Abu Dhabi Court of Cassation Judgment On Liquidated Damages Clauses After Termination

Abu Dhabi Court of Cassation
judgment on liquidated damages

clauses after termination
Al Tamimi & Company - Advocates and Legal Consultants

El-Ameir Noor and Ahmad Ghoneim
United Arab Emirates
February 26 2015
It is an established principle of UAE Courts of Cassation that the termination of

any contract means that the primary obligation...
It is an established principle of UAE Courts of Cassation that the termination of any contract
means that the primary obligation (i.e. the obligation to execute the contract) also
terminates and consequently any other obligations set out in the said contract, including
the Liquidated Damages clause (the LD) and/or the penalty clause, shall terminate and
cannot be applied anymore. Accordingly, the legal basis for claiming compensation, if any,
will be based on tortous liability and not contractual liability.
In Abu Dhabi Court of Cassation Commercial Appeal 790 of 2013 (dated 22 October 2014),
the Abu Dhabi Court of Cassation developed this established principle further, as it held that
termination does not always prevent the court from applying a liquidated damages clause or
a penalty clause. The Cassation Court highlighted that as long as the liquidated damages
clause or penalty clause is an independent clause which the parties have agreed will survive
termination, it will be effective after the termination of the contract.
Al Tamimi & Company successfully represented the claimant in this case before the Abu
Dhabi Court of Cassation.
The facts of the case
The claimant entered into a development agreement with the defendant, whereby the
claimant agreed to grant rights to the defendant to enable the latter to develop a plot of
land by constructing a tower and thereafter to use, enjoy and deal with the tower and pay
the premium in accordance with the terms of the contract.
The defendant paid instalments amounting to 50% of the premium but failed to pay the
remaining instalments.
After terminating the defendant on notice, the claimant filed a case before the Abu Dhabi
Court of First Instance seeking (i) approval of its right to terminate the contract (ii)
compensation amounting to AED 64,048,522 representing its loss of profit sustained due to
the defendants failure to execute the contract.
The Abu Dhabi Courts findings
The First Instance Court issued a judgment approving the claimants termination of the
contract and awarding compensation of AED 31,285,656 (as per the evaluation of the court
appointed experts).
Al Tamimi & Co was appointed to represent the claimant before the Court of Appeal. On
appeal the claimant argued that the contract includes a liquidated damages clause which
stipulates that in case of termination of the contract due to the defendants breach, the
claimant will be entitled to have all the due instalments up to the date of termination.
Therefore, the claimant requested from the Appeal Court an order for compensation
amounting to AED 55,972,800 instead of AED 31,285,656.
The Court of Appeal rejected this argument and highlighted that the court was not allowed
to apply liquidated damages clauses after the termination of a contract.
The claimant filed an appeal to the Court of Cassation. The claimant argued that the Court of
Appeal had failed to notice that the parties had agreed in the contract that the liquidated
damages clause would stand and be effective after termination, and that it did not simply
apply during the execution of the contract. Accordingly, the judicial principle that the Appeal
Court relied on did not apply.
The Court of Cassation accepted this argument by the claimant, holding that:
Although there is a judicial principle which holds that the termination of any contract
means that the contract and all its clauses (including the LD or penalty clause) terminates,
this is only applicable if the LD clause or penalty clause represents a penalty for any failure
to perform the contractual mutual obligations during the execution of the contract.
However, if the LD clause or penalty clause provides that it will survive and be
effective after termination of the contract as a penalty for said termination, rather than
being a penalty that is due upon any failure on performing the mutual contractual
obligations during the execution of the contract, then such a clause is to be considered as a
separate and independent agreement even though it is stipulated in the terminated
contract.
Therefore, the judicial principle that the Appeal Court referred to and relied on is not
applicable in the subject case and accordingly the LD clause or the penalty clause is to be
applied.
The importance of the judgment
The judgment is important for a number of reasons.
On a practical level, it firmly clarifies, for the first time in UAE, that LD clauses and penalty
clauses are classified into two types according to the text of the clause.
The first type are those that are to be applied when one party has failed to perform a
contractual obligation during the execution of the contract. Such a clause falls down upon
the termination of the contract and cannot be applied anymore as it is considered as a
secondary obligation that follows the primary obligation (i.e. the execution of the contract).
An example of this first type of clause is the LD clause set out in the 1999 FIDIC Red book at
clause 8.7[1]. This provides that:
If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor
shall subject to notice under Sub-Clause 2.5 [Employers Claims] pay delay damages to the
Employer for this default. These delay damages shall be the sum stated in the Contract
Data."
The above mentioned LD clause constitutes a penalty on the contractor in case the latter
breaches its contractual obligation to complete the project on the agreed date and the
aforementioned penalty is effective during the execution of the contract. Accordingly, if the
employer terminated the contract, this LD clause (clause 8.7) will not be valid anymore and
cannot be applied as it falls down after the primary obligation of the contractor (i.e. to
execute the contract) ceases upon the termination of the contract.
The second type of LD clause or penalty clause are those that consist of an independent
agreement between the parties regarding the due compensation or penalty that will be due
after the termination of the contract. Accordingly, in this type of clause the LD clause or the
penalty clause represents the due compensation as a penalty for terminating the contract
and not a measure that will be applied during the execution of the contract in case a breach
of a contractual obligation.
Before this Cassation judgment, the UAE Courts would not apply LD clauses and penalty
clauses after the termination of the contract and were awarding compensation, if any, based
on tort liability, which means that the claimant had to prove the actual damages sustained.
Accordingly the compensation awarded was equivalent to the value of the damages
suffered.
After this judgment, the Court has clarified that a claimant can request that the other party
pay the amount of the LD clause or the penalty clause, if any, after terminating the contract,
if the clause can be shown to be an independent agreement granting damages in the even
the contract is terminated.

Abu Dhabi Court of Cassation Judgment On Liquidated Damages Clauses After Termination

Uploaded by

Copyright:

Available Formats

Abu Dhabi Court of Cassation Judgment On Liquidated Damages Clauses After Termination

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Abu Dhabi Court of Cassation Judgment On Liquidated Damages Clauses After Termination

Uploaded by

Copyright:

Available Formats

Abu Dhabi Court of Cassation

judgment on liquidated damages

Al Tamimi & Company - Advocates and Legal Consultants

United Arab Emirates

It is an established principle of UAE Courts of Cassation that the termination of

You might also like