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Should Developers of Cancelled Projects Refund Investors’ Money in Full?

Should Developers of Cancelled Projects Refund Investors’ Money in Full?

Property Magazine

15 September 2011

By: Ludmila Yamalova, Managing Partner, HPL Yamalova & Plewka DMCC

Developers of cancelled projects not only should, but must refund investors‘ money in full.  At least this is so under the UAE Civil Transactions Law, the body of law which governs parties’ contractual rights and obligations.

Generally speaking, under Article 243 of the UAE Civil Transactions Law, “with regards to contractual rights (obligations), all the contracting parties must fulfill their contractual obligations as provided for in the contract.”  Cancellation of a project amounts to the developer’s failure to deliver the property.  Delivery of the property, however, is the very essence of the parties’ agreement to enter into a contract.  Developer’s failure to deliver the property, then, constitutes failure to satisfy his obligations under the contract.

Under the UAE Civil Transactions Law, Article 272, when a party fails to satisfy his obligations under the contract, the contract is terminated.  When a contract is terminated, “both contracting parties shall revert to the state they were in prior to the contract,” as per Article 274 of the UAE Civil Transactions Law.  The developer, therefore, must place the investor in the position he was in prior to entering into the contract.  Prior to entering into the contract, the investor possessed the amount of money which he later gave to the developer for the property.  For the developer to reinstate the investor into the position in which he was prior to the contract, he must refund the entire amount of the money he had received from the investor.  Thus, at least from the legal standpoint, as mandated by the UAE federal contract law, the developer must refund investors’ money in full.

This principle stands true irrespective of the reasons for cancellation.  For example, in the event the developer claims force majeure as the reason for not being able to perform his obligations, “the contract shall be automatically terminated,” under Article 273 of the UAE Civil Transactions Law.  Upon termination of a contract, the developer must reinstate the investor into his original position, which can only be achieved by refunding his investment.

This is the legal argument.  But then there is also a practical one, not to be ignored.  In many cases, developers do not have money to refund the full amounts.  In those cases, there is a pragmatic justification for investors to accept at least a partial refund.

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