The ‘Public Order’ & Why it Matters to Contracting Parties
Our Associate, Hisham Almansoor explains the concept of ‘Public Order’.
Hisham Almansoor – Associate ([email protected])
‘Public order’ (النظام العام) is a vital concept that continues to impact societies and legal systems worldwide. Yet quite often, the legislature and judiciary both refrain from defining this concept, which may be quite arcane to those unfamiliar with the legal world. It is widely believed that defining ‘public order’ is both a difficult and futile exercise due to its flexibility and context dependency. Nonetheless, the concept serves as a cornerstone for all jurisdictions, and it carries significant implications for contracting parties whether they share a commercial or non-commercial relationship.
In the interests of clarity, this article adopts the following understanding of the concept: the ‘public order’ may be conceived as a group of values, principles, ideals and interests shared by a society of a political, social, economic, and moral nature which set parameters for legal acts and individual conduct generally. It may also be understood in a more legal sense as rules which safeguard the broader public interest over those of individuals.
We consider in this article how the ‘public order’ plays a considerable role in Bahraini law and jurisprudence and comment on the implications of the concept for contracting parties with reference to Decree Law No. 19/2001 on the Issuance of the Civil Code (the “Civil Code”) and other relevant laws.
‘Public Order’ As a Restriction on the Freedom to Contract
The freedom to contract is a foundational legal concept globally. Under Bahraini law, this is best captured under Article 128 of the Civil Code which stipulates “The contract makes the law of the parties. Contracts can be modified or revoked only by the parties’ mutual consent or on grounds that the law permits.” However, contracting parties are not left without restraint on how they may contract with one another.
One way Bahraini law limits parties’ freedom to contract is the provisions on the subject matter of contracts. Parties are free to contract with one another and place conditions as they deem fit provided this does not contravene public order or public morals. Under Article 109 of the Civil Code, the contract shall be deemed void if the subject of the obligation under the contract is contrary to public order or public morals.
The agreement on interest, for instance, is subject to tight control by the Civil Code. Article 228(1)(a) stipulates “Any agreement for interest for utilising a sum of money or for delay in settlement thereof shall be void.” The Bahraini Court of Cassation has confirmed the significance of this rule under its ruling in Challenge Nos. 40 and 63 J.Y. 2017 where it was held “[Article 228] provides the invalidity of every agreement to receive interest in return for benefiting from an amount of money or in return for the delay in fulfilling an obligation to settle an amount of money […] which is a peremptory rule relating to the public order.” In essence, this means that in non-commercial agreements, such as lease agreements, landlords may not charge tenants interest for late payment of rent.
‘Public order’ restricts parties’ freedom to contract regarding provisions on the limitation or exclusion of liability. As a matter of principle, parties are free to negotiate and limit contractual liability, which is confirmed by the text of Article 219 of the Civil Code, which stipulates “The parties may agree to discharge the debtor from any liability arising from his failure or delay to perform his contractual obligation, except where it is due to his fraud or gross fault.” However, different considerations apply where the exclusion of liability is in respect of a tortious act/omission (construed under Bahraini law as an ‘unlawful act’). In these circumstances, Article 181 of the Civil Code holds that any term which seeks to partially or fully restrict liability for an unlawful act (prior to said liability arising) shall be deemed null and void. Therefore, in the event of gross fault or fraud, the rules of tortious liability are applicable (even where there is a prior contractual relationship), under which the creditor may claim compensation for direct, foreseeable losses as well as non-foreseeable losses. This has been confirmed by the Bahraini Court of Cassation in numerous rulings, including Challenge No. 1796 J.Y. 2019 where it was held “[…] the compensation awarded by the courts must satisfy the losses suffered by the creditor, whether material or moral in nature, and may include financial loss (damnum emergens) and loss of profits (lucrum cessans), in order to restore the creditor’s position to that had the fault not occurred. However, the scope of tortious liability is broader in scope than its contractual counterpart, as the former includes foreseeable harm and unforeseeable harm whereas the latter is limited to loss that is foreseeable at the time of concluding the contract, provided there is no fraud or gross fault by the debtor.” Therefore, where gross fault or fraud by the debtor are established, the rules on tortious liability are applicable, and the debtor may not rely upon a term which restricts or excludes liability for an unlawful act.
