In brief:

  • The UAE courts have the ability under the Civil Code to vary a contract to disregard limitations on liability where the loss suffered is in fact greater than the limitation.
  • This can impact the various ways of seeking to limit liability or recover losses under contract, such as caps on liability, liquidated damages and indemnities.
  • Limitation periods in the UAE should also be borne in mind when considering the protection a contracting party may be expecting from its liability limitation provisions, or any indemnities in its favour.

Whilst including strongly worded clauses limiting and/or excluding liability in a commercial contract is often advisable, it should be noted that under UAE law, some aspects of such clauses may not provide the same level of protection they might otherwise afford a party under a foreign law.

Article 390 (1) of the Civil Code states, “contracting parties may fix the amount of compensation in advance by making a provision therefore in the contract, subject to the provisions of the law”. However, parties should be mindful that Article 390 (2) also provides that a judge may vary the agreement so as to make compensation equal to the loss suffered, upon the application of either of the parties, and that any agreement to the contrary will be void. Under the principles of the Commercial Code, however, liability may be either excluded or limited by way of express contract. Article 390(2) may not, by virtue of these principles, apply to express provisions under a commercial contract that limit or exclude payment of compensation for breach of contract, however there have been varying judgments in the UAE on this issue.

So, under UAE law, while including limitation and exclusion of liability provisions in a commercial contract is worthwhile, it is important to note that, should they ever be challenged before a UAE court, the court has the jurisdiction to ignore the limitations and to award damages to a party which are equal to the actual losses suffered.

That said, and with good commercial practice in mind, we set out below three examples of how you might seek to limit your liability under the contract:

1. Insert a cap on your liability

A cap on liability can be drafted in various ways, but the objective is to limit the total liability under the contract, perhaps linked to particular circumstances, to a specified maximum sum. This could be the value of the contract to you, or perhaps the amount of foreseeable losses arising from the breach. The value of your professional indemnity insurance can be a good starting point here in defining that cap.

2. Exclude indirect and consequential losses

Although under UAE law recovery of consequential or indirect losses can be difficult, the inclusion of an express clause excluding such liability from the contract can help to clearly define upfront what the parties see as the areas of risk, and therefore what to expressly cover in the contract in terms of remedy for breach.

3. Liquidated Damages

A typical liquidated damages clause will provide that in specifically defined circumstances, a defaulting party will pay a set amount to the other party which has been pre-determined and agreed as the quantum of loss, regardless of the amount of loss actually suffered. As discussed above, bear in mind that these types of limitation clauses may be at particular risk of unenforceability under UAE law.

Limitation periods

In the UAE, limitation periods are not expressed in one statute but are contained in multiple laws, potentially applicable, dependent on the nature of the contract. The length of limitation period also varies, depending on the cause of action. The Civil Code contains the general provision in relation to limitation periods that a claim is time-barred after 15 years, unless a specific statute states otherwise. Notably, the Commercial Code sets the limitation period for a claim for breach of a commercial contract at 10 years. Please see our article here for more details on limitation periods in the UAE.

Conclusion

Although the commercial contract is the traditional ‘home’ of liability limitation and risk mitigation, the best way to limit your business’ exposure in its relationships with third parties is to adopt sound, consistent and relevant business practices in its operations. These can certainly be inscribed in the written agreement, but their true value lies in their ‘real life’ assumption by your business. Frequent reporting, use of tight controls to monitor performance and the striving for a cooperative and fruitful relationship with your business partners is where your true liability limitation and protection rests. We discuss this approach to commercial contract drafting in our article on creating a fruitful contractual relationship here.