Contractor Delays: Delay Penalties vs. Compensation for Damages

Contractor Delay in Performing Works Between Delay Penalties and Compensation for Damage

A Study of the Dubai Court of Cassation Judgments in Commercial Appeals Nos. 383 and 386 of 2025

First: The Legal Question

Construction contracts raise the question of the legal effect of a contractor’s delay in performing the works, particularly where the contract contains a liquidated damages clause or delay penalty. The matter becomes more complex where the contractor performs part of the works and then ceases performance, or where the contract is terminated before completion of the project.

The question therefore arises as to whether the employer is entitled to claim the agreed delay penalty despite the incomplete works and termination of the contract, and whether the employer is entitled to compensation for actual damages, including the loss of the opportunity to use or lease the property and the extent to which such loss may constitute loss of profit.

The Dubai Court of Cassation addressed these issues in Commercial Appeals Nos. 383 and 386 of 2025, at the hearing held on 16 July 2025, affirming the distinction between a delay penalty associated with late delivery and compensation based on actual damage arising from total or partial non-performance.

Second: Introduction The effect of a contractor’s delay is not limited to a mere delay in completing the works, as it may result in the loss of opportunities to use, lease, or commercially exploit the property, in addition to the additional costs arising from completing the project through another contractor.

The nature of the damage varies depending on the status of the project. Where the contractor has completed the works but delayed delivery,

the consequence may be the application of the agreed delay penalty. However, where the project remains incomplete, or the contractor ceases performance and the contract is terminated, the matter concerns non-performance of the contractual obligation and the resulting actual damages and loss of profit.

This highlights the importance of distinguishing between a delay penalty and compensation for damage, which was addressed by the Dubai Court of Cassation in the judgment under consideration in light of the provisions of the UAE Civil Transactions Law, particularly Articles 292 and 892, while examining whether the loss of an opportunity to use the property constitutes a compensable element where established on a factual and reasonable basis.

Third: Facts of the Case The dispute arose from a construction contract dated 6 July 2015, pursuant to which the contractor was entrusted with carrying out maintenance works on the project constructed on Plot No. RB-03. During the course of the project, a dispute arose between the parties concerning the extent to which the works had been performed and the delay in completing and delivering them within the agreed timeframe.

According to the judgment, the contract was terminated on 7 February 2021. The employer subsequently completed the works and claimed various amounts from the contractor, including the value of the works completed, the delay penalty, compensation for material and moral damages, in addition to loss of profit resulting from the delay in implementing the project. The total amount claimed in the action was AED 40,264,528.

The employer’s principal basis for its claim was that the contractor’s delay in completing the project deprived it of the opportunity to use and exploit the property during the period within which the project should have been completed. In particular, the employer maintained that it was entitled to compensation for the rental revenues that could have been generated from the real estate units had the project been completed within the agreed timeframe.

At the first-instance stage, the Court appointed a three-member panel of experts to examine the accounts and works in dispute and determine the amounts due between the parties. Following the submission of its report, the Court, on 14 November 2022, ordered the contractor to pay AED 2,431,084.36, together with legal interest at the rate of 5% from the date of the claim until payment, and dismissed the remaining claims.

Neither party was satisfied with this judgment. The employer and the contractor both appealed, and the matter was referred again to the expert panel to examine the various elements of the dispute. At the first appellate stage, the Court, on 29 March 2023, set aside the first-instance judgment insofar as it concerned the delay penalty and amended the amount awarded to AED 1,580,905.29, while upholding the judgment in all other respects and dismissing the employer’s appeal.

However, the dispute did not end at this stage. Both parties challenged the judgment before the Court of Cassation in Commercial Appeals Nos. 643 and 699 of 2023. On 28 August 2024, the Court of Cassation set aside the judgment and remitted the case to the Court of Appeal, among other reasons, due to deficiencies concerning the expert report and the examination of the claim for loss of profit.

Following the remittal, the Court of Appeal appointed a new three-member expert panel. The panel reached findings that had a material impact on the reassessment of compensation. It assessed the loss of profit resulting from the inability to use the apartments during the delay period at approximately AED 4,877,739.40, based on the market rental value, the number of units, which amounted to 63 apartments, and the period during which use was lost, estimated at approximately four years.

The panel also assessed the difference in the cost of completing the project, compared with the value agreed with the contractor, at AED 1,843,521.66. Based on the total of these elements, the Court of Appeal, in its judgment dated 26 February 2025, amended the amount awarded in favour of the employer to AED 6,721,261.06, while dismissing the remaining claims.

Both parties again challenged the judgment before the Court of Cassation. Commercial Appeal No. 383 of 2025 was filed by the contractor, while Commercial Appeal No. 386 of 2025 was filed by the employer. The Court ordered that the two appeals be consolidated due to their connection and adjudicated them in a single judgment. At the hearing held on 16 July 2025, the Court dismissed both appeals.

