Judicial Scrutiny of Contracts: Hardship & Unfair Terms
Our Associate Hisham Almansoor discusses how the courts may intervene in contracts in the context of unfair terms, hardship and liquidated damages clauses.
Hisham Almansoor ([email protected]) – Associate
Contracts are a way of confirming and enforcing obligations that are expected from either party to the contract before the courts of law. Contracts are afforded a special status under civil laws, wherein the principle of pacta sunt servanda posits that the contract makes the law of the parties and no deviation from, or amendment to the same, is permitted except as prescribed by the contract or the law. Said principle is captured under Article 128 of the Decree Law No. 19/2001 Issuing the Civil Code (“BCC”), effectively providing the backbone of the civil legal system.
Parties are, in principle, free to include any condition agreed upon in the contract, provided it does not contravene the law, public order or morals (Article 110(a) BCC). This provision confirms the power of the courts to intervene where an issue stems from the terms of a contract itself as opposed to the broader circumstances in the case of hardship.
Standard Form Contracts
An interesting example of judicial intervention in private contracts arises where there is a large imbalance of power between the parties. This is typified in standard contracts provided on a ‘take it or leave it’ basis where no discussion on the terms occurs prior to the conclusion of the contract. In these circumstances, the weaker party is deemed to have submitted and acquiesced to the more dominant party who presented the terms to the former.
Article 57 BCC provides, “A standard form contract is one whose terms and conditions are set in advance by one of the parties and to which the other party consents with no ability to negotiate more favourable terms.” Article 58 BCC also provides, “Where a standard form contract contains arbitrary conditions, the Judge may at the request of adhering party, amend such conditions so as to remove any prejudice or relieve such party of the obligation to perform these conditions even though he was aware thereof, in accordance with the principles of equity. Any agreement to the contrary shall be deemed void.”
In confirming the court’s authority to intervene in the context of Islamic banking agreements, the Court of Cassation under Challenge No. 299 J.Y. 2010 held “[…] the late payment penalty imposed by Islamic banks on their clients in Murabaha contracts […] is a type of contractual compensation that is subject to the general principle stipulated in Article 226 of the Civil Code. […] If the court finds that the contract was concluded by way of acquiescence, it may, upon the customer’s request, reconsider this agreement by removing any prejudice therein or exempting the customer entirely from this fine, taking into account considerations of justice and honourable dealings.”
Hardship
Another strong example of judicial intervention in contracts is in the context hardship under Article 130 BCC, which provides “Where a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders fulfilment of the contractual obligation, though not impossible, excessively onerous for the debtor in such a way as to threaten him with exorbitant loss, the judge may, after taking into consideration the interests of both parties, reduce the excessive obligation to a reasonable level or increasing the other party’s obligations. Any agreement to the contrary is void.”
Hardship in the performance of contracts has become increasingly prevalent in the wake of the COVID-19 pandemic and has been the subject of many disputes. Under Challenge Nos. 63 and 67 J.Y. 2021, the Court of Cassation deemed the COVID-19 pandemic, and the precautionary resolutions issued by various governmental bodies, to be debilitating the conduct of business and hampering the ability of debtors to perform contractual obligations, such as payment of rent. The Court ordered the decrease of rent by 50% for a specified period, which is but one example of judicial scrutiny of private agreements to moderate the terms therein.
Liquidated Damages
Liquidated damages allow contracting parties to agree upon a sum of money payable to the non-breaching party in the event of a breach of contract. For a deeper discussion of liquidated damages, particularly in the construction industry, please visit our article (Liquidated Damages & Penalty Clauses in the Construction Industry).
Notwithstanding the parties’ agreement under a contract, pursuant to Article 226 BCC, courts may reduce the liquidated damages claimed by a contracting party where the defaulting party establishes that (i) the liquidated damages were grossly exaggerated in the contract or (ii) the principal obligation to which the said damages relate was partially performed. Article 226 BCC stipulates “Damages fixed by agreement are not due, if the debtor establishes that the creditor has not suffered any loss. The court 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. An agreement contrary to the provisions of the two preceding paragraphs is void.”
In practice, this has been implemented in a notable judgment of the Bahraini Court of Cassation under Challenge No. 197 J.Y. 2006 where it was held, “It is established that if the debtor has carried out some of the tasks he was obligated to perform and failed to perform others, then his negligence in this case is considered a partial negligence, which permits the court to reduce the agreed-upon compensation to the extent that is proportional to the amount of real damage suffered by the creditor. Considering the same, whereas the challenged ruling – with the discretionary authority enjoyed by the court – decided to reduce the agreed upon compensation to the amount decided upon because the debtor – the Appellant – had carried out 80% of the agreed upon work […]”.
Concluding remarks
In a dispute, contractual provisions may not always be taken at face value. In light of the factual circumstances of a dispute, the courts are able to interfere where terms are deemed arbitrary and unfair, or where exceptional circumstances render performance of contractual obligations highly burdensome.
For more information, please contact us on [email protected].