The Authority Of The Judge To Amend The Value Of The Penalty Clause: Analytical
Study According To The UAE Civil Transactions Law No. (5) Of 1985, As Amended By
The Federal Law No. (1) Of 1987
Dr. Enas Mohammad Alqodsi
College of Law – Abu Dhabi University – Abu Dhabi UAE
enas.alqodsi@adu.ac.ae
Article History: Received: 11 January 2021; Revised: 12 February 2021; Accepted: 27 March 2021; Published
online: 10 May 2021
Abstract: The parties to the contractual relationship may not leave the matter of assessing compensation to the
judge, as originally agreed, but rather an earlier or later agreement is entered into to estimate the amount of compensation in the event of a breach of the contractual obligation by either party, in what is known as the "penalty clause", which is considered as one of the most important means created by the Administration in order to reinforce the debtor's promises to meet his contractual obligations, although this condition may diverge from its primary goals, which lie in providing a guarantee and insurance for implementing the contractual obligations, and estimating the amount of compensation resulting from breach of these obligations, into a means of wrongfully enriching themselves at the expense of others, which prompted the UAE legislators to empower the judiciary to amend the provisions of the penalty clause so as to ensure the fair and balanced implementation of the contractual obligations in the context of contractual relationship .
In this research the Researcher has dealt with various jurisprudential and legal definitions of the penalty clause and the conditions for its falling due, and the authority of the judge in facing the penalty clause, by stating the extent of the judge’s power to reduce the amount of compensation specified in the penalty clause, as well as the cases of possible increase of the same.
The research has concluded with a number of results, most important of which are:
The penalty clause may play the role of a liability-limiting or restricting condition when the pre-determined agreed-upon amount of compensation falls short of the actual damage caused by non-implementation; besides, it may also play the role of haphazard assessment, that is where the agreed-upon compensation amount has been calculated, as far as possible, proportionally with the anticipated damage, as well as being a compensation in itself.
Keywords: Penalty Clause, Compensation, Authority of the Judge, Contractual Liability. 1. Introduction
The failure of the debtor to corporeally meet his obligation entails establishing the creditor’s title to seek compensation for that, whether the non-implementation is due to the debtor’s act or to his refusal to personally intervene, or because such corporeal implementation would overburden the debtor, though such non-implementation by the debtor would not cause serious damage to the creditor .
The creditor’s right to request compensation for corporeal non-implementation of the obligation is also established in the case of delay in its implementation or defective implementation, and just as compensation can be ordered by a court of law, it can also be mutually agreed upon between creditor and debtor, under the so-called "penalty clause" .
The penalty clause or the so-called consensual or out-of-court compensation first appeared in olden times in the Roman law, as a penalty or a special punishment for those who breached their obligations. This penalty clause was agreed upon between the parties to the contract in advance. The development of legal concepts, however, made clear that the penal nature of this condition is in contradiction to morality and justice, besides implying a suspected illicit usury, which ended with limiting the role of the penalty clause to its compensatory function. This type of compensation was called consensual compensation because agreeing on it was often embedded in the body of the contract which contained the original obligation. This agreement on compensation may be concluded following the signing of a contract in the form of an agreement to be attached to the original contract, provided that this agreement is concluded before the debtor breaches his obligation _ had it been concluded after such breach of obligation on the part of the debtor, it would have been considered a conciliation rather than an agreement compensation, as the reconciliation takes place after the occurrence of the damage with the aim of settling the dispute between the two opponents, and therefore it does not fall under the provisions of the agreed compensation .
Based on what has been mentioned, I would like to raise the following vexed question: "What are the conditions for the payability of a penalty clause, and to what extent can a judge amend it?"
To answer this question, I divided the research into two parts: the first part has dealt with the concept of the penalty clause, has touched on the identification of the penalty clause and then the terms of its payability were explained .
