Liquidated Damages in Commercial Contracts – A Comparative Legal Insight
A Comparative Legal Note on Commercial Contracting Practices
In the context of commercial and consultancy engagements, it is not uncommon for contracts to include liquidated damages provisions as a means of incentivising timely performance and addressing delays. While widely used, the treatment of such provisions varies significantly across legal systems. This note, prepared by ItQan – Advocates and Legal Consultants, offers a comparative perspective on the enforceability and scope of liquidated damages under Saudi law and Egyptian law, highlighting the practical implications for contract drafting and enforcement.
I. Liquidated Damages under Saudi Law
The legal system in Saudi Arabia is grounded in Sharia (Islamic law), which strictly prohibits Riba (usury). As a result, any contractual provision that imposes a financial penalty solely for late payment of money is likely to be deemed invalid, as it may be construed as Riba.
However, where the delay pertains to performance of services, delivery of works, or fulfilment of non-monetary obligations, Saudi courts generally recognise the validity of liquidated damages, provided the delay is attributable to fault or negligence on the part of the defaulting party and not the result of force majeure or circumstances beyond their control.
Notably, Saudi courts retain broad discretion to invalidate or reduce the agreed-upon damages if the claimant cannot establish actual harm, or if the stipulated amount is found to be excessive in light of the circumstances.
Accordingly, ItQan advises clients operating in the Kingdom to adopt a carefully tailored approach, including:
- Incorporating a grace or cure period before penalties take effect.
- Clearly excluding force majeure events and client-side delays from triggering damages.
- Providing a precise and measurable scope of obligations tied to the liquidated damages clause.
Liquidated Damages in Commercial Contracts
II. Liquidated Damages under Egyptian Law
Under Egyptian law, parties are permitted to agree in advance on a fixed compensation for contractual breaches, including delay, whether the breach involves non-performance or late payment.
The agreed sum is presumed to reflect the estimated damage, and courts will generally enforce it without requiring the claimant to prove actual harm, unless the breaching party can show that either:
- No loss was suffered, or
- The amount agreed is grossly exaggerated.
In either case, Egyptian courts may exercise their discretion to reduce the liquidated damages to a reasonable level. This mechanism strikes a balance between contractual freedom and judicial oversight, making liquidated damages an effective enforcement tool in the Egyptian context.
Liquidated Damages in Commercial Contracts
III. Key Points of Distinction
- Nature of Enforceability:
Liquidated damages for late payment are generally unenforceable under Saudi law due to Sharia prohibitions, whereas they are enforceable under Egyptian law, subject to judicial review.
- Requirement to Prove Loss:
Saudi courts require the actual occurrence of harm to uphold liquidated damages, while Egyptian courts presume loss unless rebutted by the debtor.
- Judicial Intervention:
Saudi courts exercise broad discretion to invalidate or reduce agreed penalties. Egyptian courts may intervene only when the penalty is clearly excessive or unjustified.
- Contractual Function:
In Saudi Arabia, liquidated damages are seen as a secondary, compensatory measure, whereas in Egypt, they function as a primary contractual remedy that encourages timely performance.
IV. Closing Remarks and ItQan’s Recommendations
Based on the foregoing, ItQan – Advocates and Legal Consultants recommends the following when drafting contracts involving parties in these jurisdictions:
- For Saudi Contracts:
Exercise caution when including liquidated damages provisions. Avoid applying penalties to late payment clauses. Instead, focus on performance-based breaches, with clear cure periods, force majeure carve-outs, and an obligation to act in good faith. Consider the likelihood of judicial modification or rejection if damages are deemed excessive or unjustified.
Liquidated Damages in Commercial Contracts
- For Egyptian Contracts:
Liquidated damages are generally enforceable and may be used more broadly, but the agreed amount must still be reasonable and proportionate. Overreaching may invite court intervention, particularly in disputes involving minor delays or technical breaches.
In all cases, precise legal drafting and a sound understanding of the applicable legal system are crucial to preserving the enforceability of commercial remedies and maintaining the balance of risk. ItQan’s legal team remains available to assist clients in structuring contracts that are both commercially robust and legally sound within their target jurisdictions.
By: Mahmoud Atef
Managing Partner – ItQan
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