Contractual Damages

Contractual Damages

Maintaining order and balance within society, as well as respecting agreements and commitments between individuals, constitutes one of the primary reasons for the necessity of compensating damages arising from the failure to perform contractual or legal obligations. In essence, fulfilling an obligation undertaken by an individual entails moral, social, legal, and even ethical duties.

In all societies, adherence to commitments is regarded as a valued principle, while breach of such commitments is considered antisocial conduct. Accordingly, most legal systems have established enforcement mechanisms, primarily financial, to prevent and remedy such violations.

In Iranian law, various mechanisms have been established to compensate for damages arising from contractual breaches. One such mechanism is the explicit determination of damages at the time of the principal contract’s conclusion, intended to compensate for losses arising from contractual non-performance. Such compensation may be claimed directly by the injured party, commonly referred to as a penalty clause or liquidated damages, or covered by a third party, such as an insurer. In general, under statutory provisions, damages are classified as non-contractual or contractual.

Conditions for the Establishment of Contractual Liability

Where a person causes damage to another without the existence of a contractual relationship, they are obligated to compensate for such damage under the principles of civil liability. One method of compensation in such cases is restoring the injured party to their position prior to the occurrence of the damage. For example, payment of repair costs for a vehicle damaged in a non-intentional accident. Where restoration to the previous condition is not possible, compensation may be provided through alternative means, including non-monetary equivalents or monetary damages.

Contractual Damages

Article 221 of the Civil Code addresses damages arising from contracts and provides that, when a person undertakes to perform an obligation, they are liable for damages suffered by the other party in the event of breach, provided that such damages have been stipulated in the contract.

Conditions for Claiming Contractual Damages

Parties may claim damages arising from a contract if the following conditions are satisfied:

• A contractual relationship between the parties is essential. The contract must be valid and lawful. Oral contracts are also subject to claims for damages.
• There must be non-performance, defective performance, or delay in the performance of the contractual obligation. In other words, a claim for damages arises when the obligated party fails to perform the obligation or fails to perform it within the agreed time.
• Compensation for damages is applicable only where actual loss has been incurred by the injured party, unless a specific amount has been stipulated as damages under Article 230 of the Civil Code.
• The contract must expressly provide that damages will be compensated in the event of non-performance or delay in performance.
• The failure or delay in performance must not be due to force majeure or external causes beyond the control of the obligated party.

Accordingly, the establishment of a contractual relationship, the occurrence of damage, and the existence of a causal link between the damage suffered and the breach of contract are essential requirements for claiming contractual damages.

Strengthening Contracts Through Liquidated Damages

In contractual relations, there is often concern regarding the possibility of non-performance by the obligated party. In some cases, even after performance, deficiencies in the completed work may become apparent. For this reason, parties may exchange a security instrument, such as a guarantee check, to ensure performance of obligations. As a result, it is common practice in significant transactions to include a liquidated damages clause. Under such clauses, the parties agree in advance on a specified amount to compensate damages arising from non-performance, which must be paid to the injured party upon breach.

Compensation Through Daily Penalties

Another method of compensating damages is the determination of a daily cost for each day of delay, calculated from the date of breach of the obligation. Including such provisions in contracts reinforces their binding nature under legal principles. Claiming damages pursuant to Article 221 of the Civil Code and Article 515 of the Civil Procedure Code does not preclude compelling performance of the contract. Both remedies may be pursued concurrently.

Frequently Asked Questions About Contractual Damages