Fourth: Course of the Proceedings and Judgments at the Various Levels of Litigation Initially, the dispute primarily concerned the determination of the value of the works and the amounts due, in addition to the claim for the delay penalty and compensation for damages and loss of profit. The Court of First Instance ultimately awarded the employer only AED 2,431,084.36, together with legal interest, and dismissed the remaining claims. The Court of Appeal then reconsidered the matter in light of the expert report, set aside the delay penalty, and amended the amount awarded to AED 1,580,905.29.

However, in its previous judgment issued in 2024, the Court of Cassation found that the treatment of the claim for loss of profit was insufficient in terms of reasoning and that the judgment had not adequately addressed the employer’s defence and the documents relied upon to establish the damage and loss of use of the property. Accordingly, it set aside the judgment and remitted the case to the Court of Appeal.

Following the remittal, the issue became clearer, as the damage was re-examined by a new expert panel and the elements of compensation were determined in greater detail. The expert report identified two principal elements: first, the loss of profit resulting from the inability to use the apartments during the delay period; and second, the difference in the cost of completing the project.

The Court of Appeal relied on these findings in determining compensation at AED 6,721,261.06, while dismissing the claim for the delay penalty. This dismissal was based on a legal basis different from merely stating that the contract had been terminated; rather, the Court linked entitlement to the delay penalty to the nature of the obligation breached and the extent to which the contractor had completed the works.

When the dispute was again brought before the Court of Cassation in Appeals Nos. 383 and 386 of 2025, the Court affirmed the soundness of this approach and dismissed both the contractor’s appeal against the compensation and the employer’s appeal seeking entitlement to the delay penalty and other elements of compensation. The judgment ultimately dismissed both appeals.

Fifth: Analysis of the Court of Cassation Judgment The principal significance of the judgment lies in the distinction between two situations: first, where the contractor completes the agreed works and then delays their delivery; and second, where the contractor ceases performance or performs part of the works without completing them, resulting in the termination of the construction contract before completion.

Relying on Article 892 of the Civil Transactions Law, the Court held that the delay penalty is associated with the completion of the works and the delay in delivering them, and does not constitute a general sanction applicable to all forms of breach of the contract. Where the works are not completed, however, the dispute falls within the scope of contractual liability and compensation for damage resulting from total or partial non-performance.

In this context, the Court relied on Article 292, which provides that compensation is assessed according to the damage suffered by the injured party and the profit it has lost. Accordingly, in cases of non-performance, compensation is not determined by the amount of the delay penalty, but rather by the extent of the damage proven to have been caused by the contractor’s breach.

This is particularly significant in investment real estate projects, where the loss of an opportunity to use or lease the property may constitute an element of damage where its assessment is based on a factual and reasonable foundation. In the case under consideration, the expert report was relied upon in assessing the lost rental revenues at AED 4,877,739.40, and the difference in the cost of completing the project at AED 1,843,521.66.

The Court also affirmed the importance of technical expertise in assessing the elements of damage and recognized the trial court’s authority to assess the expert report and adopt its findings where they are based on sound reasons supported by the documents on record.

Conversely, the Court rejected compensation for the decrease in the market value of the property, thereby preventing the combination of compensatory elements that would result in double compensation for the same damage. Accordingly, the judgment established a clear methodology beginning with determining the nature of the breach, followed by identifying the resulting damage, and ultimately assessing compensation in light of the evidence, expert findings, and causal relationship.

Sixth: Legal Effect and Principle Derived from the Judgment The judgment confirms that a delay penalty is not recoverable merely because the contractor has breached its obligations; rather, it is associated with the completion of the works and the delay in delivering them. Where the contractor has performed the works in whole or in part but failed to complete them, the employer’s right lies in claiming compensation for proven damages, including completion costs, loss of use, and loss of revenues.

The judgment also establishes parameters for claims for loss of profit, requiring a causal relationship and a reasonable basis capable of being established and objectively assessed. This highlights the importance of expert reports and documents relating to rental value, the duration of the delay, and the extent of the damage.

The practical significance of the judgment lies in the need to distinguish, when drafting contracts and claims, between the liquidated damages clause and compensation for damage, while documenting the effects of delay and losses from the time they arise. Accordingly, the judgment represents an important application of the rules of contractual liability to disputes arising from the non-completion of projects and the employer’s resulting need to complete them and bear the losses arising therefrom.

Seventh: Conclusion The Dubai Court of Cassation judgment in Commercial Appeals Nos. 383 and 386 of 2025 confirms that the determination of the employer’s rights depends first on the nature of the contractor’s breach. Where the contractor has completed the works but delayed their delivery, the delay penalty may be applied; however, where the contractor has failed to complete the works, the matter concerns contractual liability and compensation for damage.

The judgment further confirms that non-performance may result in damages exceeding the value of the unperformed works, such as loss of use of the property, completion costs, and loss of revenues, provided that such damages and their connection to the breach are established. It also clarifies that loss of profit may be compensated where it is supported by reasonable grounds and can be objectively assessed.

The significance of the judgment lies in the need to distinguish between delay in delivery and non-performance, and between a delay penalty and compensation for damage. It also emphasizes the importance of drafting construction contracts clearly and documenting performance, delay, and losses from the outset of the dispute, thereby enabling the damage to be accurately assessed before the experts and the court.