Archive: August 2015

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Good Faith in the Middle East
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FIDIC Update: Further clarity provided by Obrascon Huarte Lain SA v HM Attorney General for Gibraltar

Good Faith in the Middle East

By Darran J. Jenkins, K&L Gates, Doha

The concept of good faith as applicable in the Civil law jurisdictions of Qatar and the United Arab Emirates (“UAE”) is one that may be unfamiliar to lawyers from a common law background where good faith is applies in a very limited fashion, if at all. [1]

The Position in the Middle East

The position in Qatar is set out in Article 172 of the Qatar Civil Code[2]:

1.    The contract must be performed in accordance with its contents and in a manner which consistent with the requirements of good faith.

2.    The contract is not confined to obliging a contracting party to its contents, but also includes its requirements in accordance with the law, custom and equity as per the nature of the obligation.

The corresponding article in the UAE Civil Code[3] is Article 246 which states:

“(1)     The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.

(2)     The contract shall not be restricted to an obligation upon the contracting party to do that which is (expressly) contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the transaction.”

In Bahrain, Article 127 of the Civil Code[4] requires:

A contract is not only limited to its expressed conditions, but also as regards everything which according to law, usage and equity is deemed in view of the nature of the obligation, to be a necessary sequel to the contract, taking into consideration custom and usage, requirements of equity, nature of business, good faith and honesty.”

And Article 129 provides:

A contract must be performed in accordance with its contents and in compliance with the requirements of good faith and honesty.”

Each of these Civil Codes takes an almost identical approach to the treatment of good faith. As a result, a contract will not be interpreted using solely its terms but will be interpreted against the requirements of customs, equity and good faith.

The requirement to act in good faith is a strong, positive obligation on the parties to a contract.  It is not merely a requirement not to act in bad faith and not to deceive one another. Each party is instead under a legal obligation to exercise good faith in the performance of its contractual obligations and it is dealings with the other party. In a construction context, the duty of good faith would require an employer to cooperate with the contractor and deal with change requests in a timely and fair manner, whilst a contractor would be obliged to avoid delaying the performance of their works.

It is interesting to note that the obligation within the Qatar Civil Code is to perform the contract in good faith but it does not extend to negotiating the contract in good faith. The parties are free to adopt an adversarial approach to negotiation of the contract to try to obtain the best possible deal for themselves. Only once the contract has been signed does the duty to act in good faith arise.

In relation to insurance contracts, the duty to perform in good faith under the Civil Code does not in any way limit the duty of the insured to act with utmost good faith when placing the policy.  This is because the Civil Code also recognizes and enforces a higher standard of care where the parties have agreed it should apply.

[1] Please note, all English extracts in this Article are taken from an unofficial English translation of the Qatar and UAE Civil Code, reference should always be made to the original Arabic text.

[2] Law Number 22 of 2004

[3] Law Number 5 of 1985

[4] Law Number 19 of 2001

FIDIC Update: Further clarity provided by Obrascon Huarte Lain SA v HM Attorney General for Gibraltar

By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London

We wrote recently on the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC).  The case provided welcome clarity on the interpretation of Sub-Clauses 4.12 (Unforeseeable Physical Conditions) and 20.1 (Contractor’s claims) and Clause 15 (Termination).  The matter was appealed and dismissed unanimously in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712 (http://www.bailii.org/ew/cases/EWCA/Civ/2015/712.html).

The dispute arose out of the design and construction by Obrascon Huarte Lain SA of a road and tunnel under the runway of Gibraltar airport.  The contract was an amended form of the FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor, 1st edition, 1999; the Yellow Book.

In the first instance case, Mr Justice Akenhead was required to consider whether the employer was entitled to terminate.

In addition, the judgment clarified that, under Sub-Clause 20.1 of the FIDIC Conditions (Contractor’s Claims), time does not start running for the Contractor to give notice until the date on which he is aware (or should have been aware) of the delay resulting from a particular event or circumstance. The court only considered Sub-Clause 20.1 in relation to the extension of time, but the same principle is expected to apply to claims for additional payment made pursuant to the same provision.

The contractor appealed on the grounds that the court had incorrectly found that contamination encountered was foreseeable, failed to find that documents provided by the engineer constituted variations and failed to find that the employer had invalidly terminated the contract.  The contractor’s appeal against Mr Justice Akenhead’s decision was unanimously dismissed by the Court of Appeal.  The appeal judgment provides contractors with some helpful explanation in respect of each of these grounds of appeal.

(i)  What would constitute unforeseeable physical conditions under Clauses 1.1.6.8 and 4.12?

In this respect, the Court of Appeal was reluctant to overturn findings of fact made at the first instance, particularly in the case of appeals from a specialist court such as the English Technology and Construction Court (the TCC).

However, the Court of Appeal did note that Mr Justice Akenhead had “held that an experienced contractor would make its own assessment of all available data. In that respect the judge was plainly right. Clauses 1.1 and 4.12 of the FIDIC conditions require the contractor at tender stage to make its own independent assessment of the available information. The contractor must draw upon its own expertise and its experience of previous civil engineering projects. The contractor must make a reasonable assessment of the physical conditions which it may encounter. The contractor cannot simply accept someone else’s interpretation of the data and say that is all that was foreseeable.

(ii)  Had the Engineer issued instructions which varied the Works?

Again, on some points, the Court of Appeal was reluctant to interfere in the findings of the TCC.

The Court of Appeal found that the documents referred to it did not amount to instructions to vary the contract.  They were either matters which were the contractor’s obligations in any case, concessions by the employer which could be withdrawn and were not contractual or matters which the contractor had not, in fact, acted upon.

The analysis here (at paragraphs 101 to 112) of the judgment gives some indication of the Court’s interpretation of a variation instruction.

(iii)  What would give rise to a failure to proceed with the works under Clause 8 and so justify termination pursuant to Clause 15.2?

The first instance court had summarised the relevant legal principles.  These were not challenged but the contractor appealed the court’s application of the principles.

The Court of Appeal first addressed the contractor’s claim that it was undertaking a re-design of the works with which the employer and contractor had elected.  However, the Court of Appeal found “it is clear that neither GoG nor the Engineer made an election which committed them to adopting the re-design and rejecting the original design of the tunnel. The Engineer made it plain that the original design was perfectly satisfactory and capable of being constructed without any risk to health or safety. The Engineer was simply considering the re-design as a modification put forward by OHL”.

In addition, when the engineer considered the contractor’s design under Clause 5.2, he was considering whether the design was technically acceptable and whether, if the design was implemented, the completed works would accord with the contract. If the re-design is satisfactory in all those respects, it is not for the Engineer to reject the design because he thinks it will take too long to build as the contractor claimed.

The Court of Appeal then considered termination under Clauses 15.2(b) and 15.2(c)(i) and the obligation under Clause 8 of the FIDIC Conditions to “proceed with the works with due expedition and without delay”.  The Court decided that the obligation under Clause 8 is not directed to every task on the contractor’s to-do list.  Rather it is directed to activities which “are or may become critical”.

The Court of Appeal then considered whether there was a “reasonable excuse”, within the meaning of clause 15.2(c), for the contractor’s failure to proceed with the works.  On examination of the facts, it found there was no reasonable excuse.

As we have said, the appeal was unanimously rejected and agreed that the employer had validly terminated the contract.  The decision provides helpful clarity and reasoning to understand the FIDIC Conditions and should, combined with the first instance judgment, provide some welcome guidance in the areas considered.

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