Property seller loses AED850,000 claim after Abu Dhabi court rejects penalty clause demand

Abu Dhabi: The Abu Dhabi Commercial Court of First Instance has dismissed a property seller’s claim for AED850,000 in contractual compensation after ruling that the lawsuit was not based on a valid legal foundation.

According to court records, the claimant filed a lawsuit against a man and a woman, seeking AED850,000 in agreed compensation, legal interest, court fees, expenses and legal costs.

The claimant stated that he had entered into an agreement to sell a property to the first defendant for AED8.5 million, with payment terms specified in the contract. He said the parties later signed an addendum extending the transfer date and stipulating that the defaulting party would pay AED850,000 in compensation if the transaction was not completed.

The seller argued that the defendants failed to fulfil their obligations despite being served with a legal notice demanding completion of the transaction and transfer of ownership.

The defendants did not attend the proceedings.

In its judgment, the court said the AED850,000 sought by the claimant constituted a contractual penalty clause intended to compensate a party for damage resulting from a breach of contract.

The court explained that, under the Civil Transactions Law, a penalty clause is linked to the existence and enforcement of the original contractual obligation.

It noted that the claimant relied on the penalty clause contained in the contract addendum and sought compensation for the defendants’ alleged breach. However, he did not file any request seeking enforcement of the property sale agreement against the buyers.

The court stated that it could not treat the compensation claim as an implicit request to enforce or terminate the contract, adding that a penalty clause is a secondary obligation dependent on the original contractual obligation.

According to the court, because the claimant did not pursue enforcement of the sale contract, there was no legal basis for applying the penalty clause in the manner requested.

The court therefore dismissed the lawsuit and ordered the claimant to pay court fees, expenses and AED200 in legal costs.