'No compensation or penalty if contract terminated'

The Dubai Court of Cassation has ruled that the termination of a contract in civil cases, by agreement among the parties or via the court, ends the contractual relationship between them, bringing the parties to the situation before signing of the contract.

The end of the contractual relationship also brings an end to commitments and obligation written in the contract, including clauses about penalty and compensation.

Based on this new judicial doctrine, the Dubai Court of Cassation rejected the appeal of a real estate company, which had asked the court to compel the investor to pay penalty as per the penalty clause of the contract

The company had asked the court to allow it to retain the instalment of Dh562,000 already paid by the investor as compensation for the latter’s failure to pay the remaining instalments.

The case began when an investor filed a lawsuit against a real estate company, asking the court to compel the company to implement the contract of sale of an apartment in Madinat Jumeirah.

The investor also asked the court to force the real estate company to delivery this apartment to him and register it in his name after completion of payment of the remaining instalments.

The plaintiff (investor) said that he had bought the apartment for Dh1,594,000 and had paid Dh562,000 of the total amount.

He added he was surprised by the company's refusal to accept the remainder of the instalments. He also said the company had sold the apartment to another buyer, citing alleged delays in payment of instalments.

The real estate company filed a complaint against the investor, seeking to end the contract and retain Dh562,000 as compensation as per a clause in the original contract.

The Court of First Instance ruled that the real estate company must pay Dh39,000 to the investor.

The two parties to the dispute did not accept the judgment and they challenged it before the Court of Appeal. The investor asked the court to annul the contract and retrieve the instalment already paid by him along with interest accrued.

However, the Court of Appeal ruled in support of the rule of avoidance of the contract and the eligibility of investor to recover the value of the instalments that he had already paid. Also, amending the lower court’s verdict, the court ruled that the investor must be paid Dh56,000 instead of Dh39,000.

The real estate company did not accept this provision and challenged it before the Court of Cassation, demanding the right to enforce the penalty clause in the contract, which stipulates that the company had  the right to retain  40 per cent of the total value of the contract in the event of its dissolution.

The Court of Cassation rejected the plea of the real estate company and issued its above-mentioned verdict.

The Court of Cassation based its judgment on Article 247 of the Civil Transactions Act which stipulates that in case of revoking of the contract and ending the contractual relationship between the parties, all obligations and conditions, including penalty clause, are also annulled.

The Court said due to termination of the contract and ending of the contractual relationship, there will be no compensation as provided for by the contract.

The Court also said as the parties had requested annulment of the contract and end the contractual relationship between them, the penalty clause contained therein, including the stipulated compensation, must also be considered annulled.

Follow Emirates 24|7 on Google News.