Recoverability of damages under Qatari Law

Contract law and damages in Qatar are principally governed by Law No 22 of 2004 enacting the Qatar Civil Code (the Civil Code). The Civil Code sets out the general principles of contract law, including the requirements of a contract (e.g., offer, acceptance and good faith), what constitutes a defective contract (e.g., based on mistake, fraud, coercion or exploitation), and contains provisions relating to the validity, enforceability and termination of contracts.

With respect to damages, the Civil Code also covers a number of topics, including what damages can be recovered and the elements that must be proven, what damages cannot be recovered and what damages can or cannot be capped or excluded.

Freedom of Contract

The Civil Code recognises the parties’ freedom of contract, subject to certain legislative provisions. This is expressed under Article 154 of the Civil Code, which states: “The contract may include any provision agreed to by the contracting parties, unless such provision is prohibited by law or in breach of the public order or morality.”

Article 154 of the Civil Code therefore expresses the contractual principles of freedom of contract. The parties are generally free to agree to whatever contract terms they choose (subject to certain prescribed limits), including terms governing liability and the limitation or exemption of liability.

For example, it is a misconception that force majeure always excuses a party from performance or liability. The parties under the Civil Code are free to agree otherwise. In this respect, Article 258 of the Civil Code states: “An agreement may be made that the debtor will bear the consequences of force majeure or an unexpected event.”

Similarly, another example reinforcing the parties’ freedom of contract can be found under Article 259(1) of the Civil Code, which states: “Agreement may be made to exempt the debtor of any liability arising from failure to execute his contractual obligation or for delay in execution…” Also, Article 259(2) of the Civil Code states: “Agreement may also be made to exempt the debtor from liability for fraud or serious fault that arises from persons he employs in the execution of his obligation.”

Contracting parties are therefore generally free to agree to hold each other liable for certain events, such as force majeure, or conversely to exempt each other from certain liabilities, such as failure or delay in executing obligations. However, as noted below, certain liabilities cannot be limited or excluded under Qatari law.

Recoverable Damages for Breach of Contract

The Civil Code permits the recovery of liquidated damages and/or actual damages. Whether one or both forms of damages can successfully be recovered – and the extent to which one of these will be considered to be an exhaustive and sole remedy – will generally depend on the specific wording of the contract. Any interpretation resulting in double recovery will be difficult to sustain.

With respect to liquidated damages, parties to a construction contract will often pre-estimate and pre-determine the amount of damages to be paid by the contractor in the event of delay to completion, usually based on a daily rate for each day of delay. These pre-calculated damages are commonly referred to as liquidated damages; they can be a useful tool in circumstances where the damages would otherwise be uncertain, unascertainable or difficult to prove. Another advantage of a liquidated damages provision is that the claiming party may not need to prove the actual damages sustained. Instead, it will usually be sufficient to prove the occurrence of the triggering event, such as delay in completion, which will entitle the claimant to recover the contractually stipulated liquidated damages absent a valid defence by the defaulting party.

Although liquidated damages are commonly seen in construction contracts, where it is often important to meet specified deadlines, they can also be used in other commercial contracts, where damages may be difficult to calculate or ascertain.

Article 265 of the Civil Code permits the inclusion of liquidated damages in a contract. It states: “If the object of the obligation is not a sum of money, the parties to the contract may assess in advance the amount of compensation in the contract or in a subsequent agreement.” In other words, if the obligation under the contract does not consist of payment of money and involves instead the performance of some act, the parties may include a liquidated damages provision in the contract to pre-assess the amount of compensation due upon a failure to perform.

On the other hand, the Civil Code also provides the court (or an arbitral tribunal applying Qatari law) with discretion to reduce the amount of liquidated damages agreed by the parties if the defaulting party can demonstrate that the claimant sustained no detriment or that the pre-agreed damages are considerably exaggerated. In this respect, Article 266 of the Civil Code states: “The compensation agreed upon will not be payable if the debtor proves that the creditor has not sustained any detriment, and the court may reduce the compensation below what was agreed upon if the debtor proves that the assessment was exaggerated to a considerable degree, or that the obligation has been executed in part. Any agreement to the contrary is null and void.”

Article 266 of the Civil Code is a mandatory legal provision. It provides the court or a tribunal applying local law with the discretion to reduce the pre-agreed liquidated damages to reflect the aggrieved party’s actual losses, despite what was agreed in the contract. In practical terms, however, it can sometimes be difficult to prove a negative (i.e., that the creditor has not sustained any detriment).

Interestingly, how liquidated damages are interpreted and enforced in common law jurisdictions contrasts starkly with the accepted approach in a number of civil law jurisdictions, including Qatar, the UAE and Egypt. In common law jurisdictions, it is a long-established principle that a contractual penalty provision is unenforceable as the general purpose of contract law is to compensate, not penalise.

