Recovering lost profits: Is Saudi law changing?

Saudi Arabia is introducing major reforms to its legal system as part of Vision 2030. This includes modernising areas of commercial law presently governed by Shari’a rules. These sweeping developments will amend and clarify important aspects of areas of commercial law.

The recovery of lost profits under Saudi law has generated some debate. Our previous blog post explained that Saudi courts typically reject loss of profit claims as being too remote, but this could be changing very soon.

Recovering lost profits under Saudi law as it stands

Saudi courts and scholars have viewed lost profits claims with scepticism, reasoning that assessing profits in a counterfactual scenario may give rise to gharar—that is, uncertainty, ambiguity or unnecessary risk. A fundamental rule of Islamic jurisprudence is that contracts must be free from uncertainty and therefore, judgments in Saudi Arabia have held that lost profits are unrecoverable.

Notwithstanding, Saudi courts have awarded lost profits where the injured party was able to prove direct loss. For example, a distributor was awarded lost profits caused by a principal’s breach of an exclusive distribution agreement. The distributor proved that it would have profited under another arrangement with a third party but for the breach. The Court held that “the [principal] has caused this damage, which entails compensating the [distributor] for the damage it has sustained in the form of certain lost profits”. In other cases, Saudi courts have awarded shop owners lost profits following the wrongful closure of their shops by administrative bodies. In assessing damages, the courts relied on the shop’s accounts as well as input from court-appointed experts.

In another case, an author was wrongfully prevented from selling their work by an administrative authority notwithstanding the fact that he had obtained the necessary approvals. The court calculated the author’s damages based on the full retail price of the publication as at the time of censorship in respect of all printed copies of the book that could no longer be sold. The court agreed to compensate the author for the entire stock of printed copies on the assumption that they would be sold at their full price as opposed to awarding the mere cost of production. However, the court refused to award compensation for the lost opportunity to profit from the sale of additional copies that had not yet been printed on the basis that such losses were “speculative”.

In the words of an appellate court within the Board of Grievances, “the established position of the courts not to award compensation for loss of profit is not absolute”. The court went on to give the following guidance:

• courts should not refrain from awarding lost profits purely on the basis that they cannot be exactly quantified; and
• when losses cannot be exactly assessed, the court can award the compensation that is most likely to remedy the damage.

The court justified awarding lost profits in that case based on the claimant’s loss of an opportunity which, in the court’s view, was certain.

The court’s holding is also consistent with Shari’a rulings rendered by the International Islamic Fiqh Academy (IIFA), an organ of the Organisation of Islamic Cooperation of which Saudi Arabia is a member. For example, in Resolution No. 109 (3/12), the IIFA Council decided that lost profits were recoverable provided they were certain. This rule has been cited by Saudi courts as the evidentiary standard for awarding lost profits, albeit more commonly in the context of cases denying such damages because the claimant had failed to meet the “certainty” threshold.

Anticipated reforms and the promise of certainty

Saudi law on the recovery of lost profits is likely to change soon, at least in the domain of commercial contracts. A draft Commercial Transactions Law has been in public consultation in Saudi Arabia marking the first time that the Kingdom has considered promulgating a standalone law codifying the principles, customs and usages governing the dealings of merchants. The draft law would apply to construction contracts if promulgated in its present form.

Article 45 of the draft Commercial Transactions Law limits recovery to lost profits that are “certain and not speculative in accordance with Shari’a principles”. The reference to Shari’a does not necessarily mean that lost profits will be interpreted strictly. On one view, it may simply limit parties’ ability to recover losses that are remote, which is a common limitation in many legal systems. However, Saudi courts may take a more conservative approach than neighbouring jurisdictions based on previous practice.

A Saudi Civil Transactions Law has also been drafted and was approved by the Shura Council, the country’s Consultative Assembly, in May 2022. When promulgated, the Civil Code will regulate private law relationships and apply to merchants where the Commercial Code is silent. The draft Civil Transactions Law may permit the recovery of certain lost profits as well.

These legislative developments will bring Saudi law on lost profits closer to the laws in other MENA jurisdictions including Bahrain, Oman, Qatar, Egypt, Jordan and the UAE. This change was arguably foreshadowed by the Unified Civil Code which was prepared by the Gulf Cooperation Council and approved by Saudi Arabia as a model code for member states based on Sharia. It provides that the damages should include both actual losses and lost profits, provided that such losses are a natural consequence of the harmful act.

Conclusion

Saudi courts have occasionally awarded damages for lost profits in cases where the injured party was able to substantiate the loss and establish causation. However, instances where lost profits were awarded are not representative of a settled position of the Saudi courts which are still hesitant to consider lost profits claims due to the Shari’a prohibition of gharar.

At present, there is a tension in Saudi cases between the principle of full reparation (which requires recovery of lost profits in certain cases) and the prohibition on recovering remote or uncertain damages. These two rules are not mutually exclusive, and their almost universal application has not prevented courts in other jurisdictions from awarding lost profits which, owing to their inexact nature compared to actual damages, need only be established with “reasonable certainty”.

That said, there is an existing basis under Sharia law for awarding lost profits. The anticipated promulgation of the draft Commercial and Civil Transactions Laws will be an important step in setting a clearer legal standard for claiming lost profits and will hopefully create more certainty and consistency. In view of this rapidly changing legal landscape, parties doing business in the Kingdom should keep abreast of these and other developments and involve counsel early, especially when entering into long-term contracts.

This is part of a series of blog posts on managing risk in commercial and construction disputes under Saudi law. Click here to see other posts in the series.