In our first two articles on this collection, we launched the brand new Civil Transactions Legislation of the Kingdom of Saudi Arabia (known as the “KSA Civil Code”) and supplied evaluation of its key provisions related to forming contracts.[1]
On this article, we take into account the affect of the KSA Civil Code’s key provisions of specific curiosity to events partaking in development contracts in Saudi Arabia. These embrace each common contractual ideas, in addition to particular provisions associated to contracts for service, often known as Muqawala contracts.
Common Provisions
The KSA Civil Code features a collection of obligatory provisions (i.e. provisions which is able to apply no matter what the events say of their contract) which could be of direct relevance to development contracts (and development disputes). These embrace provisions referring to: (i) good religion and abuse of proper; (ii) moderation of contractual damages; and (iii) rest or suspension of contractual obligations.
Good Religion and Abuse of Proper
As mentioned in our second article on this collection, the KSA Civil Code has codified the Sharia legislation requirement for contracting events to behave in good religion. The KSA Civil Code requires the contract to be executed “in a fashion in keeping with the necessities of fine religion.”[2] This requirement additionally extends to negotiations previous to getting into the contract, because the KSA Civil Code states {that a} “social gathering negotiating or terminating the negotiations in dangerous religion shall be chargeable for the harm incurred by the opposite social gathering.”[3]
Examples of dangerous religion throughout negotiations embrace knowingly withholding substantial data and a scarcity of seriousness in negotiations.[4] In that regard, events to a development contract ought to be cautious to make sure that in finishing up negotiations in respect of potential variation orders or extensions of time throughout the course of a undertaking they achieve this on a good-faith foundation. For example, an employer who conducts negotiations with a contractor with none intention of recognizing what could be an in any other case legitimate entitlement could also be discovered to have acted in dangerous religion.
The appliance of fine religion will even apply to the events’ efficiency of their obligations, and this could prolong to conditions wherein a celebration has a contractual discretion or proper which could in any other case look like limitless. This relates intently to the requirement {that a} contractual proper should not be abused.[5] The KSA Civil Code gives a non-exhaustive listing of conditions that may quantity to an abuse of proper, together with:[6]
- Exercising a contractual proper solely to trigger hurt;
- The place the advantage of exercising the contractual proper is “completely disproportionate” to the hurt suffered by others; and
- Exercising a contractual proper for an illegal function.
In that respect, there could also be circumstances wherein the employer’s train of a contractual proper or discretion, comparable to to refuse approval of a bit of labor, could possibly be mentioned to be abusive in some circumstances (e.g. if the work is in any other case compliant and the employer is looking for to make use of its refusal to approve as a part of a wider negotiation technique).
Moderation of Contractual Damages
The KSA Civil Code additionally permits for the moderation of contractual compensation (or “liquidated damages”) in sure circumstances, no matter what the events have supplied for of their contract,[7] particularly:
- If the debtor can show the claimant didn’t endure any precise harm, the KSA Civil Code states that the pre-agreed contractual compensation won’t be due in any respect;[8]
- If the extent of contractual compensation is exaggerated as in contrast with the precise loss suffered by the employer, or if the duty was accomplished partially, then the courtroom (or arbitral tribunal) could revise the quantity of damages downwards;[9] and
- If the contractor dedicated fraud or gross error that causes the employer a loss better than the agreed-upon degree of contractual compensation then the courtroom (or arbitral tribunal) could revise the quantity of damages upwards. That is in keeping with the final restriction on the events’ capacity to exclude or restrict legal responsibility for fraud or gross error.[10]
These provisions could shield contractors and sub-contractors within the occasion an employer makes an attempt to implement a liquidated damages clause regardless of not struggling any loss or struggling a smaller precise loss than is represented by the contractual sum claimed.
Leisure or Suspension of Contractual Obligations
Building contracts will typically set out in specific phrases the circumstances wherein a celebration is likely to be relieved of its obligations, comparable to by setting out an in depth regime for what’s to be outlined as a pressure majeure occasion and what the affect of such an occasion will probably be on the events’ respective obligations. Article 125 of the KSA Civil Code additionally gives, basically phrases, {that a} social gathering shall not be chargeable for damages that arose attributable to circumstances past their management comparable to pressure majeure, the fault of a 3rd social gathering or the fault of their counterparty.
