Civil Law and UAE: Liquidated Damages Adjustment Rules

1. Introduction

Liquidated damages are a contractual mechanism through which parties determine in advance the compensation payable if a specified contractual breach occurs. They are particularly common in:

• construction contracts;
• EPC contracts;
• FIDIC contracts;
• real-estate development agreements;
• supply contracts;
• infrastructure projects;
• technology contracts; and
• long-term commercial arrangements.

UAE law traditionally recognised agreed compensation but gave courts significant power to adjust it. A major change has now occurred: the new Federal Decree by Law No. 25 of 2025 on Civil Transactions, effective 1 June 2026, replaces the former Article 390 regime with Article 340, which provides a more structured adjustment mechanism.

The basic modern UAE approach can therefore be expressed as:

Parties may agree compensation in advance, but the agreed amount is subject to statutory judicial control.

2. Meaning of Liquidated Damages

Liquidated damages are an agreed monetary consequence of a specified contractual breach.

Example

A construction contract provides:

Contractor shall pay AED 50,000 for every day of delay, subject to a maximum of 10% of the contract price.

If the contractor completes the project late, the employer may invoke the agreed delay-damages clause.

The purpose is to avoid having to calculate every item of loss after the breach.

Common examples include:

• AED 50,000 per day of construction delay;
• fixed compensation for failure to meet completion milestones;
• agreed compensation for failure to deliver equipment;
• agreed compensation for failure to meet performance requirements.

3. Historical UAE Rule: Former Article 390

Under the 1985 Civil Transactions Law, former Article 390 provided:

1. Parties could determine compensation in advance by contract or subsequent agreement.
2. The judge could, at the request of either party, adjust the agreed amount so that it corresponded to the actual harm.
3. An agreement excluding that judicial power was ineffective.

Thus, UAE law historically differed from a strict common-law conception of liquidated damages.

The contractual figure was not necessarily final.

The courts could intervene to align the agreed compensation with actual loss.

This historical regime is important because many reported UAE cases concerning liquidated damages were decided under Article 390.

4. Current Rule: Article 340 of the 2025 Civil Transactions Law

The current law is more structured.

Article 340 provides that:

Article 340(1)

Contracting parties may pre-determine compensation by including the amount in their contract or in a subsequent agreement, subject to law.

Article 340(2)

The court may reduce the agreed compensation if the debtor proves:

• that the agreed assessment was excessive; or
• that the original obligation was partially performed.

Article 340(3)

The court may reduce the agreed compensation where the creditor's own fault:

• contributed to the occurrence of the damage; or
• contributed to increasing the damage.

If the creditor's fault predominates over the debtor's fault, the court may refrain from awarding compensation.

Article 340(4)

The creditor may claim more than the agreed compensation if the creditor proves that the debtor committed:

• fraud; or
• gross fault.

Article 340(5)

Any agreement contrary to Article 340 is void.

This is a significant change from the former Article 390 framework.

5. Difference Between Old Article 390 and Current Article 340

The new Article 340 therefore gives greater statutory detail concerning when reduction can occur and when the agreed amount can be exceeded.

6. Principle of Contractual Freedom

Liquidated damages begin with contractual autonomy.

The parties are generally permitted to decide:

• what constitutes delay;
• the amount payable per day;
• the maximum liability;
• the triggering event;
• applicable notice requirements;
• whether different rates apply to different milestones.

This is commercially important because parties price contractual risk when entering the agreement.

For example:

AED 100,000 per day × 20 days = AED 2 million.

The agreed amount allows the parties to anticipate their exposure.

The current Article 340 continues to recognise this contractual freedom while placing statutory limits on it.

7. Judicial Adjustment Is Not Automatic

A crucial point is that the court does not automatically rewrite every liquidated-damages clause.

Under current Article 340(2), reduction depends on the debtor establishing specified grounds, particularly:

• excessive assessment; or
• partial performance.

The provision therefore protects contractual certainty while retaining judicial supervision.

This is particularly significant for sophisticated construction contracts.

8. Case Law

Case 1: Dubai Court of Cassation, Appeal No. 222 of 2005 — Judgment of 19 June 2006

This is a leading historical UAE authority concerning agreed compensation.