As for the second part, it has been devoted to discussing the extent to which the judge's authority can amend the penalty clause, so that the case of reducing the agreed compensation amount has been addressed, and then the case of the decision to increase that amount has been discussed.
The Researcher has followed the analytical approach by analyzing the texts contained in the UAE Civil Transactions Law, in addition to the historical approach through presenting the historical aspect of the emergence of the penalty clause.
1. The Concept of the Penalty Clause
The consensual compensation was called the penalty clause1, according to the French Civil Law, which called it
“La clause penale”, influenced by the Roman law which called it “Stipulatio poenae”2. From the Contract's
circumstances, implications and their counter obligations, the Parties to the contract could discover that the compensation determined by the judge's general awareness of breaching one of the obligations specified by the contract could not be fair to one or both of the contracting parties, so they may agree to determine the value of compensation in advance in accordance with what they deem fair from their mutual point of view; besides, the penalty clause may be multilateral, meaning that it can be conceivable that a penalty clause be stipulated for non-implementation, and another one for late implementation3.
And although, as a general rule, the penalty clause is to be included in the original contract, this does not prevent it from being included in a subsequent agreement, and it should be taken into account that, if the penalty clause was stipulated in the initial contract and was in the meantime overlooked in the final contract, then the latter will govern the relationship between the two parties, as this indicates that they have abandoned it and that they no more adhere to it4.
To clarify the concept of the penalty clause, I hereby set out to define it first, then, second, to explain the terms and conditions for its validity, as follows:
1.2. Definition of the Penalty Clause
The penalty clause has had several definitions5 which all agree in the end that it is: “A clause attached to the
contract in which the contracting parties determine the amount of compensation if one of them breaches his obligation, either by abstention or by late implementation, or to compensate for the damage resulting from defective implementation"6
As for the legal definition, the UAE legislator has defined it through the text of Article (390) of the UAE Civil Transactions Law, which provides that “the contracting parties may specify in advance the value of compensation by stipulating it in the current contract or in a subsequent agreement ...”
Having presented the jurisprudential and legal definitions of the penalty clause, we hereby discuss the terms and conditions of its validity, as follows:
1.3. Terms and conditions for a Penalty Clause validity:
Since the penalty clause is a clause in a contract in which the contracting parties estimate the amount of compensation resulting from breaching the original obligation contained in the contract, which is often the case; or a breach of a non-contractual obligation resulting, in some cases, from an illegal act.
1 And it is called the penalty clause because it is usually presented as a condition of the original contract
conditions, and the contracting parties are arranged as a penalty in the event that the debtor breaches his obligation, whether by failure to implement it or by delay in its implementation, but nothing prevents it from being an agreement to estimate the compensation due from a source other than the contract, such as an unlawful act. See: Abd Alrazzaq A. Alsanhouri, Mediator in Explaining Civil Law, House of Revival of Arab Heritage, Beirut, 1998, Part 2, P. 851 .
2 Ali A. Solaiman, Different Legal Perspectives, University Press Office, Algeria, 1994, P. 179 .
3 Ibrahim Al-Desouki Abu Al-Layl, The Penalty Clause in Contracts and Legal Actions According to the
Egyptian and Kuwaiti Laws, Dar Al-Nahda Al-Arabiya, Cairo, 1982, P. 15.
4 Tayeb Fayza, The Judge's Authority to Amend the Contract in the Formation and Implementation Stages,
Doctoral Thesis in Law - Specialization in Private Law - Faculty of Law and Political Science at Abdel Hamid Ibn Badis University, Mostaganem, 2018-2019, P. 268.
5 For more definitions that were said about the penalty clause, see: Anaad Ihsan, Consensual Compensation
(Penalty Clause), Master Thesis in Law - Specialization Contracts and Responsibility, Faculty of Law and Political Science - University of Blida 2, 2014/2015, P. 24 and following.
