Caps and Limitations on Liability

Freedom of contract in the UAE is specifically written into federal law, but with certain provisos relating to public policy concerns. The UAE Civil Code (Federal Law No.5 of 1985) clearly notes that, "if the terms of a contract are clear, they shall not be deviated from by interpretation in order to determine the intention of the parties" (Article 265). There is, however, a proviso that freedom of contract is subject to public policy and morality, which has been widely interpreted by local courts. Therefore, an exemption from liability will not apply in circumstances where a deliberate act, fraud or negligence can be established.

Further, while pre-agreed liquidated damages may have been confirmed in the contract, it is always open to a court (or tribunal) to adjust the damages to reflect the actual loss suffered. Article 390 of the Civil Code states that:

Exclusions of Liability

"1. The parties to a contract may determine in advance the amount of compensation by stating it in the contract or a later agreement...

2. In all cases, the court may, at the request of either party amend said agreement to make the estimate equivalent to the damage..."

The official Commentary on the Civil Code notes that:

"If the compensation is due and the same is equal to the loss sustained, then the liquidated damages agreement in question shall be upheld. However, if the due compensation is not equal to the loss sustained, the judge shall have the right, upon the request of one of the parties, to increase or decrease the amount of such compensation in order to reflect the loss. This is in line with the Shari'ah principles under which compensation shall be equal to actual loss suffered".

To date, UAE Courts have shown a willingness to reduce contractual damages but take more convincing where a party is seeking to increase the agreed cap.

Contractual caps and limitations on liability are, therefore, acceptable, but either party to a contract can ask the court or tribunal to vary such provisions to reflect actual losses suffered.

It should also be noted that industry custom and practice will be considered when assessing damages. The overwhelming norm in the UAE construction industry is to limit damages to 10% of contract value. Where a contract has omitted a cap on damages, therefore, it is possible that a court could insert such a provision. Court judgments have supported both positions i.e., there are cases where courts have inserted a 10% cap and others where courts have upheld higher damages. On this basis, it is sensible to insert a cap on liquidated damages with reasonable confidence that the courts will support the freedom of contract principle.

While an exclusion of liability may be enforceable in certain circumstances, as noted above, a party cannot contract out of tortuous liability arising from a wrongful or deliberate act. Article 296 of the Civil Code states that, "any condition purporting to provide exemption from liability for a harmful act shall be void". This clause is regularly given a wide interpretation and parties should be advised that an exclusion of liability is likely to be defeated where there was a wrongful or deliberate act creating the liability.

It is also worth noting that an engineer and a contractor are jointly and severally liable for the structure of a development for a period of 10 years (decennial liability) as detailed in Article 880 of the Civil Code. This provision operates as a strict liability and will apply even where the defect arises due to ground conditions or where the employer approved the defective construction. This is a mandatory term of the law and parties cannot exclude liability for defective construction.

Use of Indemnities

The use of indemnity clauses in the UAE is perfectly common and the same rules apply; freedom of contract applies and parties can, therefore, agree to indemnity clauses. As noted above, however, a party cannot protect itself from tortuous lability arising from a wrongful or deliberate act.

"Knock for knock" clauses and other limitation of liability or indemnity clauses will require careful drafting and an acceptance that they may be unenforceable if contrary to the law or public policy considerations. Also, there is no certainty as to what constitutes a deliberate or wrongful act and therefore, it is common to see an aggrieved party attempting to establish that the damage arose as a result of such a wrongful or deliberate act and thereby remove any limitation of liability.

Use of Time Bar Provisions

Time bar provisions are a key concern in the UAE. There is regular discussion in the local courts as to the effect of a contractual time bar when weighed against provisions of good faith and the Shari'ah principle that a "just claim never dies". Notwithstanding the Shari'ah principle, the laws of the UAE include a number of different limitation periods for different types of claim. In commercial matters a claim must be commenced with 10 years, although it is not entirely clear under the law whether a construction claim is properly classified as a commercial or civil transaction. It is, however, widely believed that the 10-year limit applies to construction cases.

Generally speaking, a party has to take action to preserve its right to claim and it will lose such right if particular conditions are not met. In construction terms, therefore, it is likely that contractual time bars will be upheld provided they are not unduly onerous or unfair. Construction disputes in the UAE will regularly include arguments as to time bars and there is no certainty on this point but the general view is that time bars should be enforced, which is supported by court judgements. Court judgements in the UAE are, of course, not binding under the Civil Law system and with such considerations it can be interesting to note the different treatment given to contractual time bars by common law and civil law trained arbitrators.