Civil Code is good news for Saudi Arabia’s construction sector

On June 19, 2023, Saudi Arabia passed the Civil Transactions Law or the “Civil Code” by a royal decree. The Civil Code, which came into force on Dec. 16, 2023, seeks to codify, into 721 articles, the Kingdom’s rules relating to contract and property rights. Prior to the code’s introduction, Saudi Arabia was governed primarily by an uncodified system of the Shariah law. Therefore, the rollout of the new laws marks a monumental change in the country’s legal framework.

Application

It comprises three key parts, covering rules pertaining to contractual obligations, specifically designated “nominate” contracts, and rights in rem, i.e., property rights, which take priority of application and a final section, including 41 general rules inspired by the Shariah principles, which apply in the absence of applicable provisions elsewhere. The Shariah law provisions will still apply where they are “most appropriate.”

The Civil Code applies retrospectively except where its application would contradict another statutory provision or a judicial principle or where a limitation period for a right has already started running prior to Dec. 16, 2023.

Construction projects

Articles 461 to 478 of Part 2 of the Civil Code are dedicated to a specific type of contract called Muqawala, which relates to the construction or the performance of works.

These provisions will have important ramifications, particularly on the Kingdom’s staggering giga-project program, which includes a series of geographically diverse tourist, residential, commercial, retail, and industrial capital projects.

Obligations for contractors

Under the Civil Code, contractors are required to ensure any work materials they provide are compliant with the technical specifications agreed upon with the employer or, at the very least, are “adequate for their intended purpose.”

Contractors must use “all reasonable care” to protect materials provided by the employer under the agreement, including ensuring proper use in line with technical practices, and return to the employer any unused materials. They may be required to bear the cost of a third party correcting or completing works that the contractor failed to perform in compliance with the contract if the employer’s prior notice of such breach has expired without remedy. Employers also have the right to request termination in such circumstances.

For employers

The code obliges employers to take over work immediately upon the contractor completing the work and making it available. Should an employer reject the works without “legitimate reason,” a contractor is not required to compensate them for any damage to the works thereafter where they are not in breach.

Where a contract is based on unit prices, the contractor cannot claim extra costs for additional quantities unless the contractor immediately notifies the employer.

If the excess is substantial, the employer may withdraw from the contract but must do so without delay and pay the contractor for work carried out.

In respect of lump sum contracts, a contractor may not demand any increase for the execution of the works, even where prices for materials or wages increase. If a variation is made, the contractor may only request additional remuneration where the variation is the employer’s fault or with the agreement of the employer.

Where unforeseen exceptional circumstances skew the balance of contractual obligations between a contractor and employer, the court is empowered under the Civil Code to extend the contractor’s performance period, alter its remuneration, or even terminate the contract.

If the contractor’s remuneration is not specified in the contract, the contractor shall be entitled to fair remuneration, together with the value of the materials he has provided as required by the work.

Subcontracting

Under the Civil Code, a main contractor is permitted to subcontract the whole or part of the work to another contractor unless otherwise required by law, the agreement, the nature of the work, or the circumstances of the contractor. The main contractor shall remain liable to the employer, and the subcontractor shall have no claim against the employer unless by way of assignment from the main contractor.

Termination

The new provides for a Muqawala contract to terminate in scenarios such as upon completion of the works; if the work is impossible to perform due to a foreign cause, provided the party terminating the contract compensates the other party for related damages; if the contractor becomes incapable of completing the works due to reasons beyond their control; upon the death of the contractor where the contractor performs the work himself or if his qualifications are a material consideration in the contract.

Conclusion

Both contractors and employers participating in construction projects in

Saudi Arabia should pay due regard to the provisions of the Civil Code.

Save for where relevant exceptions apply, construction contracts entered into before Dec. 16, 2023, are not exempt, so the rules apply to both ongoing projects and those in the pipeline.

The codification of such principles should foster more certainty for the industry. In line with this, a Commercial Transactions Law is also currently being established to regulate the conduct of business in Saudi Arabia.

This, together with the Civil Code, should bode well for the future of Saudi Arabia’s gigaprojects and business activity more generally.