Perspectives

How Saudi Arabia updated contract rules to handle its building boom

In April, Neom brought some 100 international construction companies for a two-day industry forum (From the Neom newsroom)
Saudi Arabia’s new Civil Transactions Law entered into force on 16 December 2023. It’s a cornerstone of the Kingdom’s broader Vision 2030 initiative, which aims to invigorate the economy by encouraging foreign investment and modernising the Kingdom’s legal framework.

The law affects contracts generally in the Kingdom, but construction is particularly suited to take advantage of it.

Construction is booming there with “giga-projects” like Neom, the vast Red Sea tourism developments, the New Murabba projects, and more.

Industry output is expected to grow annually at a rate of 4% between 2024 and 2026.   

The Civil Transactions Law, comprised of its 721 Articles and underlying Sharia law maxims, includes various provisions which expressly provide for muqawala (construction) contracts.

Such provisions aim to encourage consistency in contractual interpretation and thus promise a more predictable environment for contractors and investors.

A defining contractual regime

The law is not a mere codification of Sharia laws, and nor is it a carbon copy of laws in similar Islamic jurisdictions. Instead, it’s a clear and defining contractual regime in the Kingdom.

Article 1 confirms the hierarchy of applicable provisions, with the Articles under the new law ranking as foremost important. The relevant Sharia law maxims apply only where the statutory provisions in the Articles are silent.

Specific rules for the interpretation of contracts are set out in Article 104, amongst others.

These prescribe that contractual provisions ought to be construed literally and in accordance with the parties’ original will and intent.

Further, any interpretation of the terms must not act to contradict another term under the contract.

Parties should not, therefore, attempt to rely on an individual contractual term in isolation as such an approach will rarely be enforced by a presiding court or arbitrator.

Time limits introduced

Under the old law, no prescription or limitation period existed with respect to a party’s right to bring a claim.

The new law, specifically, Articles 295 to 297, sets out relevant limitation provisions applicable to contractual claims:

  • Article 295 confirms that the right for legal action to be heard will be unenforceable after 10 years (except where the law provides otherwise) – this limitation period will typically apply to claims under construction contracts;
  • Article 296 provides a 5 year limitation period for claims relating to professional fees and renewable rights; and 
  • Article 297 provides a short 1 year limitation period for claims under certain consumer and employment contracts. 

Crucially, when calculating the relevant limitation period, parties should be aware that any period runs according to the Islamic Hijri calendar (not the Gregorian calendar), which consists of either 354 or 355 days per year. 

Clearer on terminations

Circumstances and conditions for termination of contracts are markedly clearer under the the new law.

Article 94 provides that a contract cannot be revoked or amended except by agreement of the parties or by virtue of a statutory provision.

If a contract is rescinded for any reason, the parties are to be returned to the condition in which they were before the contract was entered into.

If this simply is not possible, as would often be the case on construction projects (given the nature of the works), then a court or arbitrator may award compensation as appropriate.

However, most construction contracts in the Kingdom are based on standard form contracts (such as FIDIC or JCT) and so will typically contain specific termination provisions.

Such provisions will continue to take effect ahead of certain generic termination provisions under the new law.

Certainty on liquidated damages

One of the most definitive changes under the new law is the added certainty surrounding liquidated damages.

Under the new law, liquidated damages are permissible.

However, the quantification of such damages is subject to Article 179, which expressly allows a presiding court or arbitrator to reduce the amount of liquidated damages: (i) if such amount is considered excessive, (ii) if it can be shown that no loss has in fact been suffered and/or (iii) if a relevant obligation has been at least partially performed.

Relatedly, Articles 136 to 139 and 180 concern damages to be applied where there is a breach of contract.

In short, these Articles provide that an obligor should only pay compensation for foreseeable damage as at the time the contract was entered into.

Lastly, Articles 128 and 172 confirm that any damages owed to a creditor will be proportionately reduced by the extent to which that creditor, through his own fault, has contributed to the damage arising from the breach.

As such, damages shall be apportioned amongst the parties as appropriate.

This approach is particularly relevant when considering commonly deployed arguments of concurrent delay – the new law is clear that if both the contractor and employer are equally responsible for a period of delay, then they should be equally responsible for the resulting losses.

Conclusion

In light of the new law, parties can expect greater certainty as to the application and enforcement of provisions under their construction contracts.

Notwithstanding this, the new law’s strict emphasis on the literal meaning of terms acts to reinforce the importance of unambiguous and clear contractual drafting.

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