The contract law of Iraq is contained in the Iraqi Civil Code (Law No. 40 of 1951, as amended). Iraqi contractual principles are mainly based on the Egyptian Civil Code, which was inspired by European civil law.

The Iraqi Civil Code is divided into a short introduction and two main sections. The introduction deals with general issues, such as applicable legal sources, the distinction between individuals and legal entities, the rules of application of laws and certain classifications.

The code provides for an interest rate of 4 per cent on delayed payment in respect of civil matters

The first main section regulates the law of obligations, and contains general provisions of the laws of contract, tort and some specific types of contract, such as sales, barter transactions, gifts, partnerships, loans, leases, agency and insurance. The second part addresses property rights and related issues.

The Iraqi Civil Code adopts the principle of freedom of contract, with only some limits and mandatory provisions generally enacted in order to protect weaker parties. Under the code, a contract is formed by offer and acceptance. The common law concept of consideration is not required. A contract does not need to be reduced to writing provided it can be proven that the parties intended to be mutually bound. The subject matter of the contract must be defined and not be illegal or “prejudicial to public order and morals”. In a Muslim country, this means the contract must not be contrary to sharia (Islamic law).

Force majeure

The code provides that a party is not liable to pay damages for non-performance or delay in performance of a contract if the cause was beyond its control. However, although Iraqi law makes provision for the effect of a force majeure event, it is recommended that parties entering into commercial contracts also include standard force majeure provisions. Iraqi courts have been reluctant to construe force majeure clauses to cover civil unrest or war in favour of a contracting party against the Iraqi government or government entities.

Contractual remedies

The Iraqi courts can order specific performance for a breach of contract, but in the event that performance of the obligation would be too onerous on that party, damages may be awarded instead. Alternatively, a party may request that the contract is cancelled and claim compensation in the form of damages.

Generally, the courts will aim to put the parties into the position they would have been in had the contract been performed. Unless the claim involves fraud or gross negligence, the damages awarded will not exceed the loss suffered or the amount of lost profit that was foreseeable at the date of entering into the contract. It is open to the parties to agree the amount of damages payable in the contract, but the amount may be subject to review and equitable adjustments by the courts if the original agreement was excessive. The parties may also agree limitations on liability in the event of a breach under the contract, and may thus exclude, for instance, indirect damage.

Damages may include the lost gain of the creditor, provided it is a natural result of the non-performance or delay in performance of the obligation. However, damages may not exceed the loss suffered, except in cases of fraud or gross negligence. Damages fixed by agreement are not due if the debtor establishes that the creditor has suffered no loss, and a court may reduce the amount agreed upon if it is grossly excessive or the principal obligation has been partly performed.

The code also provides for an interest rate of 4 per cent on delayed payment in respect of civil matters (payments due in a personal capacity or unsecured loans) and 5 per cent for commercial matters (transactions in the course of a business or secured loans) from the date that a claim is filed with the courts for payment. The parties may, however, choose a different interest rate, provided it does not exceed 7 per cent.

Limitation period

Generally, the contractual limitation period is 15 years, other than in certain circumstances in which it is less. These include where the right is a recurring one, such as the right to receive rent or salary for which a five-year limitation period applies. In a number of cases, the Iraqi courts have applied the 15-year limitation period to cases of recurring claims where the transaction was concluded in writing. Claims for unjust enrichment are barred after three years. A one-year limitation period applies to the rights of certain professionals and employees to be reimbursed for their work. It is not permitted to amend the limitation period contractually.