Liquidated Damages for Delay in Construction Contracts in Oman

It is usual for construction contracts to include provisions by which delay liquidated damages would be payable by the contractor to the owner/client in the event the contractor is delayed in achieving one or more of the construction milestones.  However, the calculation of the value of such delay liquidated damages (usually a daily rate) is not generally considered in detail by the parties, and such amounts are usually randomly ascertained amounts, which do not bear any resemblance to the actual financial loss that is sustained by the owner/client in the event of such delay and are generally subject to a relatively small percentage of the contract price.

Delay liquidated damages are used as a secondary obligation enforceable upon the breach of a primary obligation (the primary obligation in most cases being the completion of the construction or stages of the construction in accordance with agreed construction milestones).  Both the FIDIC Red Book 1999 1st Edition (Clause 8.7 – Delay Damages) and the Omani Standard Documents for Building and Civil Engineering Works 1999 4th Edition (Clause 47 – Penalties for Delay) include liquidated damages provisions applicable in the event of delay to the construction milestones caused by the contractor, and both provisions allow for the contracting parties to agree to the damages amount.  It is important to note that such payment by the contractor of such amounts does not relieve the contractor from its obligation to complete the construction.

Article 267 of the Civil Code promulgated by Sultani Decree 29/2013 (“Civil Code”) specifically deals with the Oman law position regarding liquidated damages, as follows:

"(1) If the subject matter of obligation is not a sum of money, the contracting parties may determine the amount of compensation in advance by making a provision of same in the contract or in a subsequent agreement. 

(2) In all cases, the court may, upon the application of either of the parties, amend such agreement to make the compensation equal to the damage, and any agreement to the contrary shall be null and void.”

Article 267(1) determines that the contracting parties may agree to a liquidated damages amount but Article 267(2) gives certainty to the generally accepted position that, regardless of the liquidated damages amount included in the contract, the Omani courts are specifically permitted to re-open liquidated damages clauses, and adjust the amounts so that they are commensurate with the value of the actual damage incurred. Article 267(2) is obviously in direct conflict with the freedom to contract for which Oman has previously been well known. However, this provision of the Civil Code merely follows established precedent applied by courts of UAE, Qatar and Saudi Arabia who all take a similar position in that they are also not opposed to re-opening pre-agreed liquidated damages clauses.

Therefore, if either the contractor or the owner/client wish to apply to court to adjust the contracted liquidated damages amount, the burden of proof of actual loss and how it is different from the liquidated damages amount set out in the contract is likely to lie with the party seeking the adjustment to the contracted liquidated damages amount from the court.

Further, whilst we are not aware of any case law directly on this point since the enactment of the Civil Code in August 2013, we are aware of a number of existing cases before the Omani courts in which the argument has been put forward by a contractor that the liquidated damages set out in a commercial contract are too high.  However, in practice, given that it is the owner/client who proposes the rate of liquidated damages, and that the contractor prepares and submits its contract price proposal on this basis, in our view, it would be unlikely that an owner/client could successfully bring a claim in court to increase the rate of liquidated damages.

We will review in more detail the practical application by the Omani courts of Article 267 of the Civil Code in another article later this year.

Therefore, in theory, to reduce the risk of a dispute arising between the parties, the owner/client should consider an amount for liquidated damages that would be a genuine, pre-agreed estimate of the likely damage of a delay, due to a fault of the contractor, to the construction milestones.  However, practically speaking, and as is market practice, the owner/client will typically weigh the risk of completion delay and associated owner/client loss against obtaining a reasonable contract price proposal, since an increased contractor liquidated damages liability is most likely to be reflected in an increased contract price.  An owner/client would then seek to mitigate its exposure through insurance.