The case concerned the former Article 390 regime.

The Dubai Court of Cassation recognised that the court possessed statutory authority to adjust agreed compensation so that it corresponded with the actual damage.

Principle

The parties' agreed amount is important, but it does not necessarily prevent judicial examination of the actual loss.

Current relevance

Because Article 390 has been replaced by Article 340, this case should be treated as historical authority explaining the development of UAE liquidated-damages doctrine, rather than as a direct interpretation of the wording of today's Article 340.

9. Case 2: Dubai Court of Cassation, Petitions Nos. 63 and 99 of 2005 — Judgment of 26 July 2005

These proceedings concerned the relationship between agreed damages and proof of actual loss.

The reported judicial approach recognised that an agreed damages clause affects the evidential position, but the court remains responsible for establishing the elements necessary for the damages ultimately awarded.

Where the actual loss required investigation, expert evidence could be necessary.

Principle

An agreed damages clause does not eliminate the court's responsibility to determine the legally relevant loss where adjustment is properly raised.

Importance

This is particularly important in construction disputes where:

• delay periods are disputed;
• several causes of delay exist;
• actual loss is contested;
• rental losses are claimed;
• prolongation costs are alleged.

10. Case 3: Union Supreme Court, Petition No. 370/20 — Judgment of 2 May 2000

This authority was cited in Sky News Arabia FZ-LLC v Kassab Media FZ (LLC).

The Union Supreme Court's approach, as reported in that DIFC judgment, treated the agreed compensation as a contractual assessment of harm. The party challenging it could seek to establish that the agreed amount was excessive or that the presumed relationship between the agreed amount and the harm was absent.

Principle

An agreed damages clause carries significant evidentiary and contractual weight.

Important qualification

The case arose under the former Article 390 regime, so it should be used primarily as historical guidance. The present Article 340 expressly allocates particular burdens and grounds for reduction.

11. Case 4: Sky News Arabia FZ-LLC v Kassab Media FZ (LLC) [2018] DIFC CFI 067

This case is particularly useful because it shows that not every large contractual payment is liquidated damages.

The defendant argued that minimum guaranteed payments constituted an unenforceable penalty under Article 390 of the UAE Civil Code.

The DIFC Court rejected that characterisation.

The Court found that the minimum guaranteed payments were consideration for the contractual exclusivity arrangement rather than compensation for a breach.

Principle

The court must first identify the legal nature of the payment.

A payment does not become liquidated damages merely because it is a fixed amount.

Importance

Before applying adjustment rules, the court must determine:

Is this actually compensation for breach, or is it consideration for another contractual obligation?

12. Case 5: Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016

This is a particularly important construction case.

The contract imposed liquidated damages of AED 42,500 per day, capped at 10% of the contract price.

The contractor argued that the delay damages should not apply because some delay resulted from the employer's conduct.

The DIFC Court of Appeal rejected that argument in relation to the contractual provision at issue.

The Court also considered the DIFC Contract Law's own approach to liquidated damages, under which agreed damages are generally enforceable but may be reduced where they are grossly excessive relative to the harm resulting from the relevant non-performance.

Principle

A party cannot use general good-faith arguments to contradict a clear contractual allocation of delay risk.

Importance

The case demonstrates that:

Liquidated damages + contractual risk allocation + clear drafting = significant contractual weight.

It also shows why the governing law matters: the DIFC statutory regime is not identical to mainland UAE Article 340.

13. Case 6: Architeriors Interior Design LLC v Emirates National Investment Co LLC [2024] DIFC TCD 001

This is a highly relevant modern construction decision.

The contract provided delay damages of AED 10,000 per day, with a contractual cap.

The employer sought additional actual costs in addition to the stipulated delay damages.

The Court rejected the additional claim because the contract stated that the stipulated delay damages were the damages due for the relevant default.

The Court then considered the historical Article 390 of the UAE Civil Code.

Importantly, the Court observed that judicial adjustment would be rare in a detailed standard-form construction contract because:

• the selected rate affects pricing;
• contractual risk allocation is important; and
• an agreed rate reduces uncertainty and the need for extensive proof.

