Financial Clearance: Explanation, Uses, and a Downloadable Template

Among the procedures that most effectively preserve rights and resolve disputes is what is known as a “financial clearance”, which disputing parties often resort to in order to prove the receipt and delivery of a financial entitlement under any item, so that each party’s rights are guaranteed and there is no opportunity for false claims or demands for what is not rightfully due.

In this topic, we will delve deeper into the details of financial clearance and its types, discuss how to create it and the most important conditions for its validity, answer the most frequently asked questions about it, and provide you with a guideline template for each type that you can use and modify whenever needed.

Article Content

1. What is a financial clearance?
2. What are the types of financial clearance?
3. How is a financial clearance created?
4. Conditions for the validity of a final clearance
5. When is a financial clearance void under Saudi law?
6. What are the reasons for using a financial clearance?
7. Notes regarding financial clearance
8. A sample financial clearance wording
9. Frequently Asked Questions

What is a Financial Clearance?

A financial clearance is a legal procedure aimed at settling financial entitlements between two parties, confirming the first party's commitment to pay all dues owed to the second party, whether in the form of salaries, wages, allowances, debts, or other entitlements. Accordingly, the right of the second party to claim any additional entitlements in the future is forfeited.

Financial clearance occurs between two parties: a company and an employee, worker, client, or contractor; two companies; or one individual and another. A financial clearance may be comprehensive, the most common, or partial, which is often limited to debt settlement. In the following lines, we will learn more about the types of financial clearance and how they are created.

What Are the Types of Financial Clearance?

There are various types of financial clearance depending on the different situations in which two parties may exist, where one party is entitled to payment and both wish to carry out a clearance procedure in light of the definition explained above. These types include the following:

Financial Clearance for a Daily Wage Worker

This applies to a worker paid daily, not to a full-time employee. Despite the absence of a fixed monthly salary, it confirms the termination of the relationship, prevents future cooperation, and ensures that both parties have received their full rights.

Sample Financial Clearance for a Daily Wage Worker

Clearance Date: [Date]

We, [Company Name], issue this financial clearance after agreeing to pay an amount of [Agreed Amount in Numbers], only [Agreed Amount in Words], to our daily wage worker Mr. [Worker’s Name], holder of identification number [ID Number / Passport Number], in relation to the days during which the worker performed work for the company, without any future objection or claim regarding this amount.

This financial clearance includes all rights and entitlements of [Worker’s Name], and his signature on this clearance constitutes an acknowledgment thereof. We also confirm under this agreement that we will not make any future claims regarding the amount mentioned above, and that this agreement is considered final and binding between both parties.

Company Signature: _______________________
Worker Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance for an Employee

This serves as a release of liability and confirms the termination of the employment relationship between the employee and the company, with the employee having received all his financial entitlements.

Sample Financial Clearance for an Employee

As a basic requirement for terminating the employment relationship between us, [Company Name], and Mr. [Employee Name], holder of identification [ID Number / Passport Number], who was working with us as [Job Title], an amount of [Agreed Amount in Numbers], only [Agreed Amount in Words], has been paid to the employee [Employee Name], without any future objection or claim regarding this amount. This financial clearance includes all rights and entitlements related to bonuses, wages, benefits, and other entitlements due to him. We also note that he owes us no dues; therefore, we will not make any future claims against him.

Clearance Date: [Enter Date]

Company Signature: _______________________
Employee Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance for a Contractor

This applies to construction projects between the contractor and the property owner. It clarifies the amounts spent after construction or after a specific stage, along with details of how the funds were spent. This document is subject to taxation in the contracting sector.

Sample Financial Clearance for a Contractor

Clearance Date: [Enter Date]

We, [Company Name], with Commercial Registration No. [Commercial Registration Number], acknowledge the entitlement to pay an amount of [Enter Agreed Amount] to the contractor [Contractor Name], holder of identification [ID Number / Passport Number]. Through this clearance, we confirm that we have paid him this amount in full, with no future entitlement on his part to claim this amount. This financial clearance includes all rights and entitlements related to the contract concluded between us and the contractor [Contractor Name].

Company Signature: _______________________
Contractor Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance Between Two Companies

Whether the relationship is reciprocal or one company acts as a client, the financial clearance reflects the settlement of all debts and obligations and the termination of the previously concluded contract.

Sample Financial Clearance Between Two Companies

Clearance Date: [Enter Date]

Pursuant to this financial clearance, we, [First Company Name], holder of Commercial Registration No. [Commercial Registration Number], and [Second Company Name], holder of Commercial Registration No. [Commercial Registration Number], agree to a final financial settlement after we, [First Company Name], paid an amount of [Agreed Amount in Numbers], only [Agreed Amount in Words], to [Second Company Name]. By signing this clearance, neither party has the right to hold the other accountable for any other entitlements.

