An exclusive remedies clause provides that a party’s remedy for breach of contract is restricted to the form of redress expressly prescribed in the contract to the exclusion of all other remedies that would otherwise be available at law. Such a clause means that a party’s rights and liabilities are codified in the contract.
Exclusive remedies clauses frequently arise in construction contracts in the UAE and often prove to be a hotly contested issue. This article is therefore to consider exclusive remedies clauses from a UAE law perspective and, by comparison, briefly sets out the common law position (from where the concept is derived).
The potential impact of an exclusive remedies clause
A typical exclusive remedies clause in a construction contract may read as follows:
“The Employer and the Contractor agree that their respective rights, obligations and liabilities as provided for in the Contract shall be exhaustive of the rights, obligations and liabilities of each of them to the other arising out of, under or in connection with the Contract or the Works. Accordingly, except as expressly provided for in the Contract, neither party shall be obligated or liable to the other in respect of damages or losses suffered by the other which arise out of, under or in connection with the Contract or the Works, whether by reason or in consequence of any breach of contract or of statutory duty or tortuous or negligent act or omission.”
Although it is customary for construction contracts to provide that specific remedies apply in certain circumstances (most notably in respect of liquidated damages in the event of delay and/or failure to satisfy certain performance criteria), a contractor is invariably required to discharge a multitude of other fundamental obligations and it is unusual for the contract to specify the remedy for a breach of each obligation.
Accordingly, the effect of a widely drafted exclusive remedies clause can, on the face of it, be dramatic as the contractor may be absolved from liability in the event of breach unless an express remedy is referred to in the contract that applies to the breach in question. Depending on the drafting, this could potentially lead to the employer being required to remedy big ticket items such as structural defects, at its own cost and expense.
Additionally, an employer could be deprived of compensation even if the contract specifies a particular and exclusive remedy for a particular breach if the remedy in question is unenforceable (perhaps on account of unclear drafting).
Position under UAE Law
While Article 258 of the UAE Civil Code provides that contractual provisions should be “given their true meaning” and the principle of freedom of contract generally prevails, Article 31 of the UAE Civil Code provides that this is only the position if a clause does not conflict with a mandatory provision of law.
As such and although much will turn on the relevant drafting, the following provisions place serious doubt over the enforceability of an exclusive remedy clause under UAE law:
It could also be argued that the use of an exclusive remedies clause to evade liability which would otherwise arise may result in unjust enrichment. This is contrary to Articles 318 and 319 of the Civil Code.
Position under Common Law
The situation regarding the enforceability of exclusive remedies clauses is different under the common law as the usual rules of interpretation apply to exclusive remedies clauses, meaning that the clause will be construed in accordance with its natural and ordinary meaning. As such, provided that an exclusive remedies clause is unambiguously drafted and validly incorporated into the contract, several judgments have confirmed that exclusive remedies clauses are, in principle, enforceable in common law jurisdictions and may therefore extinguish rights that would otherwise be available to the injured party.
The main exceptions to this rule arise if:
Notwithstanding the questions regarding the enforceability of exclusive remedies clauses in the UAE, we recommend that employers in the UAE always resist their inclusion on the off-chance that such a clause is held to be legitimate and to avoid unnecessary uncertainty. Similarly, contractors should find alternative ways to limit their contractual liability as they may be dangerously exposed if an exclusive remedies clause the contractor is seeking to rely upon is struck out.