Some rules of the Egyptian Civil Code, issued by Law No. 131 of 1948, on forming and performing a contract differ from what a Gulf party expects, starting with the earnest money rule and the judge's power to reduce a burdensome obligation. This article explains the rules from the Arabic text published on the Egyptian Tax Authority website, from our Cairo office. Article numbers refer to the Civil Code.
A contract is concluded by two matching expressions of will
Article 89 says a contract is concluded as soon as two parties exchange the expression of two matching wills, subject to any special form the law requires. Under Article 90, will may be expressed in words, in writing, by a sign commonly used in custom, or by taking a position whose meaning the circumstances leave no doubt about. It may also be implied unless the law or the parties require it to be express. Under Article 91, an expression of will has effect at the moment it reaches the knowledge of the person it is addressed to, and its arrival is presumed to mean knowledge unless proved otherwise. Article 92 adds that the death or loss of capacity of the person who made the expression before it takes effect does not prevent it from taking effect when it reaches the knowledge of the person addressed, unless the expression or the nature of the dealing shows otherwise.
How long an offer lasts
If a time for acceptance is fixed, the offeror must keep the offer open until it ends, and the time may be inferred from the circumstances or the nature of the dealing (Article 93). If the offer is made in the contract meeting with no time stated, the offeror is released if acceptance does not come at once, and the same applies to an offer made by telephone or a similar means. The contract is still concluded, even if acceptance is not immediate, if nothing shows that the offeror withdrew in the interval and the acceptance came before the meeting ended (Article 94).
Agreement on the essentials, and the letter of intent
Article 95 says that if the parties agree on all the essential matters and reserve detailed matters to be agreed later, without stating that the contract is not formed if they cannot agree on them, the contract is considered concluded. If a dispute arises on the matters left open, the court decides them according to the nature of the dealing, the provisions of law, custom and fairness. A letter of intent that covers the essentials can therefore be a complete contract, even if you did not mean it to be. To avoid this, say expressly that nothing binds the parties until a signed definitive agreement exists.
Under Article 101, an agreement to conclude a specific contract in the future is formed only if all the essential matters of the contract and the time within which it must be concluded are determined, and a form that the law requires for the contract must be observed for the promise too. Under Article 102, if a person promises to contract and then refuses, and the other party sues for performance of the promise, a final judgment can stand in the place of the contract if the conditions for the contract, especially as to form, are met.
The mirror rule, absent parties and silence
Article 96 provides that an acceptance that adds to the offer, restricts it or modifies it counts as a rejection containing a new offer. Under Article 97, a contract between absent parties is concluded at the place and time at which the offeror learns of the acceptance, unless there is an agreement or a legal provision otherwise, and the offeror is presumed to have learned of it where and when it reached him. Track the chain of correspondence: the last conforming acceptance created the contract, and the place is where it reached the offeror.
Article 98 covers silence. If the nature of the dealing, custom or the circumstances show that the offeror did not expect an express acceptance, the contract is considered concluded if the offer is not rejected in good time. Silence in reply counts as acceptance if there was earlier dealing between the parties and the offer relates to it, or if the offer is solely for the benefit of the person it is addressed to.
Adhesion contracts
Article 100 says acceptance in adhesion contracts is limited to submission to terms the offeror has set and does not allow discussion of them. Article 149 goes further: if a contract is concluded by adhesion and contains arbitrary terms, the judge may modify them or release the adhering party from them, as fairness requires, and any agreement to the contrary is void. Article 151 provides that doubt is generally interpreted in favor of the debtor, but that the interpretation of unclear wording in an adhesion contract may not harm the adhering party. A party that imposes a standard form in Egypt bears the cost of every ambiguity and risks having a one-sided term modified by the court.
Earnest money in Egypt: withdrawal is the default
Article 103 provides that paying earnest money when the contract is made means that each party has the right to withdraw, unless the agreement says otherwise. If the payer withdraws, he loses it. If the recipient withdraws, he returns twice the amount. This applies even if the withdrawal causes no harm. Many foreign parties expect earnest money to confirm the deal. In Egypt it is, by default, the price of the freedom to leave, so a clause copied from another system may mean something quite different here. Say expressly in the contract what the earnest money is for.
Capacity and defects of consent
Article 109 says every person has capacity to contract unless the law removes or limits it. Under Articles 110 and 111, a minor who cannot discriminate has no capacity and all of his acts are void, and the financial acts of a discerning minor are valid if purely beneficial, void if purely harmful and voidable if between the two. Article 119 allows a person with limited capacity to ask for annulment, without prejudice to his liability for compensation if he used deceitful means to hide his lack of capacity.