The Court ultimately maintained the agreed AED 10,000-per-day rate for the relevant 16 days.

Principle

Courts should take contractual risk allocation seriously, particularly in sophisticated construction agreements.

Current significance

This decision is especially useful for understanding how a court may approach adjustment under the old Article 390. For contracts governed by current mainland law, Article 340 must now be applied.

14. Case 7: Bond Interior Design LLC v TR88house Restaurant and Entertainment Center LLC [2023] DIFC TCD 001

This construction dispute involved claims for delay and liquidated damages.

The Court found that the claimant seeking liquidated damages had to establish that the opposing contractor was solely responsible for the relevant delay period under the contractual mechanism.

Evidence indicated that there were potentially concurrent delays, including delays associated with variations.

The liquidated-damages claim therefore failed because the necessary factual foundation had not been established.

Principle

A liquidated-damages clause does not eliminate the need to prove that the contractual conditions triggering the clause actually occurred.

Practical importance

The claimant must establish:

1. contractual entitlement;
2. relevant breach;
3. applicable delay period;
4. responsibility for that delay; and
5. satisfaction of any contractual prerequisites.

15. Case 8: Five Real Estate Development LLC v Reem Emirates Aluminium LLC [2020] DIFC TCD 009

This construction case involved a contract containing:

• daily delay damages;
• engineer's damages; and
• a maximum liquidated-damages cap of 10% of the contract price.

The case demonstrates the importance of carefully analysing the contractual mechanism and the parties' subsequent agreements concerning amounts due.

Principle

The court examines the actual contractual arrangement rather than treating every monetary claim connected with a construction project as automatically recoverable liquidated damages.

The case is useful for understanding the interaction between:

• agreed amounts;
• variations;
• settlement correspondence;
• contractual caps; and
• proof of entitlement. 

16. Case 9: Dubai Court of Cassation — Historical Construction Approach

UAE construction jurisprudence has also recognised an important principle concerning the relationship between a primary obligation and an ancillary liquidated-damages obligation.

Reported Dubai Cassation jurisprudence has treated delay penalties as ancillary to the principal contractual obligation. Where termination extinguishes the relevant primary obligation, the contractual delay-penalty mechanism may no longer operate in the same manner, leaving the claimant to establish general damages under the ordinary rules.

Principle

The enforceability of liquidated damages can depend upon the continuing legal existence and operation of the underlying contractual obligation.

Practical significance

Before claiming liquidated damages following termination, the claimant must examine:

• whether the contract was terminated;
• whether termination was valid;
• when the termination took effect;
• whether delay damages accrued before termination; and
• whether post-termination losses must instead be established as general damages.

This historical approach should be applied carefully because the precise consequences depend upon the contract and the applicable current law.

17. Reduction for Excessive Compensation

Under current Article 340(2), the debtor may seek reduction by proving that the agreed assessment was excessive.

Therefore, the debtor should ordinarily produce evidence addressing:

• actual loss;
• reasonable expected loss;
• period of breach;
• causation;
• partial performance;
• alternative causes;
• mitigation;
• contractual risk allocation; and
• relationship between the agreed amount and the actual circumstances.

The burden under the current provision is therefore materially important.

18. Partial Performance

Article 340 expressly recognises partial performance as a ground for reduction.

Example

Contract price:

AED 10 million

Agreed delay compensation:

AED 100,000 per day

Suppose the contractor substantially completed the works but failed to complete a relatively minor portion.

The debtor may argue that full application of the agreed amount would be excessive because there was substantial performance.

The court must examine the actual contractual obligation and extent of performance.

19. Creditor's Contributory Fault

Article 340(3) introduces another important adjustment mechanism.

Suppose:

• contractor is responsible for 60% of the delay;
• employer contributed to 40% of the delay.

The employer's own conduct may justify reduction of agreed compensation.

The court may reduce compensation where the creditor contributed to:

• occurrence of damage; or
• increase in damage.

If the creditor's fault predominates, the court may refuse compensation.

20. Fraud or Gross Fault

The current law also contains an important protection for the creditor.

