Construction under the KSA Civil Code Part 3: Performance of Contracts

An analysis of the provisions of the Saudi Civil Code relating to the performance 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 3 focusses on the parties’ obligations in the performance of their obligations, the concepts of good faith and abuse of rights and particular considerations relevant to contractual notices. As in our previous entries in this series, we also provide our thoughts on best practices clients should be following when engaging in construction projects in Saudi Arabia.

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.

Performance of the contract

The Code, like many other regional Civil Codes, affirms the general obligation of parties to perform their contract in accordance with its terms. Article 94(2) of the Code states:

The contracting parties must perform their obligations under the contract.

Article 95(1) likewise confirms:

A contract shall be implemented as per its provisions and in a manner consistent with good faith practices.

Parties are therefore expected to comply with and perform their contractual obligations. As to what those obligations might be, Article 104 limits the extent to which the contract may be interpreted to determine the parties’ intent:

If a statement in a contract is unambiguous, the meaning thereof may not be altered on grounds of interpretation to meet the intent of the contracting parties.

This principle can sometimes cause problems where the contract is drafted in a way that does not reflect what the parties (or one of them) intended but is nevertheless clear on its terms. The risk is that, where the contract is unambiguous on its face, a party may be held to an obligation it did not intend to perform.

Accordingly, it is essential to ensure not only that the parties’ respective positive obligations are set out clearly, but also that the drafting is sufficiently clear as to avoid unintended obligations being imposed on either party.

In a construction context, this will be particularly relevant where the parties seek to amend standard-form templates using bespoke particular conditions (or similar). Care should be taken when preparing these documents to avoid parties agreeing to perform obligations that were not their intended responsibility.

Good faith

In common with other regional Civil Codes, Article 95(1) of the Code (set out above) imposes an obligation on parties to act in good faith in the performance of their contracts. This is not a stand-alone obligation but refers to the way the parties must satisfy their stated contractual obligations.

Generally speaking, the proper performance of an obligation in accordance with the parties’ agreement will prima facie be considered performance in good faith. Conversely:

• a failure properly to follow the contract terms (for example, failing or refusing to assess and determine validly submitted extension of time or monetary claims); or
• the improper exercise of contractual rights (for example, calls on performance bonds in the absence of a legitimate basis for doing so),

are likely to constitute bad faith on the part of the responsible party.

However, again in keeping with the regional approach, Article 95(2) of the Code goes further, requiring that:

A contract shall be binding on a contracting party not only in terms of its provisions, but also in relation to other requirements as prescribed by legal provisions, custom, and the nature of the contract.

This provision acts to fill the gaps of a contract with, essentially, implied terms required for the contract’s proper performance. As such, parties should not simply assume that, just because a particular activity is not expressly stated in their contract, they have no responsibilities in relation to it. Rather, it is understood that parties involved in contractual relationship must act honestly and fairly towards each other: they should not seek to take unfair advantage of situations or exploit the other party and they are expected to cooperate and make efforts to try to avoid conflict, ensuring that their conduct aligns with the spirit of their agreement and the expectations set forth by their relationship.

Potential examples relevant in construction contracts may include:

• where a contractor is stated in the contract to have satisfied himself as to site ground conditions, but is prevented from accessing the site (or parts of it) by the employer (or employer’s other contractors, for whom the employer is responsible) to carry out his inspections;
• where the contractor is responsible for obtaining authority approvals, but, in practice, these approvals will not be issued without the employer’s assistance and this assistance is withheld, resulting in delay.

Pursuant to Article 95(2) of the Code, and even in the absence of an express obligation, the employer’s responsibility in these instances would arguably be to provide the required access or assistance, as applicable. Failure to do so may lead to claims for relief by the other party, usually in the form of claims for extensions of time and associated costs, disruption costs or variations to the contract.

Despite its prevalence in regional jurisprudence, good faith is a nebulous concept. Interpretation and application of the doctrine of good faith can vary and how the Saudi Courts will approach this issue remains to be seen. Reliance on arguments of good faith should therefore be considered as a fallback option and it is preferable for parties to have as clear and comprehensive contract terms as possible.

Notices

An area where the foregoing provisions of the Code are likely to be hotly debated is contractual notices.

Most construction contracts contain comprehensive notice provisions. These usually require parties seeking some form of relief or entitlement to provide written notice of this to the other party. Invariably, these clauses prescribe strict time periods for the provision of such notices, often combined with a loss of entitlement if these deadlines are missed. (These are different from prescription periods imposed, by law, which will be the subject of a separate article.)

