Saudi Civil Transactions Law

The Civil Transactions Law (“the CTL”) of Kingdom of Saudi Arabia has been issued on 18 June 2023 with the Royal Decree M/191 and published on 19 June 2023 in the Official Gazette. In accordance with the Article 721 of the CTL, the CTL will come into effect 180 days after its publication in the Official Gazette, which corresponds to 16 December 2023.

Considering the Vision 2030 of the Kingdom as well as the ongoing legal reforms therein, issuance of the CTL represents one of the most significant transformations in the legislative system of the Kingdom of Saudi Arabia.

With its 721 articles, the CTL comprehensively sets rules and regulations on a wide variety of topics concerning civil transactions. These include, the law of persons, law of property, types of rights, and usage of them, liabilities, guarantees, general provisions for contracts, such as formation, termination, nullity, obligations, execution thereof, tortious acts, losses and damages, compensations, as well as specific provisions for different types of contracts including construction contracts.

Significance and Application

The CTL represents a milestone in Saudi Arabia, since prior to adoption of the CTL, the civil law was not codified and issues relevant thereto were regulated based on the Basic Law of the Government among which the Islamic Law, i.e. Holy Quran and Sunnah, was considered as the basis in accordance with the various doctrines of different Islamic scholars. With issuance of the CTL, contemporary global standards and terms are now set forth under a codified law and legal clarity for business affairs and transactions is provided.

It is also worth mentioning that a legislative hierarchy is set forth under Article 1 of the CTL. According to this Article 1 (2), application of provisions of the CTL does not prejudice the special provisions. Therefore, it is interpreted that the special provisions shall a priori apply. Moreover, according to Article 1(1), the provisions of the CTL shall be applied to all matters that are addressed in the CTL by specific wording or as to the content. In the absence of such context, provisions of the general rules set forth among the final provisions under the conclusion section of the CTL shall apply. In the case there is no rule that can be applied in the CTL, the provisions derived from Islamic Law that are most convenient in light of the CTL shall apply.

Another important matter regarding the CTL concerns its temporal application being envisaged as retrospective. While the CTL came into effect on 16 December 2023, according to the Royal Decree, it will be applicable also to contracts that have been executed before this date. There are two exceptions to this retrospective application. Either (i) one of the parties needs to demonstrate a contradicting “statutory provision” or “judicial principle” with respect to the situation at stake, or (ii) a limitation period needs to have already begun to run before 16 December 2023.

Construction Contracts

As mentioned, the CTL sets forth rules and regulations for several different contract types among one being the contracts concluded for construction. Provisions specific to construction contracts are regulated between Articles 461 and 478. On the other hand, it is envisaged that other relevant principles shall also apply to construction contracts where applicable. For the purposes of this paper, main general principles and specific provisions that concern construction contracts are evaluated below.

General Provisions

Principle of Good Faith

While the necessity to exercise the principle of good faith for contracting parties was already a part of Islamic Law, this rule is now explicitly included in the CTL under Article 95 as “[T]he contract must be executed in accordance with its content and in a way consistent with good faith”. Additionally, in Article 41, the liability for damages is attributed to a party acting in bad faith during the contract negotiation phase as “[I]f a contract is being negotiated, the negotiating parties shall not be liable to conclude the contract, nonetheless, the party who negotiates or ends the negotiation with bad faith shall be liable from the damages suffered by the other party. Such liability shall not include a compensation for loss of profit expected under the negotiated contract”. Accordingly, it is clear that the CTL requires not only the

execution, but also the negotiation of contracts to be conducted in good faith.

Limitation of Liability

Even though previously the Saudi Courts did not implement a liability cap, limitation of of liability now becomes applicable under the CTL. Accordingly, Article 173 is as follows:

“The parties are allowed to agree the debtor to be exempted from the compensation for the damages stemming from non-performance of contractual obligations or delay therein, exception of which are fraud or serious fault.

It is not allowed to agree on an exemption from a liability stemming from the harmful act.”

In many countries allowing for the limitation of liability of contracting parties, this freedom is restricted for the cases where the party for whom liability is excluded and/or limited somehow acts in wilful misconduct or gross negligence. Similar to this general approach, it is worth noting that in application of this limitation of liability provision, the CTL sets forth that the debtor cannot be exempted from liability for damages resulting from serious fault. It is reasonable to interpret “serious fault” in a manner to correspond to wilful misconduct and gross negligence, as used under civil law terminology. Fraud is the other exception, which prevents application of exemption from liability to compensate damages. The provision also mentions that the contacting parties cannot agree on a limitation of liability clause for damages stemming from “the harmful act”. Although, what is envisaged by a harmful act is not clear, it would not be wrong to interpret that such an act includes actions constituting fraud, tort, wilful misconduct and/or gross negligence. Whether inclusion of some other actions in the framework referred to with “harmful act” is possible will become clear in time with application of the CTL.

