Liquidated Damages Made Simple: What Saudi Arabia’s Civil Transactions Law Says

Client Alert  |  May 15, 2025

The Civil Transactions Law codifies the rules governing liquidated damages clauses under Saudi law. This client alert outlines key considerations for contracting parties when adopting such clauses, and how courts may approach them in practice.

How Liquidated Damages Clauses are Recognized in Saudi Arabia

The Saudi legal framework recognizes liquidated damages as pre-agreed estimates of losses incurred by one party due to the other party’s breach of contract, including non-performance or delay in fulfilling contractual obligations.

Historical Context

Even prior to the Civil Transactions Law, Saudi courts recognized liquidated damages clauses based on Sharia principles. Such clauses have been upheld as valid and enforceable, except in cases where:

  • the breaching party had a legitimate excuse for non-performance or delay; or
  • the agreed amount was deemed excessively high, amounting to financial coercion, in which cases courts have assessed excessiveness based on prevailing customs and practices.[1]

How Liquidated Damages Operate Today

  • Validity:Parties can agree on liquidated damages, either in the original contract or a later agreement.[2]
  • Simplified Burden of Proof:Liquidated damages clauses render the occurrence of damages presumed. To enforce such a clause, the aggrieved party is not required to prove damage or causation – merely that a breach has occurred.[3]
  • Avoiding Liquidated Damages:A party may avoid liability under a liquidated damages clause by proving either:
    • that the other party did not suffer any damage;[4] or
    • that the damage was not caused by the party’s breach, but rather by the other party’s acts, omissions, or a force majeure event.
  • Reducing Liquidated Damages:The breaching party may be successful in reducing the sum of liquidated damages by proving either:
    • that the pre-agreed amount is grossly exaggerated, thereby allowing the court to rule in accordance with the general principles of liability under Saudi law;[5] or
    • that the breaching party has partially performed their obligations, thereby allowing the court to assess the extent of unperformed obligations and apply the liquidated damages clause accordingly.[6]
  • Court Discretion:Courts cannot freely adjust liquidated damages clauses. Their discretion is limited to:
    • reducing the amount in cases of gross exaggeration or partial performance. A mere discrepancy between the damages incurred and the agreed sum is insufficient to warrant reduction[7]; or
    • increasing the sum if the non-breaching party proves that deceit or gross negligence by the debtor caused the damage to exceed the agreed sum.[8]
  • Prohibition on Payment Obligations:In line with Saudi Arabia’s strict prohibition of interest payments[9], it is impermissible as a matter of public policy for liquidated damages to apply to payment obligations.[10]
  • How Saudi Arabia Compares to Neighboring Jurisdictions:Saudi Arabia’s approach towards liquidated damages clauses shares similarities with the approaches of UAE and Egypt, but there are some differences. For example:
Element Saudi Arabi UAE Egypt
Default position on prior notice of imposition No prior notice required.[11] Prior notice required.[12] Prior notice required.[13]
Court discretion to adjust liquidated damages Relatively limited.[14] Relatively broad.[15] Relatively limited.[16]

Points to Consider When Drafting a Liquidated Damages Clause

  1. Be specific. Clearly define what triggers the liquidated damages (delays, quality issues, etc.).
  2. Consider industry benchmarks. Base estimates on market standards or historical data to avoid claims of exaggeration.
  3. Expressly address partial performance. Specify how damages will be calculated if some of the triggering obligations are met.
  4. Follow notice requirements. While Saudi law does not by default require notice to enforce liquidated damages, your specific contract might.
  5. Understand burden of proof requirements. Know who bears the burden of proof in different scenarios to claim or defend tactically.
  6. Consider all available remedies and seek them tactically. Parties may be precluded from enforcing liquidated damages clauses in conjunction with other contractual remedies.

[1]  Resolution No. 25 dated 31/08/1394H by the Council of Senior Scholars: “The Council unanimously decides that the penalty clause stipulated in contracts is valid and legally binding, and must be upheld unless there is a legitimate excuse for the breach of the obligation that justifies it under Sharia. In such a case, the excuse nullifies the obligation until it ceases. If the penalty clause is, by customary standards, excessive to the extent that it serves as a financial threat and deviates significantly from the principles of Sharia, then fairness and equity must prevail, based on the actual loss of benefit or incurred harm.” Cases in which Saudi courts upheld the Council of Senior Scholar’s Resolution No. 25 include the General Court’s Decision No. 1 of 1439H: “The liquidated damages clause included in contracts is a valid and enforceable condition which must be upheld, unless there is a legitimate excuse for breaching the obligation that is recognized under Shari’a, in which case the excuse suspends the obligation until it ceases. If the amount of liquidated damages is excessive by customary standards, to the point that it constitutes financial coercion and departs from the principles of Shari’a, then recourse must be had to justice and fairness, based on the actual harm incurred or the benefit lost. The determination of such matters in case of dispute is to be made by the competent court with the assistance of experts and professionals.”

[2]  Civil Transactions Law, Article 178: “The contracting parties may specify in advance the amount of compensation whether in the contract or in a subsequent agreement, unless the subject of the obligation is a cash amount. The right to compensation shall not require notification.”

