Construction under the KSA Civil Code Part 1: Formation of Contracts

An analysis of the provisions of the Saudi Civil Code relating to the formation of construction contracts.

In June 2023, Saudi Arabia announced its new Civil Transactions Law by way of Royal Decree No. M/191 (the Code). The Code came into force in December 2023 and effectively represents the first codification of the laws relating to contract and tort in the Kingdom. 

The enactment of the Code is a welcome development and a key part of Saudi Arabia's drive towards modernisation. It is also fundamental to attracting inward investment and creating a stable economic platform for local and international businesses, offering increased certainty and predictability for commercial operations in Saudi Arabia.  To that end, the Code has retrospective effect, applying to contracts and events that predated its enactment (subject to the exceptions set out in the Royal Decree), providing further certainty to commercial parties operating in Saudi Arabia.  

The codification of laws also represents a departure from the previous system of Islamic Sharia to one more aligned with the Egyptian Civil Code, like several of the Kingdom's regional neighbours. That said, Sharia principles remain relevant - whether by being stated in the Code itself or used as guidance where it is silent - and the Code also has distinct differences in several key areas compared to other regional Civil Codes.  Additionally, the Code is subject to other specific laws and regulations. It is not the sole source of law governing civil transactions and other legal instruments may also be relevant.

Caution must therefore be exercised - particularly by those new to the Kingdom - and clients should not assume that, given the similarities between the Code and other regional laws, their legal position will be the same across jurisdictions.

In this series of articles, we explore certain key provisions of the Code relevant to our clients engaged in construction projects in Saudi Arabia. This Part 1 focusses on the formation of contracts, use of standard-form templates and best practice when preparing and agreeing contract documents.

Except where otherwise stated, translations of the Code are taken from the English translation produced by the Official Translation Department of the Bureau of Experts at the Council of Ministers.

Contract formation

The Code sets out how contracts may be concluded and, in this respect, codifies commonly accepted requirements for a contract to be formed.  These include principles of offer and acceptance, capacity and clarity of subject matter - concepts that are likely familiar to clients in the construction industry who are used to executing and administering complex contractual documents for their projects. 

However, the Code goes further than other Civil Codes - seeking to avoid issues that have arisen elsewhere in the region - and the following Articles of the Code are worth noting.

Framework agreements

Article 45 of the Code recognises the concept of "framework agreements" - contracts that set out the basic terms agreed between the parties that govern their overall relationship, with specific terms forming part of separate, but related, agreements. 

Such arrangements are common in supply contracts, where a framework agreement may be supplemented by subsequent purchase orders for goods and materials. Article 45 makes clear that the framework agreement is deemed part of the subsequent contracts concluded between the parties.

This is a welcome development and a pragmatic approach to framework arrangements. It will likely provide greater comfort to suppliers of goods and materials to projects in the Kingdom, who often operate under these types of arrangements. Instead of being faced with having to treat each of their contracts or purchase orders separately - potentially leading to multiple concurrent claims or proceedings, for example in the case of non-payment - the parties may consider their agreements as a whole. It is also hoped that the codified recognition of framework arrangements will help to streamline and accelerate procurement times - essential for the delivery of Saudi's Vision 2030 initiative and beyond - by removing the need to negotiate comprehensive terms for each individual agreement.

In recognising these types of arrangements, the Code is more reflective of market practice than the laws of other jurisdictions, where these issues have given rise to disputes. In Dubai for example, the status of purchase orders issued pursuant to a framework agreement was the subject of court proceedings that were appealed all the way to Cassation level (see our commentary on this judgment here). The Code seeks to avoid these disputes arising at all.   

Incorporation of terms by reference

The Code's recognition of the use of multiple, inter-related contract documents is expanded in Article 46 of the Code. This Article expressly confirms parties' ability to incorporate terms of one document - for example, a standard-form contract such as in the FIDIC suite of contracts - by express or implicit reference in another document.

In doing so, the Code again offers a forward-thinking and market-friendly approach, formally recognising:

1. the common practice in the construction industry (and others) of having multiple inter-related contractual documents that are intended to be read and have effect together; and

2. the prevalent use of standard-form contracts that set out the bulk of the parties' respective rights and obligations in a separate document.

Given the Kingdom's current focus on construction, it is likely that the drafters of the Code were keen from the outset to avoid disagreements over the status of standard-form contracts, such as have been seen elsewhere (see below).

