Kingdom of Saudi Arabia Civil Code: General principles of contract law - termination of contracts

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 third in our three part series on the general principles of contract law under the CTL, we analyse the provisions relating to the termination of contracts.

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Termination and annulment of contracts

Articles 105-114 of the CTL deal with the termination and annulment of contracts. These provisions identify four circumstances where a contract may be terminated:

1. By mutual consent (Article 105);
2. By exercise of an option to cancel the contract  (Article 106);
3. For breach of an obligation (Article 107);
4. As a result of impossibility of performance  (Article 110);

We consider each of these categories below.

Mutual consent

Article 105 provides that the parties may terminate a contract by mutual consent.  

Option to cancel

Pursuant to Article 106, it is permissible to terminate a contract if the parties agree that one or both of them has an option to terminate (for example in a loan contract, the parties may agree that the borrower may terminate the contract after it has been signed within a specific window of time i.e a "cooling off period"). A party exercising such an option must give notice of its intention to do so.

Termination for breach

Pursuant to Article 107, where one of the contracting parties breaches the contract, the other party – after notifying the breaching party – may request either specific performance of the contract or termination with compensation if that is required.

Article 107 makes it clear that in order for the termination to be effective:

1. Notice of the breach must be given;
2. The obligation must be a material one. Article 107 does not however define what amounts to a material term. This will be a question of fact for the Court to determine.

Article 108 provides that the obligee may agree that the contract may be terminated for breach by the obliger without the need for a judicial ruling, if agreed. It is not clear whether a standard termination clause in a contract would be upheld under article 108, or whether the specific wording "without the need for a judicial order" is required. No doubt this point will be clarified by the Courts in the near future. In the interim, we would recommend that parties specifically include this wording if they wish to reserve the right to terminate the contract without reference to the court.

Impossibility

Article 110 deals with what common law practitioners would identify as the doctrine of frustration and provides that where the contract becomes impossible due to reasons beyond the control of the obligor, the contract will be rescinded. 

Where the impossibility is only partial, only that part of the obligation (and the corresponding obligation of the other party) affected by the impossibility shall be cancelled. However, in this scenario the obligee may still seek an order terminating the contract but the Court may reject that request if the impossible part of the obligation is not material to the contract.

Effects of termination

Articles 111 to 113 deal with the effects of termination and annulment of a contract and provide that

1. Where the contract is terminated or annulled the two contracting parties shall be returned to the status they occupied before the contract was entered into. If that is not possible, the court may order compensation;
2. If the contract is a temporary contract, then the termination or annulment shall not have retroactive effect, and the court may order compensation if that is required.

Termination of a contract does not nullify an obligation to settle a dispute or maintain confidentiality. If, for example, the parties to a contract agreed to terminate their contractual relationship and settle all claims between them, the settlement will remain legally binding even though the underlying contract has been terminated and the parties will be obliged to maintain confidentiality if that is provided for in the settlement agreement and/or underlying agreement.

Article 114 provides that if a contract is binding on both parties and corresponding obligations are due for fulfilment, a party may refrain from executing his obligation if the other contracting party has not performed his obligation. For example, if a contract for the sale and purchase of a unit “off plan” requires the purchaser to pay an instalment of the purchase price upon the building reaching a certain stage of construction and that stage has not been reached, the purchaser may refrain from paying the corresponding instalment of the purchase price.

Conclusion

Articles 105-114 of the CTL provide some much needed clarity as to the circumstances under which a contract may be terminated or annulled. In addition to termination by mutual consent, the CTL recognises contractual provisions entitling a contracting party to exercise an option to terminate, termination for breach and termination in the event of frustration.

However, as was pointed out in our previous article, the provisions of the CTL do not eliminate the need for careful drafting, particularly when it comes to termination clauses. Notice provisions and the right to terminate without the need for a judicial order require careful consideration to give effect to the parties agreement and ensure that the contract will be upheld by the Court.