Contractual Conditions

Contractual Conditions

Contractual conditions refer to provisions inserted into an agreement under which one or both parties undertake to provide security, to act as a guarantor, or to comply with specific requirements in relation to their obligations.

Where it is stipulated in a contract that a party must provide a specific asset as security, and such an asset is destroyed or becomes defective before being delivered as security, the beneficiary of the condition shall have the right to rescind the contract. In this circumstance, the beneficiary may not demand a substitute asset or the difference in value between the sound and defective property. However, if the asset is destroyed or becomes defective after it has been delivered and accepted as security by the beneficiary, the right of rescission shall no longer exist.

If the parties intended only that security be provided in general terms, the obligor must furnish appropriate security in accordance with their agreement and fulfill the stipulated condition.

Where the contract requires the provision of a guarantor and the obligor refuses to comply, the beneficiary of the condition shall have the right to rescind the contract.

Remedies for Breach of Contractual Conditions

Liquidated Damages Clause

Liquidated damages refer to compensation for non-performance or delay in performance, the amount of which is predetermined and fixed in the contract. A liquidated damages clause provides that, upon failure to perform within the agreed time, the breaching party must pay a specified sum. The parties may also stipulate a periodic payment, such as a monthly amount, in case of delay.

Pursuant to Article 230 of the Iranian Civil Code, where a contract stipulates that a breaching party must pay a specified amount as damages, the court may not order payment of more or less than the amount agreed upon.

Accordingly, where a liquidated damages clause is included in a contract, the court shall award the exact amount stipulated, regardless of whether the actual damage suffered is greater or less than the fixed sum.

Exemption from Liability Clause

An exemption clause provides that if the obligation is not performed within the agreed time, the obligor shall not be liable for damages. As a general principle, such a clause is valid, except in the following circumstances:

• Where the obligor has intentionally caused the damage or committed gross negligence.
• Where the damage involves bodily injury.
• Where the damage concerns personal dignity or reputation.

A common question is whether, in order to claim damages for breach of contractual obligations, it is necessary to expressly include a clause stating that damages shall be payable in the event of non-performance. The answer is negative. Modern contractual practice and commercial custom recognize that failure to perform within the agreed time ordinarily gives rise to liability for damages.

Pursuant to Articles 224 and 225 of the Iranian Civil Code, even if the contract does not expressly provide for damages upon non-performance, the obligor may still be liable, as such provisions have become customary and are deemed incorporated into contracts by prevailing practice.

In monetary obligations, the mere maturity of the debt does not, in itself, entitle the creditor to claim damages for delay. Under Article 522 of the Civil Procedure Code, entitlement to delay damages requires that the debt be due and that the creditor has formally demanded payment. In obligations payable upon demand, such as certain promissory note securities issued by banks, delay damages may be claimed only after the creditor has made a demand.

Limitation of Liability Clause

A limitation of liability clause restricts the maximum amount of damages recoverable under a contract. For example, the contract may specify that liability shall not exceed a stated amount. In such cases, if the actual loss exceeds the contractual cap, only the agreed maximum may be recovered. Conversely, if the actual loss is less than the cap, only the proven amount of damage shall be awarded.

Waiver of Contractual Conditions

A contractual condition creates a right in favor of the beneficiary, which the beneficiary may waive. However, a condition of the result cannot be waived, because once agreed, the legal effect arises immediately and cannot be undone by unilateral waiver.

Waiver may be effected through any conduct, whether oral, written, or implied by action, that clearly indicates the beneficiary’s intention.

If the principal contract within which the condition was stipulated is rescinded or mutually terminated, the condition, being ancillary to the contract, shall automatically cease to have effect.

Frequently Asked Questions on Contractual Conditions