Non-performance

(i) Impossibility

According to Article 110 (1), it is set forth that the synallagmatic contracts shall be automatically terminated in case one of the corresponding obligations becomes impossible to perform due to a reason beyond the control of the party failing to perform as a result of such impossibility. The article reads as: “The contracts which are binding on both sides, if the performance of the obligations becomes impossible with a reason that is not under the control of the debtor, debtor’s obligation and the counter obligation shall come to an end and the contract shall be rescinded automatically”. In such case, the parties are no longer required to apply to court by requesting rescission of the contract, and the contract will automatically come to an end. Second paragraph of the same article envisages that in case of partial impossibility, then only such part of the obligation that has become impossible to perform and the corresponding obligation in that proportion shall end automatically, without a need for a court decision. Additionally, it is possible for the counter party to request from the court termination of the contract in its entirety. Nonetheless, the court may reject the termination request if it deems such partial impossibility is not significant with respect to the whole of the obligations.

Finally, apart from termination, Article 294 of the CTL also sets forth that the debtor shall be discharged of its obligation to perform, if it can be proven that it is impossible for the debtor to perform due to reasons beyond control.

(ii) Unexpected exceptional circumstances

Article 97 of the CTL reveals itself as a mandatory general provision against which no party agreement can be made. In that vein, this provision provides the legal ground for adaptation of a contract to unexpected exceptional circumstances which negatively affect one of the parties and impose a heavy burdensome on that party in performing its contractual obligations. In such a case, the affected party may invite the counterparty to negotiate necessary adjustments on the contract to avoid such negative effects. However, if no agreement is reached between the parties within a reasonable period of time, then the court may reasonably amend the burdensome obligation by adapting the contract to such exceptional circumstances, which were not possible to be anticipated at the time of entry into the contract, provided that the affected party proves the extent of hardship caused by such circumstances on its performance. Turkish law also has this concept, although there are some differences in

implementation.

On the topic of impossibility, Article 471 (3) of the CTL is a special provision specific to construction

contracts, and further describes in addition to the general provision under Article 97 above the court’s authority to restore the contractual balance. This provision is explained in detail below under Section B/(c) that is relevant to special provisions pertaining to construction contracts.

(iii) Defence of non-payment

Pursuant to Article 114 of the CTL, if a contracting party fails to perform its obligation, then the counter party may suspend the corresponding obligation, until the failing party performs its obligation. In order to be entitled to such a right of suspension, both corresponding obligations should be due for performance. The same concept also applies under Turkish law.

Termination of contracts

The primary general provision concerning the term of the contracts are Article 94 of the CTL, which provides that a valid contract cannot be revoked or amended except by agreement or by virtue of a statutory provision. Other general provisions for termination of contracts are regulated under Articles 105 to 114.

Further, there are special provisions specific to termination of construction contracts. Among general provisions, it is set forth that a contract can be terminated under various circumstances such as parties’ mutual agreement to end contract in whole or in part (Article 105), breach of the contract (Articles 107 and 108), or impossibility of the performance (Article 110).

Differing from the Turkish law approach, under the Saudi laws, it is not possible for a party to terminate the contract upon material breach of the other party by providing a reasonable remedy period if the breach is not remedied within such term. The Saudi approach in case a contracting party fails to fulfil an obligation under a valid contract allows the other party to apply to the court by asking for an order for the contract to be performed (Article 94) or rescinded (Article 107). Under Article 108, the parties may also agree that the contract is rescinded, if one of them fails to perform an obligation, without having need for a court order. Therefore, in case of a breach by a party, the parties may agree to terminate the contract or in the absence of any such party agreement, the contract may only be terminated by way of a court award.

Consequences of termination, in the sense whether it affects the contractual relationship by returning the parties to pre-contract state or prospectively by preserving the obligations performed so far, are regulated under Article 111 of the CTL, which foresees differing terms for different circumstances. Under Turkish law, similar to CTL, different consequences apply to ending of contracts, while ending of a contract with a retroactive effect is called “rescission”, and ending of a contract with no retroactive affect is called “termination”.

