Dubai contract law: Breaching party liability

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Staff Writer, TLR

Published on July 14, 2023, 17:41:00


Civil code, UAE law, the law reporters

Introduction to breach of contract related laws in UAE

Breach of a contract is a frequent scenario that occurs around us. The party affected by the breach can bring a claim for damages against the breaching party. In order to entirely understand the concept of breach of contract, it is necessary to comprehend what a breach of contract is, what course of action does the affected party have, and what can the breaching party rely on during a lawsuit for damages under the UAE Laws. 

The scope of contracts is huge and dynamic. From small transactions with a retailer to large scale purchases like acquiring a business entity, we enter into contracts either directly or indirectly, knowingly or unknowingly. Every country has its own law to govern the contracts entered into by the parties involved. The definition of ‘Contracts’ under the UAE Civil Code has been given as, “A contract is the coming together of an offer made by one of the contracting parties with the acceptance of the other, together with the agreement of then both in such a manner as to determine the effect thereof on the subject matter of the contract, and from which results an obligation upon each of them with regard to that which each is bound to do for the other.”  If there is a law established, it indicates that the rights of the parties may be violated in a contract. When one of the parties to the contract doesn’t perform or consummate its obligation, the party is said to breach the contract. 

Article 124 of the laws in UAE Civil Code provides that contracts is one factor through which personal obligations arise. Thus when these obligations are not performed by one party either partially or completely, contractual liability arises on the party who hasn’t performed their obligation. Contractual liability is said to arise when the following three conditions are satisfied:

1. Default on the part of the party which fails to fulfil its obligation or delays the performance of an obligation which was agreed upon while entering into a contract. 
2. Damage caused to the party due to such failure or deference.
3. Presence of a causation (a causal link between the damage caused and the compensation that has been provided).
If any one of the above mentioned pre-requisites are absent, the claim for damages or compensation will elapse and a party cannot be held liable.  The Dubai Court of Cassation stated that “it is the responsibility of the claimant to prove his claim and that of the respondent to refute it” . In simpler words, it is necessary for the claimant to prove that there was a breach of contract due to which damage or loss was caused to them, and that there is the existence of causation, to claim compensation from the respondent or the party that has breached the contract.  

Once the breach of contract is proven, the affected party can claim damages from the breaching party. The law related to provision of damages which the breaching party has to pay, and the reliability of breaching party under the UAE Law is described as follows:

● Firstly, the damages are determined by keeping in mind the harm suffered to another party and not by considering the benefit that can be caused to the defendant. Also, it is significant to note that only contractual damages are provided in cases of breach of contract under UAE Laws. Consequential damages is not a course of action that can be opted by the affected party.

● Secondly, according to Article 389 of the UAE law of Civil Code, damages have to be paid for losses or damage caused directly due to the breach, and the damage shouldn’t be remote to the breach. This indicates that foreseeability of damage by both the parties while entering into a contract is a necessity. In simple words, it is mandatory for both the parties to have foreseen the damage caused due to breach of contract. Thus, the party that breached the contract can rely on proving that the damage suffered was not foreseen by them at the time of making the contract to mitigate the compensation.

● Further, if the amount of compensation to be paid in case of breach, hasn’t been mentioned under the contract, the court has the discretion to decide the compensation based on the gravity of the breach and loss suffered. The party that has breached the contract can thus reduce the amount of damages to be paid by proving that the harm suffered wasn’t grave and serious.

● Fourthly, UAE Law considers the loss of profits due to a breach of contract as liability that arises on the breaching party. UAE Law doesn’t recognize the provision of damages if the loss was a mere possibility. The party claiming damages must show that loss of profits was certain result of the breach. Breaching party can rely on establishing that the loss of profits as a result of breach wasn’t a certain effect, but was a mere probability. 

Other provisions or legalities on which a breaching party can rely are provided as follows:

● Article 238 of the Civil Code provides for requirements authorizing a party to reject the contract for a defect that exists in the contract. The requirements are that:
a. The contract must be pre-existing.
b. The subject matter of the contract (the main element on which the contract is based) must be affected due to the defect.
c. The party affected by the breach should be unaware of the defect.
d. Exemption from liability must not be a benefit provided to the breaching party under the contract. 

Thus, the party that is sued for non-performance can invoke this provision to justify their breach of contractual obligation. 

● Article 218 talks about the non-binding contract, and explains that a party can refuse to perform or cancel the contract if it has been included in the contract, a provision that the contract is not binding, or both the parties have agreed that a party can cancel the contract at its discretion. The breaching party may prove this to escape or mitigate liability. 
● A party can deny performing its obligation on the claim that the contract is void (if it violates any provisions of law, unlawful subject matter), voidable (situations or circumstances provide an option to a party to perform or reject the contract, for e.g.: Duress), or defective. These concepts can be studied in detail under the Civil Code of UAE Law.

All the articles mentioned above, their interpretation and explanation can help a breaching party in identifying what provisions can they rely on while facing a breach of contract lawsuit. The above mentioned are some of the fundamental ways and provisions that can be utilized by the breaching party, while there are more ways to deal with a breach of contract claim. Thus, the parties can essentially rely on the UAE laws that deal with contracts, and interpret them in their favour to either completely escape or deduce their liability.  

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