By: Advocate Bashar Ibrahem Amosh
22/8/2021
I. Background
Lawyers and legal consultants engaged in the process of reviewing and drafting commercial agreements will almost certainly stumble upon or add clauses related to indemnity, liability, compensation and the circumstance that need to be fulfilled for damages to be granted by the breaching party to the other party in almost all types of agreements. This is due to the fact that lawyers acting on behalf of their clients will always want to guarantee first-rate commitment to the terms and conditions agreed upon by the parties. Thus, what better way to guarantee such commitment if not through ‘consensual compensation’ and care for not being financially penalized by the other party for any losses incurred due to bad performance or shortcomings in performing certain obligations. Many business people, especially those who are not aware of local laws, tend to think that the enforceability of such clauses is a matter of fact and that the mere explicit expression of such clauses, de facto leads to enforceability and implementation.
II. Enforceability
It is a bit more complicated than that. In order to enforce such clauses, certain conditions must be met in accordance with local legislation and well-established judicial precedents laid down by the Court of Cassation, which is the highest judicial authority in Jordan and when we say the highest it means that decisions issued by the same are final and cannot be appealed. In this article, we shall examine the existence of mutually agreed consensual compensations in light of the relevant provisions of the law and verdicts issued by the Court of Cassation to spread legal awareness amongst the Jordanian legal community and business fields which require the incorporation of similar clauses in their commercial dealings.
III. Key Business Requirement
As referenced in our introduction, indemnity clauses are crucial to any business relationship governed by specific terms and conditions. A talented and skilled lawyer will, without exception, always ensure the incorporation of an indemnity clause to protect the legal and financial interests of the party he or she is representing. If invoked, indemnity clauses will allocate the risk for claims of losses or damages between the contracting parties. To further clarify and by way of example, if one of the contracting parties incurs losses or damages due to a breach, commission, omission or an act of negligence by the other party, said party is legally and contractually bound to reimburse the party suffering from such loss or damage. Surely, there are different drafting approaches which a legal counsel may opt to choose from when drafting an indemnity clause, such an approach would be chosen based on common and well-known legal practice in a specific commercial sector, such as by way of example, construction, whereby indemnity clauses are carefully drafted and inserted to ensure full compliance from the contractor’s side and in some cases even its sub-contractors.
IV. Drafting an Indemnity Clause
To further emphasise, top-notch legal drafting of indemnity clauses would be very precise and specific as to what the reimbursement from the breaching party would include to the other party. For example, the parties may agree to hold each other harmless against all claims, losses, damages, lines, judgments, penalties, fines, legal or consultancy fees and in general against all liabilities arising out, involving or in connection with the breach, negligence or wilful misconduct of the party in breach of its obligations. In some commercial agreements (specifically service provision-oriented agreements), the parties choose to incorporate a limitation of liability clause, where the breaching party will only be liable to other party to a certain amount of material compensation. Hence, for example, the parties may agree to limit the liability of one another to the actual value of paid services pursuant to the agreement or it could be the agreement price/value itself (e.g., a USD1,000,000 agreement price in return for specific services, would be the limit of compensation the breaching party will be contractually bound to pay to the other party; subject always to being proven). In other agreements, the parties agree to incorporate a consensual compensation amount in the events of default or breach. In this case, the compensation required from the breaching party will be assumed and specified regardless of the actual damages that were incurred by the other party.
V. Jordanian Laws and the Court of Cassation
The above-mentioned information is extremely important and every legal counsel should be aware of, but what is more important is the enforceability of such clauses in court and in this case in light of the applicable laws and regulations of Jordan. The Jordanian Civil Code No. 43 of 1976 was clear and explicit regarding the basis on which compensation is granted to the damaged party; Article 364(1) of the Civil Code states that “subject to the provisions of the law, the contracting parties shall have the right to specify the amount of compensation by expressing the same under the contract or in a later agreed upon agreement”. Furthermore, Article 364(2) further states that “in all cases the court shall have the right, based on either party’s request, to amend such compensation and equating it to the damage incurred; any agreement contrary to that shall be deemed null and void”. Hence, we can comfortably say that it is up to the courts to decide on the actual damages incurred regardless of the compensation amount originally agreed upon by the contracting parties (although the law did allow it, but within the courts’ discretion). This is evident and consolidated by numerous judicial precents issued by the Court of Cassation.