First Company Signature: _______________________
Second Company Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance for Rent

This reflects the settlement of all rent payments for a specific property or leased item.

Sample Financial Clearance for Rent

Clearance Date: [Enter Date]

I, [Landlord Name], holder of identification [ID Number / Passport Number], hereby acknowledge that I have received all financial dues related to the rental of the property located at [Rented Property Address], including any late fees, in the amount of [Agreed Amount in Numbers], only [Agreed Amount in Words], from Mr. [Tenant Name], holder of identification [ID Number / Passport Number]. Under this clearance, I am not entitled to claim any other dues in this regard.

Landlord Signature: _______________________
Tenant Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance for a Client

When the relationship between the two parties is that of a service provider or goods supplier and a client, it may be necessary to conduct a financial clearance to release liability for any financial entitlements. In this case, this type of financial clearance is created.

Sample Financial Clearance for a Client

Clearance Date: [Enter Date]

We, [Company Name], with Commercial Registration No. [Commercial Registration Number], hereby acknowledges through this clearance the receipt of an amount of [Agreed Amount in Numbers], only [Agreed Amount in Words], from Mr. [Client Name] as payment for providing the service/product [Service/Product Name]. We confirm that there are no other financial dues owed by him to us, and we have no right to claim any future dues. We also confirm that we will not make any future claims regarding the amount mentioned above.

Company Signature: _______________________
Client Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance for a Housemaid

A housemaid or domestic worker has an employment relationship with the place of service—whether a home or a commercial establishment—which entitles her to financial compensation. Therefore, when the employment relationship ends, a financial clearance is prepared.
 

Sample Financial Clearance for a Housemaid

I, [Housemaid Name], holder of identification [ID Number / Passport Number], hereby acknowledge that I have received from Mr. [Homeowner Name], holder of identification [ID Number / Passport Number], an amount of [Agreed Amount in Numbers], only [Agreed Amount in Words], representing all my financial entitlements for my service period from [Service Start Date] to [Service End Date]. I have no other entitlements, and this is my acknowledgment thereof.

Clearance Date: [Enter Date]

Housemaid Signature: _______________________
Homeowner Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance Between an Investor and a Company

Investors in third-party companies have financial entitlements arising from their relationship with those companies. Since the terms of these entitlements may be multiple and sometimes complex, both parties resort to a financial clearance to avoid any unfounded claims for entitlements after the clearance.
 

Sample Financial Clearance Between an Investor and a Company

Clearance Date: [Enter Date]

Pursuant to this clearance, we, [Investor Name], holder of identification [ID Number / Passport Number], and [Company Name], with Commercial Registration No. [Commercial Registration Number], agree on the payment and receipt of the final agreed financial amount arising from the investment relationship between both parties, which extended from [Investment Start Date] to [Investment End Date], without any future objection or claim by either party regarding this matter, including any profits or other returns.

Investor Signature: _______________________
Company Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance Between a Company and a Supplier

To release liability for any financial entitlements owed to a supplier, companies prepare a financial clearance between themselves and the supplier by issuing a clearance document confirming receipt of all dues, so the supplier has no right to claim any further entitlements afterward.

Sample Financial Clearance for a Supplier

We, [Company Name], holding Commercial Registration No. [Commercial Registration Number], confirm through this financial clearance the entitlement to pay an amount of [Agreed Amount] to the supplier [Supplier Name], holder of identification [ID Number / Passport Number], in consideration for the materials and products supplied. We also document that he has received this amount in full, with no deductions. By signing this clearance, he acknowledges that he has no right to make any future claims regarding this amount. This financial clearance includes all rights and entitlements related to the contract concluded between us.

Clearance Date: [Enter Date]

Company Signature: _______________________
Supplier Signature: _______________________
Witnesses’ Signatures: _______________________

Financial Clearance Between Two Individuals Due to Debt

Sometimes referred to as a debt settlement clearance, this involves settling claims related to debts and obligations between two parties, in which the debtor discharges his liability, and the creditor has no right to later claim the debt.

Sample Financial Clearance for Debt

I, [Creditor Name], holder of identification [ID Number / Passport Number], hereby acknowledge that [Debtor Name], holder of identification [ID Number / Passport Number], has settled the debt owed to me in the amount of [Debt Amount in Numbers], only [Debt Amount in Words]. Under this financial clearance, I have no right to claim any dues or rights related to this debt.