6 Ghasaq K. Ibrahim, Civil Liability Emerging in the Informatics Framework Contract, Arab Center for
The terms and conditions for a Penalty Clause validity as compensation set by the contracting parties in advance are the terms and conditions for establishing civil liability in general, these conditions being linked to the debtor making a mistake, damage befalling the creditor, and a causal relationship connecting the error to the damage, in addition to the condition of giving warnings.
There is no doubt that these conditions are necessary and required by the idea of the penalty clause itself as a contractual clause aimed at ensuring the implementation of the original commitment as agreed, and regardless of the source of that obligation. The jurisprudence also approves of these conditions because the penalty clause is not just an alternative that can replace compensation, but rather it is an agreed-upon compensation.7
We can examine the conditions of the penalty clause validity as follows:
1. The condition of error: Although the jurisprudence has given differed definitions of the concept error, yet the prevalent opinion is that error is a deviation from normal behavior of a man, with the concerned person knowledge of that8
As a general rule, it is the responsibility of the creditor to prove the debtor’s error, whether the obligation is contractual or non-contractual so long as the obligation is within the sphere of the error-making responsibility, but there is a reason for commutation in the field of contractual obligations once the debtor’s commitment was aimed at achieving a result which the creditor contents himself with proving unfulfilled, as such non-fulfillment presupposes the error of the debtor, who should, following proper procedures, prove the existence of an outside cause in order to exonerate himself.
But if the debtor’s obligation is one of sheer paying attention, then the creditor must prove the debtor’s fault that resulted in delay or failure to implement the obligation; that is, to prove the debtor’s negligence that should be proven in every possible method, being a material occurrence.
The burden of proof is also transferred to the debtor, by trying to prove that he has exerted the necessary care, which is the care of the normal man in the same circumstances, but if the implementation of the obligation has made it impossible to satisfy the creditor, due to an outside cause beyond the control of the debtor, the penalty clause in this case may be waivered except in the event that the two contracting parties have agreed that the consensual compensation becomes payable despite the impossibility of implementation, which is an intensification of liability according to the provisions of the first paragraph of Article (383) of the UAE Civil Transactions Law, which provides that “if the debtor is required to preserve a thing, manage it, or exercise caution when carrying out his commitment, he will be considered to have fulfilled his obligation if he exerts, when implementing it, all the care that any ordinary person would exert, even though the intended purpose is not achieved, unless otherwise stipulated by law or by the said Agreement".
The text makes clear to us that the Emirati legislator has approved the agreement that, for the debtor to fulfill his obligation
he is required to work harder and pay more attention, or no less than, the average person, which implies a modification of liability either by commutation or intensification, as understood by the text of Article (296), according to which the Emirati legislator has not permitted the agreement to amend the provisions of responsibility for the harmful act, as, by the same token, it is inferred that agreement to amend the provisions of contractual liability is permissible 9.
Finally, we point out that if the debtor makes no error, he subsequently assumes no responsibility, and the agreed compensation is not payable anymore.
2. The condition of damage: The damage is considered a basic element for the establishment of liability, which is harm caused to the injured person as a result of a mistake attributable to the debtor in general, be it material or immaterial, and since the prevailing rule is that there is no compensation without damage, which is a prerequisite for the validity of the penalty clause. The judge has wide discretionary powers regarding this condition, according to the severity of the damage; moreover, the UAE Civil Transactions Law has also followed suit. After this law had approved in the first paragraph of Article (390) the validity of the penalty clause, the second paragraph stipulated that: "the judge may in all cases and based on the request of either party amend this agreement in a way that makes the evaluation equal to the damage, with every agreement to the contrary becoming null and void." It becomes apparent from the text that the existence of the penalty clause does not prevent the judge from exercising his usual powers to assess compensation that he enjoys in the absence of this condition, but he cannot exercise this power except at the request of one of the parties.
7Abdel Moneim Albadrawi, The General Theory of Obligations, a comparative study in the Lebanese
Obligations Law and Egyptian Civil Law, Printing and Publishing House, Beirut, 1968, P. 98.
