Contractual compensation in focus: Analysing KSA Civil Law's approach to variations in construction
In December 2023, the Kingdom of Saudi Arabia enacted the Civil Transactions Law (the "KSA Civil Law"), ushering in a new era of legal regulations governing various aspects of civil transactions within the Kingdom. While its implementation is still relatively recent, the implications of this comprehensive legislation, particularly in the realm of construction law, have already begun to unfold. Building upon previous discussions on the KSA Civil Law from a construction law perspective, this article delves deeper into key provisions that directly impact heads of claim in construction contracts.
Specifically, we turn our attention to two critical aspects: quantum meruit and variation claims. As essential components of construction contracts, these concepts play a pivotal role in determining fair compensation for contractors and addressing unforeseen changes or additional work encountered during project execution. By examining the nuances of quantum meruit and variation claims within the framework of the KSA Civil Law, we aim to provide a comprehensive understanding of the legal landscape governing compensation entitlements and contractual variations in construction projects within the Kingdom of Saudi Arabia.
Quantum meruit and variation claims
The KSA Civil Law adopts a distinct approach regarding compensation entitlements and variations in construction contracts. Article 180 of the KSA Civil Code delineates that parties are only entitled to compensation foreseeable at the time of contract formation. This article explores the implications of Article 180 and its interplay with provisions on Muqawala contracts, as outlined in Articles 470 to 472 of the KSA Civil Law.
Article 180
If the compensation is not determined in the contract or under a statutory provision, the court shall assess it in accordance with the provisions of Articles (136), (137), (138) and (139) of this Law. If, however, the obligation stems from the contract, the debtor who has not committed fraud or a gross error shall only be liable to compensate for the damage that would normally have been expected at the time of entering into the contract.
Article 180 underscores the principle that compensation, when not determined in the contract or by statutory provision, shall be assessed based on foreseeable damages at the time of contract inception. Unlike neighbouring jurisdictions, the KSA Civil Law makes no explicit reference to the recoverability of "loss of profit" under Article 180. However, compensation is to be assessed in terms of Articles 136 to 139.
Articles 136, 137, 138 and 139 delineate the principles governing compensation, emphasising the need for full restoration of the damaged party to the position they would have been in, but for the occurrence of the damage. Article 136 underscores the concept of comprehensive compensation, highlighting the obligation to fully compensate the injured party for their losses, with the aim of restoring them to their original position.
Article 137 expands on the notion of compensation by stipulating that damages include both the actual loss suffered and any loss of profits resulting from the harmful act. Crucially, this article clarifies that damages are deemed recoverable if the harmed party could not have avoided them by making reasonable efforts under the circumstances. Therefore, while Article 180 does not make a specific reference to loss of profits, if profits are accounted for within the contract, it can be argued that damages resulting from loss of profits would be a foreseeable at the time of the contract, as provided under Article 137.
Article 138 delves into the realm of moral damage, which encompasses sensory or psychological harm inflicted on an individual as a result of prejudice to their body, freedom, honor, reputation, or social status.
Article 139 of the KSA Civil Law introduces provisions regarding the assessment and nature of compensation. Article 139 allows for flexibility by permitting the court, depending on the circumstances and at the request of the damaged party, to order alternative forms of compensation such as reciprocal compensation, restoration of the status quo, or specific performance.
Procedural requirements
Articles 470 to 472 clarify the procedural requirements for contractors to claim compensation, emphasising the necessity of timely notification to the employer.
Article 470 of the KSA Civil Law outlines specific provisions for situations where the execution of the agreed plan exceeds the quantities listed in the itemised BoQ. It mandates that contractors must promptly notify the employer of any substantial discrepancies to avoid losing the right to recover excess costs. Additionally, if the excess work is significant, the employer has the option to suspend the contract but must compensate the contractor for the work already completed according to the contract conditions.
Article 470
1.If a contract is made under an itemised list on the basis of unit prices and it appears during the course of the work that it is necessary for the execution of the plan agreed substantially to exceed the quantities on the itemised list, the contractor must immediately notify the employer thereof, setting out the increased price expected, and if he does not do so he shall lose his right to recover the excess cost over and above the value of the itemised list.
2. If the excess required to be performed in carrying out the plan is substantial, the employer may withdraw from the contract and suspend the execution, but he must do so without delay and must pay the contractor the value of the work he has carried out, assessed in accordance with the conditions of the contract.
Article 470 has a significant impact on contractors' claims. The KSA Civil Law preamble states that the Civil Transactions Law has retroactive effect, except when there is a conflicting statutory provision or judicial principle upheld by a party, or when it concerns extinctive prescription pre-dating the Law.
