Civil Law and UAE — Proportionality in Contractual Sanctions

1. Introduction

Proportionality in contractual sanctions means that the financial or other contractual consequence imposed for breach should bear a reasonable relationship to the breach, the actual harm suffered, the extent of performance, and the circumstances of the parties.

In UAE civil law, this principle is particularly important for agreed compensation, liquidated damages, penalty clauses, termination consequences, and other contractual sanctions.

The current framework is the Federal Decree by Law No. 25 of 2025 promulgating the Civil Transactions Law, which entered into force on 1 June 2026 and replaced the former Federal Law No. 5 of 1985 Civil Transactions Law. (UAE Legislation)

The new law expressly expands judicial control over agreed compensation. The UAE Government explains that the court may reduce agreed compensation where it is excessive, where the obligation has been partly performed, or where the creditor contributed through its fault to the occurrence or increase of the damage. Where the creditor's fault completely absorbs the debtor's fault, the agreed compensation may be denied. The new law also allows compensation exceeding the agreed amount where fraud or gross fault by the debtor is established. (UAE Legislation)

2. Meaning of Contractual Sanctions

A contractual sanction is a consequence agreed or imposed under a contract following non-performance or improper performance.

Examples include:

delay damages;

agreed compensation;

liquidated damages;

contractual penalties;

termination payments;

forfeiture of deposits;

compensation for defective performance;

additional charges for delayed completion;

contractual indemnities.

The important point is that a contractual sanction should not automatically become a windfall for the innocent party.

The UAE approach attempts to balance:

Contractual freedom + certainty + compensation + fairness + proportionality

3. Legal Foundation of Proportionality

The current Civil Transactions Law places substantial importance on contractual consent while simultaneously requiring contracts to be interpreted in accordance with justice and good faith.

For example, Article 120 of the current law states that the basic principle of a contract is the parties' consent and what they have undertaken, while also requiring contractual interpretation to achieve justice and good faith between the parties. (UAE Legislation)

Therefore:

Freedom of contract does not necessarily mean freedom from judicial control over excessive contractual compensation.

The proportionality principle becomes particularly important where the agreed sanction is substantially greater than the consequences of the breach.

4. Agreed Compensation and Proportionality

An agreed-compensation clause allows the parties to determine in advance the amount payable following a specified breach.

For example:

“For every day of delay, the contractor shall pay AED 50,000.”

The advantage is commercial certainty.

The difficulty arises where:

the actual loss is AED 5,000 per day;

the contractual amount is AED 50,000 per day;

the project was substantially completed;

the employer contributed to the delay;

the breach caused little or no actual loss.

This is where proportionality becomes relevant.

5. Current UAE Approach

Under the new Civil Transactions Law, judicial supervision over agreed compensation has been strengthened.

The court can consider factors such as:

A. Excessiveness

If the agreed amount is disproportionately high compared with the consequences of the breach, reduction may be appropriate.

B. Partial performance

If the debtor substantially performed the obligation but failed in only a limited part, the contractual sanction may be reduced.

C. Creditor's contribution

If the creditor's own conduct contributed to the damage, the sanction may be reduced.

D. Creditor's dominant fault

Where the creditor's fault effectively absorbs the debtor's fault, the contractual compensation may not be awarded.

E. Fraud or gross fault

The new framework also recognises circumstances in which the creditor may recover more than the agreed amount where the debtor's fraud or gross fault is established. (UAE Legislation)

Thus proportionality operates in both directions.

6. Proportionality Is Not the Same as Automatic Invalidity

A major distinction should be made between UAE law and some common-law approaches.

Under UAE civil-law principles, an excessive contractual sanction is not necessarily treated simply as void.

The more characteristic remedy is judicial adjustment.

Therefore:

Excessive clause → judicial examination → assessment of circumstances → possible reduction

rather than necessarily:

Excessive clause → automatic invalidity

Historical UAE jurisprudence concerning former Article 390 strongly illustrates this approach.

7. Judicial Discretion

The court may examine:

the contractual clause;

the nature of the breached obligation;

seriousness of the breach;

actual consequences;

degree of performance;

conduct of the creditor;

conduct of the debtor;

causal relationship between breach and loss;

evidence produced by the parties;

whether the contractual amount remains commercially and legally proportionate.

The court should therefore distinguish between a legitimate compensation mechanism and a contractual mechanism producing an unjustified benefit.

8. Burden of Proof

Historically, UAE jurisprudence treated the agreed amount as an important contractual assessment of anticipated damage.