8 Mohammed S. Alsaadi, Explanation of the Algerian Civil Law, Sources of Commitment - The Legal Case, Dar
Al Hoda, Algeria, 2nd Edition, 2004, P. 27, 28.
9 Iyad M. I. Jad Al Haq: Voluntary Sources in the UAE Civil Transactions Law (Contract and Solitary
Thereupon, the judge may, upon the debtor’s request, reduce the amount of compensation to make it equal to the damage, or he may not award compensation if there is no damage, and he may, upon the creditor’s request, increase the amount of compensation to make it equal to the amount of the damage10.
The basis of the penalty clause is that it be applied in terms of the contractual liability, according to Article
(390) of the UAE Civil Transactions Law, that is the contracting parties should agree in advance and in writing
to the compensation. As for the liability for dereliction, Article (296) of the UAE Civil Transactions Law stipulates that “it is null and void each condition that releases anybody from their liability for damage" . It can be said, based on this, that the penalty clause that limits liability for dereliction is null. The agreement on compensation cannot be conceived except after the occurrence of the damaging act, given that the person responsible for the damage does not know the injured except after the occurrence of the damage, in addition to the fact that law is the source of this responsibility, and therefore provisions of the law may not be broken because they are part of the public order.
And although the general rules of the contractual liability require the creditor to take the brunt of proving the damage he claims and its extent so that he may be eligible of being awarded a judgment for the agreed compensation, providing for a penalty clause for the debtor's non-implementation of his obligation or his delay in implementing it would relieve the creditor of the burden and extent of proving the damage, which means that such burden of proving the damage is transferred from creditor to debtor on account of the penalty clause11.
With the existence of this penalty clause and equally to the same extent covered by the agreed amount it is assumed that damage will occur although this legal presumption is capable of proving the opposite, and, as such, the debtor may prove that the creditor has not suffered any damage in order to avoid liability12 or prove that the
damage he suffered was not so extensive as to deserve the compensation for the agreement stipulated in the contract13.
In addition to the need to prove the causal relationship between error and damage, which I am going to discuss hereunder:
3. The Causal Relationship between Error and Damage: The two pillars of error and damage should not be sufficient to make the agreed compensation payable _ a third pillar should be present i.e. the causal relationship between them, because the lack of the latter is the same as the lack of any element of the compensation validity in general.
The debtor can deny his responsibility by proving the external cause, thus severing the causal relationship between the error and the damage, hence there will be no enforcement of the penalty clause, which is included in the text of Article (287) of the UAE Civil Transactions Law that “If the person proves that the damage was caused by an external cause beyond his control such as a celestial blight, a sudden accident, force majeure, or the action of others, or the act of the affected person himself, the debtor becomes unbound by the guarantee unless the law or agreement provides otherwise".
The external cause that breaks the causal link between error and damage is every matter that makes the execution of obligations impossible or cause harm to the creditor and that is not attributable to the debtor, which is either an occurrence that is not attributable to anybody; rather to "force majeure", or it could be the act of the creditor himself, or the act of others.
10 In this regard, the Federal Supreme Court says that what was stated in Article (390) to the effect that the
contracting parties' determining of the amount of compensation in the contract concluded between them makes the damage a reality in their estimation, so the creditor is not commissioned to prove it, and it is assumed that the amount of compensation agreed upon is proportional to the damage caused to the debtor, The judge shall adhere to this assessment and implement it unless the debtor proves that it is not proportionate to the damage. (Appeal No. 264 of 2011 Civil hearing 1/14/2011.
11 Accordingly, a ruling has been received by the Federal Supreme Court that determines the elements of
damage included in the calculation of compensation is one of the issues of law that are subject to the control of the Court of Cassation, contrary to the assessment of compensation that the trial court is entitled to when it has indicated the elements of damage and there is no text in the law or agreement that obliges it to follow certain criteria in this assessment and established (Appeal No. 115 of 2004 session 5/18/2004)
12 Accordingly, a ruling was received by the Federal Supreme Court that the assessment of compensation for
damages is one of the substantive issues that the trial court has jurisdiction over when its assessment is valid in light of the circumstances of the incident and is based on acceptable reasons. (Appeal No. 809 year 2004, session 30/6/2004.
