What it means
A supply contract might specify a daily sum for delay, a charge for missing a service level or a fixed amount for abandoning work. Such terms offer an agreed way to price risk and can make negotiation more predictable.
Yet the number in the contract is not necessarily the final amount a court would award. In England, the modern test from the UK Supreme Court's Cavendish and ParkingEye decisions asks whether the clause imposes a detriment out of all proportion to a legitimate interest in performance.
UAE law has a different framework: Federal Decree-Law No. 25 of 2025 replaced the old Civil Transactions Law on 1 June 2026, and Article 340, rather than the repealed law's Article 390, governs pre-agreed compensation.
Under Article 340 the court may reduce the agreed amount when the debtor proves exaggeration or partial performance makes the amount exceed actual loss, and the creditor contributing to the harm is another ground. It may decline compensation where the creditor's fault significantly outweighs the debtor's.
An increase above the agreed amount requires the creditor to prove the debtor's fraud or gross fault, which is narrower than the prior law's general power to adjust agreed compensation. Define when a delay starts, whether extensions of time apply and what records demonstrate performance, because a daily amount should not silently run through a period for which the other party caused the delay.
State any maximum clearly. Financial planning should keep contractual exposure separate from expected legal outcome.
Before signing, compare the amount with credible scenarios such as re-procurement cost, financing, lost rent or demonstrable operational disruption. Negotiate a fair cap and practical extension process, and revisit older template language that cites Article 390 as present law, especially in UAE contracts.
A clause that mirrors a realistic estimate of loss and protects a genuine interest is easier to defend than a figure chosen only to pressure the other side.
In practice
Real-world examples.
Example
A buyer and supplier agree a stated daily amount for late delivery, with clear extension rules. The contract also says when the delay clock starts and what records will prove the delivery date.
Example
A contractor documents that a customer's site closure contributed to a delay before assessing an agreed charge. The dated correspondence lets both sides separate chargeable days from days caused by the customer.
Example
A UAE team checks Article 340 and its contract rather than citing repealed Article 390. It also updates its template so that new agreements no longer describe the old article as current law.
Formula
Calculation
Illustrative contract amount = Lesser of (daily agreed amount x chargeable delay days) and the stated cap, if any
Worked example. A fictional contract specifies AED 5,000 per day for 12 chargeable days, capped at AED 50,000. The arithmetic gives AED 60,000 before the cap and AED 50,000 after it. This is contractual arithmetic, not a finding that the amount is recoverable. Extension, breach and adjustment questions remain, and the parties should preserve relevant records before making a claim or a formal response.
A prudent planner might also record a separate estimate of provable loss, say AED 35,000, so that management can see the AED 15,000 gap between the capped contractual figure and the evidence if the amount were challenged.Case study
Seen in the real world.
This illustrative and entirely fictional case follows Desert Rose Interiors, an invented Dubai fit-out contractor. A restaurant contract states AED 5,000 per chargeable day of delay, capped at AED 90,000. When the project ends 22 days after the original date, the restaurant initially calculates AED 90,000 under the cap. Desert Rose has dated correspondence showing that site access was unavailable during part of the delay. The parties first examine the extension clause and actual chargeable days.
They then seek advice on Article 340, including evidence about the amount, partial performance and whether the restaurant contributed to the harm. Neither side assumes the article guarantees a particular court outcome. The invented parties negotiate a documented settlement after reviewing evidence. Their example separates contract arithmetic from legal recovery and shows why records matter more than a bare percentage.
Watch out
Common mistakes.
- Citing repealed UAE Article 390(2) as the current rule.
- Assuming every amount above proven loss is invalid under English law.
- Treating the contractual figure or cap as an automatic court award.
Questions
People also ask.
How do penalty clauses and liquidated damages differ?
It depends on governing law. Under English law, proportionality to a legitimate interest matters; an amount need not be a perfect forecast of loss. UAE Article 340 instead sets grounds for adjusting agreed compensation.
Can a UAE court reduce an agreed amount?
Article 340 permits reduction on specified grounds, including proven exaggeration, certain partial performance and creditor contribution to harm. The earlier Article 390(2) was replaced in June 2026.
Does a cap guarantee the maximum payment?
No. A cap limits the contract calculation but does not prove breach, chargeable days or legal recovery. Check the contract and governing law.
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