However, whilst it is hoped that the Code will prevent these types of disputes, its application and interpretation have yet to be tested in the Saudi Courts given its relative novelty. Accordingly, clients should not unquestioningly assume that the provisions of the Code will apply without nuance. This is particularly the case in relation to "special" clauses, such as arbitration agreements to refer disputes for final determination in arbitration.

Arbitration clauses

Historically, regional courts have often treated arbitration clauses differently from other operative provisions in a contract, requiring special actions to be taken by the parties for the arbitration clauses to be valid.

Usually, the reasoning behind this approach is that an agreement to arbitrate is an exception to the parties' default right to refer their disputes to court. Given this exceptional deviation from the norm and the potential impact on parties' default rights at law, a clear and inequivalent statement of mutual intent is required for this agreement to be enforceable.

This is a particularly relevant in construction contracts, as:

1. arbitration is often seen as a preferable method of dispute resolution for complex construction disputes, allowing as it does greater flexibility in terms of process, evidence, and expert opinion, as well as the ability to have the dispute decided by industry specialists;

2. parties' agreements to refer to disputes to arbitration, as opposed to the local courts, are often contained within general conditions of contract, such as the FIDIC suite of standard-form contracts; and

3. these general conditions are often incorporated into the parties' contract by a general reference to the conditions as a whole, rather than specific references to each individual clause of the standard-form document.

However, whilst this is common practice in the construction industry, certain regional courts have cast doubt on the validity of this approach. In Dubai, for example, a Court of Cassation judgment in Case No. 1308/2020 called into question the ability of parties to incorporate arbitration clauses in their contracts by a general reference to a standard-form template (see our commentary on this judgment here).

In summary, the Dubai Court's reasoning was that a specific reference to the arbitration clause was required to demonstrate the parties' clear intent to depart from the default jurisdiction of the local courts.  A general reference to a particular document as a whole, though it contained the arbitration clause, did not satisfy this requirement.  The arbitration clause therefore did not form part of the parties' contract and the award rendered in proceedings commenced pursuant to that clause was invalid and unenforceable. 

Whilst this position appears to be changing in light of the more recent judgment concerning framework arrangements, referred to above (and, indeed, coming more in line with the position under Articles 45 and 46 of the Code), considerable time, money and effort has been expended arguing these issues in court, which could have been avoided with careful drafting at the contract negotiation stage.  

It is conceivable that a recalcitrant award debtor may try to overturn an arbitration award in the Saudi Courts on the basis that an arbitration clause has not been validly incorporated into the parties' contract.  Further guidance and clarification on this issue from the Saudi Courts is therefore likely to be given in due course.   

In the interim, the approach adopted by the Dubai Courts may be seen as instructive as to drafting best practice and the consequences of failing properly to incorporate an arbitration clause prior to execution.

Further guidance may also be taken from Article 9(3) of the Saudi Arbitration Law (Royal Decree No M/34), which (in translation) confirms the need for a clear reference to an arbitration clause for it to be incorporated into the parties' contract:

It is also considered in effect of a written arbitration agreement all referrals - in the contract - to the provisions of a model contract, or an international agreement, or any other document containing an arbitration conditions only if the referral is clear in considering this condition a part of the contract.

Potentially, therefore, a Saudi Court could consider an arbitration clause unenforceable if it is incorporated as part of a general reference to a standard-form contract. 

Pending further direction and clarification from the Saudi Courts, clients intending to incorporate important or exceptional provisions into their contracts by reference (particularly arbitration clauses) should consider making express reference to these - or including them in their primary contracts in full - rather than relying on a general reference to a collection of terms in a separate document.  

More generally, given the relative novelty of the Code and interim uncertainty regarding its implementation and enforcement, parties should seek legal advice to navigate this transitional period until there is more clarity provided by the Saudi authorities and courts.

Key takeaways and best practice

Pending further clarification from the Saudi Courts as to the interpretation and application of the Code:

• Where using multiple contract documents, parties should ensure that they have clearly and expressly incorporated relevant terms into their primary contracts.
• For inter-related contracts, such as framework agreements and purchase orders, parties should ensure these documents clearly state which terms are to apply to each – for example, by expressly importing dispute resolution provisions in a framework agreement in any subsequent purchase order.
• Parties seeking to include special or exceptional provisions, such as arbitration clauses, should consider making specific express reference to these clauses in their primary contract – or setting them out in full – rather than assuming a general reference to a category of terms (such as a standard-form contract) will suffice. This is to avoid any later argument that these terms were not validly incorporated or that the parties’ intentions were sufficiently unclear as to render these provisions unenforceable.