which derives from the French Civil Code, has been adopted in the civil codes of many middle-eastern countries, including the UAE, Jordan, Quwait, Bahrain, Libya, Qatar, Iraq, Syria and very recently Saudi Arabia. In addition, these civil codes all have provisions outlawing the abusive exercise of rights. For example, Article 5 of the Egyptian Civil Code states that:

“The exercise of a right is considered unlawful … if the benefit it is desire to realize is out of proportion to the harm caused thereby to another person …”

Such provisions can provide separate grounds for challenging one party’s reliance on a time-bar clause, particularly where that party was already aware of the events giving rise to the claim and where the loss which would be suffered by the other party by enforcing the time-bar would be substantial.

Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC

This recent decision of the courts of the Dubai International Financial Centre (“DIFC”) provides an interesting counter-point to the position under the UAE Civil Code noted above. The DIFC is a “financial free zone” established in 2004 by federal decree in the UAE. Under this decree, a free zone is empowered to enact its own civil and commercial laws to the exclusion of UAE law, whilst still remaining subject to UAE criminal laws.

DIFC Contract Law No. 6 of 2004 (the “DIFC Contract Law”) was loosely modelled on English common law, as well as the UNIDROIT Principles of International Commercial Contracts. One aspect which departs from English law is the inclusion of an implied duty of good faith and fair dealing in Article 57. The article states simply that “Implied obligations arise from … (c) good faith and fair dealing”.

Another departure from English law is the power given in Article 122 of the Contract Law to reduce the amount of any liquidated damages specified by a contract to a reasonable amount in certain circumstances. Whilst liquidated damages sums are generally enforceable Article 122(2) states that they “may be reduced to a reasonable amount where [they are] grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.”

There are evident similarities between the power in Article 122(2) and the principle of an abusive exercise of rights referred to above, particularly in the comparison which is made between the harm caused and the benefit specified by the contract. The doctrine of penalties covers similar ground under English law, but has a more onerous test and does not allow a court to substitute a reasonable amount.

Both of these provisions were raised in Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC the Panther Real Estate, a DIFC case involving a claim for liquidated damages under a 1^st Edition FIDIC Red Book contract. The DIFC court found that extension of time claims made by the contractor were time-barred due to the contractor’s failure to serve Notices of Claim under clause 20.1. The Contractor relied on Articles 57 and 122 and appealed to the DIFC Court of Appeal.

In relation to Article 57 and the implied obligation of good faith, the DIFC Court of Appeal considered that clause 20.1 was clear in word and effect and admitted “of no scope for the postulated implied term or obligation of good faith”. In the Court’s view, the obligation of good faith:

“is concerned with the implication of terms into a contract and the mode of performance by the contracting parties. Nowhere does it 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. … To accede to the Contractor’s argument that delay damages for such delay should not be payable if and to the extent that the delay or some of it is caused by the Employer’s actions or inaction would mean reaching a decision in flat contradiction to what the parties have agreed. The obligation of good faith neither requires nor permits such a course.”

Such an approach mirrors English law’s approach to implied terms, which are not permitted to contradict the express terms of a contract. The approach is also consistent with English law’s approach to express good faith obligations, which the English courts have consistently held are to be read subject to the other express terms of a contract.

The Contractor fared no better in relation to its claim for a reduction in the amount of the delay liquidated damages payable under Article 122. The DIFC Court of Appeal considered this article to be directed at complaints that the amount of a liquidated damages clause was excessive in comparison to the delay losses which would be suffered by the employer. The Contractor’s attempt to use the article to relieve it from the consequences of the time-bar was therefore misdirected:

“The Contractor’s argument appears to assume that the relevant "non-performance” is its own failure to give the required notices under Sub-Clause 21. If that were the case, there would be a respectable argument for saying that the obligation to pay up to 10% of the contract price as liquidated damages for that failure would be grossly excessive. But this would be to mischaracterise the position. The liquidated damages are payable not for the failure to serve the required notices within the required time but for failing to complete by the contractually agreed completion date. There has been no attack on the amount of liquidated damages payable for that failure …”

This appears to be a strict interpretation of Article 122 which may reflect the common law background of the DIFC judges. The Court also appears not to have considered the references in Article 122(2) to “other circumstances” which, on one view, may have permitted consideration of a broader range of circumstances than merely the financial balance between the actual delay losses suffered by the employer and the level of liquidated delay damages specified by the contract.

Conclusion

The enforcement of time-bar provisions remains an area where common law and civil law jurisdictions diverge. The outcome of the Panther Real Estate case provides a unique illustration of this tension, with the common law approach of the DIFC judges ultimately prevailing over the civil law inspired provisions of the DIFC Contract Law relied on by the contractor. 

Contractors and employers involved on international construction projects would be well advised to take time in advance of a project to ascertain the governing law’s approach to time-bar provisions. Parties from civil law jurisdictions in particular can be surprised to learn how strict common law jurisdictions can be with regard to the enforcement of time-bars. Parties may also wish to make amendments to the time-bar provisions or the applicable law of any given contract to ensure the legal reality of their contract meets the expectations of the project team.

* This is an abridged version of an article originally featured in the 2024 CMS Annual Review of English Construction Law Developments. To download a copy of the Annual Review, please click here.

References:

JV of American and EU Dredging Companies v Red Sea Public Authority (RSPA), final award, CRCICA case No. 281/2002, 28 June 2004

Waterfront Shipping Company Ltd v Trafigura AG [2007] EWHC 2482 (Comm)

Steria Ltd v Sigma Wireless Communications Ltd [2007] EWHC 3454 (TCC)

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

Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC) 

ICC case 23229 (2020) reported in C.R. Seppälä, The FIDIC Red Book Contract: An International Clause-by-Clause Commentary (1^st Edition, Wolters Kluwer, 2023)

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