Article 340(4) permits the creditor to seek compensation above the agreed amount if the creditor proves that the debtor committed:

• fraud; or
• gross fault.

This means the agreed amount is not an absolute ceiling in every situation.

Example

A contractor deliberately falsifies progress certificates to conceal a serious contractual default.

If the resulting conduct constitutes legally established fraud or gross fault, the creditor may seek compensation exceeding the agreed amount, subject to proof.

21. Liquidated Damages and Concurrent Delay

Construction disputes frequently involve concurrent delay.

For example:

• Contractor delays structural works by 30 days.
• Employer delays design approval by 20 days.
• Both periods overlap for 15 days.

The employer cannot simply multiply the contractual daily rate by the entire calendar delay without examining the contractual requirements and causation.

The Bond case demonstrates the importance of proving responsibility for the relevant delay period.

22. Liquidated Damages and Extension of Time

A liquidated-damages clause must be read together with:

• extension-of-time clauses;
• variation provisions;
• notice requirements;
• employer-risk events;
• force majeure;
• suspension provisions;
• completion certificates.

Example

Contract:

Completion date: 1 January.

Contractor completes:

1 March.

But the employer granted:

30-day extension.

The relevant delay may therefore be only 29 days rather than the entire period.

Failure to account for contractual extensions can undermine the damages claim.

23. Contractual Cap

Many construction contracts provide:

“Liquidated damages shall be AED 50,000 per day, subject to a maximum of 10% of the contract price.”

A cap is an important part of the contractual risk allocation.

However, under current Article 340, parties cannot simply contract out of mandatory statutory protections. Article 340(5) declares contrary agreements void.

Thus:

Contractual cap ≠ absolute immunity from statutory adjustment.

24. Liquidated Damages vs Penalty

The terminology can be confusing.

In common-law systems, courts may distinguish between:

• liquidated damages; and
• unenforceable penalties.

UAE civil law traditionally approaches the issue differently.

The central question is generally not merely:

“Is this called a penalty?”

Instead, the court examines:

• the contractual provision;
• the nature of the obligation;
• whether it compensates for breach;
• the actual legal loss;
• statutory adjustment rules; and
• the circumstances of the breach.

Sky News Arabia illustrates the importance of first determining whether a payment is actually compensation for breach.

25. Liquidated Damages vs General Damages

Current Article 339 provides that where compensation is not determined by law or contract, the court assesses it according to the damage actually sustained.

26. Liquidated Damages and Actual Loss

Under the current regime, actual loss remains highly important.

But there is a subtle distinction:

Before breach

The parties may agree a predetermined compensation mechanism.

After breach

The court may need to determine whether statutory grounds exist for:

• reducing it;
• refusing it because of creditor fault;
• or allowing more than the agreed amount where fraud or gross fault is established.

Therefore, actual damage remains a central reference point, but Article 340 now provides a more detailed framework for its use.

27. Role of Experts

Construction disputes often require expert evidence.

Experts may investigate:

• project schedules;
• critical path;
• delay causes;
• extension-of-time entitlement;
• rental losses;
• additional costs;
• financial consequences;
• completion dates;
• employer-caused delay;
• contractor-caused delay.

The historical Dubai Cassation jurisprudence concerning Petitions 63 and 99 of 2005 illustrates the importance of establishing the actual elements of damage where adjustment is in issue.

28. Liquidated Damages and Good Faith

Good faith remains relevant to contractual performance.

But good faith does not automatically allow a court to ignore a clear contractual damages mechanism.

Panther demonstrates this point particularly clearly: the Court refused to use the general good-faith obligation as a means of contradicting the parties' agreed allocation of delay risk.

Thus:

Good faith regulates the exercise of contractual rights; it does not automatically destroy contractual certainty.

29. Liquidated Damages and Judicial Discretion

The modern UAE approach combines:

Contractual autonomy

The parties choose the amount.

Judicial supervision

The court can intervene under statutory conditions.

Evidence

The party seeking adjustment must establish the statutory basis.

Proportionality

The agreed compensation cannot operate independently of the statutory requirements governing excessive compensation, partial performance and creditor fault.

