Unreasonable Withholding of Required Written Approval

Dispute between employer and consultant.

APRIL 24, 2020

Construction Agreements are classified to be continuous contracts whose execution extends through a prolonged period of time, as the obligations of the parties thereto necessitate time to be fulfilled and can not be performed instantly.

The duration within which the agreement is executed may come up with some changes due to the needs of the client or the development of works, and that’s why variation orders are common in the field of construction.

Case Background:

In an arbitral dispute between a client of ours and a reputable employer (opponent), the incidents were that the parties concluded a Design Consultancy Services Agreement for performing the design of premises for educational institution, with approximate built-up area of 10,000 m2. Nevertheless, there has been an expansion occurred to the project space by approx. 45% due to special space requirements, along with doubling certain program areas to provide dedicated space areas and student accommodation.

Our client was required by the agreement to get the written approval of the employer prior to performing any variations works. Being aware of the project space expansion, the opponent never expressed its refusal to the performance of any extra works nor giving express written approval, accordingly our client has accomplished the design of a total area of over 15,000 sq. m. On claiming the additional fees by our client, the opponent held on to the wording of the agreement requiring its prior written approval to variations and refrained from paying the additional fees, which raised the question of to what extent the contractor may depend on the implicit approval of the client, in order to perform necessary variations to the project.

Legal Issues and Proceedings:

In cases where the written approval of the client is required by the agreement, it’s also necessary to restrict the right of the client to give the prior written approval to necessary variations when the unreasonable withholding of such approval will result in work disruption. Being aware of the circumstances of work, the client shall not be enabled to act maliciously on basis of the agreement wording, and that’s what we built our defense on. On the other side, the said Agreement stated that the employer shall give his decision in writing within a reasonable time as not to delay the services.

The parties agreed that the applicable law to any dispute arising in relation to the agreement shall be the substantive law of England and Wales, and accordingly we shall refer to the judicial precedents of the English courts in this regard.

On viewing the judicial precedents of the English courts we found that there has been tendency to materialism, as the English judiciary considers good faith as fluid and vague, and can’t be depended upon in rewarding clear judgments in order to settle disputes of contractual nature. They say when we have a contract, we don’t go down any road in departure from the wording of the contract, even if the literal meaning of the contract enabled either party to act with bad faith. In Mayor of Bradford v. Pickles, decided in 1895, Lord Halsbury famously stated: "If it was a lawful act, however ill the motive might be, he had a right to do it. If it was an unlawful act, however good his motive might be, he would have no right to do it.”
On the other hand, some jurisprudence believes that there’s nothing novel or foreign to English law in recognizing an implied duty of good faith in the performance of contracts, and in “Text, cases and materials on contract law” by Richard Stone and James Devenny it was stated that: “a power conferred by a contract on one party to make decisions which affect them both must be exercised honestly and in good faith for the purpose of which it was conferred, and mustn’t be exercised arbitrarily, capriciously or unreasonably: see e.g. Abu Dhabi National Tanker Co v Product Star Shipping Ltd…”

Legal Proceedings:

FTD Partners at first served a notice on the other party and called for the amicable resolution of the matter, however, did not receive any positive response in this regard. FTD Partners filed a civil case against the insurance company for the recovery of the claimed amount, presented evidence in the support of its Claims and against the conduct of another party.

Decision:

The arbitral tribunal accordingly upheld our point of view and issued an arbitral award in favor of our client on the basis of our defense, standing on the point that all commercial transactions shall be performed with good faith, and that no party to a contract shall misuse the powers conferred to it by acting maliciously or arbitrarily.

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