‘Public Order’ As a Measure of Protection
‘Public order’ may also be seen as a principle capable of protecting parties where there is an inequality of bargaining power, or where circumstances beyond the parties’ control inevitably impact or frustrate the performance of contractual obligations. This may be demonstrated in three key examples:
First: Commercial Agencies
Commercial agencies in the Kingdom of Bahrain are regulated under Decree Law No. 10/1992 (“CAL”). The public order, in a protective stance to the benefit of the agent deemed to be the weaker party in the commercial relationship, goes to great lengths to afford commercial agents the right to claim compensation following the termination of a commercial agency. This is confirmed by the text of Article 8(d) CAL which stipulates “The agent shall, notwithstanding any agreement to the contrary, be entitled to claim compensation from the principal in the event of termination of the agency relationship prior to the expiry of the fixed term, if the efforts exerted by the agent led to an evident success in the promotion of the principal’s products or to the increase in the number of its customers and due to the refusal of the principal to renew the agency agreement the agent was unable to receive the profit of such success”. (Emphasis added).
A legal provision which expressly states “notwithstanding any agreement to the contrary” is an unequivocal reference to public order considerations by the Bahraini legislator to protect the commercial agent from being taken advantage of by the principal who often enjoys strong bargaining power (perhaps as a large corporation with a wide degree of choice over which company to appoint as an agent).
Second: The Doctrine of Hardship
Hardship is a doctrine which impacts the debtor’s ability to perform a contractual obligation. This is to be distinguished from ‘force majeure’, which addresses situations where performance is rendered impossible due to a cause outside of the parties’ control. For a deeper consideration of the difference between the two concepts and their impact on contracting parties, please visit our article titled: COVID-19: Force Majeure or Hardship.
The hardship doctrine is expressed under Article 130 of the Civil Code, which stipulates “Where, however, 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.” (Emphasis added).
The legislator demonstrably protects the debtor from the risk of being incurred with extremely onerous obligations which became arduous to perform due to circumstances that were not envisaged by the parties upon concluding the contract.
Third: Employment Contracts
Public order plays a significant role in the context of labour law in protecting the weaker party, the employee. Nowhere is this more apparent than under Articles 4 and 5 of Law No. 36/2012 on the Issuance of the Labour Law for the Private Sector (“LLPS”). Article 4 stipulates that “Any condition or agreement that contravenes the provisions of this Law, even if its date precedes the date of entry into force of this Law, shall be deemed null and void if it prejudices the workers’ rights prescribed therein […]”. For instance, where an employer seeks to include a term in the employment contract which varies the end-of-service indemnity payable to non-Bahraini employees pursuant to Article 116 LLPS, or where a term forfeits the employee’s right to receive the balance of annual leave in accordance with Article 59(c) LLPS, these would be deemed null and void – despite the employee signing the employment contract – as the employer is attempting to diminish the employee’s statutory rights.
In respect of employer-employee settlements, Article 5 LLPS stipulates that “Any conciliation involving a derogation from or forfeiture of the worker’s rights arising from the employment contract during its validity period or within three months as of the date of its expiry shall be deemed null, if contrary to the provisions of this Law.” The Court of Cassation has confirmed the public order’s protection of employees where the employer presents a ‘settlement’ to the employee during the validity period or three months from the expiration of the contract in Challenge No. 337 J.Y. 2014 where it held that a settlement concluded prior to the lapse of three months which failed to specify its components (e.g. accrued annual leave, leaving indemnity etc) contravened Article 5, and the court obliged the employer to settle the employee’s accrued annual leave and leaving indemnity, despite the prior signed settlement between the parties.
Concluding remarks
‘Public order’ is a concept capable of protecting the weaker party in contractual relationships, but also serves as a restraint on parties’ freedom to contract where a legal provision renders specific terms agreed by the party null and void, if it may prejudice broader political, social, economic, and moral interests shared by a society. This was evident from the Civil Code’s restriction on the freedom to contract where the subject matter is contrary to public order or morals, and where a non-commercial agreement provides for interest. ‘Public order’ may also be regarded as a protective principle to the benefit of the weaker party in contractual relationships, or the debtor with the burden of an obligation which has become highly onerous to perform.
For more information, please contact us on [email protected].