In contrast, a liquidated damages provision in Qatar is not inherently unenforceable merely because it seeks to penalise. In fact, one Arabic translation of the term “liquidated damages”, as used in many Arabic contracts, is “delay fines” [غرامة تأخير]. Such a characterisation does not render the so-called “delay fines” unenforceable under Qatari law, as it very well may in a common law jurisdiction.

In addition to liquidated damages, the Civil Code also permits the recovery of actual damages. In this respect, Article 256 of the Civil Code states, in relevant part: “If the debtor does not execute the obligation in kind, or delays in executing it, he is obliged to pay compensation for the detriment sustained by the creditor...”

The “detriment sustained by the creditor” in this context can be interpreted as a reference to actual damages, which in contrast to liquidated damages are determined post-contractually, after the damages have arisen; they are based on actual, not pre-estimated damages. To recover actual damages, the non-defaulting party must generally prove breach of an obligation, loss or detriment sustained, and a causal link between the breach and the loss.

With respect to actual damages, Article 263(2) of the Civil Code states, in relevant part: “The compensation will include the loss sustained by the creditor and the profit foregone, on condition that this is a natural result of failure of performance of the obligation or delay in performing it...”

Consequently, actual damages will extend to a broad range of damages, including: costs of rectification; costs of completion; additional operational, staffing and upkeeping costs; as well as lost profits and any other “loss sustained by the creditor and the profit foregone” as a result of the defaulting party’s non-performance, so long as such damages are the natural and direct result of the breach.

Finally, it is worth noting that moral or reputational damages are also recoverable under Article 264 of the Civil Code, which provides that “compensation will include intangible detriment…”

Limitation of Liability under Qatari Law

In accordance with the principle of freedom of contract, the parties are generally free to agree to limit their respective contractual liabilities under Qatari law, subject to certain limitations. Construction contracts, for example, frequently impose a cap on the amount of liquidated damages that can be recovered in case of delay. Often, the cap is 10% of the contract value, meaning that the non-defaulting party cannot recover liquidated damages from the defaulting party in excess of the 10% cap.

The Civil Code not only permits parties to limit their respective contractual liabilities in this way, but also includes provisions to protect and safeguard such contractual limitations. For example, Article 267 of the Civil Code states: “If the detriment exceeds the amount of the compensation agreed upon, the creditor may not claim for more than this amount, unless he proves that the debtor has committed some fraud or serious fault.”

Article 267 of the Civil Code therefore affirms that contractual limitations on liability are generally valid, binding and enforceable, absent “fraud or serious fault”.

Damages that cannot be Limited or Excluded under the Civil Code

As noted above, the parties’ freedom of contract is subject to the parameters prescribed under the law. Certain liabilities cannot be limited or excluded under Qatari law. For example, Article 253(2) of the Civil Code states: “At all times, the obligor shall be liable for any fraud or serious fault committed by him.”

Contractual limitations therefore generally do not apply in relation to fraud or serious fault. As noted above, however, Article 259(2) of the Civil Code permits an agreement to be made “to exempt the debtor from liability for fraud or serious fault that arises from persons he employs in the execution of his obligation.” Similarly, it is also well established that liability cannot be limited or excluded for criminal acts.

In addition, Articles 711 to 715 of the Civil Code provide for certain forms of decennial liability in construction contracts that cannot be limited or excluded. Article 711 of the Civil Code, for example, imposes strict joint liability on contractors, architects and engineers for any collapse or defect of buildings or other fixed structures constructed and designed by them, “even if that collapse or flaw arises from a defect in the land itself, or the employer for the work has allowed the defective buildings or structures.”

Conclusion

Parties have freedom of contract in Qatar subject to the exceptions contemplated by the law. Contracting parties are therefore generally free to limit or exclude contractual liability, such as that for failure or delay in executing obligations (Article 259(1) of the Civil Code) and liability for the fraud or serious fault of an employee (Article 259(2) of the Civil Code). Conversely, the contracting parties are free to agree to hold each other liable for certain events, such as force majeure (Article 258 of the Civil Code).

Where a party is found to be liable, the Civil Code permits the recovery of liquidated damages (which are pre-estimated damages fixed by agreement) and/or actual damages (including costs of rectification and completion and lost profits) that arise post-contract and must be proven. Actual damages may be contractually limited and these limitations will generally be valid and enforceable, unless the debtor has committed fraud or serious fault, as stipulated under Articles 267 and 253(2) of the Civil Code. There are also other circumstances under the Civil Code where liability cannot be limited or excluded, such as the strict joint liability imposed on contractors, architects and engineers under Article 711 of the Civil Code.

Parties should be aware of what liabilities and damages can be capped or excluded under Qatari law prior to including provisions limiting or excluding liability in their contracts. This will help avoid any unpleasant surprises later.

We would be happy to provide any specific advice in relation to the above upon request.