KSA Civil Law – A construction law perspective
The Kingdom of Saudi Arabia enacted the Civil Transactions Law (the “KSA Civil Law”) which will come into effect in December 2023, has a retrospective effect, and therefore applies in almost all cases to contracts signed before 16 December 2023.
Many of the principles set out in the KSA Civil Law mirror those set out in the UAE Civil Code. Title 3 of the KSA Civil Law addresses construction, or Muqawala contracts, and bears many similarities to the principles enshrined in the UAE Civil Code, which should give a level of comfort and certainty to contracting parties in Construction Projects within the Middle East.
Similar to the UAE Civil Code, the KSA Law codifies the Sharia law principle of good faith.
- The negotiations of a contract may not place the negotiating parties under the obligation to conclude such a contract. However, the party negotiating or terminating the negotiations in bad faith shall be liable for the damage incurred by the other party. This shall not include the loss of profits expected from the negotiated contract.
- The lack of seriousness in negotiations, or knowingly withholding any substantial information that affects the contract shall constitute an act of bad faith”
Article 41 of the KSA Civil Law requires parties to not only act in good faith during the lifetime of the contract, but parties must also negotiate contracts in good faith. Therefore, should a party enter into negotiations with no intention of concluding a contract, they may be liable to compensate the other party for damages suffered (excluding loss of profit).
The KSA Civil Law further addresses contractual interpretation, and how clauses should be interpreted if there is any ambiguity.
- When the wording of the contract is clear, it may not be deviated from under the pretext of interpreting it to seek the will of the contracting parties.
- When a contract can be interpreted, it shall be necessary to look for the common will of the contracting parties and to go beyond the literal meaning of the words, guided by custom, the conditions of the contract, the nature of the transaction, what is customary in dealing between the contracting parties, their condition and the honesty and trust which should exist between them. The terms of the contract shall interpret each other by conferring upon each term a meaning that does not conflict with the other terms.
- Doubt shall be interpreted in favor of whoever incurs the burden of the obligation or the term. In contracts of adhesion, doubt shall be interpreted in favor of the compliant party.”
Therefore, if the language of the contract is clear the Parties are not permitted to deviate from the literal meaning of the contract. However, if there is some ambiguity in the contract terms and there is room to interpret the contract, the common intention of the Parties must be considered. In determining the common intention of the Parties, a Court and/or tribunal may consider the industry customs, the nature of the transaction, and customary practice between the Parties. In this regard, the KSA Civil Law takes a similar stance to that of the UAE Civil Code wherein Courts/tribunals may consider the nature and custom of both the transaction and the party's prior conduct. The KSA Civil Law, however, permits a Court and/or tribunal to interpret an ambiguous clause in favour of the party who incurs the burden of the obligation.
The KSA Civil Law provides general provisions if a contractor is delayed in completing its scope of work, stipulating that if a contractor is delayed in its performance, it is obligated to compensate the employer for any loss suffered. However, if there is any delay attributable to the employer, it must be considered when applying liquidated damages.
If the debtor is late in fulfilling his obligation, he shall compensate the creditor for any damage he suffers as a result of the delay, unless he proves that the delay in fulfillment is due to a cause beyond his control.
If the creditor has by his fault contributed in causing the damage arising from the non-performance or the delay in performance, or has increased such damage, the provisions of Article (128) of this Law shall apply.”
Article 171 of the KSA Civil Law mirrors Article 386 of the UAE Civil Code, in that if a contractor is liable to compensate the employer if it has caused delays to its work.
Interestingly, the KSA Civil Law clarifies that if the employer is liable for, or has contributed to, some of the delays to the contractor's work, the compensation shall be adjusted to reflect the employer's liability.
Similar to Article 390 of the UAE Civil Code, the KSA Civil Law further states that while Parties may agree on liquidated damages, affixing the calculation pertaining to compensation in advance, any limitations set on liquidated damages can be either increased or decreased by the Court.