The Code provides four grounds for annulment:
- Mistake (Articles 120 to 124). A party who made a fundamental mistake may ask for annulment if the other party made the same mistake, knew of it, or could easily have discovered it. A mistake is fundamental if it is so serious that the party would not have contracted but for it, particularly a mistake about a quality that matters to the parties or ought to be treated as such in light of good faith, or about the identity of the other contracting party or a quality of his that was the main reason for contracting (Article 121). A mistake of law is treated like a mistake of fact (Article 122). A calculation error or a slip of the pen does not affect validity, but it must be corrected (Article 123). A party may not rely on his mistake in a way that conflicts with good faith, and stays bound to the contract he meant to make if the other party shows readiness to perform it (Article 124).
- Fraud (Articles 125 and 126). A contract may be annulled for deceit if the tricks used by a party or his agent were serious enough that the other party would not have contracted without them. Deliberate silence about a fact or circumstance counts as deceit if the deceived party would not have contracted had he known it. Deceit by a third person allows annulment only if the other party must be presumed to have known of it.
- Duress (Articles 127 and 128). A party who contracts under fear wrongfully caused by the other party, based on a serious and imminent danger to himself or another in life, body, honor or property, may seek annulment. The court takes into account the person's sex, age, social and health condition and other circumstances. Duress by a third party counts only if the other party knew or must be presumed to have known.
- Exploitation (Article 129). If one party's obligations are wholly out of proportion to the benefit he gets or to the other party's obligations, and he contracted only because the other party exploited an evident recklessness or uncontrolled desire, the judge may annul the contract or reduce his obligations. The claim must be brought within one year from the contract, and in contracts for value the other party may avoid annulment by offering what the judge considers enough to remove the imbalance.
Performance: the contract binds, with one exception
Article 147(1) says the contract is the law of the parties and cannot be broken or modified except by agreement or for reasons the law provides. Article 147(2) is the rule that most surprises Gulf parties. If general exceptional events that could not be foreseen occur, and as a result performance of the contractual obligation, though not impossible, becomes so burdensome for the debtor that it threatens him with heavy loss, the judge may, depending on the circumstances and after balancing the parties' interests, reduce the burdensome obligation to a reasonable level. Any agreement to the contrary is void. A fixed price clause or a "no adjustment" clause does not remove this power. Under Article 148, the contract must be performed according to its terms and in a way consistent with good faith, and it covers what its nature requires under the law, custom and fairness.
Signing through a representative
When a contract is made through a representative, the representative's person, not the principal's, counts for defects of will and the effect of knowledge, but a principal who gave specific instructions cannot rely on the representative's ignorance of what the principal knew or must have known (Article 104). If the representative contracts within his authority in the principal's name, rights and obligations go to the principal (Article 105). If the representative does not state that he acts as representative, the effect does not go to the principal unless the other party must be presumed to have known of the representation or did not care whether he dealt with the principal or the representative (Article 106). If the representative and the other party were both unaware that the authority had ended, the effect goes to the principal or his successors (Article 107). Ask for the power of attorney and read its scope before signing.
What we review before signing in Egypt
We review the chain of offers and acceptances and which one formed the contract, whether a letter of intent could bind, the earnest money clause, standard and adhesion terms, the authority of the signatory, and clauses that try to exclude judicial revision of a burdensome obligation. We deliver this service from our Cairo office.
Read also: Egypt Dispute Resolution: Arbitration and Court Challenges | Egypt Investment Law: Guarantees and Incentives for Investors
Frequently asked questions
When is a contract concluded in Egypt?
When two parties exchange the expression of two matching wills (Article 89). Between absent parties, at the time and place the offeror learns of the acceptance (Article 97).
Does a qualified acceptance form a contract?
No. An acceptance that adds to, restricts or modifies the offer is a rejection that contains a new offer (Article 96).
What happens to earnest money if a party withdraws?
By default each party may withdraw. The payer loses it, and the recipient who withdraws returns twice the amount, even if no harm results (Article 103).
Can an Egyptian court change a contract because performance became too costly?
In the case Article 147(2) describes: exceptional general events that could not be foreseen and that make performance burdensome enough to threaten heavy loss. The judge may reduce the obligation to a reasonable level, and a clause to the contrary is void.
Can a court change unfair standard terms?
Yes, in a contract of adhesion. The judge may modify arbitrary terms or release the adhering party, and any agreement to the contrary is void (Article 149).
Do you review commercial contracts in Egypt?
Yes. From our Cairo office we review contract formation and terms before signing and in disputes.