Civil Transactions Law: What Has Changed in the Liability of Contracting Parties?

Introduction

Before the Civil Transactions Law was issued, many rules on contracts and liability were derived from a range of juristic and judicial interpretations. The Law brings these rules together in a written text, so that a contracting party knows in advance its rights and obligations, and how liability will be assessed if either party breaches its obligation.

This article does not survey the entire Law. It focuses on four issues that directly affect the liability of contracting parties: good faith in performance, the scope of compensation, penalty and exemption clauses, and unforeseen circumstances.

First: good faith is no longer just a general principle

Article (95) of the Law requires a contract to be performed in a manner consistent with the requirements of good faith. In practice, an obligation is not read by its bare wording alone, but in light of the purpose of the contract and the honesty that dealings require.

What does this mean for a contracting party?

• Exploiting a drafting loophole to harm the other party may be considered contrary to good faith.
• Cooperating in performance (providing information, giving notice of obstacles) is part of the obligation, not a courtesy.
• It is advisable to keep records of correspondence during performance, as it reveals each party’s conduct in a dispute.

Second: the scope of compensation is now clearer

The general rule

Article (120) provides that any fault that causes harm to another obliges the person who committed it to pay compensation. Article (137) provides that compensation is assessed according to the loss suffered and the gain missed by the injured party, where this is a natural result of the harmful act.

Moral damage

Article (138) provides that compensation covers moral damage suffered by a natural person, such as harm to their body, liberty, honour, reputation or social standing. This widens the scope of claims in some disputes compared with what was settled in previous practice.

What does this mean for a contracting party?

A party claiming compensation must prove the fault, the damage and the causal link between them, and must prove the value of the loss or missed gain with documents. Invoices, substitute contracts and financial reports therefore carry great weight in any claim.

Third: penalty clauses and exemption clauses

Agreed compensation

Article (178) allows the contracting parties to fix in advance the amount of compensation for a breach. However, Article (179) gives the court the power to reduce this amount if it is excessive, and allows a claim for more if it is proven that the damage exceeded it due to fraud or gross fault by the obligor.

Impact on drafting: a very high penalty clause may not achieve the intended effect, because the court may reduce it. It is better to base the amount on a reasonable estimate of the expected damage, and to document the basis of that estimate.

Exemption from liability clauses

Article (173) allows an agreement exempting the obligor from compensation for failing to perform its contractual obligation, except where this results from fraud or gross fault. An agreement exempting a party from liability arising from a harmful act is not valid.

Impact on drafting: “absolute non-liability” clauses do not protect a party that commits fraud or gross fault. Limitation of liability clauses should be specific and clear in scope.

Fourth: unforeseen circumstances and restoring balance

Article (97) addresses general exceptional circumstances that could not have been foreseen at the time of contracting and that make performance of the obligation so onerous for the obligor that it threatens them with a heavy loss. In this case, the Article allows the obligor to invite the other party to negotiate, and allows the court, depending on the circumstances and after balancing the interests of both parties, to reduce the onerous obligation to a reasonable level.

What distinguishes an unforeseen circumstance?

• It must be exceptional and general, not specific to the obligor alone.
• It must be unforeseeable at the time of contracting.
• It must make performance onerous, not impossible; impossibility is governed by other rules.

Impact on drafting: contracting parties may include a specific clause for price adjustment or renegotiation when circumstances change, reducing the need to go to court.

Fifth: limitation periods for hearing claims

Article (295) sets a general rule that a claim will not be heard after ten years from the date the right became due, and subsequent articles set shorter periods for certain rights. A claim for an established right should therefore not be delayed, and the period applicable to the specific type of right should be checked.

A simplified practical example

A business entered into an annual supply contract at a fixed price, and the cost of the raw material then rose sharply because of a general circumstance that was not foreseeable at the time of contracting. In this case, several questions arise in order:

1. Does the contract include a price adjustment or renegotiation clause? If so, it is the first point of reference.
2. Is the circumstance exceptional, general and unforeseeable? An ordinary price increase is usually not enough.
3. Has performance become onerous, threatening a heavy loss? This must be proven with figures and documents.
4. Was the other party invited to negotiate? Documenting this invitation and what followed matters if the case reaches court.

Conversely, if the supplier stops supplying without justification, the business may claim compensation for the loss it suffered and the gain it missed, or the agreed penalty if there is one, subject to the court’s power to assess it.

What should you do now?

1. Review your existing contracts that include a penalty clause or a broad exemption clause.
2. Update your contract templates to include a change-of-circumstances clause and clear limitation of liability clauses.
3. Document performance: correspondence, notices and delivery records are your evidence in a dispute.
4. Do not delay claiming an established right, so that you do not approach the limitation periods.

Conclusion

The Civil Transactions Law has moved many rules of contractual liability from interpretation to written text. This benefits the party that drafts its contract carefully, and exposes contracts written in haste. If you have existing or upcoming contracts, reviewing them in light of these provisions is a preventive step that costs less than a dispute.