Law and regulation of consequential damages clauses in the energy sector in the UAE

The term is not defined under UAE law and is not treated consistently as a legal concept. 

In this regard, UAE law distinguishes between direct and consequential (or indirect) harm.  Article 283 of UAE Federal Law No. 5/1985 (the “Civil Code”) provides that:

(1) Harm may be direct or consequential; 
(2) If the harm is direct, it must be unconditionally made good, and if it is consequential there must be a wrongful or deliberate element and the act must have led to the damage. 1 Although Article 283 relates to torts, the UAE Courts of Cassation have held that the tort provisions of the Civil Code are similarly applicable to damage caused by a breach of contract.

Accordingly, pursuant to the Civil Code, a party that causes direct harm or loss is liable whether they acted deliberately or recklessly.  However, a party that causes consequential harm or loss will only be liable if it can be shown that the party acted deliberately or wrongfully, and that those actions can be linked to the damage or loss.

Although the Civil Code appears to differentiate between direct and consequential loss, there is some uncertainty around the meaning of “consequential”, as it is not defined in the Code itself.

Exclusions for ‘consequential loss’ are widely used throughout the UAE, including in the energy and construction sectors.

Contractual provisions that exclude consequential loss are generally enforceable under UAE law, subject to some exceptions. Article 31 of the Civil Code provides that a mandatory provision of law takes precedence over a contractual stipulation.  Accordingly, and for completeness, certain types of damage cannot be excluded:

• personal harm or injury. Under UAE law, any contractual term purporting to exclude or limit liability for a harmful act to a person shall be void (Article 299 of the Civil Code);
• criminal liability;
• a harmful act i.e. a tort, including negligence (Article 296 of the Civil Code). This is a matter of public policy, to prevent people being less careful in what they do. Pursuant to Article 282 of the Civil Code, any harm done to another shall render the offender liable to make good the harm; and
• liability for fraud or “gross error” (Article 383 (2) of the Civil Code).

In addition, and in accordance with Article 880 of the Civil Code, construction contracts are subject to strict decennial liability for dangerous or structural defects that threaten a building’s structure. In this instance, any attempt to exclude or limit decennial liability will be void (Article 882 of the Civil Code).

Examples of the types of clauses from infrastructure contracts are:

Example 1:

No Party shall be liable to any other Party or Parties whether by way of indemnity or in contract or in tort for any indirect or consequential loss or damages or loss of profit, loss of use, loss of production or loss of contract or for any financial or economic loss whatever and howsoever caused.

Example 2:

Neither party shall be liable to the other for any indirect and consequential losses or damages including loss of business and/or loss of profit.

Example 3:

To the extent allowable under the law of the Subcontract, neither Party shall be liable to the other Party for loss of use of any Subcontract Works, loss of profit, loss of any contract, or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Subcontract other than under clause XX (Termination), clause XX (indemnities) and clause XX, provided that a liability to pay or allow delay damages shall not be considered as or be deemed to be liability for loss of profit, loss of any contract, or indirect or consequential loss or damage.

As set out in question 1 above, the UAE Civil Code does not provide a definition of ‘consequential loss’.

What is meant by ‘consequential loss’ when used in a contractual exclusion clause will then be a matter of contractual interpretation (to be applied at the discretion of the judge).  To that end:  

• Article 265 of the Civil Code states that if the wording of a contract is clear, it may not be departed from in order to ascertain the intentions of the parties.  The intention of the parties is ascertained subjectively (unlike common law systems).
• However, in the event there remains doubt as to the true construction or interpretation of the relevant clause, Article 266 of the Civil Code provides that any doubt is construed in favour of the debtor. This is itself problematic as there can be difficulties in ascertaining who the debtor is.   
• Accordingly, where contracting parties have expressly referred to consequential loss in an exclusion of liability clause, and clearly defined what the term includes, that definition is likely to be accepted by a court or tribunal applying UAE law unless it is considered to be unlawful or unfair. If there is debate as to the correct interpretation of the clause, the judge is likely to consider the subjective intention of the parties.
• Where consequential loss is not defined, a court applying UAE law will likely approach the interpretation of consequential loss in the manner set out in question 1.

It is therefore advisable to clearly define the term consequential loss to avoid potentially unintended interpretations.

The exceptions to enforceability in 2 (above) will also apply.

It is generally accepted in the UAE that the contract is the law of the parties and the courts will therefore look to uphold the contract unless it considered to be unlawful, unfair or conflicts with public policy, decency or a mandatory provision of UAE law (see Article 257 of the Civil Code). 

Therefore, contracting parties are entitled to list the heads of loss which a party is entitled to recover, including alongside consequential loss.

There is nothing in UAE law which says that the exclusion of consequential loss impacts on non-damages claims.