Enforcing and Defending Liquidated Damages in the UAE

A liquidated damages clause is supposed to provide certainty. The parties agree on a rate. If breach occurs, that rate applies. No need to prove actual loss.

In the UAE, that certainty is qualified. Under Article 390(2) of the Civil Code, courts and arbitrators have discretion to adjust liquidated damages up or down to match actual loss. The parties cannot contract out of this. Any agreement to the contrary is void.

This guide is for employers, contractors, developers, and in-house counsel dealing with delay damages, performance penalties, and LD disputes in UAE projects. Whether you are trying to enforce an LD clause or defend against one, the outcome often turns on evidence, notice compliance, and how the clause was drafted in the first place.

If you manage multiple contracts or projects per year, we can review LD clauses, notice mechanics, and claim templates on a monthly retainer, catching drafting gaps before they become disputes. Contact our construction team to discuss.

The core message is straightforward: in the UAE, liquidated damages are not guaranteed. They are a starting point for quantifying compensation that can be challenged. The clause you negotiated may not be the clause you enforce.

The Legal Framework

Article 390 of the UAE Civil Code (Federal Law No. 5 of 1985) allows parties to fix compensation in advance, but gives judges the power to vary that amount so it equals the actual loss. This power cannot be excluded by contract. Any clause that tries to prevent judicial review is void.

This differs fundamentally from common law jurisdictions. In England, if a liquidated damages clause passes the penalty test, it will generally be enforced as written. In the UAE, even a perfectly drafted clause can be adjusted if actual loss turns out to be different from the agreed amount.

Before any liquidated damages can be awarded, courts require three things:

• A breach by the party liable to pay (e.g. failure to complete by the contractual date)
• Actual damage sustained by the claimant
• A causative link between the breach and the damage

The Dubai Court of Cassation confirmed this tripartite test in Case No. 153 of 2011. The LD clause helps quantify compensation once these elements are established, but courts retain the power to align compensation with actual prejudice. If the other side challenges the figure, evidence of actual loss becomes critical.

How Reduction Works in Practice

Consider a contractor who completes a hotel project 120 days late. The contract specifies liquidated damages at AED 50,000 per day, for a total claim of AED 6 million. The contractor disputes the claim and asks the court to reduce it.

The court will ask: what loss did the employer actually suffer?

If the hotel was not scheduled to open until six months after completion anyway, the employer may have suffered no revenue loss. If the employer had no financing costs during the delay period because the facility was not yet drawing down, that element of loss disappears too. If the employer cannot point to any third-party claims, cancelled bookings, or additional supervision costs, the court may find that the actual loss was significantly less than AED 6 million.

In Dubai Court of Cassation Case No. 138/94, the court reduced pre-agreed damages in a contractor/subcontractor dispute for exactly this reason. The amount claimed exceeded the loss actually suffered, and the court exercised its discretion to adjust it downward.

This does not mean employers cannot enforce LD clauses. It means they should be prepared to justify the amount if challenged.

Common Reduction Scenarios

Courts are most likely to reduce LDs when:

• No actual loss occurred. The employer suffered no damage from the delay because the project was not yet revenue-generating, there were no financing costs, and no third parties claimed against them.
• Loss was less than the LD amount. The employer can quantify actual loss, but it is lower than the agreed rate would produce.
• Employer caused or contributed to delay. Late design information, delayed approvals, or access problems meant the contractor could not have completed on time regardless.
• EOT was wrongly refused. The contractor applied for extensions it was entitled to, but the Engineer rejected or ignored the applications.
• The rate is manifestly excessive. The daily rate bears no reasonable relationship to any loss the employer could have suffered.

The Burden of Proof

The allocation of burden matters significantly.

The employer's job is relatively simple: prove that the contractor completed late. The employer does not need to prove loss at the outset. The LD clause serves as a presumption that quantifies compensation for the breach.

The contractor carries the harder burden. To achieve a reduction, the contractor must prove that the employer suffered no loss, or less loss than the agreed amount. Dubai Court of Cassation Cases 48/2005 and 65/2005 confirmed this. The party seeking reduction must demonstrate the disproportion.

This gives employers a real advantage. They can levy LDs without initially proving loss, and the contractor has to do the work of showing the claim is excessive. But contractors with good records and strong evidence can succeed.

Penalty vs Liquidated Damages: A Distinction That Does Not Matter Here

In common law jurisdictions, lawyers spend considerable time arguing whether a clause is a "penalty" (unenforceable) or a "genuine pre-estimate of loss" (enforceable). The UK Supreme Court's 2015 decision in Cavendish Square v Makdessi refined this test, but the distinction remains important in England.