A frequently cited Union Supreme Court authority, Petition No. 370 of Judicial Year 20, explained that the incorporation of a penalty clause means the parties have contractually assessed the harm, and that the agreed compensation is presumed to correspond proportionately to the harm unless the debtor establishes grounds for challenging it. The case is quoted in Sky News Arabia FZ-LLC v Kassab Media FZ (LLC). (DIFC Courts)

Under the current Article 340 framework, the analysis should nevertheless be based on the new statutory grounds for judicial reduction rather than simply reproducing the former Article 390 wording.

9. Important Case Laws

Case 1 — Union Supreme Court, Petition No. 370 of Judicial Year 20

Principle

The Court treated a contractual penalty clause as a contractual assessment of the consequences of breach.

The creditor ordinarily benefits from the contractual assessment without having to establish the precise amount of damage from the beginning.

However, the debtor may challenge the agreed amount where the statutory requirements for judicial intervention are established.

Importance

This authority demonstrates the balance between:

contractual certainty ↔ judicial proportionality

The case is particularly important for understanding the historical foundation of UAE agreed-compensation jurisprudence. It is reported and quoted in Sky News Arabia FZ-LLC v Kassab Media FZ (LLC). (DIFC Courts)

Case 2 — Dubai Court of Cassation, Appeal No. 222 of 2005, Judgment of 19 June 2006

This is one of the frequently cited UAE authorities on agreed compensation.

Principle

The Court recognised that the agreed compensation was subject to judicial control and could be adjusted so that it corresponded with the actual damage.

Significance

The contractual figure does not necessarily become an untouchable amount merely because sophisticated commercial parties negotiated it.

The case therefore illustrates:

Contractual agreement ≠ immunity from proportionality review.

The case arose under the former Article 390 regime and should therefore be treated as historical authority when applying the current Article 340 framework. (ResearchGate)

Case 3 — Dubai Court of Cassation, Judgment No. 138/94

Facts/Context

The dispute concerned a construction-related delay between a contractor and subcontractor.

The contract contained a contractual provision dealing with damages for delay.

Principle

The Dubai Court of Cassation recognised judicial authority to reduce agreed damages where the actual loss was less than the contractual amount.

Importance

The case is significant because it demonstrates that UAE courts historically did not simply enforce every contractual “penalty” mechanically.

The substance and economic effect of the clause matter more than its label.

Thus:

Calling a provision a “penalty” does not automatically prevent judicial proportionality review.

The decision is widely cited in UAE construction and liquidated-damages discussions. (Al Tamimi & Company)

Case 4 — Abu Dhabi Court of Cassation, Appeal No. 941 of 2009

Principle

The case is frequently discussed in connection with the former Article 390 regime and the relationship between:

contractual freedom;

agreed compensation; and

proof of excessive compensation.

The jurisprudential approach placed substantial weight on the parties' contractual assessment and the burden resting upon the party challenging the agreed amount.

Significance

It demonstrates that proportionality does not mean that courts disregard the contract whenever actual loss is disputed.

Instead, the court must balance:

party autonomy + contractual evidence + statutory judicial control.

The case is therefore useful for understanding why UAE jurisprudence has sometimes been described as giving considerable weight to the agreed contractual amount. (ResearchGate)

Case 5 — Dubai Court of Cassation, Petitions Nos. 63 and 99 of 2005

These decisions are cited in UAE liquidated-damages literature concerning agreed compensation and assessment of actual loss.

Principle

The contractual provision is relevant to the assessment of compensation, but judicial examination may still focus upon the underlying circumstances and evidence concerning actual damage.

Importance

The cases demonstrate that proportionality is ultimately connected with the relationship between breach, causation and loss.

A party should therefore be prepared to produce evidence concerning:

actual financial loss;

delay;

additional expenditure;

lost use;

mitigation;

contribution to the loss.

They are historical authorities under the former Civil Code and should be read alongside the current Article 340 framework. (Lawgratis Mail)

Case 6 — Union Supreme Court, Judgment No. 412 of 2009

Principle

This authority is cited in UAE liquidated-damages analysis concerning the relationship between agreed compensation and the party challenging the amount.

The jurisprudential approach recognised the contractual assessment of damages while allowing the statutory mechanism for judicial adjustment where the relevant requirements were established.

Importance

The case reinforces an important proposition:

The existence of an agreed damages clause changes the evidentiary position, but does not necessarily eliminate judicial scrutiny.

