Ten Practical Tips for Managing the Impact of the New Saudi Civil Transactions Law on Construction Disputes

Ten Practical Tips for Managing the Impact of the New Saudi Civil Transactions Law on Construction Disputes

December 12, 2023, Covington Alert

The Kingdom of Saudi Arabia (KSA)’s new Civil Transactions Law (the CTL)[1] - effectively a new Civil Code - will enter into force on 16 December 2023 (Jumada II 3, 1445 AH) (the Effective Date).

Businesses involved in KSA construction projects need to be aware of certain key aspects of the CTL, which will have an important impact on contracts that are governed by KSA law. This article highlights ten notable features of the CTL, accompanied by practical tips for parties to consider when managing construction disputes where the CTL applies to their contractual relationship.

There are three key elements to the CTL that provide crucial context for its overall impact on construction disputes, and which will inform the practical takeaways identified in each of the ten tips listed below. The CTL:

1. Codifies contractual principles of KSA law: The CTL codifies important Shari’ah principles, which is a welcome development that is anticipated will promote greater certainty and consistency in the interpretation of KSA law. If the CTL is silent on a particular issue, Shari’ah principles will apply.[2]
2. Has retrospective effect (subject to limited exceptions): The CTL will apply retrospectively to contracts and relationships that existed before the Effective Date, unless: (1) a party is relying on existing statutory provisions or judicial principles, and can show that there is a conflict between such provisions or principles and the CTL; or (2) a limitation period has already started to run before the Effective Date.[3]
3. Contains mandatory provisions: The CTL contains a limited number of mandatory provisions, which cannot be contracted out of by agreement between the parties.

The CTL permits parties to include liquidated damages (LD) clauses in their contracts.[4] There are several limitations to this provision, notably that a contractually agreed rate of LDs will not apply if the paying party (usually the contractor) can show that the receiving party did not suffer loss.[5] To reduce the risk of unexpected consequences of the CTL on the rate of LDs, parties should evaluate whether the LD provisions in contracts entered into both before and after the CTL’s Effective Date are enforceable under KSA law.

The CTL provides that compensation will only be due after serving a notice to the defaulting party, unless the parties agree otherwise.[6] It supplements the parties’ contractual terms by specifying certain limited circumstances in which a notice will not be required, for example if the parties agree that the defaulting party is considered as being notified by the elapse of a specific period of time.[7]

The CTL provides that a party will not be liable for damages arising due to circumstances beyond their control, such as force majeure events, the fault of a third party, or the default of their counterparty, unless otherwise agreed.[8] This provision enables the parties to negotiate the allocation of risk in the contract upon the occurrence of certain events. This is, however, subject to the operation of mandatory provisions in the CTL (such as hardship, discussed next).

The CTL allows a party to request the re-negotiation of the contract if unforeseen, exceptional circumstances arise that threaten it with a heavy loss.[9] This is a mandatory provision of the CTL, and any attempt by the parties to contract out of its application will be null and void. This means that the parties to a contract governed by KSA law cannot avoid the potential consequences of the CTL’s hardship provisions in re-balancing the agreed terms of their contract, if invoked by a party that has become unduly burdened by a significant change in circumstances.

The CTL expressly permits a court, in its discretion, to award damages for intangible “moral harm”, such as damages for loss of reputation.[10] The language used in the CTL suggests – but not does confirm – that this remedy is available only to natural persons.

In the absence of a contractual price adjustment mechanism, the CTL restricts the ability to claim additional payments.[11] It is therefore important to negotiate contractual entitlements to price adjustments, defining the circumstances in which a party may have an entitlement to an additional payment. If such a mechanism is not included in the contract, additional payment rights are limited under the CTL.

If one party defaults on its contractual obligation(s), the CTL allows the innocent party to apply to the court (after giving notice to the defaulting party) for an order either requiring the defaulting party to perform the contract, or allowing termination, and claiming damages in either case.[12] The court has discretion to dismiss the innocent party’s request to terminate the contract if it is sought for a minor default. A party considering invoking this provision of the CTL should evaluate the significance of its counterparty’s default before making an application to the court.

The CTL permits a party to suspend performance as a result of its counterparty’s breach or failure to perform corresponding obligations.[13] The CTL also recognizes that a contract may include provisions allowing termination for default.[14] To mitigate the risk of an unlawful suspension or termination, it is important that the parties clearly define the circumstances in which those rights arise.

The CTL permits the parties to include a withdrawal option in their contract.[15] If contracting parties decide to include termination for convenience, the CTL requires that the right must be exercised upon notice to the other party and within the time limit specified either in the contract or by a court.[16]

Decennial liability is an important matter for construction projects in KSA, imposing a 10-year mandatory liability period for defects affecting the structural integrity of the building or causing total or partial collapse. Decennial liability cannot be excluded or limited by contractual agreement or choice of foreign law. The CTL does not address decennial liability.

Parties to construction contracts governed by KSA law should review their contracts to identify how the CTL may impact their contractual rights and obligations. In particular, parties should identify any mandatory articles in the CTL that may conflict with – and possibly render unenforceable – pre-existing contractual provisions and agree any necessary amendments. Parties should also consider how the CTL could change their approach to resolving any potential or actual disputes involving Saudi law governed construction projects.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Arbitration practice.