In the UAE, this debate is largely academic. Courts use the terms interchangeably. In Case No. 138/94, the Dubai Court of Cassation treated "penalty clause" and "liquidated damages" as equivalent concepts. What matters is not the label, but whether the amount is proportionate to actual loss.

The practical consequence: a clause that would be struck down as a penalty in England may be enforceable in the UAE, just at a reduced amount. The court does not throw out the clause entirely. It adjusts it.

What Happens on Termination

UAE courts have historically treated penalty clauses as ancillary obligations that may fall away when the contract is terminated. The reasoning is that LD clauses are secondary obligations tied to the primary obligation to complete. If an employer terminates the contract, the contractor's obligation to complete is extinguished, and the LD clause may go with it.

However, this is not an absolute rule. The outcome depends on how the clause is drafted and how the court analyses the parties' intentions. An agreed-compensation clause that is drafted as an independent obligation, rather than merely ancillary to completion, may survive termination. Courts will examine the specific wording and commercial context.

Example: An employer terminates a construction contract after the contractor falls 90 days behind schedule. The employer claims AED 4.5 million in liquidated damages for the 90 days of delay, plus the costs of completing the work with a replacement contractor.

If the LD clause is framed as ancillary to the completion obligation, the court may find it fell away on termination. The employer would need to prove actual loss for the delay period rather than relying on the agreed rate.

If the clause is drafted as an independent compensation mechanism that expressly survives termination, the outcome may differ.

The lesson for employers: If you plan to terminate, consider claiming your LDs before termination takes effect. Deduct them from payments or put the contractor on notice of the claim before serving the termination notice. And ensure your contracts are drafted with survival of compensation clauses in mind.

For contractors: Termination may provide a defence to LD claims. If the employer has already terminated, examine whether the LD clause was drafted to survive or whether it was ancillary to completion.

For more on the termination process and its consequences, see our guide on construction contract termination.

Extension of Time: Where Most Disputes Really Start

Liquidated damages disputes rarely begin with the LD clause itself. They begin with extension of time claims that were not properly made or not properly assessed.

Example: A contractor working on a commercial tower in Dubai receives 47 variation instructions over the course of the project. The contractor submits EOT claims for some variations but not others. The Engineer grants partial extensions but rejects several claims for lack of supporting documentation. The contractor completes 60 days after the extended completion date. The employer claims AED 3 million in liquidated damages.

The dispute is not really about the LD rate. It is about whether the contractor was entitled to more time. If the contractor had received the EOT it claims, there would be no delay and no LDs.

The Notice Problem

This is where many contractors lose their claims before they start.

FIDIC contracts require the contractor to notify the Engineer within 28 days of becoming aware of any event giving rise to a claim. Miss that window, and the claim may be barred entirely.

The DIFC Court of Appeal addressed this directly in Panther Real Estate v Modern Executive Systems (2022). The contractor argued it should not pay LDs because the employer had caused most of the delay. The court disagreed. The contractor had failed to comply with the contractual notice requirements for EOT claims. Even though the employer may have caused delay, the contractor's failure to follow the contractual process meant it could not claim the extensions.

The practical takeaway is stark: in the UAE, notice compliance is not optional. Even if you have a valid delay event, failure to notify properly can result in losing your EOT entitlement entirely. You end up paying LDs for delays that were not your fault.

Concurrent Delay

What happens when both parties contribute to delay at the same time?

Example: The employer is late providing design information for a particular floor, and simultaneously the contractor has insufficient labour on site to maintain progress on other floors. Both issues affect the critical path. Who bears the delay?

UAE law is still developing on this point. Article 290 of the Civil Code provides that a judge may reduce culpability where the injured party contributed to the damage. This suggests courts may apportion responsibility, but there is no settled judicial position.

FIDIC 2017 acknowledges the difficulty. Sub-Clause 8.5 invites parties to agree their own rules for concurrent delay in the Special Provisions. If the contract is silent, the tribunal must assess entitlement "as appropriate taking due regard to all relevant circumstances."

The safest approach is to address concurrent delay expressly in the contract. Specify whether the contractor gets time but no money, whether delay is apportioned, or whether some other rule applies.

Variations and Their Time Impact

Variations are a constant source of LD disputes, particularly in lump sum contracts.

The Dubai Court of Cassation in Case No. 472 of 2021 confirmed that in lump sum arrangements, a contractor cannot claim additional payment for work beyond the agreed scope unless there is a formal variation approved by the employer. But the time impact is separate.

