Clyde & Co's letter on liability in the UAE

Susie Abdel-Nabi discusses indemnity enforcement in the UAE

Susie Abdel-Nabi, Senior Associate of Clyde & Co., Dubai.
Susie Abdel-Nabi, Senior Associate of Clyde & Co., Dubai.

Are oil and gas indemnity and limitation of liability provisions enforceable in the UAE? This is a question which lawyers throughout the region are frquently asked to advise upon by oil and gas contractors and also oil companies.

As a general rule and in brief, UAE law permits parties on agreeing to the terms and conditions of any agreement which governs the relationship between those parties. This is, however, subject to certain mandatory provisions of law which means that, whilst the parties are free to enter into agreement on such terms as they see fit, this freedom is restricted in relation to certain situations.

There are a number of mandatory provisions of law in the UAE. Contracting parties cannot exclude liability in situations involving:
(1) Personal harm or injury. Under UAE Law, any contract provision purporting to provide exemption from liability for a harmful act [to a person] shall be void;
(2) Criminal liability;
(3) Contrary to Public Order;
(4) Contractor or architect liability (in respect of building design and construction of fixed installations). Any agreement that attempts to exempt a contractor or an architect from liability (or providing warranty for such works), or to limit such liability, shall be void; and
(5) Where there is evidence of wilful (deliberate) breach and/or gross negligence.

Therefore, in circumstances other than those listed above, indemnity and limitation of liability clauses are accepted under UAE law.

In the case of “knock for knock” clauses, depending on how they are drafted, they will either be considered limitations of liability or indemnity clauses which are a type of guarantee whereby a party accepts responsibility to compensate another party for losses caused by a third party (effectively guaranteeing the obligations of a third party).

In respect of liquidated damages, contracting parties also have the right to seek to fix (or cap) the amount of compensation they will be entitled to in circumstances of breach of agreement in advance of any loss or damage.

However, under UAE Law, the court may interfere in the parties’ agreement by increasing or decreasing the agreed cap on damages to ensure that any sums awarded are in line with the actual harm caused. Any agreement to the contrary is null and void.

Therefore, attempting to limit liability would not necessarily provide a party with a guaranteed limit of liability.

Overall, the UAE courts do recognise, uphold and enforce the provisions of any contract, including “knock for knock” limitations of liability and liquidated damages clauses, as long as these provisions are not in contravention of any mandatory provision of law (set out in points 1-5 above) and subject to the Court’s power of review of the adequacy of a liquidated damages clause.

In conclusion, from a commercial contracting perspective, it is never advisable to include a clause in a contract which attempts to exclude or limit liability if this will be in contradiction with a mandatory provision of law.

One of the the principal reasons for this is that if the contractual terms are inconsistent with mandatory provisions of UAE Law, the terms in question and, in extreme cases, the entire Agreement may be void or voidable.

Susie joined Clyde & Co in 2002 and qualified as a solicitor in 2005. She has worked in both Clyde & Co’s London and Dubai offices and is currently a Senior Associate based in Clyde & Co’s dispute resolution department in Dubai. Susie specialises in all aspects of dispute resolution and has particular expertise in energy related claims, corporate and banking fraud, property construction and foreign direct investment.

NOTE: This article, which was originally authored by Susie Abdel-Nabi, was incorrectly attributed this article to Nassif Boumalhab in the printed version of Issue 09, Volume 09, published in September 2013.

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