Article 178 of the Saudi Civil Transactions Law
المادة 178 من نظام المعاملات المدنية · الفصل الثاني: التنفيذ بطريق التعويض
The article permits the contracting parties to fix the amount of compensation in advance in the contract or a later agreement, unless the subject of the obligation is a sum of money, and does not require formal notice for it to be due.
Official text (Arabic)
This article has not been amended since the law was issued.
يجوز للمتعاقدين أن يحددا مقدمًا مقدار التعويض بالنص عليه في العقد أو في اتفاقٍ لاحقٍ؛ ما لم يكن محل الالتزام مبلغًا نقديًّا، ولا يشترط لاستحقاق التعويض الإعذار.
This is the official Arabic wording, the only legally binding version. We do not translate the law itself; the explanation below is ours. Official source: Bureau of Experts at the Council of Ministers
Article 178 explained in plain English
Article 178 regulates what is known as agreed compensation, whereby the parties fix in advance the amount of compensation payable on breach of the obligation, instead of leaving its assessment for later.
The article contains the following rules:
- Permissibility: The contracting parties may fix the amount of compensation in advance.
- Where it is stated: Either in the contract itself or in a later agreement.
- The exception: This is not permitted if the subject of the obligation is a sum of money. If the obligation is to pay a sum of money, agreed compensation is not fixed for it under this article.
- No formal notice required: Formal notice is not required for agreed compensation to be due.
But agreed compensation is not absolute, since Article 179 places controls on it:
- It is not due if the debtor proves that the creditor suffered no harm.
- At the debtor's request, the court may reduce it if he proves that it is excessive or that part of the original obligation has been performed.
- At the creditor's request, the court may increase it to equal the harm if he proves that the harm exceeded it as a result of fraud or gross fault by the debtor.
- Any agreement contrary to its provisions is void.
To draft an agreed compensation clause in a contract, you may consult a lawyer specializing in civil and compensation cases or in commercial cases.
Practical example
A company in Riyadh agreed with a contractor to finish its offices, and the contract provided that the contractor pays SAR 1,000 for each week of delay in handover. This is permitted agreed compensation because the subject of the contractor's obligation is work and not a sum of money, and the company does not need to give the contractor formal notice for it to be due, subject to the controls in Article 179.
Translated from our Arabic explanation with machine assistance. For guidance only; it does not replace advice from a lawyer on your situation.
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Frequently asked questions about Article 178 of the Saudi Civil Transactions Law
Is a penalty clause permitted in a contract?
Yes. The contracting parties may fix the amount of compensation in advance in the contract or in a later agreement.
Is a penalty clause permitted if the obligation is to pay a sum of money?
No. Article 178 excepts the case where the subject of the obligation is a sum of money.
Must the debtor be given formal notice for a penalty clause to be due?
No. The article provides that formal notice is not required for agreed compensation to be due.
Can the court modify the agreed compensation?
Yes. Article 179 allows the court to reduce or increase it on specified conditions.
More articles on Performance of Obligations and Agreed Compensation
- Article 107
The article lets a party to a bilateral contract, after warning the defaulting party, demand performance or termination, with compensation if warranted, in either case.
في العقود الملزمة للجانبين، إذا لم يوف أحد المتعاقدين بالتزامه، فللمتعاقد الآخر بعد إعذاره المتعاقد المخل أن يطلب تنفيذ العقد أو فسخه، مع التعويض في الحالتين إن
- Article 161
The article requires the debtor to perform his obligation when it falls due and allows it to be enforced against him by compulsion if he refuses, once the conditions for compulsory enforcement under the law are met.
يجب على المدين تنفيذ التزامه عند استحقاقه، فإذا امتنع نفذ عليه جبرًا متى استوفى التنفيذ الجبري شروطه النظامية.
- Article 162
The article provides that an obligation that does not meet the conditions for compulsory enforcement remains owed on a moral basis (diyanah); if the debtor performs it voluntarily, the performance is valid and is neither a gift nor an undue payment.
إذا لم يستوف الالتزام الشروط النظامية لتنفيذه جبرًا يبقى قائمًا في ذمة المدين ديانةً، فإذا وفاه مختارًا كان وفاؤه صحيحًا ولا يُعدُّ تبرعًا ولا دفعًا لغير المستح
- Article 163
The article provides that an obligation owed on a moral basis (diyanah) is a valid foundation on which the debtor may build a legal obligation.
الالتزام القائم ديانةً يُعدُّ أساسًا صالحًا لأن يبني عليه المدين التزامًا نظاميًّا.
- Article 164
The article compels the debtor, after formal notice, to perform in kind where possible, and lets the court, at his request, limit the creditor to compensation if performance is burdensome and causes the creditor no serious harm.
1- يُجبَر المدين بعد إعذاره على تنفيذ التزامه تنفيذًا عينيًّا متى كان ذلك ممكنًا. 2- إذا كان في التنفيذ العيني إرهاقٌ للمدين جاز للمحكمة بناءً على طلبه أن تقصر
- Article 165
The article provides that a right to a thing specified by kind attaches to a particular item only once it is set apart, and lets the creditor, on non-performance, obtain a like item at the debtor's expense.
1- إذا تعلق الحق بشيء معين بالنوع لا بالذات، فإنه لا يختص بشيء بذاته من ذلك النوع إلا بإفرازه. 2- إذا لم يقم المدين بتنفيذ التزامه جاز للدائن أن يحصل على شيء من
The texts are reproduced from the official website of the Bureau of Experts at the Council of Ministers for reference; where they differ, the officially published Arabic text prevails. This content is not legal advice.