Accordingly, after the rescission, as per Article 111(1), the contracting parties shall be returned to their status prior to entry into the contract; however, if it is not convenient given the nature of the contractual relationship, the court may decide for payment of a compensation. Further, Article 111(2), sets forth that if the contract is a time-based contract, which envisages continuous obligations for the parties (i.e. lease contracts, service contracts), the rescission shall not have a retroactive effect, and the court may order for compensation, if necessary.

Therefore, it is interpreted that pursuant to Article 111, the party breaching its contractual obligations shall be required to indemnify the harmed party by compensating reliance damages to ensure that the harmed party attains its financial position prior to entry into the contract. However, if this is impossible (i.e. in a construction project, where a certain part of obligations is already performed, or time-based contracts such as lease contracts), then the breaching party shall compensate the actual damages suffered by the harmed party due to early termination of the contract. Hence, while the term “rescission” is mentioned in the CTL that actually refers to compensation of damages with a retroactive view, in ending of time-based contracts due to a party’s breach or in the event of impossibility of the harmed party being returned to its pre- contractual financial status, rescission shall not apply retroactively, and the harmed party shall be compensated for its actual damages due to early termination.

Another noteworthy article under CTL concerns the survival of certain contract clauses even after the recission. Pursuant to Article 113, dispute settlement and confidentiality provisions under a rescinded contract shall remain in force after rescission, without prejudice to the statutory provisions. This being the default regime under the Saudi law, the parties are at liberty to agree otherwise.

In addition to the general provisions above, Articles 476 and 477 provide special provisions concerning termination of construction contracts due to an emergency excuse and consequences thereof, which are explained in further detail under Section B/(b) below.

Liquidated damages

CTL provides provisions on liquidated damages under Articles 178 and 179. Accordingly, Article 178 sets forth that:

“The contracting parties may determine in advance the amount of compensation by stating it in the contract or in a subsequent agreement, unless the object of the obligation is a monetary amount, and no notice is required for the entitlement to compensation.”

Article 178 provides the legal basis for parties agreeing on a pre-determined damages amount, whereas Article 179 regulates the details of implementation, and modification of the agreed liquidated damages amount by the courts as well as the burden of proof in application of this article under its first three paragraphs, which read as follows:

“No compensation shall be payable if the debtor can prove that the creditor did not incur any damages.

The court, upon the debtor’s request, may decrease the amount of compensation if the debtor proves that the compensation amount is exaggerated or that the obligation has been fulfilled partially.

The court, upon the creditor’s request, may increase the compensation to an amount equivalent to the damages if the creditor proves that the damages exceeded the amount of the contractual compensation as a result of fraud or serious fault of the debtor.”

Therefore, the contracting parties are allowed to determine the amount of liquidated damages at the time of entry into the contract. The parties are not required to evidence the amount of the damages that they have suffered or to serve notification in order to be entitled to such liquidated damages if the conditions are realised. The parties are also entitled to claim the damages exceeding the pre-determined liquidated damages to the extent that they can prove fraudulent behaviour or serious fault of the counter party. Finally, the fourth paragraph of Article 179 highlights the mandatory nature of the abovementioned provisions and considers any agreements by the parties to the contrary as void.

Compensation

Pursuant to Article 161 of the CTL, the court may award for the specific performance of an obligation, which a contracting party failed to perform. However, if such performance will be too burdensome for the party against whom the court has awarded, then instead of specific performance, Article 164 sets forth that payment of an indemnification may also be considered by the court. It is worth to note that besides material damages, moral damages are also addressed under the CTL through Article 138 as “[T]he compensation for the injurious act includes the compensation for moral damages”.

General provisions of the CTL required any harm to be covered in full by way of a compensation to revert the party suffering damages to the situation in which such party was, or could have been, had the harm did not occur. Reasonably, CTL requires a link of causality between the loss and the loss of profit suffered by a party and the subject breach. Pursuant to Article 180, the indemnifying party who is not acting fraudulently or at serious fault is only obliged to compensate the counterpart for the damage that could have been foreseen at the time the contract was entered into. However, in case of fraud or serious fault, such limitation does not apply in line with the concept of limitation of liability as noted under Section A/(b).

Determination of compensation amount also requires consideration of whether the party suffered damages had the opportunity to avoid the damages with reasonable efforts that an ordinary person would be expected to exercise. Pursuant to the CTL, if the breaching party, contributes to increase of the damage as a result of its own fault, such party’s entitlement to compensation shall be reduced in proportion with the fault. This regulation is also very much in line with the “contributory negligence” concept under Turkish law.

