Compensation for breach of contract – How to Avoid Court? Here’s how…
Posted by 7starsdubai on April 27, 2009
Over the last 10 years, Dubai has gained international attention due to its extensive growth and progress, particularly in the projects and construction sectors. During that period, deals were often done and contracts entered into quicker than if those deals were being carried out in less dynamic markets.
It seems that commercial parties relied heavily on their ability to negotiate solutions to any dispute rather than relying too heavily on the terms of their contracts or resorting to litigation or other formal dispute resolution procedures. The same parties may have also taken comfort from the obligation on contracting parties to act in good faith imposed by the UAE’s Civil Transactions Law (the Civil Code).
Of course the current economic climate is very different. Now financing is more difficult to obtain. This has reduced confidence that negotiation alone will resolve disputes. As companies compete for the limited credit available, contracts are being more extensively negotiated and scrutinized by all parties (including lenders). Parties are no longer relying on the market’s continued growth to push deals through or their obligation to act in good faith. The focus is shifting towards identifying what dispute resolution procedures should apply and what remedies are available if the other contracting party breaches its contractual obligations. One of the remedies receiving greater attention is the damages payable if a contracting party is in breach of a contract. Of course, the protection provided by damages will depend heavily on the offending party’s ability to pay in this market.
Time to review
Most contracts should have provisions dealing specifically with what will happen when a breach of contract occurs. Often an overarching termination provision exists, in addition to provisions relating to curing defaults, damages and events such as force majeure or change in law, and these all play a role in determining the options available to contracting parties in a variety of circumstances.
The current environment highlights the need for solid contractual provisions and should be taken as an opportunity for all players in the project and construction sector to regroup and focus on contracts that they have entered into and those that they are about to enter into. Everyone involved in project and construction deals should be asking themselves what they are entitled to if the contract is breached by the other party.
Consideration should be given to whether contracts yet to be entered into should specifically address these issues. But what if the decision is taken not to do so or an existing contract does not address damages? The Civil Code provides an entitlement to compensation for breach of contract even where the contract itself does not provide for such compensation.
Damages under UAE Law
The purpose of damages is to compensate a party for any loss suffered as a result of default by counterparty to a contract. If damages for a breach of contract are not fixed under a provision of the law or in the contract itself, the Civil Code gives the court discretion to assess compensation “in an amount equivalent to the damage in fact suffered at the time of the occurrence”. The focus here is on the actual loss suffered by a party and gives the court a broad discretion to determine an appropriate award of damages on the basis of the facts and evidence before it. However, how is the ultimate determination made and what limits are imposed on the amount of compensation that may be awarded?
Other provisions of the Civil Code that do not specifically relate to contractual damages may give some guidance as to how compensation may be assessed by a court: “In all cases the compensation shall be assessed on the basis of the amount of harm suffered by the victim, together with loss of profit, provided that it is the natural result of the harmful act”.
The key element of this provision is that a party suffering loss will be compensated for that loss, including any loss of profit, which flows naturally from the default. The explanatory memorandum to the Civil Code says damages are payable in respect of the actual loss suffered as well as loss of expectation (that is loss of an opportunity to obtain a benefit under a contract or to avoid a loss).
Each type of damages claimed will need to be substantiated and shown to result from the breach. Consequential (or indirect) losses will generally only be recoverable where it can be shown that the party causing the loss did so with a malicious intent. While it is important to keep in mind the award of damages is always at the court’s discretion, a specific damages regime in a contract can have the benefit of providing greater certainty as to a party’s right to contractual damages and can assist parties negotiate ways of avoiding recourse to court in this challenging environment.
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