The Civil Transactions Law in Saudi Arabia now codifies the rules surrounding liquidated damages clauses, offering guidance for contracting parties. These clauses are recognized as pre-agreed estimates of losses due to a breach of contract, including non-performance or delays.
Historically, Saudi courts have upheld liquidated damages based on Sharia principles. “The Council unanimously decides that the penalty clause stipulated in contracts is valid and legally binding,” states Resolution No. 25 by the Council of Senior Scholars. The resolution also notes that fairness should prevail if a penalty is excessive and deviates from Sharia principles.
Article 178 of the Civil Transactions Law allows parties to specify compensation amounts unless it involves cash obligations. “Compensation that is contractually agreed upon by the parties shall not be payable if the debtor proves that the creditor has sustained no harm,” according to Article 179.
Saudi courts may adjust compensation amounts if they are deemed excessive or partially fulfilled, but only under specific conditions. For instance, judicial intervention focuses on removing exaggeration rather than assessing proportionality to actual harm.
Furthermore, Article 179(3) permits courts to increase compensation if fraud or gross negligence by the debtor results in harm exceeding agreed-upon amounts.
The Commercial Court in Jeddah has ruled against agreeing on compensation where monetary obligations are involved, citing public policy concerns.
Gibson Dunn’s lawyers Mahmoud Abdel Baky, Rashed Khalifah, and trainee associate Hamzeh Zu’bi prepared this update. They are available for consultation regarding these legal issues through their Riyadh office contacts provided above.