Therefore, contractors who have failed to promptly notify employers of any variations and/or price increases risk significant financial loss. Special attention must be directed towards the language within Article 470, specifically the mandate for a contractor to "immediately notify" the employer of any price increase. Unlike other articles in the KSA Civil Law that simply require notice (such as Article 466), Article 470 indicates strict adherence to time limits, and it therefore appears that the drafters intended for very little leniency to be afforded on time bars. Interestingly, the KSA Civil Law does not expand upon what classifies as 'immediate' notice, leaving little room for interpretation and whether it means as soon as reasonably practical, or within contract-specified periods.
As such, and irrespective of any contractor-employer relationships, it is essential for contractors to promptly issue notices of any variation and/or price increase.
Article 471 of the KSA Civil Law introduces unique provisions regarding variations in Muqawala contracts. It stipulates that a contractor may not demand an increase in the contract price, irrespective of changes in material prices or wages, unless due to the employer's fault or with the employer's permission. Additionally, Article 471(2) limits a contractor's entitlement to additional costs for variations.
Article 471
1. If a Muqawala contract is made on the basis of an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of such plan, even if the prices of the materials used in the work or the wages of the workers or other expenses increased
2. If any variation or addition is made to the plan, the contractor may not demand any increase over the remuneration unless it is due to the employer's fault or is with his permission and he agreed with the contractor on the increase.
3. If the contractual balance between the obligations of the employer and the contractor collapses due to general exceptional circumstances that could not have been foreseen at the time of the contract and the basis for the financial assessment of the contracting contract is destroyed, the court may, depending on the circumstances, after balancing the interest of the parties, order the restoration of the contractual balance, including the extension of the period of performance, the increase or decrease of remuneration, or the termination of the contract.
Article 471(2) holds importance as it emphases the need for an explicit agreement between parties and that the variation must have been instructed by the employer. Furthermore, it stipulates that a contractor may not claim any remuneration for a variation if the employer does not provide its permission.
The practical implication of this is significant, as the engineer/employer is often delayed in providing written instructions in regards to variations and therefore contractors should simply refuse to carry out any variation unless instructed to do so in writing.
Article 472 mirrors the neighbouring jurisdictions provisions on fair compensation in cases where the contract price is unspecified. This provision ensures that contractors are entitled to fair remuneration for work done and materials provided, aligning with principles of equitable compensation.
Article 472
If the contractor's remuneration is not specified in the contract, the contractor shall be entitled to a fair remuneration, together with the value of the materials he has provided as required by the work.
Conclusion
In conclusion, the KSA Civil Law provides a framework for compensation and variations in construction contracts. Notably, it places significant emphasis on contractors adhering to strict procedural requirements, particularly regarding the issuance of timely notices and the necessity of written instructions from employers. Failure to comply with these requirements exposes contractors to substantial risks.
Specifically, contractors face the risk of forfeiting compensation for variations if they proceed without obtaining explicit permission from the employer, as stipulated in Article 471(2). This requirement presents a practical challenge, as employers may experience delays in providing written instructions for variations. Consequently, contractors who undertake variations without proper authorisation expose themselves to financial liabilities and potential disputes with the employer.
Understanding these nuances and procedural intricacies introduced in the KSA Civil Law is paramount for all stakeholders involved in construction contracts within the Kingdom of Saudi Arabia. By comprehensively grasping these differences and adhering to the legal framework, contractors can mitigate risks and ensure smoother contractual negotiations and project executions.
Practical insights
- Effective contract management: Contractors should prioritise thorough contract management practices from the outset to mitigate potential disputes. This includes clearly defining scope, timelines, and pricing structures within the contract to minimise ambiguities and unexpected variations.
- Timely communication: Timely communication between the contractor and employer is paramount. Contractors must promptly notify the employer of any deviations from the agreed plan to ensure transparency, circumvent being time barred and avoid disputes arising from misunderstandings or delays in notification.
- Documentation and record-keeping: Maintaining detailed records of all communications, variations, and work progress is essential. This documentation serves as crucial evidence in arbitration or litigation proceedings, supporting the contractor's claims for compensation.
- Seeking legal advice: Given the intricacies of the KSA Civil Law and its implications for construction disputes, contractors should employ experienced in-house contract managers full time and provide them with adequate legal support. Alternatively, retain lawyers as project counsel as they can provide valuable insights, guide contract interpretation, and devise effective dispute resolution strategies.
- Negotiation and dispute resolution: In cases where disputes arise, contractors should explore negotiation and alternative dispute resolution methods before resorting to litigation/arbitration. This approach can help preserve business relationships, minimise costs, and expedite resolution.
- Enforcement of arbitration awards: Contractors should be aware of the enforcement mechanisms for arbitration awards under the KSA Civil Law. Understanding the procedures and requirements for enforcing awards in Saudi Arabia's legal system is crucial for securing compensation effectively.
Author: Danielle O'Brien