As well as, the KSA Civil Code gives for the potential to change the contractual allocation of threat the place distinctive unexpected circumstance of a common nature happens which is able to trigger undue hardship on the obligor. Particularly, it permits an obligor comparable to a contractor to name on its counterparty promptly to barter adjustments to a time period of the contract if the distinctive unforeseeable circumstances make efficiency of its obligation “burdensome for the debtor comparable to to threaten him with exorbitant loss” [emphasis added].[11] If no settlement could be reached between the events, the courtroom (or arbitral tribunal) can “scale back the burdensome obligation to an inexpensive degree.”[12]
The KSA Civil Code subsequently gives for a 3rd social gathering to amend the contract’s allocation of threat within the occasion it’s happy that the mandatory circumstances are met.
Nevertheless, it is very important observe that: (i) the occasion have to be of a “common” nature, i.e. it can’t be restricted to the circumstances of the particular undertaking in query; (ii) the occasion have to be unforeseeable; and (iii) the obligor should meet the excessive threshold of proving that it faces not only a loss, however an “exorbitant loss,” if it have been to hold out the duty. As well as, it is very important observe that any request for negotiation won’t allow an obligor comparable to a contractor to cease performing the duty.[13]
The KSA Civil Code additionally gives events with an extra proper to withhold efficiency of a contractual obligation “so long as the opposite contracting social gathering refrains from performing its personal obligation.”[14] This proper can solely be exercised when the corresponding obligation of the opposite social gathering is due. As well as, the social gathering looking for to withhold efficiency have to be prepared and capable of perform its personal obligations.
For instance, the place an employer has not paid a contractor sums due, the contractor could also be entitled to depend on this provision to withhold additional efficiency, supplied that the contractor is in any other case prepared and capable of proceed with its obligations.
Particular Provision for Muqawala Contracts
Along with the obligatory common provisions described above, there are additionally particular provisions related to Muqawala contracts inside the KSA Civil Code, as set out at Articles 461 to 478. Whereas development contracts often could be anticipated to supply a complete allocation of threat between the contracting events, these particular provisions will complement the events’ settlement on sure issues within the occasion the contract doesn’t deal with them.
The Contractor’s obligations
Articles 463 to 466 present for a collection of obligations for the contractor (topic to the additional settlement of the events), together with that:
- If the contractor is to supply supplies, then they have to be in accordance with the contractual specification or, if not specified, they have to no less than be sufficient for his or her meant function;[15]
- The contractor ought to use affordable care to guard employer-provided supplies (e.g. free subject supplies) and to return any such supplies not used;[16] and
- If it seems to the employer the contractor is performing work in breach of the contract, the employer can request the contractor to appropriate its work inside an inexpensive time, failing which the employer could have interaction a 3rd social gathering to hold out the work in query on the contractor’s expense[17] or, whether it is not possible to rectify the breach—or to take action inside the contractually-agreed interval—the employer could demand instant termination of the contract.[18]
The Employer’s obligations
The KSA Civil Code additionally requires that, as soon as the contractor makes its accomplished work obtainable to the employer, the employer should take over the work instantly.[19] That is necessary, because the employer’s taking up of the work is usually the purpose at which there’s a switch of accountability for the underlying work (topic to any latent defects), and it additionally crystallises the employer’s statutory obligation to pay for the work.[20]
Articles 470 to 472 additional present for the varied types of compensation to which the contractor could also be entitled, and the circumstances wherein such compensation ought to be elevated, together with (i) unit charges underneath Article 470; (ii) lump sum pricing underneath Article 471; and (iii) “truthful remuneration” within the (unlikely) absence of a contractual pricing regime (i.e. akin to a quantum meruit declare) at Article 472.
Of specific observe, Article 471(3) gives that if the contractual stability of a lump sum Muqawala contract “collapses attributable to common distinctive circumstances” that have been unforeseeable then the courtroom (or arbitral tribunal), to redress the stability, has the facility to increase the efficiency interval for the contractor, alter the remuneration or terminate the contract.
Additional provisions
The KSA Civil Code contains additional provisions concerning the contractor’s capacity to subcontract its works and the restricted circumstances wherein an employer could possibly be liable to such subcontractors.[21]
It additionally gives for particular provisions referring to termination of a Muqawala contract at Articles 475 to 478, along with the final provisions for termination of contracts, which we talk about within the fourth article on this collection.
Abstract
Total, the brand new provisions within the KSA Civil Code will present each contractors and employers better certainty of their dealings, and so ought to assist to cut back the scope for disputes on development tasks. That mentioned, events on a undertaking of any vital scale ought to anticipate to need to cope with claims for extra time and/or cash, and so will probably be necessary to grasp how such claims could also be affected by the provisions underneath the brand new legislation.
