Whilst on the face of it a decision of the UK Supreme Court may appear to have little relevance to the UAE or the Middle East region generally, this judgment will be of considerable interest to those of our clients and professional contacts who deal with contracts governed by English law, contracts subject to DIFC law and, in due course, the law of the Abu Dhabi Global Market (ADGM). Both the DIFC and ADGM legal systems are predicated on English common law and this judgment will filter through to them in time.

Under English law it has been generally accepted for over a century that a contractual provision requiring the payment of damages for breach of contract must be a genuine pre-estimate of the loss that will be suffered by the innocent party as a result of that breach of contract. Clauses that are penal in nature, or are clearly intended to have a purely deterrent function, have regularly been struck out by the English courts. 

This principle, the so-called penalty rule, has now been reviewed and overhauled by the UK Supreme Court in the recent decisions in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis, reported together at [2015] UKSC 67.  

Our colleagues at Dentons in the UK have prepared a useful summary of the cases and judgments, and the implications this will have on the penalty rule under English law going forward. Also, we make some practical suggestions for contract drafting and commercial negotiations as a result of these decisions.

Of course, under UAE civil law penalties are not in fact prohibited. So whether a contractual provision is labelled as a penalty or liquidated damages may well make no difference as, pursuant to Article 390 of the UAE Civil Code, a judge has the discretion to adjust any such amount payable in order to reflect the actual loss suffered by the innocent party.