Compliance (or lack thereof) with contractual notice provisions is fertile ground for disputes in construction contracts around the world, and the Middle East is no exception.

Notice periods may be onerous and structured to ensure strict compliance, which can increase the chances of a party failing to comply with its notice obligations. This risk is particularly severe in construction contracts, where claims may be large and complex, requiring the collation and presentation of considerable amounts of technical information in a relatively short period of time. Parties therefore need to be aware of the potential impact of the Code on their obligations.

Ostensibly, the combined effect of Articles 94, 95 and 104 of the Code is to require parties to comply with their agreed notice obligations – however onerous – if they wish to obtain their sought-after relief. Where the contract clearly and unambiguously provides for a loss of entitlement for non-compliance, Article 104 may present real difficulties for a party seeking to obtain relief after the contract notice periods have expired.

Likewise, the doctrine of good faith is unlikely to provide relief in and of itself: performance of the contract in accordance with terms – including enforcement of an agreed loss of entitlement – is arguably performance in good faith.

Unrealistically short notice periods should, of course, be resisted where possible. However, as noted in Part 2 of this series of articles (available here), construction contracts in the Middle East are often presented on a “take it or leave it” basis. There may therefore be limited scope to agree more realistic and reasonable notice periods. In these circumstances, parties that have missed a notice deadline often turn to the law to relieve them of the consequences of their non-compliance.

The Code does not provide any specific or direct relief for failure to comply with agreed contractual notice periods. However, where a claim asserted to be contractually “time-barred” because of such non-compliance, there may indirectly be the potential for relief.

Article 29(1) of the Code provides that a party may not exercise its rights “in an abusive manner”. Article 29(2) provides further clarity on what will be considered “abusive” conduct:

• If the right is exercised only to harm others.
• If the benefit of exercising the right is substantially disproportionate to the harm it causes to others.
• If the right is exercised unlawfully or for other than the intended purpose.

These provisions substantially mirror those found in other regional Civil Codes (for example, Article 106 of the UAE Civil Code and Article 63 of the Qatar Civil Code). As such, previous practice in those jurisdictions may be considered instructive (at least until such time as the Saudi Courts are asked to address these issues).

In those jurisdictions, it is not uncommon for a party – usually a contractor that has missed a notice deadline – to argue that the enforcement of a contractual time-bar to prevent an otherwise legitimate claim would be an abuse of rights and, therefore, unlawful.

Such arguments are usually put forward on the basis that:

• the time-bar is being enforced simply to harm the defaulting party; or
• enforcement of the time-bar is disproportionate to the harm the defaulter will suffer (i.e. loss of its legitimate entitlements) because of its claim being prevented; or
• both.

Very often, these arguments are combined with assertions of unjust enrichment, which, under the Code, is prohibited under Article 144:

Any person, even if non-discerning, who is enriched without a legitimate cause at the expense of another person shall, to the extent of his enrichment, be liable to compensate the other person for the loss he sustains….

(Similar provisions relating to unjust enrichment can be found in Article 318 of the UAE Civil Code and Article 22 of the Qatar Civil Code.)

Assertions of unjust enrichment usually proceed on the basis that, by refusing an otherwise legitimate claim, the party enforcing the time-bar has received a windfall in the form of a benefit for which it has not paid. This would be unjust to the defaulting party and cause it to suffer loss and harm, in the form of the entitlement denied.

Pending further clarification from the Saudi Courts on the application and interpretation of Article 29 of the Code, it is likely that similar arguments will be raised in relation to Saudi projects where notice deadlines have been missed.

However, whilst these arguments are commonly raised in other jurisdictions – particularly in arbitration proceedings, where there may be a perception of greater scope to argue the interpretation of applicable law – and may be raised in relation to Saudi projects, they should not be considered a silver bullet that will relieve a party from complying with its notice obligations.

The application of the doctrine of abuse of rights to clear contractual obligations is often contested and it is by no means guaranteed that the criteria for establishing an abuse of rights in Article 29(2) will be satisfied. Moreover, given the clear provisions of Articles 94, 95 and 104 of the Code, a party seeking relief may face an uphill struggle to persuade a court or tribunal to depart from the clear and agreed terms of its contract. Much will depend on the facts of the case.

A claim of abuse of rights should therefore been seen as a last – and potentially weak – line of defence. Parties will be far better served and protected by:

• ensuring any notice provisions contained within the contract are clear, understood, reasonable and achievable in the context of the complexity of the project; and
• administering their contract properly and contemporaneously, issuing notices in compliance with their contract terms and within the timeframes specified in the contract.