The contracting parties may determine in advance the amount of compensation by stipulating it in the contract or a subsequent agreement; unless the object of the obligation is pecuniary, and the entitlement to compensation does not require serving a formal notice.
- The contractual compensation shall not be due if the debtor proves that the creditor did not suffer any damage.
- The court may reduce the compensation at the request of the debtor if he proves that the compensation agreed upon was overestimated or that part of the original obligation was performed.
- The court may, at the request of the creditor, raise this compensation to an amount equivalent to the damage if he proves that the damage exceeds the amount of the contractual compensation as a result of fraud or a gross error on the part of the debtor.
- Any agreement to the contrary of the provisions of this Article shall be void.
Therefore, liquidated damages may not be guaranteed to an employer if it has not actually suffered any loss and/or the agreed compensation was exaggerated. While in practice, UAE Courts and/or tribunals rarely award liquidated damages above 10% of the contract price (i.e., what is typically contractually agreed to), we will have to see how this is implemented in Saudi Arabia. Furthermore, and perhaps most importantly, unlike the UAE Civil Code, the KSA Civil Law stipulates that Parties cannot contract out of the Court's ability to adjust liquidated damages.
Quantum meruit and variations
The UAE Civil Code affords a contractor with protection in terms of receiving compensation for variations and/or additional unforeseen costs encountered during the lifetime of the Project works. In particular, Article 884 of the Muqawala provisions of the UAE Civil Code also provides that: “The Employer shall be obliged to take delivery of the work done when the contractor has completed it and placed it at his disposal.”
Article 885 of the Muqawala provisions of the UAE Civil Code also provides that: "The employer shall be obliged to pay the consideration upon delivery of the property contracted for unless there is an agreement or a custom to the contrary."
Further, Article 888 of the Muqawala provisions of the UAE Civil Code provides that even: "If the remuneration for the work is not specified in the contract, the contractor shall be entitled to fair remuneration, together with the value of any materials he has provided as required by the work."
The KSA Civil Law, on the other hand, sets out that parties may only be entitled to compensation that would normally have been foreseen at the time of the contract.
If the compensation is not determined in the contract or under a statutory provision, the court shall assess it in accordance with the provisions of Articles (136), (137), (138) and (139) of this Law. If, however, the obligation stems from the contract, the debtor who has not committed fraud or a gross error shall only be liable to compensate for the damage that would normally have been expected at the time of entering into the contract.
Therefore, it can be argued that pursuant to Article 180 of the KSA Civil Code, an employer shall be liable to pay a contractor for damages that would have been expected at the time of entering into a contract (such as variations). It is interesting to note that, unlike Article 41, there is no explicit reference to whether "loss of profit" is recoverable.
That said, Article 180 must be read with the KSA Civil Law's provisions on Muqawala contracts. Specifically, Articles 470 to 472, state that to successfully raise a compensation claim, a contractor must provide timely notice to the employer.
- If a contract is made under an itemised list based on unit prices and it appears during the work that it is necessary for the execution of the plan agreed substantially to exceed the quantities on the itemized list, the contractor must immediately notify the employer thereof, setting out the increased price expected, and if he does not do so he shall lose his right to recover the excess cost over and above the value of the itemized list.
- If the excess required to be performed in carrying out the plan is substantial, the employer may withdraw from the contract and suspend the execution, but he must do so without delay and must pay the contractor the value of the work he has carried out, assessed by the conditions of the contract.
Furthermore, Article 470(2) of the KSA Civil Law states that if the employer deems that the contractor's claim is excessive, it may suspend the contract but must ensure that the contractor is paid for the work done.
- If a Muqawala contract is made based on an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of such plan, even if the prices of the materials used in the work or the wages of the workers or other expenses increased
- If any variation or addition is made to the plan, the contractor may not demand any increase over the remuneration unless it is due to the employer's fault or is with his permission and he agreed with the contractor on the increase.
