As the UAE comes to terms with the realities of the post-Lehmann world, an increasing number of property investors find themselves in default of contracts. The vast majority of these are skewed in favour of developers, having been entered into during a period of economic boom when demand far exceeded the supply.
Thus, buyers in default must increasingly look beyond the contract to the provisions of law in order to obtain relief. Although there are rumours that some consultants are guaranteeing results such as obtaining ‘money back’, purchasers should beware of such strangers bearing gifts.
Misrepresentation in the contract
The presence of misrepresentation in a contract is a factual inquiry. Article 185 of the Civil Code states that misrepresentation occurs when one of the parties deceives the other by means of trickery of word or deed, which leads the other to consent to what he would not have otherwise.
It may be noted that deliberate silence amounts to misrepresentation in instances where the person misled would not have entered into the contract, as provided for in Article 186.
The effect of misrepresentation, however, is slightly less clear. The better view is that misrepresentation makes a contract voidable, i.e., the party which has been misled, at its option, may choose to treat the contract as void.
Challenging forfeiture clauses
A principal concern of many, if not all, investors is that they will forfeit the amounts invested up to the point of default (or a portion thereof).
It is a standard provision of most property contracts that in the event of default by the purchaser, the seller has the right to terminate the contract and retain a specified percentage (generally between 10 to 50 per cent of the purchase price) of the sum paid up to that point. While the fixing of the amount of compensation in advance is a legitimate exercise of contractual freedom, it is nevertheless subject to limits. This is embodied in Article 390 of the Civil Code, the relevant portion of which reads: ‘The judge may in all cases, upon the application of either of the parties, vary such agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void’ (Article 390(2)).
Simply put, the law states that while it is possible for the parties to fix the amount of compensation in advance, the Court has the power to adjust that sum to reflect the actual loss which has been suffered.
Therefore, it is open to the seller to challenge the forfeiture of his money by the purchaser where it can be shown that either the former has not suffered a loss (i.e., made a profit or attained breakeven) or the seller has suffered a loss, but the loss suffered is less than the amount forfeited.
A double-edged sword
However, therein lies the problem — the above has to be proved, which is no easy task. Furthermore, Article 390 is a double-edged sword, for if the seller is able to show that he has suffered losses in excess of the sum provided for in the contract, the judge may increase the figure beyond the forfeited amount.
Thus, a careful examination of the circumstances of each case is warranted in an economy where property values have plummeted. Also, note that it is the judge who is empowered to make this adjustment, therefore the matter must necessarily be referred to the Court.
Note that for Dubai properties, Law No. 13 of 2008 has a material effect on the foregoing. However, the Law has been extensively discussed in our previous articles, and so reference should be made to such articles. Is the economic crisis an event of force majeure?
This is a frequent question posed by many investors, however, it is one for which there is no definitive answer. Article 273 of the Civil Code provides for the cancellation of contracts if force majeure supervenes, thereby making the performance of the contract impossible.
Article 274 goes on to provide for the effect of cancellation, which is the restoration of the parties to the positions in which they were prior to the formation of the contract, or in the event that such restoration is not possible, the payment of compensation.
There is no definitive answer to this question, however, an educated assessment suggests the chances of success of such an argument to be low. On the one hand, force majeure has fairly defined limits within which the economic crisis does not fit in well. Mass cancellation of contracts
On the other, a judge or arbitrator will be hesitant, and perhaps rightfully so, to deem the crisis an event of force majeure, as it will lead to the mass cancellation of contracts, resulting in a complete standstill and disarray of economic activity.
A provision of law not found in many other jurisdictions is Article 249 of the Civil Code. It provides that if ‘exceptional circumstances of a public nature which could not have been foreseen occur as result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss, it shall be permissible for the judge… to reduce the oppressive obligation to a reasonable level if justice so requires’.
While this may sound encouraging, the burden of proof of establishing this lies with the purchaser, and will prove difficult to discharge.
Time consuming exercises
The ultimate arbiters of a property contract will be a court of law, or where there is an arbitration clause, an arbitrator or a panel of arbitrators. However, both these forums tend to be time consuming, expensive and the outcomes cannot be predicted with any certainty.
Accordingly, it is advisable to attempt a negotiated solution either directly between the parties, or with the intervention of the relevant public authorities. While the arguments discussed above find their natural homes in court or in arbitration, nevertheless they can be strategically utilised to procure a favourable outcome for buyers.
The writer is a lawyer, professional engineer and a partner at the law firm of Afridi & Angell (firstname.lastname@example.org). This article was co-authored by Chatura Randeniya, Associate, Afridi & Angell.
Buyers’ common grouses
• Given the large number of investors with shared circumstances and a possible common cause of action against a common developer, enquiries on class-action suits are frequent
• Deliberate silence amounts to misrepresentation in instances where the person misled would not have entered into the contract
• A judge or arbitrator will be hesitant to deem the crisis an event of force majeure, as it will lead to the mass cancellation of contracts, resulting in a complete standstill and disarray of economic activity