Saudi Arabia’s Civil Code:
General Principles Applicable toConstruction Contracts
Nesreen Osman
Partner, Construction Advisory and Disputes
Pinsent Masons LLP, Dubai
those relationships. As seen with other civil codes,
there are bespoke sections dealing with specific typesof relationships such as agency, insurance,
partnerships and construction contracts.

The Kingdom of Saudi Arabia enacted its longawaited Civil Transactions Law on 19 June 2023 by
Royal Decree N191/1444 (the Civil Code). The Civil
Code entered into force on 16 December 2023 theEffective Date). In this article you will find some key
take aways of the Civil Code provisions throughout
the life of your agreement and, in particular, those
relevant to the construction sector.
The Civil Code is a manifestation of Saudi Arabia’s
broader Vision 2030 initiative aimed at modernizing
its legal framework, attracting foreign investment,
and fostering economic growth. This is the first timethat the Kingdom has distilled its Sharia law
principles into a codal system, similar to those ofother jurisdictions in the region such as the UAE andQatar. There are many commonalities between thecivil codes of these countries due to their foundationin Sharia but also some notable differences of which
parties need to be aware.

Overview and key principles
The Civil Code encompasses both contract and tort,
covering issues from the formation of contracts andother obligations to liability and remedies undervarying forms of relationship and the termination of

The terms of the Civil Code govern relationships,
whether contractual or tortious (but note exceptions
discussed further below), entered into from 16
December 2023 as well as existing relationships as itwill be applied retrospectively. This means that theCivil Code applies to events that occurred andrelationships that existed, whether contractual orotherwise, prior to the Effective Date except if (a) any“statutory provision” or “judicial principle” that
relates to the event in question contradicts theprovision of the Civil Code, and one of the parties
relies upon it, or (b) a limitation period had alreadystarted to run prior to the Effective Date. The default
position is that it is for the party relying upon aconflicting statutory provision, judicial principle orlimitation period, to assert and prove that fact.
The terms of the Civil Code also govern relationshipsthat are personal / private rather than only
commercial in nature. For commercial matters inparticular, the Civil Code states that it applies (1) ina manner that does not contradict the nature of thecommercial transaction in question and (2) to theextent that it does not contradict what is specificallyprovided for in other laws governing commercialmatters.
When it comes to contractual interpretation going
forward, Article 1 sets out a hierarchy of application:
first, provisions of the Civil Code, second, the “overallrules” (described by some as “Sharia-inspired legalmaxims”) as listed in Article 720 of the Civil Code,and third, the provisions of the Islamic Sharia thatare “most appropriate”. Article 1 goes on to add that“[t]he application of the provisions of this Law shallbe without prejudice to the special statutoryprovisions”, which are understood to be otherspecialised laws.

Rules of interpretation
The Civil Code commits the general guidelines for theinterpretation of contracts under KSA law to paper.
This will serve to assist courts and tribunals withdisputes regarding contractual interpretation andshould thereby facilitate the enforcement of thosecontractual terms and lead to greater certainty for allconcerned. As is the case under other civil codes suchas the UAE Civil Code, the literal interpretation ofcontracts is paramount and therefore the clear wordsof the contract must be applied in the first instance.
However, if the wording is unclear, then the common
will of the parties must be ascertained by looking atcustom, the circumstances of the contract, the natureof the transaction and the usual course of dealing
between the parties. This provision brings in a
number of pre-existing principles of Sharia law,indicating that this area of law has been codified
rather than modified.

Formation of contracts
There are no major surprises in the section of the
Civil Code dealing with formation of contracts.
Articles 32 and 33 detail the rules for contract
creation, namely the need for an offer and acceptanceof that offer between parties with legal capacity. It is
possible to create a contractual relationship in
writing, orally or through implied actions unlessspecific circumstances require an explicit declarationof intent.

Vision 2030 aims to achieve economic diversification, global
engagement and enhanced quality of life in Saudi Arabia.

provides that individuals who are minors, mentally
incapacitated, or suffering from mental deficiencies
lack the capacity to enter into contracts.

Setting aside of contracts
The CTL further addresses, in Articles 57 to 69,
circumstances where consent is wanting by virtue ofa mistake, fraud or, and duress. A contract isconsidered void if: (i) the mistake is substantial,
known by or easily detectable by the other party, andnot merely a unilateral mistake; (ii) the actions ordeliberate silence of one party deceptively induce
another to enter into a contract; and / or (iii) it
involves coercion by material or moral means. Duress
caused by a third party can only lead to contract
rescission if the other contracting party was aware ofit.

Ongoing obligations

Parties should be mindful that Article 37 specifies
that silence does not automatically indicate
acceptance, except under certain conditions. However,silence can indeed be interpreted as acceptance when
there is a history of dealings between the contracting
parties and the current offer is related to thosedealings. Therefore, ignoring correspondence with acounterparty in the hope that silence will beinterpreted as disagreement is not a safe course ofaction. Rather, the most prudent response will be torespond with explicit disagreement.

