How Can the Concepts of Good Faith, Custom and Equity be Reconciled with Pacta Sunt Servanda?

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How Can the Concepts of Good Faith, Custom and Equity be Reconciled with Pacta Sunt Servanda?

By Waleed El Nemr* Hill International (North Africa) Ltd. Cairo, Egypt

An area of concern, especially for engineers managing construction contracts in Egypt, is the interplay between Article 147-1 and Article 148 of the Egyptian Civil Code. Article 147-1 states:

The contract makes the law of the parties. It can be revoked or altered only by mutual consent of the parties or for reasons provided for by law.” (emphasis added)

and Article 148 states:

“A contract must be performed in accordance with its contents and in compliance with the requirements of good faith. A contract binds the contracting party not only as regards its expressed conditions, but also as regards everything which, according to law, custom and equity, is deemed, in view of the nature of the obligation, to be a necessary sequel to the contract.” (emphasis added)

The concept of “good faith”, “equity” and “custom” could be problematic in the management of construction contracts.  Several questions come to mind, such as: “What does good faith mean?”, “What is the definition of custom?”, “What if the contract terms are not fair to begin with – how does fairness or equity run in parallel with the contract terms?”

A classic illustration is where the contract permits the employer (or engineer) to withhold the release of an invoice if the progress of the works is not in accordance with the latest approved schedule. Where the progress is behind schedule at a certain point in time, concerns could be raised on the strict application of the contract terms. On the one hand, an argument can be made that “fairness” entails following through with the terms the contracting parties had freely negotiated and agreed, in which case the invoice would be withheld and no payments will be released to the contractor for the period in which the progress is behind the planned schedule dates.  While standard contracts generally entitle the contractor to time in the event of delays caused by the employer or third parties, disputes often arise as to whether there was a concurrent delay by the employer and whether this employer’s delay did affect the contract completion date.  Moreover, an employer/engineer’s assessment of the claim is often made weeks after the event in question.  Hence, in respect of this illustration, payment would be withheld in the current invoice period anyway regardless of the entitlement to time under the contract for progress delay, which would constrict the contractor’s cash flow and cause more delays.

On the other hand, a contractor can argue that applying the principles of good faith and fairness entails that the contractor should not be penalized for a fault the contractor did not commit.  Hence, if during the invoiced period, the employer issued a variation (an employer’s delay) and the contractor experienced resource problems (a contractor’s delay), the invoice should not be withheld (notwithstanding the express terms of the contract) because fairness and good faith would dictate that the contractor should not be penalized for the effect on progress attributable to the varied works.

The interplay between good faith and the contract terms is also illustrated by sub-clause 14.6.2 of the FIDIC Red Book 2017 [Withholding (amounts in) an IPC], which states:

…the Engineer may withhold an IPC in an amount which would (after retention and other deductions) be less than the minimum amount of the IPC (if any) stated in the Contract Data.

Therefore, if the contract provides, as a condition precedent to the employer’s payment of any invoice, that the net invoice amount must exceed EGP 5,000,000.00 (Five Million Egyptian pounds), and the invoice for relevant period is less than the payment threshold because the contractor suffered delay due to conflicting instructions from the construction supervision consultant in response to a contractor’s request for information (RFI), questions could be raised on propriety of withholding payment in such circumstances considering the inability to achieve the minimum payment threshold is not due to any default on the part of the contractor.

While extension of time clauses address such risk, complications often arise during the application of these clauses.  The question is thus to determine to what extent the principles of good faith and fairness, which are mandated in Egyptian law, can override express contract provisions. In my opinion, this is an area that deserves in-depth research.  Each of the three parameters of good faith, custom and equity, and the relationship of each to the agreed upon terms of the construction contract, deserves a study of its own.

The irony when considering this subject is that there are provisions in the law pertaining to construction contracts that do not seem “fair”.  Take, for example, Article 657 of the Egyptian Civil Code, which states:

When a contract is concluded in accordance with an estimate drawn up on a unit price basis and it becomes apparent, during the course of the work, that it will be necessary, in order to complete the works according to the agreed plan, considerably to exceed the estimated price, the contractor shall notify the employer thereof forthwith and to inform him of the anticipated increase in price; if he fails to do so he forfeits his right to recover the expenses incurred in excess of the estimate.

When the estimated excess in the price for the execution of the plans is considerable, the employer may rescind the contract and stop the work, provided that he does so without delay and pays the contractor for the cost of the work done by him, estimated in accordance with the terms of the contract, without being liable to compensate the contractor for the profit he would have realized if he had completed the works.” (emphasis added)

This provision appears to be more stringent than the time bar clause under the FIDIC contracts that has, for more than two decades, generated controversy.  It is in many ways not fair, and also not in accordance with custom, which mandates that in a remeasured contract the contractor is compensated for the actual value of the works.  Certainly, a mistake by the designer in the estimation of the quantities in the bill of quantities is something the contractor should not be held accountable for.

How then does the poor construction practitioner on site reconcile these conflicting areas of the law?  That question remains to be answered through research but raising awareness of these issues is a first step.

 

*Waleed El Nemr can be reached at waleed@elnemr.com

Africa Construction Law

Africa Construction Law

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