The new Federal Decree-Law No. 25 of 2025 came into force on 1 June 2026. There have been significant changes to civil law aspects for the first time in a very long time. Article 340 of the Act governs agreed compensation. This section introduces a more structured framework for judicial intervention in agreed compensation clauses. It also helps to balance contractual freedom while ensuring fairness and protection against abuse.
Key Change from Article 390 of the Previous Law
Under Article 390 of the 1985 Civil Transactions Law, the law allowed the parties to agree compensation in advance, with the court having broad discretion to decrease or increase the compensation to match the actual loss. This restricted party autonomy and contractual certainty.
Agreed Compensation Under Article 340
Article 340 brings in the concept of agreed compensation, allowing the parties to predetermine the compensation in the contract itself or through a subsequent agreement.This helps the parties understand the financial consequences of contractual breaches and allows them to allocate risk in advance.
Grounds for Reducing Agreed Compensation
- Excessive or Exaggerated Compensation – If the debtor proves that the agreed amount is excessive, then the court may reduce the agreed compensation. In this case, the burden of proof lies on the debtor.
- Partial Performance – The court may reduce compensation if the debtor proves that part of the contractual obligation has been performed. The compensation can be adjusted to reflect the value of the completed performance.
- Creditor’s Contribution to the Damage – The court may reduce compensation if the creditor contributed to the occurrence of the damage. The court may also reduce compensation if the creditor’s contribution led to an increase in the damages.
Complete Elimination of Compensation – The court may also completely eliminate the compensation under Article 340(3) if the creditor’s fault significantly predominates over the debtor’s fault.
Compensation Beyond the Agreed Amount
The creditor may claim compensation exceeding the agreed amount only if the creditor proves that there was:
- Fraud
- Gross fault on the part of the debtor.
Article 340 represents a significant shift in the UAE’s approach to agreed compensation by replacing the broad judicial discretion previously available under Article 390 with specific grounds for intervention. While the provision ensures contractual certainty and parties’ freedom to agree compensation in advance, it also preserves important safeguards against excessive or unfair compensation through mechanisms such as reduction for partial performance, contributory fault, and the ability to claim additional compensation in cases of fraud or gross fault. The businesses and contracting parties should reassess their provisions relating to damages, carefully document the basis for agreed compensation, maintain records supporting loss calculations, clearly allocate responsibility for delays and breaches, and preserve notices.
We at Ayesha Aldhaheri Advocates & Legal Consultants, we closely monitor legislative developments and legal reforms to ensure that our clients remain informed of changes that may affect their rights and obligations. Our team regularly advises and represents clients in compensation claims arising from contractual disputes, assisting them in pursuing or defending claims for damages in accordance with the latest legal framework.