Statute of Limitation

Previously, there was no provision for statute of limitation under Saudi law. Now, differing from the old structure, Article 295 of the CTL now sets forth that no legal action will be heard after 10 years (except where the law provides otherwise) for contractual disputes; and it is further set forth under Article 305(1) that the contracting parties are not allowed to agree on increasing or decreasing the mentioned time bar.

SPECIAL PROVISIONS

Alongside with the general provisions reviewed above that are applicable to all types of contracts unless otherwise is specifically regulated- including the construction contracts, there are specific provisions regulated under the CTL as well. As such, the uncodified legal principles that were applied to the construction contracts became codified and gained clarity with the issuance of the CTL.

The construction contract (“muqawala”) is descripted under Article 461 as a contract where the contractor is under the obligation to manufacture things or perform a work in return for a price. The provision further emphasizes that while doing so, the contractor shall not be subject to the authority of the employer or shall not be deemed as the employer’s representative. The specific legal provisions relevant to construction contracts such as time for completion, termination, exceptional circumstances, and price are touched upon below.

Time for completion

The contractor is required to complete the works in accordance with the contract provisions and within the agreed time period as per Article 465. In case there is no time period agreed by the parties for the completion of the works, then the works shall be completed according to the generally accepted principles and within a reasonable time period required by the nature of the work.

Ending of a Construction Contract

Regarding the ending of a construction contract via termination, there are also specific provisions with respect to termination of construction contracts, apart from the above- mentioned general provisions for termination. As such, according to Article 475 of the CTL, “[C]onstruction contract will expire with the completion of the agreed works”. Article 476, on the other hand, is related to right for termination in case there is an emergency excuse that impedes performance of the contract whereby the party requesting termination is required to compensate the counter party’s damages caused by such termination. Moreover, Article 477 regulates a right for the contractor to be released from its contractual obligations where the contractor starts to execute to contract but then becomes unable to complete performance for reasons beyond its control. Accordingly, in such a case the contractor is entitled to the value of the works that are completed and costs spent for the works that are not yet completed. However, a cap is foreseen for application of Article 477 as the entitlement of the contractor cannot exceed the benefit derived by the employer. Such cap implies the aim to protect the balance of interests between the contractor and the employer.

Contract price and payments

There are several articles under the CTL dealing with payments, such as the articles between 470 and 472. According to Article 472, if the contract price is not determined by the parties, the contractor shall be entitled to a payment equal to the value of the works and materials utilised for performance of the works. Although it is not mentioned how the value of the works will be determined, whether by way of considering the then current market prices, it is deemed such reference may be considered as applied under Turkish law.

According to Article 470 (1), a contractor in order to be entitled to claim an additional payment in a unit price-based contract, is required to immediately notify the employer in case of an occurrence of a significant increase in the estimated total contract amount, by indicating the expected increase in payment. If the contractor fails to give proper notice, the contractor will lose his right to demand the costs exceeding the agreed unit price. Moreover, according to Article 470 (2), if the contract amount substantially increases, the employer may discharge of its obligations under the contract and suspend its performance without any delay, provided that the employer reimburses the contractor for the amount of the completed works in accordance with the contract. It is not clear whether the employer’s right to be discharged from its contractual obligations or to withdraw from the contract should be interpreted in a manner that the employer is entitled to terminate the contract. It is deemed that the employer shall have the right to terminate the contract in such case, by compensating the contractor for the value of the works that have been performed.

The lump-sum based contracts, on the other hand, are dealt with under Article 471 and as per Article 471(1), in the contracts where the design is agreed between the parties, the contractor cannot claim any increase in the payments even if there is an increase in any of the cost items. Nonetheless, as per Article 471(2), the contractor may request additional payment for the changes and/or additions to the design if the change or addition is caused due to the employer’s fault or the employer allows the contractor to do so, or the parties agree thereon. As explained above in Section A/III. (ii), Article 471(3) further regulates the situations in which the contractual balance is collapsed due to an unexpected exceptional circumstance and the authority of the court for restoration of such balance considering the circumstances at stake. The court’s tools in restoring the contractual balance includes extending the completion date, increasing or decreasing the contract value, or ordering the contract to be terminated.

Conclusion

Considering the previous position of Saudi law with respect to construction contracts and in light of all the concepts and provisions reviewed above, it can be said that the CTL provides clarity and legal certainty for both the contractor’s and the employer’s side. Besides, the CTL serves as a guidance to the parties while signing, executing, and ending a contract. Through a brief review of the CTL both common law and civil law approaches are observed, such as liquidated damages, recission of contracts, adaptation of contracts to unexpected exceptional circumstances, contributory negligence, defence of non-payment and many others.