SIGNIFICANCES OF THE DOWN PAYMENT (THE ARBOON) IN UAE LAW AND JUDICIAL PRECEDENTS
Perhaps one of the most distinguishing features of UAE contract law
is the significances of the Down Payment, which is known in the Arabic language as the “Arboon”.
The Down Payment in UAE Law is governed by the provisions of Article 148 of UAE Law of Civil Transactions which can be translated as follows:
(1- Payment of the Down Payment “Arboon” shall be regarded as evidence that the contract has become final and irrevocable unless the agreement or custom are to the contrary.
(2- 2- If the contracting parties agree that the Down Payment “Arboon” shall be forfeited in the event of withdrawal, each of them shall have the right to withdraw, and if the person who has paid the money withdraws he shall lose it, and if the person receiving it withdraws, he shall refund double amount that he received).
As clear from the provisions of the above article, the Down Payment shall have two significances, it must either be a proof that the contract is final and irrevocable or must be an indication that the contracting parties have agreed to retain the right to withdraw from concluding the contract.
If the Down Payment was intended for retaining the right to withdraw from the contract, and the party who made the payment opted to withdraw, he shall lose the money he paid, and if the party who was paid the amount opted to withdraw, he shall pay double the amount that he received.
As regards the other significance of the Down Payment i.e. being a proof that the contract is conclusive and binding on the parties, UAE judicial precedents have laid down a principle that in this case the relevant clause in the contract which contains the payment of the Arboon shall be treated as a Penalty Clause, thus, the following rules shall apply:
1. If the contract was found to be void, the contracting parties shall be restored to their positions prior to the conclusion of the contract, i.e. the seller shall pay back the Down Payment to the buyer, without prejudice to each party’s right to claim compensation for any damage he might have sustained due to a wrongful act committed by the other party.
2. If a party defaulted or failed to fulfil the relevant contractual obligation in the ordinary course of performing the contract i.e. during the validity of the contract, the payment of the Arboon shall indicate that the harm/damage linked to such default is assumed to have occurred and the appropriate compensation amount to in lieu thereof is assumed to be the amount of the Arboon itself. Therefore, the burden of proof – contrary to the ordinary situation- shifts to the other party, who shall be required to prove the contrary.
3. If the contract was terminated or sought to be terminated by a contracting party, the above rule shall not apply i.e. the occurrence of damage/harm or the amount of compensation in lieu thereof might not be assumed, because the agreement which contains the Clause itself is null and void and not existing anymore. Therefore, the burden of proof shall remain on the claimant to establish the damage/harm he alleges to have sustained and the corresponding compensation amount thereof.
Finally. It is pertinent to mention that the determination of either the payment of the Arboon is an indication to the finality and irrevocability of the contract or is a compensation sum paid against retaining the right to withdraw from concluding the contract is a matter of fact, on which the court exercises a vast discretionary power to reach. Therefore, it is advisable to take due care when agreeing to the payment of the Arboon; and when raising any argument to the court in relation to the Arboon, as the determination of the significance of the Arboon is of a great impact on the whole outcome of the case.
For more details or for legal advice on a relevant matter, please contact Abdulla Al Awadi & Associates