Author: afridi-angell

Liquidated damages have long constituted a fundamental mechanism for allocating contractual risk, particularly in construction and commercial agreements, by allowing parties to predetermine compensation payable in the event of breach. While the concept was recognised under the previous Civil Transactions Act of 1985 (the “Old Code”) the New Civil Transactions Act of 2025 (the “New Code“) introduces a more structured framework governing judicial intervention in agreed compensation clauses. Unlike the former provision Article 390 which granted courts unfettered discretionary authority to amend agreed compensation to reflect the actual loss suffered, Article 340 of the New Code adopts a more detailed structure that expressly regulates when and how judicial intervention may occur.

 

The revised framework seeks to balance contractual freedom with the need to prevent disproportionate or unjust compensation. As consequence, the enforceability of liquidated damages clauses may increasingly depend on considerations of proportionality and fairness, rather than the singular issue of whether the liquidated damages agreed upon reflect the actual loss suffered.

 

These developments are likely to have significant practical implications for contractors, employers, commercial parties, and legal practitioners, particularly in relation to contractual drafting, evidentiary preparation, dispute management, and litigation strategy.

 

What Has Changed?

 

Article 390 of the Old Code permitted contracting parties to agree in advance on the amount of compensation payable upon breach of contract. However, the same provision granted the courts (and arbitrators, where applicable) broad discretionary power to amend the agreed compensation if it did not correspond to the actual loss suffered. Any contractual attempt to exclude the court’s power was considered void. Importantly, the Old Code contained no guidance as to how the court may exercise its power.

 

While the New Code continues to recognise the validity of liquidated damages clauses, it introduces a more structured framework for judicial intervention by setting out guidelines for the exercise of the court’s power to adjust the quantum of damages in both upwards and downwards directions, depending on the circumstances of the case.

 

Pursuant to Articles 340 (2) and 340 (3), a debtor is entitled to seek a reduction of the agreed compensation in the following circumstances:

 

➢ where the agreed liquidated damages are exaggerated or disproportionate to the actual harm suffered;

 

➢ where the original obligation has been partially performed; and

 

➢ where the creditor, through its own fault, contributed to the damage or aggravated its consequences.

 

On the other hand, Article 340 (4) grants the creditor the right to seek an increase in the agreed compensation in the following circumstances:

 

➢ where the creditor proves that the debtor committed fraud; and

 

➢ where the creditor proves that the debtor committed gross fault.

 

Importantly, Article 340(4) permits the court to determine that no compensation is payable at all where the creditor’s own fault has completely absorbed the debtor’s fault. This reflects a more nuanced approach to the allocation of contractual responsibility and the assessment of damages.

 

Under the New Code, the issue of actual loss suffered may come into play where a debtor seeks to argue that the agreed liquidated damages are exaggerated or disproportionate and therefore should be reduced. However, it appears that a creditor may no longer seek an increase in the amount payable as liquidated damages on the grounds that the creditor in fact suffered greater actual loss.

 

Cassation Courts and the Future Interpretation of Article 340:

 

The practical application of Article 340 is likely to give rise to several important questions that remain open for interpretation. One of the principal questions is whether the situations expressly mentioned by the legislature regarding the debtor’s right to seek reduction of liquidated damages, and the creditors seek an increase in agreed compensation, are exhaustive and restrictive in nature, or whether the courts may extend such intervention by way of analogy or broader equitable considerations.

 

Equally significant is the question of how the courts will define and distinguish “gross fault” from ordinary fault, particularly given that the new provision expressly permits increasing liquidated damages only in cases involving fraud or gross fault. This also raises the question of how the courts may approach situations where the debtor’s conduct constitutes fault, negligence, or breach, but does not reach the threshold of gross fault? Whether ordinary fault alone may justify any form of judicial intervention beyond the agreed compensation remains unclear under the statutory text.

 

Another key issue is likely to be whether the courts will permit damages in excess of the actual loss suffered by a creditor, if it is able to prove fraud or gross fault by a debtor. It appears unlikely, given that Article 339 (which addresses the position where the parties have not agreed liquidated damages) retains the concept of the judge awarding damages to reflect the actual loss suffered, and as the concept of punitive damages is contrary to Sharia law.

 

Practical Takeaways: Dos and Don’ts

 

Dos

 

➢ Do clearly define the triggering events for liquidated damages, including delay, non-performance, or partial breach.

 

➢ Do ensure proportionality between the agreed compensation and the anticipated commercial loss, especially if you are the party likely to be claiming liquidated damages, as disproportionality is a ground for downward revision, and not upward revision.

 

➢ Do draft precise and unambiguous clauses to avoid disputes concerning interpretation.

 

Don’ts

 

➢ Do not treat liquidated damages as punitive penalties, as the Civil Code recognises compensation rather than punishment.