This is particularly relevant in construction contracts where delay damages are agreed in advance. (Scribd)

Case 7 — Sky News Arabia FZ-LLC v Kassab Media FZ (LLC) [2018] DIFC CFI 067

Jurisdiction

DIFC Courts, applying UAE law to the relevant contractual issue.

Principle

The DIFC Court considered a defence based on Article 390 of the former UAE Civil Code.

The Court distinguished between an actual compensation provision and a payment obligation that represented contractual consideration rather than compensation for breach.

The Court quoted the Union Supreme Court's reasoning in Petition No. 370/20 concerning proportionality of agreed compensation. (DIFC Courts)

Importance

This case teaches an important classification rule:

Not every payment obligation following contractual non-performance is necessarily a contractual penalty.

The court must first identify the true legal nature and purpose of the clause.

10. Construction Contracts

Proportionality is particularly important in:

FIDIC contracts;

EPC contracts;

infrastructure projects;

real-estate development;

engineering contracts;

supply contracts.

Suppose:

Contract value = AED 100 million

and the contract provides:

Delay damages = AED 1 million per day.

The court may have to examine:

actual delay;

cause of delay;

employer-caused delay;

contractor-caused delay;

concurrent delay;

actual financial consequences;

mitigation;

extent of completed work;

contractual allocation of risk.

The contractual number is therefore highly relevant but is not necessarily the end of the legal analysis.

11. Partial Performance

Partial performance is particularly important under the current framework.

Example

A contractor agrees to construct:

100 units;

contractual compensation for non-performance = AED 20 million.

The contractor completes 95 units but fails to complete 5.

Applying proportionality requires consideration of whether enforcing the entire AED 20 million would be excessive in light of the substantial performance.

The court can therefore examine the degree of performance rather than treating breach as an all-or-nothing event.

This is one of the areas where the current law expressly expands judicial control. (UAE Legislation)

12. Creditor's Contribution to Damage

Proportionality also operates where the creditor contributes to the loss.

Example

An employer claims AED 10 million in contractual delay damages against a contractor.

However, evidence establishes that the employer:

delayed providing drawings;

failed to provide access;

changed specifications;

delayed approvals.

The court may examine whether the employer's conduct contributed to the delay and consequently reduce the contractual compensation.

This reflects the principle that a party should not obtain full contractual compensation for damage that its own conduct helped create.

The current law expressly recognises creditor fault as a basis for reduction. (UAE Legislation)

13. Fraud and Gross Fault

The proportionality principle should not be confused with a general limitation of liability.

The current law recognises a different position where the debtor's conduct involves fraud or gross fault.

In appropriate circumstances, the creditor can claim compensation exceeding the agreed amount where fraud or gross fault is established. (UAE Legislation)

Therefore:

Ordinary breach → agreed compensation subject to proportionality

but

Fraud/gross fault → possibility of compensation beyond agreed amount

This prevents a contractual ceiling from becoming a shield for seriously wrongful conduct.

14. Proportionality and Good Faith

Good faith is an important interpretive principle.

A party cannot necessarily rely on a contractual sanction in isolation from the surrounding circumstances.

The court can examine:

contractual purpose;

parties' conduct;

commercial context;

performance;

causation;

actual consequences.

The current Civil Transactions Law expressly provides that contracts should be interpreted in a manner achieving justice and good faith. (UAE Legislation)

15. Proportionality and Abuse of Rights

An extremely high contractual sanction may also raise broader questions of abuse of rights where the contractual mechanism is used in a manner inconsistent with the legitimate purpose for which the right exists.

For example:

A creditor suffers AED 100,000 loss but attempts to recover AED 10 million under a contractual sanction without a legally sufficient basis.

The issue is not simply:

“Was the clause signed?”

The additional question becomes:

“What does the applicable law permit the creditor to recover in the circumstances?”

16. Proportionality vs. Punishment

A contractual sanction may have a deterrent function.

For example:

“AED 50,000 for every day of delay.”

It may encourage timely performance.

But UAE civil law primarily treats agreed compensation through the framework of compensation for contractual harm, rather than simply allowing a private party to impose an unlimited punitive payment.

Consequently, proportionality limits the possibility that contractual sanctions become purely punitive and disconnected from the consequences of breach.

17. Proportionality Test

A useful examination framework is:

Step 1 — Is there a valid contractual clause?

Identify the agreed sanction.

Step 2 — What breach activates it?

Determine precisely what contractual event occurred.

Step 3 — What is the purpose of the clause?

Is it:

compensation?

security?

consideration?

reimbursement?

genuine contractual allocation of risk?