A variation that adds 500 square metres of MEP work does not just cost money. It takes weeks to design, procure, and install. If the contractor does not receive an EOT for that work, those weeks become delay, and delay becomes LDs.

Every variation instruction should prompt a time assessment:

• The contractor should submit an EOT claim (or reserve the right to do so) for any variation that affects the programme
• The employer or Engineer should respond with a determination
• If neither party addresses the time impact contemporaneously, they are storing up a dispute for later

The Mistakes That Create Reduction Arguments

Many LD disputes arise not from the clause itself, but from how the parties administered the contract. Sloppy record-keeping, inconsistent correspondence, and procedural failures create openings for the other side.

Employer Mistakes That Invite Reduction

• Late design information. If the employer or its consultants delivered drawings three weeks late at a critical stage, and the contractor can prove this affected the programme, those three weeks may come off the LD calculation.
• Inconsistent correspondence. An employer who writes to the contractor acknowledging that progress is satisfactory, then later claims the contractor was in culpable delay during that same period, has a credibility problem.
• Failure to grant EOT when clearly entitled. If the contractor submitted a compliant EOT application for an employer-caused delay, and the Engineer simply never responded, the employer's LD claim for that period looks weak.
• Levying LDs without proper notice. If the contract requires the employer to notify the contractor before deducting LDs, and the employer skipped this step, the deduction may be challenged on procedural grounds.

Contractor Mistakes That Undermine Defences

• Late or non-compliant notices. The Panther case shows how strictly these requirements are enforced. A contractor who waits 45 days to notify a delay event has already lost on that claim.
• Failure to update programmes. If the contractor cannot show how a delay event affected the critical path, the delay analysis falls apart.
• Continuing work without reservation. If the employer causes a delay but the contractor continues working without notifying the delay or reserving its rights, the contractor may be taken to have accepted the situation.
• Poor site records. Daily reports, progress photographs, and contemporaneous correspondence are the raw material of delay claims. Without them, the contractor is arguing from memory against the employer's documents.

Evidence That Wins Cases

Whether you are enforcing or defending an LD claim, the outcome usually turns on evidence.

For Employers Enforcing LDs

Start with the basics: the contractual completion date (original and as extended), evidence of any certified extensions, the actual completion date, calculation showing daily rate × days of delay, and notice letters showing when and how you informed the contractor LDs were being levied.

If you anticipate a reduction argument, prepare evidence of actual loss: financing costs during the delay period, lost revenue or rental income, third-party claims or penalties, and additional consultant or supervision fees. The more you can show real loss, the harder it is for the contractor to argue the agreed rate was excessive.

For Contractors Defending Against LDs

Focus on different questions: Did you notify all delay events within the contractual time limits? Can you show how employer-caused events affected the critical path? Do you have programme updates demonstrating delay impact? Is there correspondence showing employer acknowledgment of delays?

Consider whether you need a delay expert. For substantial claims, a forensic delay analysis can demonstrate which events actually affected the critical path and what extension should have been granted.

Look for evidence that the employer suffered no or limited actual loss. Was the facility revenue-generating during the delay period? Were there actually third-party claims? Sometimes the employer's own documents show the answer.

Drafting Clauses That Survive Challenge

The clause you negotiate should anticipate that it may be tested.

Be specific about the rate. State a clear daily or weekly figure. Avoid vague formulations that require interpretation.

Include a cap. Typically 5 to 10 percent of contract value. Note that UAE courts may theoretically override caps under Article 390(2), but a cap still provides a reference point and may limit exposure in practice.

Link to the EOT mechanism. LDs should apply only to delay beyond the extended completion date, not the original date. Make this explicit in the drafting.

Consider survival on termination. If you want the LD clause to survive termination, draft it as an independent compensation mechanism rather than an ancillary obligation tied solely to completion.

Specify the certification process. Who certifies that delay has occurred? How is the contractor notified that LDs are being levied? What is the deduction mechanism?

Document the basis for the rate. A contemporaneous note explaining how the daily rate was calculated can be valuable if the rate is later challenged.

Interaction with Bank Guarantees

Liquidated damages and bank guarantees often intersect in construction disputes. An employer who cannot recover LDs through payment deductions may look to the performance bond.

The dynamic creates pressure. An on-demand performance bond can be called even if the contractor disputes the LD entitlement. The contractor's remedy is to seek an attachment under Article 417(2) of the Commercial Transactions Law, but the threshold is high.

