DIFC Court Looks at Indemnities Under UAE Law: Know Your Limits

Having written about the DIFC Court case of FIVE Real Estate Development LLC v Reem Emirates Aluminium LLC^[1] and its guidance on interpreting the notice requirements of sub-clause 20.1 of the FIDIC 1999 general conditions [Contractor’s Notices and Claims], it is well worth highlighting another aspect of the case: the DIFC Court’s view of indemnities under UAE law.

In that case, the Claimant (“FIVE”) sought damages for the loss suffered by FIVE as a consequence of a substantial delay in the construction of the FIVE JVC tower in Dubai, which they blamed on the Defendant (“Reem”).

The claim made by FIVE was unique, because FIVE had already deducted from Reem’s final account delay damages (being liquidated damages, often referred to as ‘LDs’) equal to 10% of the contract price. This was the maximum sum allowed under sub-clause 8.7 of the FIDIC 1999 General Conditions of Contract.

FIVE however alleged that it had suffered more loss than what was covered by the LDs. It claimed for this additional sum of purported loss on the basis that in addition to the LDs provision, the contract contained at clause 4.10 a broadly worded indemnity:

“[Reem] shall indemnify [FIVE] from and against all loss, costs, damages, claims, arising out of and/or in connection with the performance, acts or defaults of [Reem] …”

Whilst the claim failed, the court provided some useful observations, discussed below.

Indemnities under UAE Law

In its submissions, Reem argued that pursuant to UAE law, claims under an indemnity are treated like any other claim for breach of contract. As a consequence, the injured party’s recovery is limited to compensation for the losses incurred, as a direct result of the relevant breach.

Under common law, an indemnity provision in a contract has the power (depending on the agreed wording) to enable the indemnified party to recover loss or damage:

1. that was not caused by an act or omission of the indemnifier; and/or
2. that is not a direct consequence of a breach by the indemnifier.

The court agreed with Reem’s submissions finding “that an indemnity as such [i.e., as understood under common law] does not exist under UAE law; contractual liability depends on fault or breach”,^[2] and is limited to loss incurred and evidenced, referring to the Dubai Court of Cassation Case No. 41/2007 in its decision.

As it turned out, FIVE was found liable for the delay^[3]. However, as an attempted hedge against such finding, FIVE had submitted in its closing arguments that the indemnity provision of the contract entitled FIVE to recover its damages, even in the absence of a breach by Reem.

FIVE asserted that Reem had agreed to indemnify FIVE against loss or costs that arise from “performance” and “acts”, pointing out that neither term was limited to things done in breach or default of the contract.

The court rightly dismissed this proposition, noting that the words “performance” and “acts” must be read ejusdem generis with the word “defaults”.  Ejusdem generis means ‘of the same kind’ and is a rule of contractual interpretation providing that general words which follow specific words in a list must be construed as referring only to the type of things identified by the specific words. To this point, Glennie LJ stated:

“[t]hey all point to the need to show some breach or default on the part of Reem; and that would be the ordinary meaning of the words in the clause without recourse to such rules.”^[4] 

Indemnity Claim, over and above the deduction of Delay Damages

The court further found, that notwithstanding the existence of the indemnity provision within the higher-ranking particular conditions, sub-clause 8.7 of the FIDIC 1999 general conditions did not allow FIVE to deduct delay damages and then seek to recover purported further loss arising from the delay pursuant to the indemnity provision.

Clause 8.7 provides that delay damages “shall be the only damages due from the Contractor for such default”, being an exclusive remedies clause.

In his judgement, Glennie LJ stated:

“In my view that would preclude recovery under clause 4.10 of [the contract]. It might be argued by FIVE that the claim under clause 4.10 of the [contract] is a claim for an indemnity, not a claim for damages, and as such can run parallel with clause 8 of FIDIC. But this would make no sense. First, as a matter of construction of clause 4.10, the so-called indemnity only bites when the delay by Reem amounts to a breach by Reem on its obligations under the [contract]; otherwise, it would be absurdly wide. Second, I accept the submission that an indemnity as such is unknown under UAE law; there must be proof of breach. It follows, in my opinion, that, at least in the circumstances of the present case, a successful claim to an indemnity under clause 4.10 necessarily involves proof of breach by Reem – in which case the claim would be excluded by clause 8.7.”^[5] 

Conclusion

The judgement in FIVE provided important obiter concerning the application of indemnity provisions under UAE law contract, and that terms as wide as those used by FIVE in its contract are not going to be enforced where no harm or breach can be shown.

[1] [2020] TCD-009-2020 (Judgment dated 3 March 2023)
[2] Ibid, at Para. 68.
[3] This finding, along with the principal noted above that an indemnity (as known under common law) doesn’t exist under UAE law, meant that Reem was immediately immune to FIVE’s efforts to enforce that term.
[4] Ibid, at Para. 68
[5] Ibid, at Para 69.