Understanding of UAE law is critical for projects

An understanding of the UAE’s laws concerning liquidated damages is critical to enable a project schedule devoid of completion delays and monetary losses

COMMENT, Projects, Construction, GCC region, Laws, United Arab Emirates

As some readers will know, most forms of construction contracts include a clause entitling the employer to deduct pre-determined damages, referred to as ‘liquidated damages’ (LDs) or ‘liquidated and ascertained damages’ (LADs) if the contractor fails to deliver the project as scheduled by the contract.

Definitive provisions are made in construction contracts for establishing the date by which a contractor must complete the work it has agreed to perform. Most construction contracts include a fixed completion date; however, this target may change through the extension of time provisions, should unforeseeable circumstances delay the completion schedule. If the actual completion date of the project goes past the original or revised completion date (as extended under the contract), then the employer will be entitled to apply LDs for the period of delay.

For the employer, a delay means it will not derive benefits it intended to from the original completion date. Thus, the employer may suffer a loss or incur additional costs, such as interest in relation to financing the project for the additional period, or loss of income due to a delay in revenue generation.

LDs provide both parties with certainty to manage their commercial risks vis-à-vis completion delays.

Crucially, however, LDs should be appraised in the pre-contract stage as a genuine pre-estimate of the loss likely to be suffered by the employer. This can help avoid a potential challenge by the contractor through the courts.

From Hill’s understanding, as a contract consultancy, both English common law and Middle East civil law allow contracting parties to pre-agree upon LDs as compensation for delays. However, there is a distinction between both codes as to how they treat LDs that are considered to be excessive, and therefore, punitive in nature.

Notably, English common law does not allow penalty clauses to be enforced, but will generally uphold a LDs clause based on a pre-estimate of the likely loss, whether or not it reflects the actual loss in reality. If the LDs are found to be a penalty, then they will not be enforceable, and the employer will have to prove its actual loss was caused by the contractor’s delay. English courts do not have the power to set new LDs.

The situation is different in the Middle East. In the UAE, for example, by way of Article 390 (1) of the UAE Civil Code, contracting parties may agree upon an affixed amount of compensation in the contract.

“The contracting parties may fix the amount of compensation in advance by making [a] provision, therefore in the contract or in [a] subsequent agreement, subject to the provisions of the law.”

However, UAE courts have the ability to amend the agreed rate of LDs upon application of either party; and to review and assess the LD amount to reflect the actual loss incurred.

Article 390 (2) of the UAE Civil Code states: “The judge may in all cases, upon the application of either of the parties, vary such [an] agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void”.

This right cannot be contracted out of, and applies equally to both parties. UAE courts and arbitrators are, therefore, able to adjust the rate of LDs in the contract if the compensation is considered greater or smaller than the loss, and amend the LDs accordingly. The burden of proof to substantiate the actual loss belongs to the party seeking to adjust the level of LDs.

Both English and Emirati courts appear reluctant to enforce penalty clauses. If an English court opines that the LD constitutes a penalty, then it will refuse its enforcement, and the employer will have to make an alternative claim proving actual loss.

However, if a UAE court is of the opinion that the LDs do not reflect actual loss, then it can assess the appropriate level of damages due, which could be higher or lower than the LDs claimed.

John McKevitt is an associate director in the claims department at Hill International’s Abu Dhabi offices.

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