Exceptional protection

Fraud or gross fault may permit compensation above the agreed amount.

30. Mainland UAE vs DIFC

This distinction is essential.

Mainland UAE

Current disputes governed by the federal Civil Transactions Law should now be analysed principally through Article 340.

DIFC

DIFC has its own contractual and damages legislation.

For example, Panther applied the DIFC Contract Law's own liquidated-damages regime, under which reduction is addressed through the statutory concept of an amount being grossly excessive in relation to the harm.

Therefore:

A DIFC liquidated-damages case should not automatically be treated as a direct interpretation of current mainland Article 340.

It may nevertheless provide useful comparative reasoning.

31. Practical Example

Contract

Construction value: AED 50 million

Liquidated damages:

AED 100,000/day

Maximum:

10% of contract price

Delay:

100 days

Initial calculation:

AED 100,000 × 100 = AED 10 million

This reaches the contractual cap.

Contractor's defence

The contractor proves:

• 40 days resulted from employer-approved variations;
• 20 days resulted from employer-caused delay;
• substantial partial performance occurred;
• the agreed amount is excessive compared with the actual loss.

Under current Article 340, these facts may provide grounds for seeking reduction, subject to proof and the precise contractual/legal circumstances.

32. Practical Checklist for UAE Liquidated-Damages Claims

A court or practitioner should examine:

1. What law governs the contract?
2. Is it mainland UAE, DIFC, ADGM or another jurisdiction?
3. What exactly does the liquidated-damages clause say?
4. What event triggers the clause?
5. Did the triggering breach actually occur?
6. Was notice required?
7. Was notice properly given?
8. Was an extension of time available?
9. Who caused the delay?
10. Was there concurrent delay?
11. Was there partial performance?
12. Did the creditor contribute to the damage?
13. Is the agreed amount excessive?
14. What evidence establishes actual damage?
15. Is there fraud or gross fault?
16. Is there a contractual cap?
17. Was the contract terminated?
18. Did termination affect the damages clause?
19. Does the contract exclude additional damages?
20. Does current Article 340 apply?

33. Important Exam Points

Point 1

Liquidated damages are contractually predetermined compensation.

Point 2

The old Article 390 allowed courts to adjust agreed compensation to actual harm.

Point 3

The new Article 340 now governs agreed compensation under the 2025 Civil Transactions Law.

Point 4

The current law expressly permits reduction for excessiveness or partial performance.

Point 5

Creditor's contributory fault can lead to reduction or denial of compensation.

Point 6

Fraud or gross fault can permit compensation above the agreed amount.

Point 7

Parties cannot contract out of Article 340.

Point 8

The court must first determine whether a payment is genuinely compensation for breach.

Point 9

Concurrent delay and contractual extension-of-time provisions are highly important in construction disputes.

Point 10

DIFC cases must be distinguished from mainland UAE authorities because DIFC has its own statutory framework.

34. Case-Law Revision Table

The first three are historical mainland/Union authorities under the former Article 390 regime; the DIFC decisions arise under the DIFC legal framework and should not be presented as binding interpretations of current mainland Article 340.

35. Conclusion

The UAE's approach to liquidated damages seeks to balance contractual freedom with judicial control.

Under the former Article 390 regime, courts possessed broad authority to adjust agreed compensation to correspond with actual harm. The current Article 340 of the 2025 Civil Transactions Law, effective from 1 June 2026, provides a more detailed statutory framework: agreed compensation is recognised, but reduction may occur for excessive assessment, partial performance or creditor fault, while fraud or gross fault may justify compensation exceeding the agreed amount.

The most important formula for examination is:

Agreed compensation + statutory judicial supervision + proof of the statutory ground = UAE liquidated-damages regime.

In construction disputes, particular attention should be given to delay responsibility, extension of time, concurrent delay, contractual caps, partial performance, creditor contribution, actual loss and expert evidence.

The key conceptual distinction is also important:

UAE law does not simply ask whether a liquidated-damages clause is a “penalty”; it asks what the payment legally represents and whether the statutory conditions for enforcing or adjusting it have been satisfied.

Available next action: Create a downloadable PDF file here in this chat containing the findings and recommendations above