This client alert addresses the enforceability of contractually agreed exclusion or limitation of liability (liquidated damages) as well as compensation for late payment under Libyan law against the backdrop of the 2016 amendments to the Civil Code and the subsequent legislative and judicial developments that have put those amendments into question. The short point is that enforceability currently turns on whether a court applies the Civil Code as amended in 2016, which sought to prohibit exclusion and limitation of liability, or instead treats those amendments as revoked or otherwise inapplicable, in which case the pre‑2016 Civil Code approach—recognizing exclusion of liability or agreed damages subject to judicial control—would apply. Given inconsistent practice across courts and a contested legislative record, parties face material uncertainty that should be managed at the contracting and dispute‑resolution stages.
A decision of the Libyan Supreme Court has brought greater clarity to this ambiguity, ruling that the 2016 amendments to the Civil Code were validly revoked by Law 1/2020 with retroactive effect. We discuss the implication of this ruling.
Legislative Background and Status of the 2016 Amendments
In January 2016, the so‑called second General National Congress (GNC) – one of two competing legislative bodies in Libya in the time between August 2014 and mid 2016 – introduced amendments to the Civil Code with the stated aim of aligning private law more closely with Islamic sharia. Law 6/2016 on Amending the Civil Code introduced several key changes relating to compensation in lieu of performance, including:
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- Revised Article 220 to prohibit agreeing on exclusion of liability,
- Revised Article 226 to prohibit parties from agreeing liquidated damages in advance,
- Introduced Article 224 (3) that excludes compensation for breach of contractual obligations if the subject of the obligation is a debt of money, and
- Abolished Article 229 which granted statutory default interest.
The second or outdated GNC was subsequently dissolved mid 2016 in the course of implementing the Skhirat Political Agreement, which aimed at ending the division of legislative and governmental bodies in Libya following the 2014 contested election. The House of Representatives (HoR), which emerged from the 2014 election, became the sole legislative authority in Libya. The status of laws enacted by the GNC during the 2014–2016 period remained unclear.
In 2020, the HoR enacted Law 1/2020 that intended to collectively annul laws issued by the second GNC, thereby purporting to revoke, among other measures, the 2016 Civil Code amendments. That 2020 statute itself is controversial: it did not enumerate the laws to be annulled and, depending on political affiliation, the legitimacy of HoR or the particular parliamentary session that adopted the statute has been contested. This legislative history has produced significant uncertainty in positive law. In practice, court decisions are not uniform. Some panels have applied the Civil Code as amended in 2016, refusing to grant compensation for late payment. Others have proceeded as if the 2016 amendments were invalid or revoked, applying the pre‑2016 Civil Code framework that for instance recognizes agreed damages, subject to judicial moderation.
The Supreme Court Confirms the Non-Applicability of the 2016 Amendments (Decision of 27/4/2023)
The Libyan Supreme Court took a clear position on the status of the 2016 amendments in its decision dated 27/4/2023 on Civil Appeal No. 792/64 JY which is binding on lower courts. the Fourth Civil Chamber (Tripoli) considered a cassation appeal by the Prime Minister and others against a Court of Appeal judgment in favor of a respondent who had sued for rescission of a vehicle purchase contract and compensation for non-delivery. The court of first instance ordered rescission and awarded compensation; the Court of Appeal reduced the compensation but otherwise affirmed the judgment.
The appellants petitioned for cassation, alleging among other grounds that the appealed decision granted compensation in violation of Article 224(3) of the Civil Code (the sub-article introduced by the 2016 amendments) as it awarded damages for mere delay in a monetary obligation whereas Article 224 (3) excludes compensation for breach of contractual obligations if the subject of the obligation is a debt of money.
From a dogmatic standpoint, this ground is unsubstantiated, as compensation was awarded for breaching the obligation to deliver the purchased vehicle, i.e. breaching a non-monetary obligation. The defendant’s failure to deliver resulted in the rescission of the contract and a claim for both a refund of the purchase price and compensation. This compensation however addresses non-delivery, rather than any refusal or delay in issuing the refund.
The Supreme Court did not address this aspect, however it dismissed the appeal on the grounds that Article 224 (3) of the Civil Code had been repealed by Law No. 1/2020 with retroactive effect and thus could not support the appellants’ argument. To that end the court stated,
[…]The second ground is unfounded, since paragraph three of Article 224 of the Civil Code, which was added by Law No. 6 of 2016, is repealed with a retroactive effect by Law No. 1/2020 which stated in its paragraph one (All laws and decisions issued by the General National Congress after the end of its mandate on August 3, 2014, are considered null and void.). This led to the extinguishment and erasure of all effects emanating from the repealed laws. In its [Law 1/2020] second paragraph it stipulates that the application of previous laws shall continue. Given that the appealed judgment granted compensation for damage incurred by appellee due to the delay in fulfilling the obligation, assuming that this damage occurred, it [ the appealed judgement] did not violate the law.”
