Limitation of liability clauses - can they always be enforced?

Obligations and liabilities under UAE law arise out of contracts, unilateral acts, acts causing harm (torts), acts conferring benefits and the law itself. Many individuals and corporations frequently use and rely on limitation of liability clauses in all types of contracts in the United Arab Emirates and other jurisdictions without any consideration of the actual validity or enforceability of such clauses.

Contractual liability in the United Arab Emirates may arise only where valid contracts (including oral contracts) exist between the liable party and the party that has sustained the damages. In addition, the liable party must have violated one or more of its obligations under the contract and as a result of this violation, there must be a harm caused to the other party.

Contractual liability can therefore be established only if the following principles are met and cannot exist in the absence of any of these principles:

• There should be a wrongful act represented by non-performance, violation of the terms of a contract or delay in the performance of any of the obligations under the contract by the defaulting party.
• Damages must be sustained by the other party to the contract.
• There must be a reasonable connection between the wrongful act of the defaulting party (the violation of the obligations under the contract, which is usually determined by the court on a case-by-case basis) and the damages sustained by the other party to the contract. This means that the damages sustained must be as a result of violation of the terms of the contract.

The freedom of contract principle dictates that parties have the freedom to form contracts as they see fit, without government restriction, as they are the best judges of their own interest. The only stipulation is that any contract must not be illegal, immoral or violate the rules of public order. Based on this principle, contracting parties may agree to extend or limit their liabilities under any contract in several forms. This includes fixing the amount of compensation payable by the defaulting party in advance by making reference to the same either in the contract or in a subsequent agreement, before the damage is caused.

However, there are a few exemptions or limitations to the 'freedom of contract' rule on which many contracting parties attempt to rely, with a view to limiting their liabilities under all types of contract. These include the following:

• The court may, upon the application of either party, vary such limitation of liability clauses so as to make the compensation equal to the losses sustained, with any agreement to the contrary deemed invalid. However, if the parties to a contract agreed on the amount of the compensation payable to the party that sustained the damages after the violation of the contractual obligations, this would be considered as a new agreement or as a settlement. In such event, the court would not intervene because the agreement came after the violation and the damage.
• The court can intervene if it was proven that the impossibility of the performance arose out of an external cause in which the obligor played no part (eg, a natural disaster, unavoidable accident, force majeure, an act of a third party or an act of the party suffering loss). However, in this case the obligor would have to prove that this was due to an external cause. The determination of liability arising out of a default and the determination of whether one of the parties has violated or breached its contractual liabilities always fall under the courts' authority. However, the party that sustained damages as a result of breaching a contract is obliged to prove such breach and to prove the connection between the breach and the damages sustained.
• If the party that sustained damages participated by its own act in bringing about or aggravating the damages, then the court may reduce the level by which the act must be made good or order that it need not be made good.
• In the event of fraud or gross negligence on the obligor's part, the court may intervene.

Limitation of liability clauses will always remain subject to UAE law - the nature of some contracts makes them subject to specific regulations and they are therefore exempted from the general rules relating to the limitation of liability.

Although these clauses might be extremely important in certain contracts, the parties to a contract should seek proper advice on the validity or enforceability of these clauses in particular, and on the contracts in general, before using or relying on such clauses. In addition, the invalidity of such clauses could affect the validity of the entire contract if the clause violates the local laws or the rules of the public order and if the contract was entirely dependent on this clause.

For further information on this topic please contact Mojahed Al-Sebae at Taylor Wessing (Middle East) LLP by telephone (+9714 309 1000), fax (+9714 358 7732) or email (m.al-sebae@taylorwessing.com).