The Egyptian Civil Code (the “ECC”) stipulated compensation as an alternative way of performing contractual obligations, namely in both cases of delay or non-performance (the “Breach”) of such obligations.
The general rules of contractual compensation, according to the ECC, is that it may be claimed after the debtor is legally summoned by the creditor to perform his contractual obligations. The compensation then shall be determined by Judge, equivalent to the harm affected the creditor. Harm here refers to the physical harm, which includes the incurred loss and the missed profits that the debtor should have expected at the time of the contract’s creation; in addition to any emotional harm that affects the creditor from the debtor’s Breach of obligations.
Contracting parties, as per the General Rule of the ECC, are granted the right to pre-determine the amount of compensation in the contract, in case of any Breach of their contractual obligations. This rule is well-recognized in the Egyptian legal system in all kinds of contracts. In reality, the contractual clause is usually a clause which determines an amount to be paid, without requiring any further notice or procedures, in specified cases of Breach. And although this clause is in accordance with the ECC, the amount of such conceptual compensation is still challengeable.
The Conceptual Compensation amount can be challenged, as an exception to the general rule, according to the ECC in three cases. The first case is when the defaulted party can prove that no harm affected the claiming party from his Breach of the contract, as an application to the principal of “No Harm, No Foul”. In such case, the judge may decide that despite of the validity of the Conceptual Compensation clause, the non-entitlement of the claiming party to the Conceptual Compensation.
The second case of challenging the Conceptual Compensation clause is by proving that the compensation was highly overestimated, the determination of such overestimation is only decided by the judge, according to his discretion power.
The third and last case of challenging the Conceptual Compensation is the case where the defaulted party proves the partial fulfilment of its contractual obligations. In the last two cases, if considered the compensation is highly overestimated or that the contractual obligation is partially fulfilled, the judge may reduce the amount of compensation to the extent that becomes appropriate to the harm affected the claiming party.
The ECC also stated another important rule to apply Conceptual Compensation, which is summoning the other party to execute his obligation unless otherwise stated between the parties. Moreover, The ECC specified the following as a reason for not summoning the other party:
– If the execution of the obligation becomes impossible or without interest because of an act of the debtor.
– If the subject matter of the obligation is the recovery of an injury resulting from an unlawful act.
– If the subject matter of the obligation is the restitution of a stolen thing known as such by the debtor, or something, which has been unduly received by the debtor who is aware of such undue receipt.
– If the debtor declares in writing that he is not going to perform his obligation.
Based on the above-mentioned rules, the Conceptual Compensation clause in any contract shall be very well drafted. Moreover, claiming the Conceptual Compensation shall not be deemed certain just by any Breach by the defaulted party, even if such Breach is stated as a reason to the entitlement of the compensation.
Finally, the Conceptual Compensation is merely just a way of determining compensation, but it does not prevent the judge from verifying that such compensation is in accordance with the law and appropriate to the damage.
- Dispute Resolution