13 Abd Alsameea A. Abu Alkhair, The provisions of compliance in the UAE Civil Transactions Law, a
comparative study of Islamic jurisprudence, Publishing House, United Arab Emirates University Press, 2002 Edition, P. 252.
Even if the creditor succeeds in proving the debtor's liability, this would not be sufficient to make the creditor eligible for the compensation specified in the penalty clause: he ought to send him a warning as a general rule, which I am going to discuss hereinafter:
4. The Warning Clause: For the penalty clause to be valid, the creditor must give notice to the debtor as appropriate, which was stated in the text of Article (387) of the UAE Civil Transactions Law, which provides that “Compensation can be payable only after the debtor has been warned, unless otherwise stated by the law or the contract. "14
And as the compensation payability in that case is based on the debtor's failure to fulfill his obligation or on his delay in implementing it, that is it is based on a contractual error, there is no excuse here for not sending a warning.
The debtor must insist that the creditor does not send him a warning, and as he does not do that before commencement, his right is automatically forfeited, and it may not be raised once again before the Court of Cassation or the Federal Supreme Court.
It should be noted in this regard that entering the penalty clause in the body of the contract or in a subsequent agreement is not considered an explicit or implicit agreement to relieve the creditor of the duty of warning the debtor, and it should also be noted that the invalidity of the penalty clause for whatever reason does not preclude the judge from awarding compensation following proper procedures, even if the amount was greater than the amount already declared null and void by the penalty clause.15.
2. The Judge’s Authority to Amend the Penalty Clause
In application of the principle of the authority of the will, when the conditions are fulfilled for the amount of compensation agreed upon between the two parties in advance, it becomes binding upon the contracting parties and the judge, and the latter must decide that the compensation-obligated debtor should pay exactly the amount agreed upon, no more, no less, irrespective of the amount of damage that befell the creditor, because the contracting parties wanted, by their agreement, to avoid any disputes that may arise from the process of estimating the amount of compensation for damage resulting from non- implementation or delay of the agreement16.
However, in certain cases, the legislator has permitted the judge to amend the penalty clause by decreasing or increasing, and this authority is granted to the judge by the public order and every agreement otherwise is null, as Article (390), Paragraph (2) states that “the judge may in all cases, based on the request of one of the parties, amend this agreement in a way that will make the estimated amount equal to the damage, with any agreement to the contrary being null and void".
Consequently, the text did not make agreement on the penalty clause a basis for its validity except in the case of failure to prove anything that is contrary to the fact that the value of the penalty clause is equal to the damage. Yet, if one of the parties proves that the damage is less or more than the value of the penalty clause, the judge then will have the authority to reduce or increase its value, and consequently the damage in both cases of reduction or increase shall be the basis for adherence to the penalty clause.
Accordingly, I will (first) discuss the judge’s authority to reduce the penalty clause, and then the judge’s authority to increase the penalty clause (Second).
2.2. The Judge's Authority to Reduce the Penalty Clause
We mentioned before that the second paragraph of Article (390) of the UAE Civil Transactions Law has made the amount of damage caused to the creditor a basis for considering the reduction or increase of the penalty clause value.
If it turns out that the damage that occurred was not as extensive as expected by the two parties, and that their assessment was exaggerated, then the matter can be attributed to either a miscalculation by the two parties or duress experienced by the debtor, which made him accept a condition that he knew in advance to be unfair, either through the creditor’s pressure, or on impulse and in haste; in all cases the penalty clause should be commuted to an extent commensurate with the damage17.
