Kingdom of Saudi Arabia Civil Code: General principles of contract law: performance of contracts and rules of interpretation

The Saudi Civil Transactions Law ("CTL") was enacted on 19 June 2023 by Royal Decree M/191. The CTL is a landmark piece of legislation for Saudi Arabia as it codifies for the first time the law governing contract and tort in the Kingdom. In this article, the second in our three-part series on the general principles of contract law under the CTL, we analyse the provisions relating to performance of contracts and rules of interpretation.

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Performance of the contract

Articles 94 – 103 of the CTL set out the rules pertaining to the performance of contracts, contracts of adhesion, force majeure and the creation of third party rights.

We discuss each of these topics below.

Performance of contracts – general principles

Article 94 provides that a contract, once properly concluded between the parties, can only be revoked or amended by mutual consent of the parties, or in accordance with the law. Therefore, unless otherwise required by law, each of the contracting parties must fulfill their obligations under the contract. Accordingly, once it is signed, a contract is binding on both parties and there is no statutory right to terminate or amend the contract unilaterally.

Article 95 sets out some important principles in relation to implied terms and provides that:

1. The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith. This has always been a fundamental principle of sharia law, but it is now formally codified in the CTL;
2. The contract will not be limited to the obligations expressly agreed by the parties, but shall also include terms implied by law, custom, and the nature of the contract. 

Contracts of adhesion

Article 96 deals with contracts of adhesion and provides that if a contract is made by way of adhesion and contains unfair provisions, the Court may vary those provisions in accordance with the requirements of justice. There is no contracting out of this provision.

Force majeure

Article 97 deals with what lawyers would usually identify as “force majeure” and provides that if “exceptional circumstances of a public nature” which could not have been foreseen at the time the contact was made result in the performance of a contractual obligation becoming oppressive for the obligor to the point where the obligor is threatened with “grave loss”, the obligor may approach the other party to re-negotiate the terms of the contract. While those negotiations are ongoing, the obligor must continue performing the obligation. If no agreement can be reached within a reasonable time, the obligor may apply to the Court to have the contract amended to reduce the oppressive obligation to reasonable level. Again, there is no contracting out of this provision.

Article 97 deals with force majeure in a rather unique way. The provision entitling the party affected by the exceptional circumstance to approach the other party to re-negotiate the terms of the contract is quite novel, but makes practical sense. In order to claim relief under Article 97, the affected party must give notice of the exceptional circumstance to the other party and continue to perform its obligations until either the other party agrees to amend the terms of the contract, or the court makes an order to that effect. What the affected party cannot do is simply declare an exceptional circumstance and then refrain from performing its obligations. In other words, the affected party cannot rely on exceptional circumstance after the fact. The onus is on the affected party to demonstrate, at an early stage, that the exceptional circumstance event has made the contract more expensive to perform and then engage with the other party to amend the contract. It is only after the parties negotiations have failed to achieve a resolution that the affected party can claim relief from the Court.

It is important to note the Article 97 defines force majeure as “exceptional circumstances of a public nature”. That is a fairly narrow definition which would require the affected party to show that the event is – (a) exceptional; and (b) of a public nature – in other words it is an event that affects a significant proportion of the population, not just the contracting parties themselves. Let us use the example of a contract between an international energy company and a public utility to supply gas turbines for power generation. A significant increase in the price of components due to a shortage of raw materials would arguably not, by itself, amount to a force majeure event which would entitle the supplier to increase the price of the turbines because it is arguably not exceptional or public. However, if the shortage of raw materials was due to an act of war or terrorism, that may qualify as a force majeure event because it is exceptional and does affect a significant proportion of the public. An act by a government authority to block the importation of products for security purposes or to protect public health might also fall into this category.

Third party rights

Articles 99 and 100 deal with third party rights and provide:

1. A contract may not impose an obligation on a third-party, but may create a right in favour of a third-party;
2. A party (promisor) who undertakes to procure the performance of an obligation by a third-party does not bind the third-party to perform that obligation;
3. If a third-party accepts to perform an obligation, that acceptance shall take effect only from the time  acceptance is given unless the third-party expressly or impliedly intended that the acceptance should take affect from the time the original undertaking was given by the promisor;
4. If the third-party refuses to perform the obligation, the promisor will be liable to indemnify the other contracting party if that is required;
5. A person may contract in his own name and impose a condition that rights under a contract to performance of an obligation may vest in a third party. Where such rights accrue, the third-party will have the right to enforce that obligation against the obligor directly;
6. Where are condition is imposed in favour of a third-party, it is permitted for the beneficiary to be a future person or an unassigned person at the time of contracting as long as he or she can be identified at the time of fulfilling the condition.

Interpretation of Contracts

Article 104 sets out the rules for the interpretation of a contract. Similar to the Civil Codes in other GCC jurisdictions, Article 104 provides:

1. If the words used in the contract are clear, then those words will be used to interpret the will of the contracting parties. In other words, if the words of the contract are clear on their face, the parties cannot interpret them in some other way;
2. If the words of the contract are unclear, then the court may have regard to customary practice, the circumstances of the contract, the nature of the transaction and the course of dealing between the parties to determine the intention of the parties. For example:
   1. In a contract for the shipment of cargo where it is unclear when the carrier is deemed to have accepted the cargo, the Court may have regard to customary practice in the shipping industry where the issue of a bill of lading is evidence that the carrier has received the goods and that the cargo complies with its description;
   2. In a contract for the sale of frozen goods where the seller has the obligation to deliver, if the contract is unclear as to how the goods are to be transported, the Court might find that, given the nature of the contract, the intention of the parties was that seller should arrange delivery in a refrigerated container;
   3. In a contract for services where the time for payment for the services is unclear, but the employer has typically paid the contractor within 30 days, the Court might find that the intention of the parties, based on their course of dealings, was that payment would be made within 30 days;
3. Where there is a doubt about the interpretation of a contractual provision, that doubt shall be interpreted in favor of the party who bears the burden of the obligation or condition. This is a departure from the commonly accepted principle of “contra preferentum” which provides that any doubt as to the meaning of a contract should be construed against the party who drafted the contract.  

Article 104 accordingly provides a two-step process for the interpretation of a contract. The first step is to look at the plain and ordinary meaning of the words used by the parties to determine their intentions. If that is not possible because the words are unclear or absent, then step two is to look at the surrounding circumstance of the contract, customary practice and the course of dealing between the parties.

Conclusion

Articles 94 to 103 of the CTL set out important principles relating to the binding nature of contracts. These include well-known principles such as the requirement to act in good faith, force majeure and the affirmation of third-party rights which are largely in harmony with the Civil Codes in other GCC jurisdictions.

However, it is important to note that as helpful as these provisions are, there is still scope for interpretation. It will likely take several Court decisions before the precise application of these provisions becomes known. In the interim, it will remain important for contracting parties to seek proper legal advice when drafting their contracts to ensure the parties’ obligations are clearly set out and that the contract deals adequately with circumstances that may affect the performance of those obligations.