Penalty clause / liquidated damagesIn Arabic: الشرط الجزائي

Definition

A clause agreeing in advance the amount of compensation due if an obligation is breached, also called agreed compensation (التعويض المتفق عليه). In several GCC states the court may reduce it, or increase it, if it does not match the harm.

How it varies across the GCC

Saudi Civil Transactions Law articles 178 and 179 govern the agreed sum. Bahrain’s Civil Code does so in articles 226 and 227, and Oman’s Civil Transactions Law in article 267. In the UAE, article 390 of Federal Law No. 5 of 1985 dealt with it. That law is repealed from 1 June 2026, when Federal Decree-Law No. 25 of 2025 came into force. This page does not cite an article of the 2025 law for the penalty clause.

The rules that apply to a specific matter depend on the state, any free zone involved and the current text of the law, so check the official source before relying on them.

Sources

Official texts for the points on this page. General information, not legal advice. An article number is cited only where it was verified.

1. Saudi Civil Transactions Law, art. 178, 179https://laws.boe.gov.sa/BoeLaws/Laws/LawDetails/655fdb42-8c96-422b-b8c4-b04f0095c94c/1
2. Bahrain Civil Code, Decree-Law No. 19 of 2001, art. 226, 227https://www.lloc.gov.bh/Legislation/HTM/L1901
3. Oman Civil Transactions Law, Royal Decree 29/2013 (text on qanoon.om), art. 267https://qanoon.om/p/2013/rd2013029/
4. UAE Federal Law No. 5 of 1985 (repealed from 1 June 2026), art. 390https://uaelegislation.gov.ae/en/legislations/1025