Construction under the KSA Civil Code Part 2: Unconscionable 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. 

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 2 focusses on the concepts of "duress" at the time of contract execution, unconscionable contracts and best practice when negotiating and agreeing contract obligations.

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.

Duress

A common complaint from clients operating in the region is in relation to contract terms that are presented as a fait accompli, on a non-negotiable basis.  Attempts to agree alternative terms or soften onerous obligations are rejected and parties may feel pressured to accept the proffered terms as they want to avoid losing out on the commercial opportunity.

However, if they do so, it is not uncommon for these parties to run into difficulties later, when faced with performing the onerous obligations they agreed to in the contract.  Performance is often at considerable additional cost, loss, or delay.

At that point, parties may seek ways to avoid their obligations and a common question is whether this "take it or leave it" approach to contract tendering would constitute some form of "duress" that would afford relief from compliance with onerous contract terms.

Article 67 of the Code does provide for nullification of contracts that are concluded under duress, but such arguments are unlikely to be successful in a commercial context.  Article 64 of the Code confirms that duress requires "the unlawful act of threatening a person using physical or moral means to coerce said person to act against his will", whilst Article 65 describes duress occurring where:

...the life, honour, or property of the party under duress is threatened with serious and imminent danger, or if the threat is made against others and the party under duress would not have concluded the contract in the absence of such duress.

Clearly, these criteria are unlikely to be satisfied by commercial parties during normal contractual negotiations.  It would be difficult to prove that a commercial party has been forced to enter into a particular contract in the ordinary course of business, particularly given they have the freedom to refuse to contract on the terms offered.

Accordingly, duress is unlikely to provide any assistance to parties faced with having to perform onerous obligations to which they freely agreed.

Unconscionable contracts

In contrast, however, Article 68 potentially provides relief where "a contracting party exploits the apparent vulnerability or urgent need of the other contracting party in order to conclude an unconscionable contract".

Examples of this may include:

1. a party compelled to agree to less favourable financial terms to avoid insolvency;

2. an agreement to make additional extra-contractual payments demanded to ensure the delivery of critical goods or materials; or

3. parties being held to ransom mid-contract with the threat of discontinuation of performance.

If these circumstances exist, a court (or tribunal) has the power to amend the parties' obligations or, in certain circumstances, nullify the contract.

However, Article 68 is not the panacea of bad commercial bargains; it is intended to offer exceptional relief, available only in limited circumstances: 

• First, Article 68 makes clear that the contract must have arisen out of an "apparent vulnerability or urgent need" of one party. This is less likely to exist in the case of a commercial entity, particularly at the outset of a project, except in very rare circumstances.

• Second, a claim for relief under Article 68 must be filed within 180 days from the date of execution of the contract. This indicates that the availability of relief is directly tied to the urgent circumstances existing at or closely around the time of contract. Relief is unlikely to be available to parties seeking belatedly to avoid contractual obligations in long-term contracts, such as those for construction projects.

• Third, Article 69 expressly makes clear that, in matters of pricing, "unconscionability" will not arise in circumstances that are considered "usual practice...according to custom". Market pressures such as non-exceptional price fluctuations, supply and demand and compromises during commercial negotiations are unlikely to be considered outside usual practice or custom. Accordingly, an assertion of "unconscionability" will rarely assist a party looking to revise a contract price agreed during ordinary commercial negotiations. The Code does not exist to relieve a party from its bad commercial bargain.

Key takeaways and best practice

As with all contracts, parties should familiarise themselves with their proposed contractual obligations prior to execution of their contract. Parties should satisfy themselves that these obligations are not only clear and achievable in principle, but achievable for the price tendered.  

Where possible, parties should seek advice on:

• the allocation of responsibilities under the proposed contract;

• key areas of risk in the performance of the proposed contract; and

• the potential consequences of failing to perform their contractual obligations.

Parties should consider carefully whether the risks of contractual terms offered are disproportionate to the commercial opportunity in question.

When concluding contracts, parties should not assume that they will be able to obtain relief from the performance of their contractual obligations under the Code, or that Saudi law will relieve them from their bad commercial bargain.