Clearance Date: [Enter Date]

Creditor Signature: _______________________
Debtor Signature: _______________________
Witnesses’ Signatures: _______________________

Clearance for Full Payment

When a financial clearance relates to debt, installments, or rent with partial payments, it may be referred to as a clearance for full payment. A full payment clearance confirms that the entitled party has received all remaining amounts due.

Sample Clearance for Full Payment

Clearance Date: [Enter Date]

Pursuant to this clearance, I, [First Party Name], holder of identification [ID Number / Passport Number], hereby acknowledge that I have received from [Second Party Name], holder of identification [ID Number / Passport Number], an amount of [Amount Due in Numbers], [Amount Due in Words], which represents the final remaining payment for [Nature of Transaction: Debt / Installment / Rent, etc.]. Accordingly, I no longer have any entitlements against [Second Party Name], and I have no right to claim any other dues after signing this clearance.

First Party Signature: _______________________
First Party Signature: _______________________
Witnesses’ Signatures: _______________________

How Is a Financial Clearance Created?

A financial clearance can take many forms and vary depending on the parties involved. However, there is a great similarity in their content and in the objective of the clearance, as it aims in all fields to prove that one of the parties has received the financial entitlements.

Accordingly, the elements that should be included in a financial clearance can be identified to ensure a clear understanding of how to prepare a legally valid clearance document. These elements are:

• Clearance Title:
  The financial clearance document should be titled “Financial Clearance” so that there is no confusion or ambiguity in determining the purpose of this legal document.
   
• Names of the Parties to the Clearance:
  The financial clearance should include the full name of each party if the party is an individual, and the legal name of the entity if it is a company or institution.
   
• Personal Capacity of Each Party:
  After stating the name of each party to the clearance, their capacity should be clarified in terms of the relationship linking them to the other party within the context of the clearance. If the party is an employee of the company, their position within the company should be stated, and for the company, its field of business should be clarified, and so on.
   
• Proof of Identity for Each Party:
  For the purpose of establishing legal capacity, the identity of each party should be stated—alongside the name and capacity—whether it is a national ID number, passport number, or even a commercial registration number in the case of companies.
   
• Value of the Entitlements:
  The nature of the entitlements and their actual value must be clearly and accurately stated in the financial clearance. They should be written both in numbers and in words for greater accuracy, since the main objective of the clearance is to establish each party’s rights. Therefore, one of the most important pieces of information that must be stated precisely is the value of the entitlements.
   
• Clearance Date:
  The date on which the entitlements were paid should also be included in the financial clearance document to clearly identify the period for which the entitlements were settled.
   
• Signatures of the Clearance Parties:
  The signature serves as proof of each party’s acceptance of the terms stated in the clearance and their full consent to the financial clearance. Accordingly, after signing, a party may not later claim that they did not receive the entitlements.
   
• Names and Signatures of Witnesses:
  This condition is usually required for transactions not conducted between official entities, such as companies. In customary dealings between individuals—such as property rental, debt settlement, and related matters—this condition should be taken into account.
   

Witnesses should be neutral and not affiliated with either party. Each witness should state their name and sign the clearance document to substantiate their testimony.

Conditions for the Validity of a Final Clearance

For a clearance to be legal and recognized, certain conditions must be met, the most important of which are:

• Agreement of the Clearance Parties:
  Both parties must fully agree on the details of the clearance and the value of the entitlements, and there must be no dispute between them on these matters.
   
• Free Will:
  Coercion in obtaining a clearance renders it invalid. Therefore, for a clearance to be valid, the condition of free will must be present.
   
• Execution After the Termination of the Employment Contract:
  The Saudi regulator has stated that a financial clearance concluded between the employer and the worker during the term of the contract is void by force of law. Accordingly, it must be executed after the expiration of the contract term or the termination of the employment relationship.
   
• Legal Capacity:
  Each party to the clearance must have legal capacity to undertake this legal action. Otherwise, for example, a minor’s actions are not legally recognized. The clearance document must also be drafted in accordance with legal document requirements.
   
• Comprehensiveness of Entitlements:
  The inclusion of all disputed entitlements is a condition for the validity of the final clearance, as agreed by the parties. If the agreement provides for the settlement of all entitlements owed by one party to the other, then for the clearance to be valid, it must include all such entitlements, not just part of them.
   
• Signatures of the Clearance Parties:
  The signatures of both parties are among the most important conditions for the validity of the clearance, to prevent forgery and false claims.

When Is a Financial Clearance Void Under Saudi Law?

Saudi labor law has specified the case in which a financial clearance between the employer and the worker becomes void. According to Article Eight of the Saudi Labor Law, any waiver (clearance) or settlement of a worker’s rights made during the term of the employment contract with the employer is considered void, unless it is in the worker’s interest.