14 It was stipulated by various comparative laws. Article 218 Egyptian civilians referred to it, Article 267
Kuwaiti civilians, Article 269 Tunisian civilians, Article 256 Iraqi civilians, 253 Lebanese civilians and others- Mohammed S. Alsaadi, clearly explained in the explanation of the Algerian civil law, previous reference, P. 52.
15 Mohammed A. Zahra in notes on the provisions of obligation in light of the Civil Transactions Law of the
United Arab Emirates, ed. 1999, P. 346.
16 Mohammed A. Albakri, The New Civil Law, Sources of Commitment - The Effects of Commitment, Dar
Mahmoud, Cairo, 1997, Volume 3, P.506.
The basic principle is that the existence of the penalty clause is a presumption that the agreed compensation is proportional to the damage. If the debtor claims that the damage is excessive, he will undertake to prove this by all means of proof because it is a tangible incident18, besides, the reduction shall be proportional to the damage,
and shall not necessarily be equal to it, that is, the estimation of the compensation that offsets the damage is a purely discretionary matter, whether it is related to the will of the parties, or the work of the judge, and it is not a simple arithmetic problem in which many people can reach a single result that is equal to the actual damage done, but is proportional to the damage19, that is, the judge reduces the compensation to a reasonable extent and
not to a level equaling the damage.
Also, in the event that the debtor performs part of his original commitment, it is fair that the debtor does
not pay all the amount agreed upon in the penalty clause, as long as the obligation has been partially implemented, thus the judge will have honoured the will of the contracting parties if he reduces the penalty clause in proportion to what the debtor has fulfilled of his obligation __ a concept based by Jurisprudence on the idea of respecting the will of contractors20.
The reduction is executed on the basis of the estimated amount in the penalty clause in the ratio of what has been fulfilled of the obligation, meaning that the judge reduces the agreed amount to the extent that is commensurate with the remaining part without implementation of the original obligation, with the burden of proving the partial implementation falling on the debtor, and in this case his judgment is not subject to the control of the Supreme Court as a matter of reality21.
One demerit of the Emirati legislator lies in not setting a standard for reducing the amount of the penalty clause in the event of partial implementation of the obligation22, which is the contrary of what was stated in the text of
Article (1231-5) of the French Civil Code, which holds that the reduction is not the percentage of what has been implemented of the obligation, but rather, in the extent of interest achieved by the partial execution to the benefit of the creditor, which embodies justice, and is closer to the truth in the interpretation of the intent of contractors23.
We note here that the reduction should be within the limits of the benefit received by the creditor from partial execution, as the part that was executed might not have achieved a significant benefit for the creditor, or that the most important thing for the creditor is the implementation of the remaining unimplemented part and that some implemented parts are more important than others.
2.3. The Judge’s Authority in increasing the Penalty Clause
The penalty clause in this case plays a part in commuting the liability of the debtor, according to the second paragraph of Article (390) of the UAE Civil Transactions Law. The judge may increase the value of the penalty clause based on the creditor’s request when the latter proves that the damage he sustained outweighs the value stipulated in the penalty clause24.
Consequently, the UAE Civil Transactions Law does not consider the amount stipulated in the penalty clause as representing the maximum compensation. Rather, it authorizes the judge to decide for that increase if the creditor proves that the damage caused to him outweighs the value provided for in the penalty clause whether this increased damage befalling the creditor is due to the debtor’s fraud or mistake, or attributable to
18 Mahmoud G. Zaki, the Problems of Civil Liability, Dar Al Nahda Al Arabiya, Egypt, 1978, P. 212.
19 Ismail Ghanem, General Theory of Commitment, Evidence and Provisions of Commitment, Abdullah Wahba
Library, Egypt, 1967, Part 2, Item 50, P. 125.
20 Mohammed S. Abu Saad, previous reference, P. 220.
21 Faris Abu Bakr, The Penalty Clause and the Power of the Judge to Amend it, Master’s Memorandum in Legal
Sciences, Faculty of Law and Political Science, Haji Lakhdar University Batna, 2013/2014, P. 84-85.