- If the contractual balance between the obligations of the employer and the contractor collapses due to general exceptional circumstances that could not have been foreseen at the time of the contract and the basis for the financial assessment of the contracting contract is destroyed, the court may, depending on the circumstances, after balancing the interest of the parties, order the restoration of the contractual balance, including the extension of the period of performance, the increase or decrease of remuneration, or the termination of the contract."
Article 471 of the KSA Civil Law is unique in that it states that a contractor is not entitled to any increase in the contract price regardless of any increase in the price of goods and/or materials. Article 471(2) of the KSA Civil Law further states that a contractor may only claim additional costs for variations if the variation was due to the employer's change in requirements and/or the Parties have agreed to such claim.
If the contractor's remuneration is not specified in the contract, the contractor shall be entitled to a fair remuneration, together with the value of the materials he has provided as required by the work.
Article 472 of the KSA Civil Law mirrors Article 888 of the UAE Civil Code, in that if the contract price (or part thereof) is not specified, the contractor is entitled to fair compensation for the work done and materials used.
Articles 473 and 474 of the KSA Civil Code emulate Articles 890 and 891 of the UAE Civil Code in that, subject to the terms of the contract, a contractor may subcontract its works at its own risk.
Article 474 of the KSA Civil Code codifies that a subcontractor shall have no claim against the employer for compensation unless the parties have assigned such right.
As in the UAE Civil Code, the KSA Civil Code states that parties may terminate a contract upon agreement or court order.
In bilateral contracts, if one of the contracting parties fails to fulfill its obligation, the other contracting party may – after notifying the breaching party – request execution or rescission of the contract, with compensation in both cases if there is a requirement therefor. The court may reject the rescission request if the part not fulfilled by the breaching party is of little significance in relation to the obligation.
It may be agreed that the creditor shall have the right to rescind the contract upon the debtor’s breach of his obligations without the need for a judicial ruling. Such agreement shall not exempt from giving notice unless the contracting parties expressly agree to the exemption therefrom.”
Therefore, any further conditions placed upon termination would need to be stipulated within the contract. Any interpretation of such conditions would, of course, be subject to Article 107 of the KSA Civil Law.
Furthermore, Article 466 of the KSA Civil Law stipulates:
- Where, during the progress of the work, it appears that the contractor is performing the work in breach of the contract, the employer may notify the contractor to correct the method of performance within such reasonable time as determined by the employer. Where such period expires without remedy of such breach, the employer may entrust another contractor with the completion or correction of the work at the expense of the first contractor by the provisions of Article (167) of this Law or request the termination of the contract.
- The employer may request the termination of the contract immediately if the correction or remedy of the breach is impossible, or if the contractor delays in commencing or accomplishing the work to such an extent that he cannot possibly deliver the work within the agreed period, the employer may demand the immediate termination of the contract.
Article 466 of the KSA Civil Law provides an employer with the right to terminate a contract in the event of a contractor's non-performance. Under Article 466, provided that the employer notifies the contractor of their non-performance, and the contractor fails to remedy said performance within a reasonable time (to be determined by the employer), the employer may de-scope the contractor's works. However, Article 466(2) states that if it becomes transparent that the contractor would be unable to rectify their works or would be unable to complete their works on or before the Completion Date, the employer is entitled to request a court/tribunal to terminate the contract.
Title 3 of the KSA Civil Law further delves into terminating construction contracts.
As in the UAE Civil Code, Article 475 of the KSA Civil Law states that Muqawala contracts terminate upon the completion of the work. Furthermore, Articles 476 and 477 of the KSA Civil Law confirm that if the work becomes impossible to perform due to unforeseen circumstances, the parties may agree to terminate the contract and agree upon any payment of damages (if necessary).
While the application of the KSA Civil Law is yet to be seen, the principles enshrined within it mirror those within the wider GCC region. Therefore, drawing from applicable case law in UAE, we can envisage that its application and implementation of case law will be similar to that which has been observed.
Author: Danielle O'Brien