Power Horse
The 'moral damage' has always been there in the UAE Civil Code. But in awarding Power Horse moral damages, the clause has been extended to commercial disputes as well. Image Credit: LinkedIn/@Power Horse

Dubai: Businesses in the UAE must start getting extra careful with their contractual obligations – if found to be at fault, they run the risk of having to pay ‘moral damages’ too as penalty. And these can be substantial.

'Moral damages', in its simplest definition, would relate to losses stemming from injury, belief, privacy or reputation.

Typically, these are awarded to individuals, but in a new verdict, a Dubai court has used the clause to compensate a business in a contractual breach dispute.

‘Power Horse’, the Austrian energy drink brand and with its commercial headquarters in Dubai, has just won a judgement in its favour against its UAE erstwhile partner in the local courts. And won ‘moral damages’ too.

“The final judgment addressed the granting of moral compensation for damages in a commercial dispute, specifically arising out of a breach of contractual obligations,” said Fareya Azfar, Manging Partner at the law firm Fareya Azfar & Araoui LLP and who advised Power Horse in the dispute.

Fareya Azfar
“The legal principle of ‘moral damage’ already existed under the UAE civil code – however, previously courts did not award the compensation on a contractual breach by a corporate entity,” said Azfar.

In this regard, the Power Horse judgement is significant, as the local courts look beyond the losses sustained when one entity in a contract reneges on the deal.

What the ruling does is also set the precedent for tacking on moral damage compensation in commercial disputes.

What is ‘moral damage’

According to UAE laws, the claimant can seek moral damages to compensate for any non-financial losses sustained from a breach of contract.

“This is where there is a loss of reputation, (impact on) emotions and morale,” said Fareya. “It was necessary for the UAE court to know the ‘brand’ value of Power Horse to come up with a financial compensation for loss of reputation and morale.”

3 types of 'losses' and compensation
Expectation loss: What Power Horse could have made if the contract was not breached. (This type of loss is not available under the UAE civil code, according to Fareya Azfar.)

Reliance loss: Money spent in reliance upon the contract. This is the only loss compensated by UAE courts to ‘restore’ parties to the pre-contractual position.

Moral loss: This is the loss of reputation, emotions, morale.

Tightening up on brand rights

The UAE courts have been, through multiple judgements in the recent past, have been giving brands all the protection they need on their intellectual property rights. Any misuse or misrepresentation of the original IP will have consequences for offending business, legal sources add.

According to Fareya, while the Power Horse dispute wasn’t specifically about IP rights, the court decided to look into the brand aspects as well. An independent expert panel was set up to go into the matter.

This is where “The IP rights were addressed in the context of calculating compensation for actual damages - and moral damages,” said Fareya.

“In an exceptional decision, the Court of Cassation approved the panel’s conclusions. This is a very strong precedent that will be relied to in many future similar court cases.”

As for Power Horse, the beverage is 'available throughout the UAE - and the brand is alive and kicking', said Freya.