The penalty clause in contracts protects your rights from being lost

With the recent development witnessed by the Kingdom of Saudi Arabia, it has become necessary to conclude local and international contracts and agreements in many fields to keep pace with this development and seize investment opportunities. For this reason, the Saudi organizer was keen to preserve everyone’s rights, regulate the contractual relationship between the parties in their transactions, and regulate the method of compensation and the penalty clause in the contract by enacting the necessary rules and regulations for this.

In this article, we will discuss what is a penalty clause? Is it permissible to impose a penalty clause in the contract? What are its types? What is the conditional form? What are the conditions for its eligibility? What is the difference between it and compensation? What is the contract documentation service?

What is the penalty clause?

It is an agreement between the parties to a contract to establish a condition in the contract stipulating that a specified amount of value be paid as compensation if one party breaches its obligation to the other party.

The penalty clause is imposed in the event of:

• Delay in implementing the contract within the agreed period or failure to implement it within the specified period.
• Delay in paying the debt on time.

Is it permissible to impose a penalty clause in the contract?

The basic principle is that the conditions set by the parties to the contract are permissible unless they violate a text of the system or the provisions of Islamic Sharia. Accordingly, the penalty clause provision in contracts is permissible unless the contract between the two parties is a debt. The penalty clause may not be implemented because it is usury. Examples of this include: In installment sales, if the buyer is late in paying one of the installments, he must pay an additional amount as a penalty clause in the event that he is late in paying one of the installments. This is forbidden usury.

What are the types of penalty clauses in contracts?

What are the types of penalty clauses in contracts?

The new contract system in Saudi Arabia includes the contracts included in the Civil Transactions System and the Labor System. Both systems stipulate the provisions of the penalty clause in the contracts, which are:

• Penalty clause in employment contracts: It is the contract concluded between the employer and the worker to perform specific tasks in exchange for a financial consideration paid by the employer. The contract specifies the responsibilities and duties of each of them. The employer or company has the right to demand that the worker pay the penalty clause agreed upon in the employment contract in the event that the worker wishes to leave work before the end of the period specified in the contract in fixed-term contracts in accordance with Article 77 of the Labor Law.
• Penalty clause in commercial contracts: These are contracts concluded between merchants, commercial companies, and others in order to exchange goods or services or implement commercial deals.

” The penalty clause in these contracts is crucial to protect traders from loss resulting from delay and ensure that commercial contracts are executed on time.”

• Penalty clause in purchase and sale contracts: The penalty clause may be agreed upon in these contracts unless the obligation in the contract is a debt to one of the parties. The penalty clause may not be implemented because it is usury.
• Penalty clause in contracting contracts: These are contracts concluded between the contractor and the employer to implement engineering and construction projects. The contract specifies the obligations and responsibilities of the parties. The importance of the penalty clause lies in ensuring that the parties’ obligations are implemented on time and without prejudice to the terms of the contract.
• Penalty clause in supply contracts: These are contracts concluded between two parties where the first party undertakes to supply a commodity to the second party for a financial consideration at a specific time. If one of the parties does not adhere to the specified date or none of the agreed-upon terms are implemented, the injured party has the right to claim the penalty clause.
• Penalty clause in industrial contracts: It is a contract between two parties in which one party undertakes to manufacture something with specifications agreed upon by the other party in exchange for money within a specific period, such as manufacturing furniture, appliances, etc. If one party fails to implement its obligation, the other party may demand the penalty clause from it.

What is the wording of the penalty clause in contracts?

A specialized contract lawyer from the office of Lawyer Abdul Majeed Al Rashid can assist the parties in agreeing to draft contracts in the appropriate format for them when determining the penalty clause, taking into account the following:

• The penalty clause must be clearly and explicitly stated in the contract.
• Determine the reasonable time period for implementing the parties’ obligations.
• Determine the amount of the penalty clause.

What are the conditions for eligibility for the penalty clause?

Article 179 of the Civil Transactions Law stipulates the conditions that must be met to implement the penalty clause, which are:

• The injured party proves that the other party has breached the terms of the contract.
• The injured party proves that material losses occurred due to the other party’s breach.
• The amount of the penalty clause is proportional to the damage caused by the breach of contract.

What is the difference between a penalty clause and compensation?

A penalty clause is consistent with compensation in that an amount is paid to the injured party for the damage.

On the other hand, the penalty clause is considered a material compensation agreed upon between the parties and the value specified in the contract, in which one of the parties claims in the event that the other party breaches one of the terms of the contract or does not implement the obligation within the specified agreed upon time, while the compensation is either material, moral or moral compensation and is entitled to compensation for the damage resulting from the failure to implement the contract or the other party’s failure to implement its agreed upon obligation.

What is a contract documentation service?

Many government platforms provide electronic contract documentation services in order to preserve the rights of the parties and write contracts in a way that ensures the implementation of obligations with ease and simplicity. Contract documentation services include the following:

• Documenting insurance contracts: Employment contracts can be documented electronically via the Qawa platform in order to comply with the requirements of the labor system and reduce labor disputes.
• Documentation of lease contracts: The Lease platform enables documentation of contracts between the landlord and tenant and the issuance of an electronic lease contract that is considered a binding and obligatory executive document that clarifies the rights and obligations of both parties in the contract.

Hiring a specialized contract lawyer from the office of lawyer Abdul Majeed Al Rashid is crucial before signing a contract to protect your rights and funds from being lost. A specialized contract lawyer provides a variety of legal services in the field of contracts, including preparing and drafting contracts, reviewing the terms and obligations of both parties, compensation amounts, penalty clauses, and other services.

Seek advice from the office of lawyer Abdul Majeed Al Rashid and document your contracts safely.