 

➢ Do not ignore evidentiary requirements, especially when seeking upward revision of agreed compensation. ■

The UAE’s new Civil Transactions Law (the New Code), came into force on 1 June 2026. The New Code makes a number of important changes to the law governing legal capacity, minority, and judicial protection. In particular, it lowers the age of majority, clarifies the age of discernment, expands the court’s supervisory role in relation to management of property, and introduces clearer consequences for transactions entered into without court-ordered judicial assistance.

 

1. What has changed

 

The New Code refines the legal framework governing legal capacity and the protection of minors and persons requiring assistance. The New Code:

 

➢ reduces the age of majority to 18 Gregorian years (Article 84);

 

➢ clarifies that a person below seven Gregorian years lacks discernment, and expressly fixes the age of discernment by reference to the Gregorian calendar (Article 85);

 

➢ permits the court, after inquiry, to authorise a discerning minor who has completed 15 Gregorian years to manage all or part of his property, either absolutely or subject to conditions (Article 149); and

 

➢ expands the judicial assistance regime to cover not only certain sensory disabilities but also illness requiring assistance, and provides that a transaction requiring judicial assistance is voidable if concluded without such assistance after the assistance decision has been issued (Article 158).

 

2. What the position was before

 

The now repealed Civil Code (the Old Civil Code) contains the core rules on legal capacity, but in a less precise and coordinated manner.

 

Previously, the age of majority was 21 Hijri (lunar) years. Now, its 18 Gregorian years. While a Hijri year is approximately 10 to 11 days shorter than a Gregorian year, the substantive change is the reduction of the age of majority to 18 Gregorian years. The New Code also adopts Gregorian precision in relation to discernment: a child below seven was previously treated as lacking discernment, but the New Code now expressly fixes that threshold at seven Gregorian years.

 

Similarly, under the Old Civil Code, a minor who had completed 18 Hijri years could, with authorisation, take delivery of all or part of his property for management. The New Code lowers that threshold to 15 Gregorian years, but balances that reduction by requiring court inquiry, permitting partial or conditional authorisation, and expressly empowering the court to require accounts and revoke or restrict the authorisation where appropriate.

 

While contracts of management concerning a minor’s property were recognised previously, the earlier provision did little more than state that such contracts were valid in accordance with the conditions determined by law. The New Code now identifies, in non-exhaustive terms, the types of contracts that are valid.

 

Finally, judicial assistance existed under the Old Civil Code, but in narrower terms. The earlier provision applied to persons unable to express their will due to specified conditions, and did not expressly state the consequence of a transaction concluded without the judicial assistant once assistance had been ordered. The New Code widens the class of protected persons and expressly provides that such a transaction is voidable if concluded without the court-ordered judicial assistance after the assistance decision has been issued.

 

3. Why the change matters

 

i. Contradicting certainty

 

These changes are not merely technical. They affect the threshold question of who can bind themselves contractually, and from what age.

 

The reduction of the age of majority to 18 Gregorian years and the express adoption of Gregorian thresholds for discernment bring the Civil Code into closer alignment with modern commercial practice and remove unnecessary uncertainty associated with older lunar-year formulations. In disputes involving younger contracting parties, age and capacity will now be assessed against a clearer and more familiar standard.

 

ii. Court supervision and controlled autonomy

 

The New Code does not simply liberalise the position of minors. It does so on a controlled basis.

 

Under Article 149, a discerning minor who has completed 15 Gregorian years may be authorised to manage all or part of his property, but only after the court has made the necessary inquiries.^[1] The court may grant absolute or restricted authority, require accounts, and later revoke or restrict that authority if the circumstances warrant it. That is a more active supervisory model than before, and allows the court to make a determination on a case-by-case basis, rather than adopt a ‘one size fits all’ approach. It also allows minors to participate in financial decision-making from an early stage, but only within a judicially supervised framework.

 

4. Practical takeaways

 

i. Do’s

 

➢ verify age and capacity at the outset of the transaction, particularly where the contracting party is young or may be acting with limited authority;

 

➢ inquire, obtain, and review any guardianship, trusteeship, management authorisation, or judicial assistance orders before contracting;

 

➢ confirm that the transaction falls within the scope of any authority granted by the court or by law; and

 

➢ undertake a capacity analysis and document carefully the basis on which the transaction is being entered into.

 

ii. Dont’s

 

➢ assume that a minor or protected person has general authority to manage property without checking the terms of the relevant authorisation;

 

➢ treat transactions by persons of diminished or impaired capacity as immune from challenge merely because they were concluded formally; or

 

➢ overlook the possibility that a transaction may be voidable because judicial assistance was required but not obtained.

 

iii. Issues to watch in the courts

 

The following issues are likely to require clarification through case law:

 

➢ what factors and evidence the courts will consider in deciding whether to grant, restrict, or revoke a minor’s authority to manage property;

 

➢ how broadly the courts will interpret the scope of court-granted management authorisation under Article 149;

 

➢ how narrowly or broadly the courts will interpret the distinction between ordinary acts of management and transactions requiring additional scrutiny or approval; and

 

➢ how the courts will approach transactions concluded without the participation of a judicial assistant after an assistance order has been made, including in cases where the transaction is challenged solely by reference to the absence of judicial assistance.

