Source: Emirates Today – Abu Dhabi
A property owner lost AED 850,000 after an error in drafting his legal claims prevented him from obtaining the value of the penalty clause stipulated in the sale contract. The clause was applicable in the event that one of the parties breached its obligations, failed to complete the agreement, or did not transfer ownership. The court explained that the claimant requested contractual compensation without including a request to enforce the sale contract against the buyer. It confirmed that a penalty clause is an obligation secondary to an original contractual obligation, and that his lawsuit should therefore be dismissed because it was not based on a valid legal foundation.
A man filed a lawsuit before the Abu Dhabi Commercial Court (Court of First Instance), requesting that a man and a woman be jointly ordered to pay him AED 850,000, in addition to legal interest, court fees, expenses, and attorney’s fees.
He stated that he had entered into a property sale agreement with the first defendant for the sale of his owned property for AED 8.5 million, to be paid according to the terms specified in the contract. Under the second clause of the agreement, if the agreed date for transferring ownership was extended, such extension had to be made in writing through a subsequent agreement or an addendum to the contract.
The parties also agreed that if the buyer failed to fulfill the agreement, the buyer would be obligated to compensate the seller. Due to the defendants’ failure to complete their obligations within the agreed timeframe, the ownership transfer date was extended through an addendum that expressly stipulated that the breaching party would pay the non-breaching party compensation amounting to AED 850,000.
However, the defendants allegedly failed to fulfill their obligations. The claimant sent them a formal legal notice requiring them to complete their obligations and finalize the ownership transfer, but they did not do so. The defendants, despite being legally notified, did not appear before the court, nor did any representative appear on their behalf.
The court explained in its reasoning that the claimant’s demand was considered a financial penalty imposed by the contracting parties to guarantee the implementation of their agreement. It was intended to compensate for the damage suffered by the party whose rights had been violated and was therefore considered a penalty clause, which is legally supported by Article 390 of the Civil Transactions Law.
However, the court clarified that applying such a clause requires the contract—whether an immediate contract or a continuing contractual agreement—to remain valid and effective between the parties. It must also be invoked in connection with a request by the creditor to enforce the contract, rather than to terminate it, as the principle is that legally valid agreements serve as the law governing the parties who created them.
The court noted that, upon reviewing the statement of claim, it was clear that the claimant relied on the fourth clause of the contract addendum as the basis for his request. He sought enforcement of the penalty clause and payment of AED 850,000 as agreed compensation due to the defendants’ alleged breach of their contractual obligations and to remedy the damage he claimed to have suffered.
However, the court found that the claimant’s lawsuit did not include any request asking the court to enforce the sale contract against the buyer (the defendants), and the case documents did not reveal such a request. The court is not required to guide litigants regarding their legal arguments or claims.
The court further stated that it was not acceptable to consider the claimant’s request for compensation as an implied request to terminate the contract, because agreed compensation is a penalty clause, which is a secondary obligation dependent on an original contractual obligation. Once the contract is terminated, the original obligations cease to exist, causing the dependent obligation to fall as well and eliminating its legal effect.
Therefore, contractual liability cannot be relied upon after termination and disappearance of the contract, meaning that the penalty clause cannot be applied in such circumstances. Accordingly, the claimant’s lawsuit was deemed subject to dismissal for lacking a proper legal basis.
The court ruled to dismiss the lawsuit and ordered the claimant to pay court fees and expenses, as well as AED 200 in attorney’s fees.