Out-Law / Your Daily Need-To-Know
Saudi Arabia’s Civil Transactions Law (Civil Code) sets out a robust framework for the payment of damages, rooted in principles of Islamic Sharia. As is the case in other jurisdictions across the region, parties can agree on the level of damages in their contracts. However, the Saudi courts retain discretion to adjust those damages to reflect the actual loss suffered.
Here, we look at when compensation is payable for both torts – i.e. harmful acts – and breaches of contract under the Civil Code, as well as the mechanism for compensation under both the general provisions of the Civil Code and those applicable to muqawala contracts.
Harmful acts
The basic rule for claims in tort, or ‘harmful acts’, is that any error that causes harm to others warrants payment of compensation from whoever commits the error. Liability is not established if the harm results from a cause beyond the person’s control, such as force majeure, or the fault of a third party or the harmed person, unless otherwise agreed.
If the harm is caused by multiple persons, they are jointly liable for it, in proportions determined by the court, or equally if such a determination is not possible. Similarly, if the harmed party contributes to causing the harm through fault of their own, or increases the amount of harm sustained, they forfeit their right to a portion of the damages equivalent to their contribution.
Breach of contract
The default remedy for breach of contract is specific performance of the relevant obligation. However, if the obligation is oppressive then the court may limit the creditor’s remedy to compensation if the debtor so requests, unless this would threaten the creditor with exorbitant loss.
If specific performance is not possible, or if the performance has been so delayed that it no longer serves any purpose, the court will order compensation in lieu of performance. Similarly, delayed performance also entitles the creditor to compensation for any damages that result from the delay.
As with tort claims, if a creditor contributes to causing or exacerbates the damage arising from a breach by their own fault, they may forfeit an equivalent portion of the damages.
Compensation
In terms of compensation, the Civil Code deals with torts and breaches of contract in a similar manner.
Article 180 provides that where compensation for a breach of contract is not pre-determined, the court shall calculate it on the same basis as compensation for a harmful act – though there are some important exceptions to keep in mind.
The general position on compensation is encapsulated in the ‘overall rules’, or Sharia-inspired legal maxims, found in Article 720. Rule 16 provides that “harm shall be removed /made good”, reflecting the emphasis on restorative compensation present throughout the Civil Code. This is also apparent in Article 136, which states that compensation shall be in full, returning the damaged person to the situation that they would have been in had the damage not occurred.
The Civil Code establishes a requirement for compensable damages to be a ‘natural result’ of the damaging act, in which case compensation extends not only to damage suffered but also loss of profits. For the damage to be a ‘natural result’ of the damaging act, the damaged person must have been unable to avoid it by exerting ‘reasonable effort’ under the circumstances, gauged with reference to an ordinary person. In other words, the Civil Code imposes a duty to mitigate damages.
Article 139 provides that the default form of compensation for damage is money, though the court may – upon request of the damaged party and in view of the circumstances – order compensation in-kind, restoration of the status quo, or make a specific order.
Differences to consider
There are some areas where compensation for torts and breaches of contract differ.
For example, there are no notice requirements pertaining to compensation claims arising out of tortious acts, but they are required for claims arising out a breach of contract unless an agreement or statutory provision provides otherwise, or one of the defined grounds specified in Article 176 apply.
The scope of compensable damages and the ability to limit or exclude them are other areas where torts and breaches of contract diverge. The Civil Code precludes agreeing to exclude liability for tortious damages, though limiting liability for a breach of contract is permissible except in cases of fraud or gross error.
Along the same lines, damages for breach of contract are limited to those that would normally have been expected at the time of entering into the contract, but this limitation does not apply in the event of fraud or gross error on part of the debtor.
Liquidated damages
The Civil Code allows contracting parties to pre-determine damages, either in the contract or by subsequent agreement, in which case the requirement to give notice does not apply.
As with many other GCC states, the Saudi courts are empowered to – depending on the circumstances – adjust the amount of liquidated damages to reflect the actual losses suffered, as further described below. Importantly, these are mandatory provisions; parties cannot agree otherwise.
No compensation is due if the debtor proves that there were no actual damages incurred, and the court may reduce the amount of liquidated damages if the debtor proves that the agreed-upon damages were exaggerated or that the obligation in question was partially fulfilled.
One example of how this might work in practice would be if a liquidated damages claim is brought against a contractor in connection with liquidated damages purportedly incurred up the contractual line – if the contractor subsequently proves that no such liquidated damages were levied up the line, the court may reduce or set aside the claim for liquidated damages against the contractor, on the basis that it does not reflect the actual damages incurred for delayed performance. If, on the other hand, the creditor proves that the actual damages incurred are higher than the liquidated damages due to fraud or gross error on part of the debtor, the court may increase the damages accordingly.
In this respect, the Civil Code differs from those of some other GCC states, which allow the courts to increase damages outside of circumstances of fraud or gross error.
Muqawala provisions
The muqawala section of the Civil Code – encompassed in Articles 461 to 478 – contains provisions on compensation due if the work cannot be performed. As these provisions are not mandatory, the parties’ agreement takes precedence, in so far as it deals with the same subject matter.
Article 476 provides that either party may request the contract’s termination in the event of an “emergency excuse” related to the performance of the contract, in which case they are liable to compensate the other party for any resulting damages.
If a contractor commences work but is later incapable of completing it for reasons outside of its control, Article 477 provides that the contractor is entitled to compensation for the value of the completed work, in addition to the amounts spent on incomplete work in proportion to the resulting benefit to the employer.
Co-written by Melissa McLaren, Jack Tivey, and Zaid Abu Dahab of Pinsent Masons.
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