Liquidated Damages in the UAE, Qatar, and Saudi Arabia

Jul 06 2015

INTRODUCTION

Liquidated Damages (LDs) are treated very differently across the Gulf region and from the position as understood within the English common law jurisdiction.

The universal starting point for LDs is in contract; parties should pre-determine the rate of damages a contractor should pay to the employer in the event of a (specified) breach, most commonly that of late completion. For the purposes of this article, we shall consider LDs solely in the context of delay damages, whereby in the event of delay to project completion, an employer can demand a fixed compensatory sum from the contractor.

The position of the civil law jurisdiction of the Middle East is very different from that understood within the English common law system. It is commonly accepted that English courts are generally very reluctant to look beyond the contractual position and open up any agreed position on LDs.[1] Across the Gulf however, differing civil codes empower courts (and tribunals) to look behind the parties’ contract and adjust delay damages based upon principles of actual loss and fairness.

This article discusses the differing treatments of LDs across three Gulf jurisdictions (namely, the United Arab Emirates, Qatar and Saudi Arabia), and reveals what parties can expect in regards to their compensation for delay.[2]

THE CONTRACTUAL ‘STANDARD’

As a starting point, we look to FIDIC which is widely adopted across the Gulf region; Clause 8.7 of FIDIC (Red and Yellow Book), expressly permits delay damages:

“If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer’s Claims] pay delay damages to the Employer for this default.

…

However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Appendix to Tender…”

Under FIDIC, the parties may agree the level of delay damages, together with any cap, prior to entering into the contract.

The aim of such drafting allows parties certainty, both as to the (i) contractor’s potential liability (so that he may price for this risk accordingly), and (ii) employer’s ability to recover prescribed damages from the contractor in the event of delay (so to avoid having to prove its actual loss was caused by the breach).

The parties must however clearly define what they intend by the ‘Time for Completion’, as delay damages will only begin to incur from the contractor’s failure to meet this deadline. In addition, parties should be mindful when setting the level of delay damages in their contract, so to ensure that they are a ‘genuine, reasonable pre-estimate of loss’, not a penalty, in order to be upheld.

QATAR

For those adopting FIDIC, in our experience, Clause 8.7 is not usually amended in any material way in Qatar. As such, delay damages are allowed by the parties and should be enforced by the Qatari courts (or tribunals applying Qatar law), pursuant to the Civil Code, in the manner explained below.

The particular provisions of the Qatar Civil Code which apply to the issue of delay and application of LDs are as follows: [3]

Article 265 sets out the principle for LDs in Qatar as that being agreed as between the parties.

Article 267 provides that LDs are an exhaustive delay remedy and, absent serious error or fraud on the part of the contractor, the employer’s claim is limited to the maximum level of delay damages agreed in the contract and cannot claim additional general damages for delay.

Articles 256 and 266 provides defences for the contractor as to LDs claimed. The contractor must prove that (i) no loss has been suffered, or (ii) the actual loss suffered is significantly less than the contractual amount claimed, or (iii) that the delay was caused due to matters beyond its control. The court therefore can ‘look behind’ the contract and is empowered to reduce the amount of LDs payable to the employer regardless of the level agreed by the parties.

Further, Article 257 apportions fault for delay and allows the contractor some protection by reducing or disallowing delay compensation if there has been a break in causation, where either the (i) employer has due to its own fault caused the contractor to complete late, or (ii) contractor can show its fault has been superseded by the employer.

UNITED ARAB EMIRATES (UAE)

The position in the UAE is similar to that in Qatar, save for one major difference, under the UAE’s Civil Code, the level of LDs can be increased as well as decreased by the courts:[4]

Article 390 empowers the court or tribunal to vary the parties’ agreement to reflect the actual loss position of the employer.[5]

As in Qatar, the contractor may defend the amount claimed through challenges as against the actual loss figure. Notably different however is that the UAE courts have the power to award an increased amount so to reflect the actual loss suffered. In this instance, the burden for proving the loss and its claimed entitlement to a higher level of LDs (than the contractual level), lies with the employer.

The ability to increase LDs from that agreed, opens the contractor up to the risk of further unliquidated damages. Practically, this may result in parties spending less time calculating and negotiating the level of LDs in their contracts than in other jurisdictions where LDs can not be upwardly adjusted.

SAUDI ARABIA

The position in Saudi must also be viewed entirely separately from that of other Gulf states. In general, LDs are permitted, however in principle they are not claimable unless damage has actually occurred.

The underlying principle of Shari’ah law in Saudi Arabia means that only direct losses may be awarded.

LDs are therefore considered by Saudi courts in the context of this legal framework; any delay compensation must accurately reflect the damaged party’s actual damages. Accordingly, a court will be unwilling to uphold a LDs provision if the amount exceeds the amount of losses suffered.

Applying Articles 48 and 49 of the Government Tenders and Procurement Law, courts in Saudi Arabia are unlikely to uphold a claim for any predetermined LDs sum it deems excessive (being a maximum 10% of contract value for most construction contracts), regardless of any prior contractual agreement of the parties.

CONCLUSION

There is clear variance in the way jurisdictions across the Gulf treat the concept of Liquidated Damages that parties should consider when negotiating their contracts, particularly:

Saudi Arabia – LDs are usually capped at 10% of contract value. The agreed level of compensation is open to downward adjustment by the court so as to reflect the actual loss suffered, regardless of the parties’ contract agreement;
UAE – The agreed level of LDs compensation may be either increased or decreased by the court so as to reflect the actual loss position, putting the contractor potentially at risk of both liquidated and unliquidated damages in the event of a delay breach; and
Qatar – The court may only reduce the amount of LDs claimed under the contract provided the party’s actual loss is significantly less than the predetermined level of LDs.

On the face of it, it appears that in the Gulf an arbitral tribunal or a civil law court may have a little more leeway to vary liquidated damages, when compared against the English common law courts. Despite this, the powerful concept of pacta sunt servanda (“agreements must be kept”) stands firm both throughout the Gulf region, and as a key principle of international law.

Accordingly, our experience is that courts in practice are slow to disregard the parties’ Liquidated Damages clause and, more often than not, will attempt to respect the parties’ contract, unless it appears evident that the level of LDs claimed significantly exceeds the actual loss suffered.

[1] See Azimutti-Benetti v Healey [2010] – arguably considered to be the high-water mark of the English courts’ hands-off approach, and El Makdessi v Cavendish Square Holdings [2013] where the Court of Appeal set the broader test of assessing whether a LD clause was “extravagant and unconscionable with a predominant function of deterrence”.

[2] Please note that the official language of the laws cited within this article is Arabic. Therefore, whilst English translations of certain laws do exist and are used for the purposes of this article, these are unofficial translations and the original Arabic text of the legislation always prevails.

[3] Law No (22) of 2004

[4] Law no. 5 of 1985

[5] This entitlement to look behind the parties’ contract and reflect the actual loss suffered, has been considered by UAE courts, such as the High Federal Court, case 25/24 of 1 June 2004 (Civil), where the UAE High Federal Court in Abu Dhabi explained its position in line with Article 390(2) of the Civil Code, as follows: “delay fines clauses contained in construction contracts are, in substance, no more than an agreed estimate of compensation that would become due in case of the contractor’s failure or delay to perform its contractual obligations. According to Article 390 of the Civil Code, it is not sufficient – for the agreed compensation to become due – to establish the element of fault alone. It should be established, in addition, the element of loss which is suffered by the other party. If the contractor succeeds in establishing the absence of loss, the agreed compensation should be repudiated.”