In addition, a financial clearance becomes void if any of the general conditions for its validity are missing, as explained above under the heading “Conditions for the Validity of a Final Clearance.”

What Are the Reasons for Using a Financial Clearance?

Among the reasons and motives that lead disputing parties to resort to a financial clearance are the following:

• Ensuring that the company’s liability is cleared and that there are no repeated claims for financial obligations that have already been paid.
   
• Releasing the employee from any responsibilities after signing the financial clearance.
   
• Confirming the termination of the contract and the employment relationship between the parties.
   
• Preserving the company’s capital and assets by recovering any assets entrusted to the employee.
   
• Regulating aspects of financial management in cases such as an employee’s resignation or the completion of a project.
   
• Saving the time and costs that disputing parties may spend and incur in lawsuits and courts.
   
• Maintaining good relations between the disputing parties after each party’s rights are secured.
   
• Reaching a final and binding resolution and settlement for the disputing parties.
   
• Ensuring compliance with the law by preventing either party from claiming entitlements from the other after the clearance.
   
• Ensuring transparency between the disputing parties and achieving justice.

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Notes Regarding Financial Clearance

There are some important notes and cases that many people inquire about regarding financial clearance, including:

• Signing the clearance before receiving entitlements:
  Should I sign the clearance before receiving my entitlements? In fact, the worker is not obligated to sign the clearance before receiving their entitlements, because signing it constitutes an acknowledgment of receipt of the dues.
   
• Signing the clearance without receiving entitlements:
  I signed the clearance and did not receive my entitlements—what should I do? In truth, this is an error by the employee to their own detriment, because signing the clearance constitutes an acknowledgment of receipt of the entitlements.

However, note a very important point: if you signed the clearance while you were still working at the company (i.e., your contract was still in force), the clearance is void under Article Eight of the Saudi Labor Law.

• Often, a clearance accompanies the termination of an employment contract. In cases where a clearance is used periodically to document salary payments or when a legal receipt is needed to avoid the other party denying receipt of their entitlements, the contract must be rewritten, and the parties must re-agree on the terms of work. Therefore, it can be said that a financial clearance cancels the contract.
   
• Failure to specify a subsequent date for payment of the financial entitlements indicates they were delivered before signing. In that case, the entitled party loses their right to claim them legally if they have signed a clearance stating that they were received.
   
• If the worker signs the clearance under coercion, and the coercion takes the form of physical force, such as restraining their hands, it is easy to verify that the forced signature does not match the natural signature. If the coercion is moral or psychological, the worker may file a complaint, and the matter will be adjudicated.

Sample Financial Clearance Wording

Financial Clearance

Greetings,

We hereby inform you that, pursuant to the termination of the employment relationship between Mr./Ms. ……………………………………………………………., Supervisor/Employee in the ………………………………….. Department, and the company ……………………………………………………………., registered under tax number ……………………………………………………..,

We hereby release liability with regard to financial entitlements, and both parties agree that each of them is free of liability toward the other. The due amount that has been paid is …………… Dollars, inclusive of the end-of-service gratuity and the remaining allowances and monthly salary.

With our best wishes for payment and success in the forthcoming steps.

Employee Signature               Witnesses’ Signatures               Company Signature

We clarify the wording in the attached templates for creating a financial clearance.
To download financial clearance templates, click the following download link: Financial Clearance Template

Frequently Asked Questions

What does “clearance” mean in law?

A financial clearance is a legal procedure carried out between two parties disputing financial entitlements. Through the clearance, the two parties reach a final solution regarding these entitlements, thereby releasing both parties from any future claims related to them. Once a financial clearance agreement is reached and signed, the dispute is definitively resolved and cannot be revisited.

Is signing the clearance mandatory?

It is necessary to sign the financial clearance, as it is an officially recognized legal document. The signature serves as proof of the parties’ approval of the agreement and its terms and indicates each party’s acceptance of the agreed-upon concessions. This naturally requires the presence of all disputing parties and their acceptance of the clearance without coercion or any lack of legal capacity.

What is the duration of the clearance after resignation?

After the employment relationship between the employee and the company ends, both parties must ensure that their rights are secured; therefore, a clearance is resorted to. According to the Saudi Labor Law, the employer must settle all of the employee’s entitlements and pay the full wage within a period not exceeding two weeks from the date the employment relationship ends.

In conclusion,
It should be noted that a financial clearance is a legally binding procedure for both parties. Therefore, before signing it—if you are the entitled party—you must ensure completely that you have actually received your full entitlements as agreed and as stated in the financial clearance document.