22 Bornan Aleid, Judicial Supervision of the Penalty Clause, Article in the Journal of Legal and Social Sciences,
Zayyan Ashour University, Djelfa, Issue 05, P.92.
23 Mohammed S. Abu Assad, previous reference, P. 223.
24 It was ruled that “it is decided that the penalty condition stipulated in Article 390, civil transactions, is a
consensual compensation ... and that the contracting parties may specify in advance the value of this compensation by stipulating it in the contract or in a subsequent agreement, and that this condition is fulfilled that makes the damage fall into the discretion of the contracting parties, so it does not cost the creditor. By proving it because its presence establishes an inconclusive presumption of the occurrence of the damage, and the debtor in this case has to prove that the damage demanded for compensation has not occurred, and the judge may reduce the amount of the agreement compensation if the debtor insists that the amount of compensation is exaggerated to a large degree, "Federal Supreme Federal 6 June 2000 Al-Taanan 610 for the year 20 BC and 7 for the year 21 BC. Q22 A. 3,
circumstances beyond the control of the debtor. The provision never restricts the judge’s authority to decide for that increase25
Here it should be noted that the Emirati legislator does not specify the cases in which the amount of the penalty clause may be increased by the judge at the request of the creditor, as the judge is granted free hand on this issue, as was the case with reducing the value of the penalty clause, which is clear from the above-mentioned text of Article (390) Transactions, United Arab Emirates, Paragraph (2). This enables the creditor to resort to the judiciary demanding an increase in the value of compensation to be equal to the damage inflicted in every case the amount of the penalty clause does not match the actual damage. In this regard, the judiciary has discretionary authority: if the creditor is able, for example, to prove that the breach of the original obligation was due to the debtor’s fraud or a gross mistake made by him, the judge has the power in this case to increase the value of the penalty clause _ an application of the text of Article (383) Paragraph (2) of the UAE Civil Transactions Law which states that “In all cases the debtor remains accountable for the cheating or serious errors he commits". Moreover, if the creditor is able to prove that the agreed compensation includes an indication to exemption or relief of responsibility for the unlawful act, then the judge has the authority to increase the amount of the consensual compensation in this case as well, in accordance with the provisions of Article (296) of the UAE Civil Transactions Law.
We hereby criticize the position of the Emirati legislator in giving the judge absolute authority to amend, at the request of one of the parties, the value of the penalty clause in all cases in which this compensation is not equal to the amount of damage caused, on the grounds that this could lead to the cancellation of every role played by the penalty clause, without achieving the desired required practical benefit. So what is the point of legalising the penalty clause in the first paragraph of Article (390) of the UAE Civil Transactions Law, which gives the contracting parties an agreement in advance to determine the value of the security in the contract or in a subsequent agreement? Perhaps this matter means that the door remains wide open for the contracting parties to resort to the judiciary and seek appeal against the agreed compensation.
The Emirati legislator is to be also criticized for stipulating equality between the guarantee and the damage, with regard to the value of the penalty clause, and the Emirati legislator had better adopt the amendment of the penalty clause to be proportional to the damage.
It is worth noting that giving the judge absolute authority to amend the value of the penalty clause is not to say that he is wrong all the way: On the one hand, the judge exerts this authority of his only if requested by the disputants, and on the other hand the penalty clause can be beneficial to the creditor because it relieves him of the burden of proof and passes it on to the debtor who could claim that the damage has not occurred or that the agreed compensation is exaggerated.
