How the law of liquidated damages can be applied in the local jurisdiction

Erin Miller Rankin, an associate at Masons Galadari, explores what happens in the local market when the amount of damages recoverable in the event of a specified breach (e.g. late performance) is agreed at the date of the contract.

Liquidated damages provide a contractual means to predetermine a loss and they are generally used to penalise a contractor for delays - these clauses are favoured by employers because they alleviate the need to prove an actual loss. Although the concept of fixing a sum at the outset - to be paid upon the occurrence of a certain event - seems straightforward, there are some local issues that need to be understood.

UAE law does not view liquidated damages and general compensatory damages as mutually exclusive.

UAE law does not view liquidated damages and general compensatory damages as mutually exclusive. In other words, an employer may successfully impose a liquidated damages penalty and then seek compensation for actual losses.

Article 390 of the Civil Code grants the court residual jurisdiction to vary an agreed level of compensation to reflect actual losses suffered. This clause could be used either by a contractor seeking to have the liquidated damages reduced to reflect actual loss, or by an employer arguing that the liquidated damages provided for in the contract should be increased, as they did not fully reflect its actual loss. It is important to note that the party seeking an adjustment bears the burden of demonstrating the actual loss suffered and its variance from the liquidated damages as set out in the contract. Obviously, it will be difficult for a contractor to demonstrate the actual losses of an employer.

Liquidated damages are often used as an employer's remedy for delay. In such a case they are generally tied to either the date for completion set out in the contract or the end of period in which completion is to occur. In the event that the works under the contract are not completed at the specified time, then the liquidated damages clause comes into effect. Completion is typically tied to the time when the employer takes possession of, or uses, the works.

A defence to a liquidated damages claim can be based on contract or general principles of UAE law. Defences pursuant to the contract typically consist of assertions that: (a) the works were complete, meaning that either the works required to be performed under the contract were done or that certification was improperly withheld; or (b) the contractor was entitled to an extension of time; or (c) the contractual formula for determining liquidated damages is inoperable.

Defences pursuant to UAE law may include: (a) the contractor is not responsible for the project delays; or (b) there were concurrent culpable delays; or (c) the quantum of liquidated damages needs to be adjusted to reflect the employer's actual loss.

There are frequent disputes over when the works are sufficiently complete so as to ‘stop the clock' on the running of liquidated damages. But the degree of completion required is generally found within the terms of the contract. Otherwise, entitlement to liquidated damages can be determined with reference to the issuance of a taking-over certificate. In this case, a contractor would have to prove that the employer wrongfully failed to issue a taking-over certificate, thus improperly claiming liquidated damages.

A contractual extension of time pushes out the date by which a contractor is required to complete the works under the contract. Circumstances giving rise to an extension of time claim are set out in the contract and are generally accompanied by a requirement to give notice of a delaying event. Accordingly, one must examine whether the contractor was entitled to a contractual extension of time, which would minimise the amount of liquidated damages otherwise owing to it.

If the formula for determining liquidated damages as set out in the contract cannot be implemented due to poor drafting, it will not be enforceable. In this situation an employer's only option is to seek damages by proving its actual loss.

Frequently, delays occurring on projects are due to more than one cause. Often a delay caused by an employer runs for part of, or all of, the same amount of time as a delay caused by a contractor. In such a case, it cannot properly be said that the contractor has caused all of the delays giving rise to liquidated damages. Support for this is found in Article 290 of the Civil Code: "The court may reduce the liability or award no damages, if the victim contributed to the events which caused the damage, or increased the damage." However, some contracts specifically state that only delay periods for which a contractor bears no responsibility may be used to extend time, thereby avoiding liquidated damages. In the absence of such a clause, parties may rely on Article 291 of the Civil Code to have liability apportioned to reflect the appropriate degree of responsibility.

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