Article 95 of the Civil Code codifies the Sharia
principle of good faith and states that (i): a contract
must be carried out in accordance with its terms and“in a manner consistent with the requirements ofgood faith” and (ii) the contract is not limited tobinding the contracting party to its terms, but it also
includes requirements arising out of statutory
provisions, custom and the nature of the contract.
Parties can expect the principle of good faith to be
applied by the KSA courts through all stages of thelife of their relationship, from negotiation andperformance of the contract through to termination.

Article 48 addresses the capacity to contract which

Not only must a party exercise its rights in good faithbut it must not abuse its rights. Article 29 of the Civil
Code provides that “no right may be exercised
wrongfully” and lists specific instances when thiswould be the case. Specifically, (i) if a right is
exercised only to cause harm to others; (ii) if thebenefit generated from exercising the right isdisproportionate to the harm it causes to third
parties; or (iii) if the right is exercised for an unlawful
purpose or in an unlawful manner. As such, evenwhen carrying out a contractual right, parties must
keep this principle in mind and consider the purposeof their actions and the harm likely to be suffered asconsequence.

Renegotiating terms
Article 97 of the Civil Code codifies the position inrelation to ‘exceptional unforeseen circumstances’,
allowing the court to reduce a burdensome obligation.
In the event of exceptional circumstances of a generalcharacter, which could not have been foreseen at thetime of entering into the contract and as a result of
which the performance of a contractual obligation
becomes burdensome for the debtor such as tothreaten them with exorbitant loss, they may seek torenegotiate that obligtion with the counterparty.
However, a request to renegotiate does not permit therequesting party to stop performing the contract. If
the parties cannot renegotiate the obligation, thenthe court has the power to restore the obligation to areasonable level. There is also a provision of a similar
nature under the muqawala section of the Civil Codewhich relates specifically to contracts to make a thingor perform any work in consideration ofcompensation (including construction contracts).

the Kingdom and can be found in the Implementing
Regulations of the Saudi Building Code Application
Law, also known as the "Building Regulations,"which enshrine decennial liability in Article 29. As
such, contractors and consultants involved in theconstruction and design of construction works in
Saud Arabia should be aware that structural failures
for construction works are fully covered under the nofault regime of decennial liability.

Loss and Damage
Liquidated Damages
The Civil Code allows parties to agree a predetermination of damages in their contracts, as longas the object of the obligation is not pecuniary. The
Civil Code also grants the courts the ability to adjust
pre-determined damages to reflect the actual loss
suffered. The damages can be reduced if the court ortribunal considers this appropriate but can only be
increased in cases of fraud or gross error on the partof the debtor. This approach is different to that ofsome other legal systems in the Middle East such as
the UAE, which allow the court to increase preagreed damages in wider circumstances not limited
to gross error or fraud. Under Article 180, thedamage compensated must be foreseeable at the timeof entering into the contract.

Moral damages and Loss of profits

Liability

The Civil Code now expressly allows compensation
for loss of profits under Article 137 and moral
damages under Article 138. These provisions arefound under the Acts Causing Harm section of theCivil Code and appear to also apply to contractual
agreements subject to the caveat under Article 180
described above relating to foreseeability.

Limitation of liability

Interest

Article 173 of the Civil Code allows parties to limit
liability but not in the event of fraud or gross error. It
is not possible to exclude liability arising from a tort.

The Civil Code does not deal with interest and it isassumed that the situation has not changed fromthat prior to the Civil Code. Therefore, contractual
provisions entitling the recovery of interest in theKSA remain unenforceable, and the KSA courts will
not award interest.

Strict liability
Parties to construction contracts in the Middle East
will be familiar with a form of strict liability known
as ‘decennial liability’ which holds contractors andconsultants liable in the event of structural failuresoccurring within 10 years. While the Civil Code issilent on this issue, this liability is very much alive inTermination
General provisions of the Civil Code dealing withtermination of contracts can be found in Articles 105

(termination by mutual consent), Article 106(exercise of an option to terminate), Article 107(termination for breach of an obligation) and Article
110 (termination due to impossibility of performance).
Bespoke to construction contracts, the Civil Codeoutlines the termination possibilities for muqawala
contracts encompassing the following scenarios(Article 475-478):a)Termination upon the completion of the works.

b)Termination by either party if there is an
emergency excuse related to the performanceof the contract, provided that the party
requesting termination compensates theother party for resultant damages.

c)Termination if the contractor initiates work
but subsequently becomes incapable ofcompleting it due to reasons beyond theircontrol. In this scenario, the contractor isentitled to payment for the completed workand the expenses incurred for uncompleted
works, to the extent of the benefit gained by
the employer.

As such, parties to construction contracts must
consider the particular provisions in the muqawala
section of the Civil Code as of particular application
when faced with termination of their agreements.

*The Japanese version of this article is published in
the January 2024 issue of JOI magazine by theJapan Institute for Overseas Investment.

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