THE AUTHORS:
Benjamin Knowles, Partner & Chair of International Arbitration at Clyde & Co
Mahmud Sawan, Trainee Solicitor at Clyde & Co
Clyde & Co’s Young Arbitration Group provides a unique insight into international arbitration issues through the lens of young international arbitration practitioners working across different jurisdictions. In this series with Daily Jus, Clyde & Co explores the evolving landscape of damages in arbitration, analyzing recent developments, legislative changes, and their impact on dispute resolution worldwide.
Both Egyptian and Libyan law consider damages a matter of substantive law. Although the two systems share a civil law structure, key differences remain, particularly in Libya’s prohibition of interest and narrower approach to moral damages.
Are Damages a Substantive or Procedural Law Issue?
Both Libyan and Egyptian legal systems treat damages as a matter of substantive law. The Libyan Civil Code, which closely follows the Egyptian Civil Code, outlines rules on liability, causation, and the calculation of damages. These rules are part of the broader law of obligations. They apply to both contractual and tortious claims. Together, they form the core framework that arbitral tribunals use to assess liability and compensation when Libyan or Egyptian law governs the dispute.
In arbitration, if the parties choose either Libyan or Egyptian law as the applicable substantive law, the arbitral tribunal must apply the relevant Civil Code provisions. These provisions guide the tribunal in determining both the nature and the extent of the damages.
Applicable Law to Heads of Damage and Quantification
Where the parties select Libyan or Egyptian law to govern their contract, the heads of damage and the method of quantification are determined by that selected law.
Both legal systems recognise two main categories of compensation. These are:
(1) Actual material loss, such as financial damage or destruction of property; and
(2) Loss of expected profit, provided it is clearly proven and directly caused by the breach.
Under Egyptian law, if the amount of compensation is not set by contract or statute, the court (or an arbitral tribunal applying Egyptian law) is authorised to assess it. The compensation may include both the loss suffered and the lost profit. However, this is only allowed if the loss is a natural result of the failure to perform, or of the delay. In contract claims, damages are limited to what was foreseeable at the time of contracting, unless the breach involved fraud or gross fault (Article 221 of the Egyptian Civil Code (“ECC”))
A similar structure exists under Libyan law. The Libyan Civil Code, which is closely modelled on the Egyptian Code, adopts the same dual approach to compensable harm. Tribunals applying Libyan law may award compensation for both actual loss and lost profit (Article 224 of the Libyan Civil Code (“LCC”)). Both systems also allow tribunals to modify excessive contractual penalties. Article 227 of the LCC permits the reduction of agreed compensation if the debtor can show that the amount is exaggerated, or that part of the obligation has been fulfilled. This reflects the same principle found in Article 223 of the ECC.
Commonly Pleaded Heads of Damages
Under both the Egyptian and Libyan civil codes, parties may claim compensation for direct material loss. This includes losses caused by contractual non-performance or physical damage to property. Both systems also expressly recognise loss of profit (lucrum cessans) as a compensable head of damage. However, such claims are subject to the condition that the loss was a natural and foreseeable result of the breach.
Both jurisdictions explicitly permit the recovery of moral damages. In Egypt, this is codified in Article 222 of the Civil Code, while Libya addresses it under Article 225 of its Civil Code. These provisions affirm that compensation is not limited to material harm but extends to non-pecuniary losses, including emotional suffering and damage to reputation
The Libyan Civil Code also specifies that moral damages do not transfer to others, unless there is a clear agreement to that effect, or the injured party has asserted the claim directly before a court (Article 225). This aligns with the position under Egyptian law, which imposes similar limitations on the transferability of such claims. However, there is a disagreement regarding whether legal persons (e.g., companies) can recover moral damages. Certain court decisions have taken the view that moral harm is inherently personal. For instance, in a 2020 ruling (Cassation Appeal No. 13444 of Judicial Year 90), the Egyptian Court of Cassation held that legal persons cannot claim moral damages, as such harm is inherently personal. The court clarified that a company suffering reputational harm may instead seek compensation under material damages if it can show financial loss resulting from the harm.
Heads of Damages Not Recognised
Neither Libyan nor Egyptian law recognises punitive damages. Such damages are considered inconsistent with the compensatory function of civil law. The purpose of compensation is to restore the injured party to the position they would have been in but for the breach, rather than to punish the wrongdoer.
Both legal systems also exclude speculative or indirect losses. Examples include remote business opportunities or hypothetical investment returns. These losses are not recoverable unless they are both foreseeable and a natural consequence of the breach. Additionally, they must be clearly proven.
Non-Compensatory Damages: Contractual Penalties, Liquidated Damages, Restitution, and Interest
Contractual penalties and liquidated damages clauses are enforceable under both Libyan and Egyptian law (Article 225 of the LCC and Article 223 of the ECC). These clauses are valid provided they reflect a genuine pre-estimate of the likely loss arising from a breach.
However, the enforceability of such clauses is subject to judicial oversight. Both civil codes grant the court or arbitral tribunal the power to reduce or adjust the amount if it is found to be excessive. The test typically considers whether the agreed sum bears a reasonable relationship to the actual harm suffered. If the stipulated amount significantly exceeds the real loss, it may be reduced to a fair level. This approach reflects the civil law principle that damages must be compensatory rather than punitive.
Restitutionary damages, grounded in the doctrine of unjust enrichment, are also recognised in both jurisdictions. These arise in situations where one party has received a benefit at the expense of another without legal justification. A common example is where a contract is later declared void or unenforceable. In such cases, the party that conferred a benefit may seek to recover its value. Restitution is not concerned with fault, but with reversing an unjust gain.
Interest on damages, however, is an area where Egyptian and Libyan law diverge sharply.
In Egypt, interest is permitted under the Civil Code and is frequently awarded in both judicial and arbitral proceedings. Egyptian courts routinely uphold claims for pre-award and post-award interest, particularly in commercial disputes. The legal basis for such awards may be found in the contract itself or in statutory provisions. Interest is viewed as a legitimate means of compensating a party for the time value of money lost due to delayed payment or non-performance.
In Libya, by contrast, the awarding of interest is generally prohibited. Interest is classified as riba, which is forbidden under Islamic law. As such, tribunals applying Libyan law must exercise caution. Even if international legal principles or institutional rules (such as those under ICSID (International Centre for Settlement of Investment Disputes) or ICC (International Chamber of Commerce) would otherwise allow for interest, arbitral tribunals should refrain from awarding it if Libyan law governs the dispute.
Conclusion
Libyan and Egyptian law provide a broadly similar legal foundation for the assessment of damages in arbitration, rooted in the civil law tradition. Both recognise actual loss, lost profits, and, in principle, moral damages. However, Libya’s stronger alignment with Islamic law creates key distinctions in practice, most notably its prohibition of interest.
ABOUT THE AUTHORS
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