2.4. Penalty Clause and Public Order
Given the importance of the penalty clause in practical and economic life, the Emirati legislator has organized his provisions according to the considerations of public order, as the judge’s authority of amending the value of the penalty clause, whether by decrease or increase, is an authority related to public order. Consequently any agreement shall be null and void that excludes the judge’s authority in this respect, according to provisions of Article (390) Paragraph (2) of the UAE Civil Transactions Law, which are:
1. The Emirati legislator has stipulated the occurrence of damage, and considered it a cornerstone of the penalty clause value payability, meaning that if the debtor delays the implementation of his commitment associated with a penalty clause, but does not harm the creditor in the process, then the penalty clause should not necessarily be enforced, because this matter is linked to the public order. Consequently, if the contracting parties agreed on the validity of the penalty clause value even if the creditor was not harmed, the debtor can in this case turn to the court, claiming that no damage has occurred, with the intention of evading payment of the amount of the penalty clause.
2. Agreeing to exempt or reduce liability in the case in which the debtor commits fraud or error, is considered null, as is clear from the text of Article (383) Paragraph (2) where it says, “In all cases, the debtor remains responsible for any fraud or error that he incurs. Particle."
3. The UAE legislator has granted the court the authority to intervene to modify the value of the penalty clause, whether by increase or decrease, based on the request of one of the contracting parties, to be equal to the amount of damage actually caused, and it is considered public order, and therefore any agreement that includes the exclusion of the court’s authority, whether by increase or decrease, is considered null as stated in Article (390) Paragraph (2) by saying, "... Any agreement that contradicts this shall be null and void."
25 This is in contrast to the Egyptian law, which restricted the judge’s authority to increase the penalty clause on
the case if the creditor proves that the debtor has committed fraud or a serious mistake that entails damage to the creditor exceeding the value of the agreed condition (Article 225 Egyptian Civil)
Conclusion:
The Emirati legislator, on the model of the other comparative legislations, and in application of the principle of the authority of the will, has established the ability of the parties to estimate in advance the amount of compensation that the creditor is entitled to if the debtor breaches his obligation in the future, whether this breach is due to delay or to non-implementation of the obligation, be it in the contract or in a subsequent agreement. If the agreement occurred after the damage, then we are not dealing with a penalty clause, but rather a with a conciliation contract, yet the Emirati legislator did not leave it unchecked, but kept it under control in order to avoid the arbitrariness of the powerful party, so that the judge might add either an increase or a decrease in order to figure out an appropriate estimate of this damage.
I finally came up with a host of results:
1. The penalty clause may play the role of a limiting or restricting condition of liability, when the amount of the
agreed pre-determined compensation is less than the actual amount of damage resulting from non-implementation.
2. The penalty clause may play the role of a penalty assessment, and this is in the case in which the amount of the
agreed compensation has been measured as far as possible on the basis of the anticipated damage.
3. The penalty clause plays the role of compensation, which is a precautionary means that is used only in the
absence of tangible implementation; that is, when it is impossible to fulfill the original obligation for a reason due to the debtor’s error.
4. It spares the contractors the lengthy and complicated judicial procedures as well as the expenses. 5. The judge cannot adjust the amount of compensation agreed in the contract on his own.
At the end of the Research, I suggest the following:
1. The UAE legislator should restrict the judge’s authority through amending the consensual compensation,
whether by increase or decrease, because giving free hand to the judge or restricting his freedom at the request of one of the contracting parties could enfeeble the role of the consensual compensation in contracts, especially as one or the other of the contracting parties always wants to amend the amount of the agreed compensation, and for this reason I suggest that the second paragraph of Article (390) of the UAE Civil Transactions Law be phrased as follows: “The judge may reduce this compensation, if the debtor proves that the estimate was clearly exaggerated, or that the original obligation was carried out only in part, but if the individual exceeds the value the consensual compensation, the creditor may not claim more than this value unless he proves that the debtor has committed fraud or a gross error, with any agreement to the contrary being null and void”.
2. The Emirati legislator ought to replace the meaning of "modifying the agreed compensation to an extent that is
equal to the damage" with “to an extent that suits the damage”.
3. Granting the judge the power to intervene, even though on his own, without ceasing to stipulate the creditor’s
claim for an increase, or the debtor’s claim for a reduction, in order to restore the contractual balance, in compliance with modern legislation.