[3]  For example: Board of Grievance’s decision in Case No. 20 of 1430H (predating the enactment of the Civil Transactions Law): “…and the administrative authority is not required to prove that it has suffered harm, given that [the liquidated damages] constitute an agreed-upon compensation for presumed harm, including harm resulting merely from delay.” Commercial Court in Riyadh’s decision in Case No. 4530906759 of 1445H: “The Law expressly provides that liquidated damages are not due to the creditor if the debtor proves that the creditor has suffered no harm. This is specifically stated in paragraph (1) of Article (179) of the same Law mentioned above,” presuming that liquidated damages are initially owed to the creditor upon breach, and it is the debtor’s burden to rebut this presumption by proving the absence of harm. This position is consistent with the literature of leading scholars in the region. For example, A. Sanhouri, ‘Al Waseet on the Explanation of the Civil Code’, Part Two, p. 817, concerning a similarly formulated legal provision in Egypt’s Civil Code: “[…] the presence of a Liquidated Damages Clause renders the occurrence of damage presumed, and the creditor would not be required to prove it.  Therefore, if the debtor alleges that the creditor has not incurred damage, it is he who would bear the burden of proof, and not the creditor.”

[4]  Civil Transactions Law, Article 179: “Compensation that is contractually agreed upon by the parties shall not be payable if the debtor proves that the creditor has sustained no harm.”

[5]  Civil Transactions Law, Article 179(2): “The court may, upon a petition by the debtor, reduce the compensation if the debtor establishes that the agreed-upon compensation was excessive or that the original obligation was partially performed.” A. Almarjah, ‘Explanation of the Saudi Civil Transactions law,’ 1445H, Part One, p. 297: “Judicial intervention is limited to removing exaggeration in the liquidated damages clause, not to assessing its proportionality to the actual harm. Accordingly, if the agreed liquidated damages exceed the actual harm, but the excess is not deemed gross, the judge may not reduce the amount.”

[6]  Civil Transactions Law, Article 179(2): “The court may, upon a petition by the debtor, reduce the compensation if the debtor establishes that the agreed-upon compensation was excessive or that the original obligation was partially performed.”

[7]  A. Sultan, ‘A Brief on the General Theory of Obligation’, 1983, Section 2, p. 78, concerning a similarly formulated legal provision in Egypt’s Civil Code: “…if there is excess in the quantification, but it is not exaggerated, it is impermissible to reduce it, as the fundamental principle is that the Judge orders in accordance with what has been agreed-upon by the parties, and absent one of the conditions of the exception, it is obligatory to resort to the fundamental principle.” A similar opinion has been given by a Saudi scholar; A. Almarjah, ‘Explanation of the Saudi Civil Transactions law,’ 1445H, Part One, p. 297: “Judicial intervention is limited to removing exaggeration in the liquidated damages clause, not to assessing its proportionality to the actual harm. Accordingly, if the agreed liquidated damages exceed the actual harm, but the excess is not deemed gross, the judge may not reduce the amount.”

[8]  Civil Transactions Law, Article 179(3): “The court may, upon a petition by the creditor, increase the amount of compensation to the extent necessary to cover the harm if the creditor establishes that an act of fraud or gross negligence by the debtor is what caused the harm to exceed the agreed-upon compensation.”

[9]  Commercial Court in Jeddah, Case No. 4531041638 of 1445H: “…it is impermissible to agree on compensation where the subject of the obligation is a monetary amount. Given that this Article pertains to public order (public policy), the parties may not contract out of or override its provisions…”

[10]  See, Resolution No. (109) (12/3) of the International Islamic Fiqh Academy: “It is permissible to stipulate a penalty clause in all financial contracts, except in contracts where the primary obligation is a debt, as this would constitute explicit riba (usury),” upheld by the Commercial Court in Jeddah in Case No. 433665897 of 1443H.

[11]  Civil Transactions Law, Article 178: “The contracting parties may specify in advance the amount of compensation […] The right to compensation shall not require notification.”

[12]  UAE’s Civil Transactions Law, Article 387: “Compensation is not due without the debtor being notified, unless otherwise provided by law or agreed upon in the contract.”

[13]  Egypt’s Civil Code, Article 218: “Unless otherwise specified, compensation is not due without the debtor being notified.”

[14]  Civil Transactions Law, Article 179(2): “The court may, upon a petition by the debtor, reduce the compensation if the debtor establishes that the agreed-upon compensation was excessive or that the original obligation was partially performed.” Id, Article 179(3): “The court may, upon a petition by the creditor, increase the amount of compensation to the extent necessary to cover the harm if the creditor establishes that an act of fraud or gross negligence by the debtor is what caused the harm to exceed the agreed-upon compensation.”

[15]  There are some inconsistent court decisions noted across and within each of the jurisdictions. UAE’s Civil Transactions Law, Article 390(2): “The judge may, in all cases, at the request of one of the parties, amend such an agreement, in order to make the amount assessed equal to the damage. Any agreement to the contrary is void.”

[16]  Egypt’s Civil Code, Article 224: “(1) Damages fixed by agreement are not due, if the debtor establishes that the creditor has not suffered any loss. (2) The judge may reduce the amount of these damages, if the debtor establishes that the amount fixed was grossly exaggerated or that the principal obligation has been partially performed. (3) Any agreement contrary to the provisions of the two preceding paragraphs is void.”

The following Gibson Dunn lawyers prepared this update: Mahmoud Abdel Baky, Rashed Khalifah, and Hamzeh Zu’bi*.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement, or practice groups, or the following authors in Riyadh:

Mahmoud Abdel-Baky (+966 55 056 6323, mabdel-baky@gibsondunn.com)

Rashed Z. Khalifah (+966 55 236 0511, rkhalifah@gibsondunn.com)

*Hamzeh Zu’bi is a trainee associate in Riyadh and not admitted to practice law.

© 2025 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials.  The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel.  Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.