Saudi Arabia’s Civil Code: ‘good faith’ in construction contracts

Saudi Arabia's Civil Transactions Law (Civil Code) entered into force on 16 December 2023. In this article, we consider the potential consequences of provisions within the Civil Code requiring parties to contract in ‘good faith’.

Tender and contract negotiations

Construction tender processes are highly competitive, time consuming and costly for all involved, yet representations made, or omitted, during the process remain a major source of tension, potentially giving rise to delay, price overrun and disputes. Offering construction industry participants in Saudi Arabia enhanced certainty, Article 41 of the Civil Code expressly mandates that parties refrain from negotiating, or terminating negotiations, in bad faith. If a party acts contrary to these requirements during contract negotiations, it may become liable for the damage suffered by the affected party, provided that the damage suffered is not a “loss of expected gain from the contract”.

In most instances, the parties may be confined to recovering its tender costs, such as the costs of bid preparation, but circumstances may exist to extend the compensable loss further, for example, to damages resulting from loss of opportunity to tender for other projects. It is also worth noting that the Civil Code makes clear that deliberately failing to disclose material facts or circumstances affecting the contract amounts to bad faith. Accordingly, parties would be well advised to pay heed to these provisions.

Performance

Once the tender process has concluded, construction contracts by their nature often provide parties with unilateral rights, benefiting one party and causing a corresponding, albeit commercially accepted, harm to the counterparty, for example, suspension of works, descoping, time bars or limitations on liability. While ‘lawful’ within the strict sense of the contractual terms, unconsidered exercise of such rights, may cause unjust and/or unanticipated consequences. It is in this context that Article 95 of the Civil Code provides a critical balancing mechanism, requiring parties to perform the contract “…in a manner consistent with the requirements of good faith”. As such, even when seeking to exercise a contractual right, parties must keep this principle in mind, consider the purpose of their actions, and remain cognisant of potential harm likely to be suffered as a consequence.

Article 95 also states that a contract is not limited to binding the contracting party to its express terms, but also includes the “necessities” in accordance with statutory provisions, custom, and the nature of the contract. In a construction context, we have seen in other jurisdictions that it is possible that the following “necessities” might be implied into contracts: a duty to cooperate; an obligation not to prevent another party’s performance; a duty to carry out works with proper skill and care. In a Saudi law context, exercising contractual rights in a manner that conflicts with the “necessities” could form the basis for claims of delay or disruption costs.

Moreover, not only must a party exercise its rights in good faith, it must also not abuse its rights. In common with other Middle East jurisdictions, Article 29 of the Civil Code provides that no right may be exercised arbitrarily/wrongfully and lists specific examples of when this may be the case, specifically, if a right is exercised only to cause harm to others; if the benefit generated from exercising the right is completely disproportionate to the harm it causes to others; or if the right is exercised for an unlawful purpose or in an unlawful manner. In addition to the unilateral rights noted above, construction contracts commonly allow one party to direct another to alter their performance by, for example, prioritising or accelerating certain works, nominating a certain sub-contractor, or only using a particular supplier. Due to their nature, exercising such rights in a wrongful or arbitrary manner may potentially fall within one of the categories captured by this Article, amounting to an abuse of right.

Termination

Particular caution is required when exercising contractual provisions relating to termination, especially those which do not strictly require a breach of contract.

Although such termination provisions are widely recognised and accepted in commercial practices, their application must be carefully weighed against the principles of ‘good faith’. For instance, if a contract permits termination due to delays, poor performance, or insolvency, but the initiating party has partly contributed to these delays directly or indirectly – for example, by failing to properly certify and/or pay payment applications – then proceeding with termination may potentially conflict with the principle. Similarly, if the contractual availability of a termination clause was used to leverage commercial negotiations, subsequently exercising an option to terminate may also infringe upon the principle.

The Civil Code, notably in Articles 107 and 110, empowers courts to assess the appropriateness of a termination request to ensure that exercise of such rights is not just contractually valid but also equitable and justifiable. This aspect highlights the need for parties to not only consider the contractual terms but also the broader context and wider implications of their actions, especially in cases where their decisions may have significant repercussions for the other party.

Conclusion

The Civil Code’s integration of the principle of ‘good faith’ across all phases of a construction contract – from the negotiation and performance to termination – offers a framework that further aligns legal compliance with ethical conduct. This approach fosters a construction industry that values transparency, fairness, and mutual respect, ultimately leading to more stable and trusting business relationships.

Contractors and other industry participants in Saudi Arabia must therefore navigate their contractual obligations with a keen understanding of both the letter and the spirit of the law, ensuring that their actions contribute to a balanced and equitable construction sector.

Co-written by Melissa McLaren, Jack Tivey, and Zaid Abu Dahab of Pinsent Masons.