The Court therefore accepted the appeal in form but rejected it on the merits.
Implications
Legal principles established by the Supreme Court in its rulings have binding effects on lower courts in Libya (Article 31 of Law 6/1982 on Reorganizing the Supreme Court). Based on this ruling it can be confidently argued that the Civil Code amendments introduced by Law 6/2016 are not applicable, and the pre‑2016 Civil Code applies. Contractual agreements excluding or limiting liability are allowed, and the injured party can still claim compensation for breach of contract alongside claim for refund of payments.
Does this mean that Compensation for Delay in Payment will be Granted under Libyan Law?
The above conclusion with regard to the non-application of the 2016 amendments may still not affect the restriction on claiming default interest or compensation for breach of monetary obligations. It is true that with the repeal of the 2016 amendments, Article 229 of the Civil Code, which provides for a statutory default interest of 5% in commercial matters, was revived and Article 224 (3), restricting compensation for breach of monetary obligations, is abolished. Yet, granting default interest or granting compensation for late payment may still be rejected by Libyan courts if deemed in violation of Law 1/2013 on “Prohibiting Usurious Transactions”.
In 2013, Libya enacted Law No. 1/2013, which prohibited interest in civil and commercial transactions. Article 1 (1) of the Law provides:
Interest on deposits and loans in all civil and commercial transactions between natural and legal persons shall be prohibited. All usurious interest, whether evident or concealed, earned from such transactions shall be invalidated on an absolute basis.
The law’s broad wording creates uncertainty about whether it applies solely to loan interest or also covers all types of interest, including default interest. The decisions of the Supreme Court in this regard have been inconsistent.
In a decision dated 16 June 2019 (Appeal 467/64 JY) the Third Civil Chamber upheld delay interest for late payment pursuant to Article 229 of the Civil Code on invoices for services provided to the Libyan Ministry of Agriculture. It effectively confined the prohibition of interest to credit transactions. After citing Law 1/2013 the Court argued,
The meaning of these provisions altogether is that it is only concerned with loans regardless of the types or denominations […]. And therefore there is no way to apply it to the provision of Article 229 of the Civil Code [providing for delay interest].
We discussed this decision in more detail in a previous client alert.
In a subsequent ruling by the Third Civil Chamber on May 26, 2021, regarding Civil Appeal no. 453/64 JY, the Supreme Court reached an entirely different conclusion. The appealed decision granted the defendants compensation for the appellant’s delay in the payment of their salaries pursuant to Article 224 and 225 of the Civil Code. The Supreme Court acted on an ipso officio base reversing the appealed decision and ruled on the basis of Law 1/2013 that
[…] claiming compensation for the mere delay in the payment of monetary amount claimed has no place in transactions before or after the enactment of Law 1/2013. Moreover the stipulations of the Islamic Sharia deemed Any increase in the principal amount of the debt (surplus) is considered usury [Riba] prohibited by Sharia. Since the contested judgment contradicted this view and upheld the lower court’s ruling to grant compensation, it is considered in violation of the law in manner that breach the public order […]
We note that the Supreme Court did not address the appellant’s argument, that compensation for late payment violates Article 224 as amended in 2016, but rather relied on Law 1/2013. In our view this does not mean that the Supreme Court confirmed the application of the 2016 amendments, as suggested by some scholars, but rather the opposite. By relying on Law 1/2013 – and not on Article 224 (3) Civil Code – the Supreme Court implicitly confirmed that Article 224 (3) of the Civil Code is repealed.
Conclusion
Despite the founded criticism to Law 1/2020 and the legal and constitutional uncertainty caused by the aftermath of the 2014 election, we take the view that Law 1/2020 validly repealed Law 6/2016 with the effect that the 2016 amendments to the Civil Code are no longer applicable. As a result, it is again permissible under Libyan law to agree on exclusion and limitation of liability to the boundaries stipulated in the Civil Code. Moreover, it is no longer impermissible to grant compensation for breach of contractual obligations, including in cases where the money paid is to be refunded for rescission of contracts. However, the right to claim default interest or compensation for late payment of monetary obligations remains contested. A restrictive interpretation of Law 1/2013 on the Prohibition of Usurious Transactions suggests that such default interest or compensation is permissible, as the prohibition applies only to interest on loans under loan agreements. In contrast, a broader interpretation indicates that all forms of interest payments and compensation for non-payment of monetary debts are prohibited under Libyan Law.
If you would like more information about this topic then please contact us.
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