If the bond is called and the LDs are later reduced by a court or tribunal, the contractor must pursue recovery in separate proceedings. The employer has the money; the contractor has a claim.

From a drafting perspective, consider whether the contract should require LDs to be certified before a bond call is permitted. This adds a procedural step that may give the contractor opportunity to challenge before funds change hands.

DIFC and ADGM: Different Rules Apply

For contracts governed by DIFC or ADGM law, the analysis changes.

Under DIFC law, Article 122 of the DIFC Contract Law allows liquidated damages to be reduced where they are "grossly excessive" in relation to the harm. This is a higher threshold than UAE Civil Code Article 390(2), which allows adjustment to match actual loss without requiring gross excessiveness.

ADGM applies English common law principles. The penalty rule applies as refined by Cavendish Square v Makdessi. If a clause is not penal in nature, it will generally be enforced as written. The court will not adjust the amount to reflect actual loss.

If certainty of enforcement matters to you, the governing law choice is significant. A clause that might be reduced by 50 percent under onshore UAE law may be enforced in full under ADGM law.

Frequently Asked Questions

Can UAE courts completely strike down a liquidated damages clause?

Yes, but it is rare. Courts more commonly adjust the amount rather than void the clause entirely. A clause may be set aside if the employer cannot establish any actual loss, but even then the employer may still recover general damages if it can prove loss through other means.

Does the employer need to prove loss to claim liquidated damages?

Not initially. The LD clause serves as a presumption that quantifies compensation. However, if the contractor challenges the amount, the employer may need to produce evidence of actual loss to defend against reduction. The burden of proving disproportion lies on the party seeking reduction.

Can liquidated damages be increased by the court?

In principle, yes. Article 390(2) allows courts to adjust damages in either direction. However, in practice, increases are extremely rare. We are not aware of reported cases where UAE courts have increased agreed liquidated damages above the contractual amount.

What happens to LDs if I terminate the contract?

It depends on how the clause is drafted. Historically, UAE courts have treated LD clauses as ancillary obligations that may fall away on termination. However, a clause drafted as an independent compensation mechanism may survive. If you are considering termination, claim or deduct LDs before termination takes effect, and ensure your contracts address this issue expressly.

Can I exclude Article 390(2) by choosing foreign governing law?

If the contract is governed by DIFC or ADGM law, Article 390(2) does not apply. DIFC law requires "gross excessiveness" for reduction, and ADGM applies English penalty rules. For contracts governed by onshore UAE law, Article 390(2) cannot be excluded regardless of any contractual provision.

How long do I have to claim liquidated damages?

The standard limitation period for contractual claims in the UAE is 15 years under the Civil Code. However, your contract may impose shorter time limits for claims, and FIDIC contracts have specific notice requirements. Always check the contractual deadlines.

Do I need expert evidence for an LD dispute?

For substantial claims, expert delay analysis is usually essential. The contractor needs to demonstrate which events caused critical delay and what EOT should have been granted. The employer may need quantum experts if actual loss is in dispute. For smaller claims, contemporaneous records may be sufficient.

Key Takeaways

• Court's power: UAE courts can adjust LDs to match actual loss under Article 390(2). This cannot be excluded by contract.
• Burden of proof: Employer proves breach. Contractor proves loss is lower than claimed to achieve reduction.
• Evidence matters: Even though the LD clause quantifies compensation, if the contractor challenges the figure, evidence of actual loss becomes critical for both sides.
• Termination: LD clauses may fall away on termination if drafted as ancillary obligations. Consider survival drafting.
• Notice compliance: Failure to give timely EOT notices can bar entitlement even if the delay was employer-caused.
• Governing law: DIFC requires "gross excessiveness" for reduction. ADGM applies English penalty rules. Onshore UAE allows adjustment to match actual loss.

How Kayrouz & Associates Can Help

Kayrouz & Associates' Construction and Litigation teams advise employers and contractors on liquidated damages matters at every stage.

At contract stage, we draft and negotiate LD clauses, caps, EOT mechanisms, and notice requirements. We review FIDIC amendments and bespoke terms to ensure your position is protected.

During the project, we advise on EOT claims and delay notices, review LD deductions before they are applied, and help defend against premature or excessive levies. We support claims for variations and extensions when delay events occur.

In disputes, we prepare and defend LD claims in arbitration and litigation, coordinate with delay experts, and advise on settlement strategy and quantum.

For businesses managing multiple projects, we offer construction contract support on a retainer basis. This ensures consistent review of LD clauses, EOT notices, and delay correspondence across your portfolio, reducing the risk of the mistakes that create disputes in the first place.

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