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Newsletter 01/2015

Construction/Property Updates | Liquidated damages provisions

 

How are liquidated damages assessed? In this report, we consider these key contractual issues in the UAE and Qatari construction markets.

How ‘fixed’ are your Liquidated Damages?

We all know that an employer’s entitlement to liquidated damages has a significant impact on contractors and the supply chain. If the contractor misses a contractual milestone, most contracts in Qatar and the UAE allow employers to levy liquidated damages.

Liquidated damages permitted

Liquidated damages are permitted under both the UAE and Qatari Civil Codes. As elsewhere in the world, the liquidated damages clause fixes a sum within the contract which is due on the occurrence of delay to an event or milestone. The often- stated purpose of such a clause is to provide certainty of risk at the contract negotiation stage if completion is delayed. However, in reality, liquidated damages primarily benefit an employer, as the clause removes the burden on the employer to prove it incurred those damages.

In some jurisdictions liquidated damages cannot be so excessive that they ‘punish’ the contractor. In the UAE and Qatar this is not an issue

Freedom to contract

The literal translation of “liquidated damages” in Arabic is “fines”. Both the UAE and Qatari Civil Codes allow parties to agree any level of future liquidated damages (or “fines”), even if the amount is arbitrary or excessive. This reflects both jurisdictions’ primary principle of freedom to contract. However, in both jurisdictions, this is subject to the discretion of the courts (and arbitrators applying the Civil Code). They may adjust the amount of liquidated damages to reflect the actual loss suffered in order to prevent one party obtaining an unjustified windfall.

Assessing damages

The UAE and Qatari Civil Codes differ in the way they assess liquidated damages. In the UAE, Article 390(1) of the Civil Code allows the parties to agree a fixed amount of damages in advance. Article 390(2) allows the court, when asked, to decrease or (importantly) increase the amount of damages to reflect the actual loss suffered. This discretion to increase the level of damages presents a serious risk for a contractor considering legal action.
As the Code emphasises the parties’ freedom to contract, our experience is that the UAE courts require robust evidence to show a disparity between the actual loss suffered and the specified damages. However, it can happen. In the UAE Federal Supreme Court, case 103 of 2004, the court ruled that the rate of liquidated damages fixed by the contract was overestimated compared to the damage suffered by the party imposing the damages and therefore should be reduced.

Unlike the UAE, the Qatari Civil Code does not allow a court to increase the rate of liquidated damages, except in the case of fraud. They may only maintain or reduce the level of damages.

To successfully reduce the rate of liquidated damages in Qatar, the contractor must demonstrate that the pre-estimate of damages was “grossly excessive” to the harm actually suffered or that no loss was suffered at all. By contrast, according to the equivalent provision of the UAE Civil Code, the court may adjust the agreed amount of compensation “under any circumstances”, so that it is equal to the actual loss.

Qatar and extensions of time

It is not all good news for contractors in Qatar. The Qatar Tenders Law entitles government entities who are employers to impose an additional penalty of up to 10% of the contract price in the event that an extension of time is granted to the contractor (see Article 56 of Law No. 26 of 2005).

In Qatar, in contrast to the UAE, parties can be assured that according to the Civil Code liquidated damages will not be increased by the court to reflect the actual loss suffered. While freedom to contract remains key in both jurisdictions, in reality the discretion of the courts in Qatar and, more particularly, in the UAE, may lead to uncertainty as to recovery of liquidated damages.

Pinsent Masons are members of the ABCD

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