Agreed compensation, and when it may be reduced
Agreed compensation — often called a penalty clause in usage — is governed by article 170 of Civil Code No. 40 of 1951. The general framework is on the page about preparing a contract.
Fixing the compensation in advance
Article 170, first paragraph, allows the parties to set the amount of compensation ahead of time, in the contract itself or in a later agreement, with regard to articles 168, 256, 257 and 258. Those articles are read in the file, together with the amount set ahead of time, if a dispute later arises over harm or over causation.
When it is not due, and when it may be reduced or increased
Under article 170, second paragraph, the agreed sum is not payable if the debtor shows that the creditor has not suffered harm. The sum may also be brought down if the debtor shows that the estimate was out of proportion, or that the original obligation has been carried out in part. Any agreement contrary to that paragraph is void. A clause that blocks proof of the absence of harm, or that blocks a reduction where the estimate is out of proportion or performance is only partial, therefore does not stand.
If the harm is greater than the agreed sum, the creditor may not claim above that sum unless it is proved that the debtor has committed fraud or a grave fault, under article 170, third paragraph. An increase is not the starting point, and it is conditional on proof of fraud or grave fault.
In a sale payable by installments, the parties may agree that the seller keeps part of the price as compensation if the sale is rescinded because the installments have not all been paid. Article 534, second paragraph, still allows the court, in the light of the circumstances, to bring that compensation down under the rules on agreed compensation. That detail is on the installment page.
The office follows a reading of the article from Baghdad, al-Yarmouk.
Legal basis and sources
Frequently asked questions
Is agreed compensation due if no harm has occurred?
No. Article 170, second paragraph, provides that the compensation is not due if the debtor proves that the creditor has suffered no harm, and every agreement contrary to that rule is void.
When may more than the agreed amount be claimed?
If the harm exceeds that amount, no more may be claimed unless the debtor's fraud or grave fault is proved, under article 170, third paragraph.
Related topics and articles
- 01Unforeseen hardship and rescission of a contractExceptional general events in article 146, and rescission of two-sided contracts in articles 177 and 178 of the Civil Code.
- 02Installment sales and the seller's retention of titleDeferred-price sales in articles 534 and 574: retention of title and acceleration of the price, even if styled as hire.
- 03Drafting a contract when dealing in BasraDrafting a contract when dealing in Basra under the federal Civil Code, followed from Baghdad.
- 04What does the Civil Code govern in a contract?How a contract is formed and becomes binding under Civil Code No. 40 of 1951: offer, acceptance and subject-matter.
- 05Points to review in a contract before signingMatters to review before signing: parties and authority, subject-matter, time, rescission, compensation and language.