In December 2023, the Kingdom of Saudi Arabia enacted the Civil Transactions Law (the "KSA Civil Law"), marking a significant milestone in the country's legal landscape. This comprehensive legislation encompasses various aspects of civil transactions, including contract law, and has substantial implications for businesses operating within Saudi Arabia.
Following the enactment of the KSA Civil Law, there has been a growing need for a deeper understanding of its provisions, particularly within specific industries such as construction. In a recent article, we explored the KSA Civil Law from a construction law perspective, shedding light on its key provisions and implications for construction projects.
Building upon that foundation, this article delves deeper into two crucial aspects of contract law: suspension and termination. Understanding the relevant provisions of the KSA Civil Law relating to suspension and contract termination is essential for construction professionals navigating the intricacies of project management and dispute resolution within the Kingdom.
In this article, we will examine key provisions of the KSA Civil Law pertaining to suspension and contract termination, analyse their implications for construction projects, and provide practical insights for construction professionals operating in Saudi Arabia. By delving into the nuances of suspension and contract termination under the KSA Civil Law, we aim to equip parties with the knowledge and tools necessary to effectively manage contractual relationships and mitigate risks in construction projects within Saudi Arabia.
Suspension
In the realm of construction contracts, the ability to suspend work can significantly impact project timelines, costs, and relationships between parties. Understanding the legal framework governing suspension is crucial for both employers and contractors.
While the KSA Civil Law does not expressly provide for suspension, it does incorporate a mechanism akin to suspension, which can serve as recourse in the absence of or in addition to contractual clauses allowing for suspension.
Article 114 of the KSA Civil Law provides:
"In bilateral contracts, if the corresponding obligations are due, either of the contracting parties may refrain from performing its obligation as long as the other contracting party refrains from performing its own obligation."
Consequently, it could be contended that if an employer ceases payment to a contractor, the contractor may, under Article 114, have the right to suspend its works. Nevertheless, this action must be exercised with prudence, taking into account the principle of proportionality and the obligation to act in good faith as per Article 41.
Termination
Terminating contracts is a complex and multifaceted process that carries significant legal implications for all parties involved. It is a critical aspect of contract management, especially in the construction industry. Under the KSA Civil Law, specific provisions govern the termination of contracts, offering guidance and legal frameworks for parties involved in contractual relationships.
Key Provisions for Contract Termination
Termination under the KSA Civil Law is permissible via the following methods:
- Mutual agreement, as specified in Articles 105 and 476;
- By completion of the agreed Works, as outlined in Article 475; and
- By court order, as stipulated in Article 107.
Article 466 addresses termination rights in construction contracts, particularly when the contractor fails to perform as per the contract terms.
"1- Where, during the progress of the work, it appears that the contractor is performing the work in breach of the contract, the employer may notify the contractor to correct the method of performance within such reasonable time as determined by the employer. Where such period expires without remedy of such breach, the employer may entrust another contractor with the completion or correction of the work at the expense of the first contractor in accordance with the provisions of Article (167) of this Law or request the termination of the contract.
2- The employer may request the termination of the contract immediately if the correction or remedy of the breach is impossible, or where the contractor delays in commencing or accomplishing the work to such an extent that he cannot possibly deliver the work within the agreed period, the employer may demand the immediate termination of the contract."
Article 466(1) empowers employers with the authority to terminate a contract if the contractor's performance is in breach of the contract, after providing an opportunity for the contractor to employ corrective actions within a reasonable timeframe determined by the employer. If the breach remains unresolved or if the contractor delays work significantly, the employer may descope the contractor's works.
Article 466(2) grants employers the right to request the immediate termination of a contract under specific circumstances. This includes situations where the contractor's breach is irreparable or when it becomes evident that the contractor cannot meet the completion date.
Moreover, Title 3 of the KSA Civil Law provides additional insights into terminating construction contracts. Articles 476 and 477 specifically address termination arising from unforeseen circumstances. Pursuant to Article 476, either party may request contract termination if the agreed-upon work becomes impossible to perform due to external factors. Furthermore, Article 476 specifies that even if a contract is terminated under this provision, compensation for damages remains applicable.
Additionally, Article 477 outlines that if a contractor is unable to complete its scope of works through no fault of its own, the employer is obligated to compensate the contractor for the value of the completed work and the expenses incurred in the performance of the contractor's obligations.
In conclusion, the KSA Civil Law provides a comprehensive framework for the termination and suspension of construction contracts. Through Articles such as 105, 465, 466(1) and (2) and 477, the law offers clear guidelines for parties involved in construction projects. Suspension and/or contract termination involve nuanced processes governed by specific provisions within the KSA Civil Law, as well as the parties' contract. Contractors and employers must navigate these provisions effectively to manage contractual relationships, mitigate risks, and ensure compliance with legal requirements. By understanding the key provisions and insights provided in this article, one can approach contract termination with clarity and confidence, ensuring the successful execution of construction projects within the Kingdom of Saudi Arabia.
Practical insights
Clear suspension and termination clauses: Ensure that contracts include clear and comprehensive suspension and termination clauses that align with the provisions of the KSA Civil Law. These clauses should outline the conditions under which suspension and termination are permissible, the notice process, and any associated compensation or damages.
Timely notification: Promptly notify the breaching party of any contractual breaches and provide them with an opportunity to remedy the situation within the specified timeframe.
Documented communication: Maintain detailed records of all communication related to suspension and/or contract termination, including notifications, responses, and any corrective actions taken by the breaching party.
Legal compliance: Ensure that all suspension and/or contract termination actions comply with the provisions of the KSA Civil Law and any other relevant regulations or legal requirements. Seek legal advice if necessary to ensure compliance and mitigate legal risks.
Professional dispute resolution: In case of disputes related to suspension and/or contract termination, consider engaging in professional dispute resolution mechanisms such as mediation or approaching the DAB (if provided for within the contract). Alternative dispute resolution methods can help parties resolve conflicts efficiently and cost-effectively, minimising the need for legal proceedings.
Continuous monitoring: Regularly monitor contract performance and compliance to identify any potential issues or breaches early on. Proactive monitoring allows parties to address issues promptly, potentially avoiding the need for contract termination altogether
Authors: Danielle O'Brien & Oliver Dupenois