 

For businesses and their advisers, the practical message is clear. The New Code modernises the law on legal capacity, but does so by combining lower age thresholds with greater court supervision and clearer routes to challenge. Parties should therefore verify capacity, authority, and court-imposed limits with greater care before contracting. ■

 

 

 

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[1] The New Code does not specify the nature of inquiries.

Laws ordinarily have prospective effect. This principle protects legal certainty and allows parties to organise their affairs based on the law applicable at the relevant time. Article 27 of the UAE Constitution enshrines this principle in relation to criminal laws, but not with respect to civil and commercial laws.

 

As will be evident immediately below, the legislature may enact civil and commercial laws with retrospective effect. It is therefore necessary to examine whether any provisions of the Civil Transactions Act of 2025 (“the New Code”) may have this effect. This inBrief examines Articles 4, 6 and 7 of the New Code governing limitation periods and transitional arrangements.

 

As a general rule, the New Code does not have retrospective effect:

 

Article 4 (1), effective from 1 June 2026, establishes the general rule:

 

“The Law shall come into force from the date of its effectiveness and shall not apply to facts and transactions preceding it, unless the Law stipulates otherwise.”

 

Consequently, the New Code applies only to facts and transactions arising after 1 June 2026. Facts and transactions that occurred prior to this date continue to be subject to the Civil Transactions Act of 1985 (the “Old Code”), unless there is express legislation to the contrary.

 

However, time limits are affected:

 

Article 6 provides as follows:

 

(1) New provisions relating to the statute of limitations (non-hearing of a case due to lapse of time) shall apply from the time they come into force to any period that has not yet been completed.

 

(2) Old provisions shall apply to matters concerning the commencement, suspension, and interruption of the limitation period regarding the time prior to the new provisions coming into force.

 

Article 7 provides as follows:

 

“If a new provision sets a limitation period shorter than that prescribed by the old provision, the new period shall apply from the time the new provision comes into force, even if the old period had already commenced.

 

If the remaining portion of the period prescribed by the old law is shorter than the period set by the new provision, the limitation period shall expire upon the lapse of that remaining portion.”

 

The practical effects of Articles 6 and 7 may be summarized as follows:

 

➢ To the extent that the New Code establishes new time-limitation periods, they will come into immediate effect with respect to causes of action that arose prior to the New Code coming into effect, even where the limitation period under the New Code is shorter.

 

➢ If the time period prescribed under the Old Code is due to expire before the time period under the New Code does, then the matter will become time-barred on the earlier date.

 

➢ If any events occurred prior to the New Code coming to effect which effect the application of the time bar (for example, an event that stops or suspends the clock), then those will be assessed under the provisions of the Old Code. Any such events that occur on or after 1 June 2026 will be assessed under the provisions of the New Code.

 

Consequently, this means that parties who intend to commence litigation find themselves with less time than was initially contemplated to do so. Fortunately, however, the New Code for the most part maintains the limitation periods provided for in the Old Code. An important exception is Article 431 of the New Code, on claims relating to the fees and expenses of doctors, pharmacists, lawyers, engineers, experts, professors, teachers, and brokers. These claims were subject to a five-year limitation period under the Old Code. Article 431 of the New Code reduces this to three years.

 

For example, where an engineer’s fees became due on 1 January 2025, the claim would ordinarily have expired on 1 January 2030 under the Old Code. However, because the limitation period remained incomplete on 1 June 2026, the new three-year period applies from that date, resulting in the claim becoming time-barred on 1 June 2029.

 

A separate question arises where the New Code prescribes a longer limitation period than the Old Code. Unlike situations involving shorter limitation periods, Article 7 does not expressly address this scenario. One example is found in Article 510 of the New Code, which provides that an action for warranty against defects shall not be heard after one year from the day following delivery of the sold item, whereas Article 551 of the Old Code prescribed a limitation period of only six months.

 

Where the six-month period had commenced before 1 June 2026 but had not yet expired by that date, there is a credible argument that Article 6 supports the application of the new one-year limitation period from the date the New Code entered into force, on the basis that the limitation period remained incomplete. However, the New Code does not expressly address this situation, and the extent to which longer limitation periods may apply to pre-existing claims remains open to judicial interpretation. Until judicial guidance emerges, caution should be exercised when assessing the impact of the New Code on claims affected by extended limitation periods.

 

Conclusion

 

The transitional provisions demonstrate an attempt to balance legal certainty with the effective implementation of the New Code. While the general rule remains that legislation does not operate retrospectively, Articles 6 and 7 provide an important framework for determining how ongoing limitation periods are treated following the entry into force of the New Code. Parties assessing existing claims should therefore carefully consider the transitional provisions when evaluating limitation-related issues after 1 June 2026. ■