Step 4 — Was the obligation partially performed?

If yes, the degree of performance becomes relevant.

Step 5 — What damage resulted?

Establish the actual consequences.

Step 6 — Did the creditor contribute?

Examine whether creditor conduct caused or increased the damage.

Step 7 — Is the contractual amount excessive?

Compare the contractual sanction with the circumstances and consequences of the breach.

Step 8 — Is there fraud or gross fault?

If established, the statutory consequences may differ.

Step 9 — Apply judicial adjustment

The court may reduce the agreed amount where the statutory requirements are satisfied.

18. Important Distinction: Penalty Clause vs. Compensation Clause

19. Proportionality and Contractual Freedom

UAE law does not reject contractual freedom.

On the contrary, contractual consent remains the foundation of contractual obligations.

The principle is better expressed as:

The parties may allocate contractual risks, but statutory judicial control may prevent an agreed compensation mechanism from producing an outcome inconsistent with the applicable law.

This is why contractual drafting should not assume that every negotiated figure will necessarily be awarded in full.

20. Proportionality in Commercial Contracts

Sophisticated commercial parties should consider:

defining the triggering event precisely;

establishing a reasonable calculation methodology;

specifying whether the amount is per day, week or event;

addressing caps;

addressing extensions of time;

dealing with employer-caused delay;

dealing with concurrent delay;

providing mitigation obligations;

distinguishing compensation from consideration;

documenting actual losses;

maintaining contemporaneous records.

Good drafting reduces later disputes over proportionality.

21. Proportionality and Arbitration

The principle is also relevant in UAE-seated arbitration.

An arbitrator applying UAE substantive law may have to consider the statutory rules governing agreed compensation.

Therefore, simply stating:

“The parties agree that the amount shall never be reduced”

does not necessarily remove mandatory statutory judicial/arbitral control.

Historical UAE authorities recognised the ability to adjust agreed compensation notwithstanding contractual wording to the contrary. (Al Tamimi & Company)

22. Practical Example

Facts

A construction contract contains:

Contract price: AED 50 million

Completion period: 24 months

Delay compensation: AED 200,000/day

The contractor completes the project 30 days late.

Contractual claim:

30 × AED 200,000 = AED 6 million

But suppose:

15 days were caused by the employer;

contractor substantially completed the project;

actual proven loss was considerably lower;

employer failed to mitigate part of the loss.

The court does not necessarily treat AED 6 million as automatically payable.

It may examine:

Contractual amount → actual consequences → partial performance → creditor contribution → proportionality → statutory adjustment.

23. Key Legal Principles

Principle 1

Contractual sanctions are generally recognised as part of contractual risk allocation.

Principle 2

Contractual freedom does not necessarily exclude judicial control.

Principle 3

Excessive agreed compensation can be subject to reduction under the statutory framework.

Principle 4

Partial performance may justify reduction.

Principle 5

Creditor's contribution to damage may justify reduction.

Principle 6

The nature and purpose of the clause must be identified.

Principle 7

Actual damage remains highly relevant to proportionality.

Principle 8

Fraud or gross fault can justify recovery exceeding the agreed amount under the current law.

Principle 9

Historical Article 390 cases remain useful but must be distinguished from the current Article 340 framework.

Principle 10

The proportionality analysis is fact-sensitive.

24. Case Law Revision Table

The older cases above concern the former Civil Transactions Law/Article 390. They remain useful for understanding UAE jurisprudence but should not be cited as though their statutory wording were the current law. The current regime is governed by the 2025 Civil Transactions Law, effective from 1 June 2026. (UAE Legislation)

25. Conclusion

Proportionality in contractual sanctions under UAE civil law seeks to maintain a balance between contractual autonomy and protection against excessive contractual consequences.

The modern position can be summarised as:

Valid contractual sanction + genuine breach + causation + consideration of actual circumstances + proportionality + judicial control.

The current Civil Transactions Law strengthens this approach by expressly recognising judicial reduction where agreed compensation is excessive, where performance is partial, or where the creditor contributes to the damage. It also recognises the possibility of compensation exceeding the agreed amount in cases involving fraud or gross fault. (UAE Legislation)

Exam Formula

Contractual Sanction → Breach → Damage → Causation → Partial Performance → Creditor Contribution → Excessiveness → Judicial Adjustment → Fraud/Gross Fault Exception

In short: UAE law respects contractual sanctions, but proportionality prevents contractual compensation from operating independently of the legal and factual circumstances of the breach.