<p>Where the contractor has failed to complete by the scheduled  completion date, he will be liable to a claim for liquidated damages  either by way of action, by deduction or by a set-off.&nbsp; There can be no  inquiry into the actual loss suffered.&nbsp; The advantage to an employer is  that he will not need to prove the loss suffered.&nbsp; The most common  default by a contractor that will give rise to a claim for liquidated  damages is a failure to reach completion or to achieve specific  milestones.<br /><br />The contractor may have a defence to the claim by  proving that the agreed sum is a penalty.&nbsp; In order to establish a  penalty, the contractor will need to demonstrate that the predominant  contractual function of the provision was to deter it from breaking the  contract, rather than to compensate the innocent party for the breach.&nbsp;  Proportionality of the damages to the costs reasonably anticipated to be  incurred is key to maintaining a valid liquidated damages claim.&nbsp; If  successful in establishing a penalty, the contractor could, however,  still be vulnerable to a claim for unliquidated (general) damages.<br /><br />The  FIDIC Red Book, 1987, provides at clause 47.1 for &ldquo;Liquidated Damages  for Delay&rdquo;, while the 1999 edition provides at clause 8.7 for &ldquo;Delay  Damages&rdquo;.<br /><br />When contractors are contemplating signing a contract  for work in the UAE and the contract is to be governed by UAE law,  however, they need to take heed of the local laws that apply to this  subject.<br /><br /><strong>The UAE Civil Code<br /><br /></strong>Article  390(2) of the UAE Civil Code addresses the issue of the enforceability  of liquidated damages in the UAE.&nbsp; In our translation, the Article  provides:</p>
<ul>
<li>The contracting parties may fix the amount of compensation in  advance by making a provision in the contract, or by later agreement,  subject to the provisions of the law</li>
<li>The court may, on the application of either party, vary such  agreement so as to make the compensation equal to the loss and any  agreement to the contrary shall be void.</li>
</ul>
<p>Under UAE law, despite what the parties may have agreed, the court  (or an arbitrator) has the ability retrospectively to change that  agreement, to ensure that the damages are equal to the loss that has  been suffered.&nbsp; The parties are not able to contract out of this.<br /><br /><strong>Interpretation by the Court<br /></strong><br />Dubai  Court of Cassation judgment 138/94 shows how the Court will view  liquidated damages and penalties.&nbsp; While decisions of the Courts in the  UAE are not binding, Court of Cassation judgments are certainly  persuasive and often followed by lower Courts.<br /><br />In this case,  there was a dispute between a contractor and a subcontractor regarding  delay to completion.&nbsp; The contract between the parties contained a  &ldquo;penalty clause&rdquo; for delay to completion and the Claimant sought to  recover the penalty in full.<br /><br />The Court confirmed its general  power to reduce the amount of damages agreed in the contract, where it  is evident that the actual loss suffered is less than the total amount  of damages agreed in the contract.&nbsp; A wide discretion is certainly alive  and well.<br /><br />It seems in fact that Courts in the UAE do not draw a  distinction between a pure penalty and a pure liquidated damages  provision and indeed the terms penalty and damages were used  interchangeably during the hearing.&nbsp; It is correct to assume that the  distinction between the two terms made in common law jurisdictions is  not significant in the UAE, due the overriding nature of the power of  the courts under Article 390 of the Civil Code.<br /><br /><strong>Conclusion<br /><br /></strong>Parties  entering into contracts need to be aware that the liquidated damages  number that is &lsquo;hotly&rsquo; negotiated and agreed, may be varied by a judge  or arbitrator where the contract is governed by UAE law.&nbsp;&nbsp; There is  discretion under UAE law for a judge or arbitrator to revise the damages  up or down so as to match the actual loss that is suffered.&nbsp; In our  experience, it is more common for the argument to be mounted by a  contactor to reduce the damages.&nbsp;That said, there are certainly  instances where an employer may apply to increase the damages.</p>