In Case No. 4310/2017, the claimant and respondent entered into an employment contract that contained a provision which states that “if the respondent did not start working for the claimant in the specified time or has left his employment prior to contract’s expiry, then he shall be obliged to reimburse the claimant with half a month salary for each month of the remaining contract term”. Based on said provision, the claimant (the employer in this case) filed a civil lawsuit claiming compensation from the respondent (the employee), since he left his employment prior to the contract’s expiry.
The Court of Cassation held and established that said provision “is considered a consensual compensation clause in accordance with Article (364) of the Civil Code and the contractual liability elements must be established” prior to granting any compensation. To clarify the claimant should prove (i) the existence of negligence on part of the respondent (ii) the damage suffered by the claimant, (iii) the causation between the negligence and the damage, (iv) the claimant must also show that he notified the respondent to cure the breach (unless both parties dispense with such notice in an express clause in the contract).
The Court further held that damages are not assumed and predicted, otherwise the Court will not be able to asses the damages. It stresses that the Court may resort to experts to quantify the damages incurred by the suffering party. Therefore, we can understand from this decision that predicting the compensation amount without resorting to experts in a specific field will unlikely be accepted by the court.
In Case No. 5966/2019, the Court of Cassation held that “the penalty clause mentioned in the agreement is considered as consensual compensation in accordance with Article (364) of the Civil Code, which requires proving the elements of contractual liability from negligence, damage suffered, causation between negligence and damage”. It further reiterated that the damage is not assumed (i.e., a specific amount cannot be expressed in a contract) and evidence must be submitted to prove it. Therefore, and in this case, the Court held that if the claimant did not prove the damage incurred due to the respondent’s refusal to perform the obligations under the agreement, the Court might resort to experts to quantify the damages.
In another employment case No. 6316/2020, the Court of Cassation held that “contractual liability shall arise when an act was performed and that such performance has caused the damage. Hence, since the claimant did not provide any evidence that damages incurred were due to the respondent’s desertion of employment”. The Court further held that as long as no legal evidence was submitted then the occurrence of damages due to the employee’s desertion cannot be assumed but rather proven.
Similarly, the Court of Cassation stressed on the same principle applied previous precedents in Cases No. 6041/2020 and No. 233/2021. Accordingly, one can confidently say that judicial precedents established by the Court of Cassation have a consistent doctrine when deciding whether to grant compensation to the suffering party in contractual relationships. To make a summary of the above-mentioned, compensation is given based on actual damages incurred as proven by the claimant and subject always to the Courts discretion (not the parties assumed consensual compensation) as clearly expressed under Article (363) and Article (364) of the Jordanian Civil Code No. 43 of 1946. Please note that such principles are implemented by the Courts in Jordan and the parties may opt to enforce the indemnity clauses without resorting to courts on amicable and agreeable basis. But if contested, the Courts will most likely look at it from the perspective detailed in this article.
Within the same sphere of indemnification under commercial agreements, I would like to briefly pinpoint how the Courts deal with delay penalties, which are key to any construction agreements or indeed any agreement that contains milestones and completion dates. Although one can argue that delay penalties are considered consensual compensation for the purposes of Article (363) and Article (364) of the Civil Code, the Court of Cassation did a draw a distinction between them and the standard indemnity clauses. In Case No. 447/2016, the Court held that delay penalties may be granted to the suffering party if (i) the work has been completed without any defects and (ii) submitted to the other party by the contractor after the completion date. Contrarily, the quantification of the damages incurred will be up to the Court by equating it to the actual damage and loss incurred by the suffering party (reference Article 364 of the Civil Code). The Court of Cassation also reiterated that these elements must be sufficed to allow delay penalties in Case No. 3736/2018, where it held that “the owner shall not be entitled to delay penalties, unless the contractor completed all the works agreed upon after the lapse of period agreed upon to complete the works”.
Adv. Bashar Ibrahem Amosh is a member of the Jordan Bar Association since 2018, holds an LLB in Law and Master’s Degree in International Business Law from the United Kingdom and is currently working as a Supervising Associate at Amosh Legal Services & Arbitration in the Corporate/Commercial Division.