Liabilities emanating from the breach of contracts fall within the purview of contractual liabilities.
In the words of the Dubai Court of Cassation, ‘There is contractual liability in the presence of three factors; a fault which occurs when one of the contracting parties does not carry out the obligations stipulated in the contract or if there is delay in performing the same; a proven damage; and the presence of causation between the fault and the damages.’
Damages can be understood as monetary payments such as compensations paid by a defaulting party for a breach, injury or loss caused to another party and are commonly granted in claims of contractual breaches or cases of torts.
Article 389 of the UAE Civil Code states that “if the compensation amount is not defined by the contract or the law, the judge shall have the authority to assess the amount equivalent to the damage suffered at the time of occurrence.” The UAE Civil Code recognises and affords the injured party rights to claim direct damages ascertained in contracts, however, where such damages or compensations do not find reference therein, the courts are empowered to assess and determine such amounts.
Broadly categorising, UAE recognises the following forms of damage as relief for aggrieved parties:
Compensatory damages serve to be a sum of money awarded to the aggrieved in recognition of the loss, suffering or injury. These damages intend to be granted in order to recompense and reinstate the aggrieved party to a more favourable position following the effect of the breach.
Liquidated Damages are predetermined contractual monetary damages, the amounts of which are often included in contracts at the formation stage, enabling the injured party a right to collect such compensation upon specific breach.
Restitution aims at reinstating the aggrieved party back to its original position such as before any breach occurred and does not include any lost profits or earnings resulting from such default.
Quantum meruit refers to the monetary damage granted to an injured party for the performance of his part of obligation before a breach of contract.
Such damages are intended towards transactions where no real harm occurs from contractual breach and the amount of such damage is significantly very small.
Remedies in equity relate to the performance of specific actions such as cancellation of contract, releasing parties from responsibilities with the help of legal experts as agreed under the contract and attending to specific needs of the aggrieved party rather than awarding monetary damage.
Such damages are rare and reserved, arising in situations where the breaching party has behaved in a manner that cannot disregard the need for punishment due to disgraceful and blameable acts.
Damages for contractual liabilities recognised in the UAE courts:
Such damages mean actual damage or loss suffered by an injured party as a direct result of the breach of contract. For example, if a party fails to pay an invoice amount of AED 1,000; the direct damage resulting from non-payment would be such exact amount as mentioned on the unpaid invoice.
As stated above liquidated damages are predetermined damages in a contract as against an anticipation of potential breach of contract. This concept is referred to as a penalty clause and finds reference under Article 390 of the UAE Civil Code. However, it is important to note that a judge is empowered under Article 390 (2) to increase or decrease such a predetermined amount in accordance with the merits of the case and thereby annulling any agreement made to the contrary effect.
Such damages include ascertaining the future loss of revenue/income or profits arising as a consequence of a breach of contract. However, it is important to note that the amount of lost profits must be certain and foreseeable and not based on speculations.
Such damages are assigned to infringements of honour, dignity, reputation, liberty and financial conditions and are more commonly granted in cases of tortious liability, however, UAE courts have granted such rewards as contractual breaches as well.
Contractual damages in the jurisdiction of the Dubai International Financial Centre Courts are governed under DIFC Law number 7 of 2005 (Law of Damages and Remedies 2005). Part 2 of the enactment deals with the concept and is applicable to any contract to which the Law of Contract applies.
It allows for a right to seek damages, either exclusively or in combination with any other remedies for non-performance, except as exempted under the Law of Contract. The aggrieved party is rightfully entitled to claim and receive full compensation against any loss incurred (including any deprived gain that has resulted due to such non-performance).
The aggrieved party has the right to damages as measured by:
Compensation is allowed on loss (including future loss) that has been established with a reasonable degree of certainty and also on the loss of an opportunity in proportion to the probability of its occurrence. In the event, that the amount of such damages cannot be ascertained with a reasonable and sufficient degree of certainty, it shall be at the discretion of the Court to conclude such assessment.
Additionally, the defaulting party is liable only for foreseeable losses which it foresaw or could have reasonably foreseen to have resulted from its default.
In the event, the injured party terminates the contract and enters into a replacement transaction within a reasonable manner and time, it is entitled to recover the amount of difference between the contract price and the price of the replacement transaction along with damages for any future losses. It is to be noted that the injured party is absolved of any liability where the difference between the prices nullifies part of the loss. The defaulting party under this law is not liable for any loss suffered by the injured party to the extent that the loss could have been reduced by taking reasonable steps on the part of the latter. In the event, that reasonable attempts have been made by the latter, it is entitled to recover all expenses reasonably incurred to mitigate such loss.
DIFC allows for interest on failure to pay money when it falls due and entitles the injured party to interest calculated from the time such payment becomes due to the time of payment (irrespective of whether the non-payment is excused). Interest on damages for non-performance of obligations accrues from the time of such non-performance. DIFC courts provide for the grant of the predetermined payment for default or non-performance by the defaulting party as agreed between the parties. Where the contract prescribes a specified amount to be paid by the defaulting party in the event of non-performance, the aggrieved party shall be entitled to receive that amount irrespective of the actual loss sustained. However, it is to be noted that such a sum is subject to decrease to a reasonable amount in the event it is largely disproportionate to the loss actually capable to be resulting from such a breach. Further, damages in the DIFC courts are eligible to be awarded in addition to, or in substitution for an injunction or specific performance where the court has jurisdiction to entertain such an application. Any action for breach of contract is required to be instituted within six (6) years from the date on which the cause of action accrued. Cause of action is denoted to arise when the breach occurs, irrespective of the injured party’s lack of knowledge of such occurrence except where such breach constitutes fraud, in which event, the cause of action shall arise when the injured party discovers such breach. It is important to note that such a limitation period can be reduced to not less than one (1) year through the original agreement but is not capable of being extended.