In Brief
- Under UAE Law, the general rule is that a party to a contract cannot elect to make a claim in tort (on the basis of tortious liability) for a breach of the contract. A contracting party must frame its claim on the basis of the provisions of the contract it is party to and the provisions governing contracts contained in the UAE Civil Transaction Law, Law No. 5 of 1985, as amended (the “UAE Civil Code”).
- To this general rule, there is a very important exception. If a party to a contract is guilty of: (a) fraud or (b) gross negligence or (c) a crime, then the counterparty may elect to sue the guilty party in tort.
- There are, potentially, at least four advantages for making a claim in tort, as opposed to a claim in contract. This Article will highlight these advantages.
The Right to Seek Remedy in Tort
The UAE Civil Code does not contain an explicit provision that permits a party to a contract to make a claim against the counterparty in tort, based on the commission of a harmful act. In the absence of an explicit enabling provision of law, the UAE courts have carved out an exception to the general rule in a number of judgments, which by consistent application, have now firmly established the exception as a rule of UAE law.
In one such case, the Federal Supreme Court eloquently declared:
“… if there is a contractual relationship particular to the parties to it and particular to the scope of it, and damage has been sustained by one of the contracting parties by reason of a breach by the other in the performance of the contract, then the provisions of the contract will apply … If, however, it is established that the act committed by one of the contracting parties leading to harm to the other is a criminal offence or if it amounts to fraud or gross error, then the party in breach will have been guilty of breach of a legal obligation, which will give rise to a liability in tort, because in no circumstances would he be allowed to commit such an act, whether a contracting party or not.” (Federal Supreme Court, Appeal No.’s 408 and 464, Judicial Year 29/2010, 20-10-2010 – Commercial).
The rationale for this exception is that a contracting party that is guilty of any of the aforesaid three types of aggravated and egregious acts/omissions ought not to enjoy the benefit of their liability being circumscribed by the limits applicable to damages for breach of contract. In contractual claims, foreseeability and remoteness of damage are relevant factors to entitlement and quantum of damages. In contrast, in respect of a tortious act/omission, all direct damage must be made good “unconditionally”, irrespective of foreseeability and intention. If damage is causative (often translated as “indirect”), it must be made good, if the harmful act was deliberate and wrongful (i.e. the perpetrator was not entitled to do the act), and in cases where damage resulting from a harmful act both direct and indirect, the rule of application to direct damage is applied (i.e. the perpetrator must make good both the direct and indirect damage unconditionally).
The exception carved out by the UAE courts is now settled law and the exception applies to all types of contracts, including commercial transactions.
Therefore, if a party to a contract has reasonable grounds to believe that an act/omission of the counterparty constitutes not only a breach of contract but also a crime or fraud or gross negligence[1], then that party may elect to make a claim in tort based on the counterparty’s harmful act/tort. The statutory principles governing torts (harmful acts) are codified in Articles 282-293 of the UAE Civil Code. Article 282 states:
“The perpetrator of any harm (idrar) … shall be bound to repair the prejudice” [or using terms as close to the text as possible, “shall render the doer thereof liable to make good the harm”].
Harmful acts include both acts and omissions. As stated by the Explanatory Memorandum of the UAE Civil Code:
“Harm [means…] an attempt to go beyond the limits at which one should stop, or to fail to reach that limit to which one should go in acting or in refraining from acting, in such a way as to cause harm. The law thus deals both with negative acts and with positive acts, and it includes both deliberate acts and mere negligence equally. Islamic jurisprudence recognizes both a positive error, and also a negative error, which [may be called] a default, or failure of care, and excess, and the like.”
Advantages of Framing a Claim on Tort (Based on Harmful Act)
There are legal and practical advantages for a party to a contract to seek remedies against a counterparty on the basis of tort. These advantages may be summarised as follows:
- It might be practically easier and often quicker for a claimant to prove the commissioning of a crime that also amounts to a breach of contract than to prove a breach of a contractual obligation under a contract. This is particularly the case if the crime/fraud is confirmed by a final judgment of a criminal court. In fact, in such cases the judge adjudicating the civil claim will be bound by the ruling of the criminal court in respect of fraud or crime. This is explicitly stated in Article 269 of the UAE Criminal Procedure Law which partly reads:
“…The conclusive criminal judgment rendered on the merits of a criminal action declaring innocence or guilt is res judicata [between the parties] and is binding on the civil courts”.
- Article 23 of the UAE Criminal Procedure Law entitles a party to a contract that is a victim of crime, including fraud to, at its discretion, bring a civil claim for damages before the criminal court examining the criminal matter. This is a departure from the mandatory rule that criminal courts do not have jurisdiction to rule on civil claims.
- Any provision in a contract aiming to limit liability for breach of contract, such as provisions providing for maximum caps of liability, is not enforceable if the act/omission complained of constitutes fraud, gross negligence or a crime.
- Last, but not least, the compensation awarded by a judge for torts/harmful acts may include foreseeable (expected) and unforeseeable (unexpected) damage, whereas (as consistently held by UAE courts), a claim for damages for breach of contract is limited to direct and foreseeable (expected) losses.
Conclusion
Framing a claim in tort in cases where an act or omission in breach of contract also constitutes a crime, gross negligence or fraud is an exception (carved out by the UAE courts) to the general rule that the parties to a contract must normally base their claims on the provisions and within the parameters of their contract.
The exception carved out by the UAE courts is of significance when a contracting party, that is guilty of egregious conduct, is seeking to take refuge behind contractual provisions limiting or excluding liability.
However, whether to exercise the exception, in appropriate cases, is a matter that must be considered carefully by the claimant’s lawyer based on all the facts and documentation to determine whether, it is in the interests of the claimant to submit a tortious claim.
For further information related to this article, please contact Dr Faraj Ahnish, Founding Partner of Hadef & Partners.