Saudi Arabia’s Civil Code: exceptional unforeseen circumstances and reallocation of risk in construction contracts

In an era marked by global shocks and unforeseen events, exposure to situations that defy traditional risk assessment remain a significant risk for construction industry participants. With its heightened dependence on international sources for labour, plant and materials, construction companies in Saudi Arabia are particularly susceptible to the challenges posed by unpredictable global dynamics. In this context, articles 97 and 471(3) of the Saudi Arabia’s Civil Code provide valuable avenues for parties to redress unforeseeably burdensome contractual obligations and reallocate contractual risk.

As the construction industry continues to navigate the effects of pervasive global events, these provisions of the Saudi Civil Code provide a much-needed framework for adaptable contracting and symbolise an ongoing commitment from the Saudi authorities to support equitable construction practices.

Read more on this topic

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• Saudi Arabia’s Civil Code: ‘good faith’ in construction contracts
• Saudi Arabia’s Civil Code: entitlement to interest in construction projects

Impact of Article 97

Article 97 provides a potential route to relief upon the occurrence of “exceptional circumstances of a general character”, provided that the circumstances were not foreseeable at the time of entering into the contract. It is a ‘mandatory’ term, meaning that any provision to the contrary is considered void.

For circumstances to be of a ‘general character’, it is likely that they must impact the general public, or at least a wide class of people, and not just the contracting parties. Where such circumstances have arisen, they must also be of sufficient severity that continued performance of a particular contractual obligation will threaten a party with “exorbitant/heavy loss”. The threshold for “exorbitant/heavy loss” will vary on a case-by-case basis, and while no guidance as to interpretation is provided by the Civil Code, it is possible that courts will consider the threshold in the context of the overall value of the contract, rather than on an item-by-item basis, or by comparison against the value of the company as a whole.

To take just one example, if faced with an increase in the cost of an aluminium construction component following a war, a party seeking to rely upon article 97 might seek to evidence: why the effects of the war were felt globally, as opposed to affecting only the country from which the component will be sourced; how the war caused the component’s price to increase; why the affected party was unable to import the component before the war commenced or source a suitable replacement, and; why continuing to import the component, at the inflated price, will cause an exorbitant loss. That party would also need to demonstrate why the war was not foreseeable at the time of entering into the contract.

In such circumstances, a party may then seek to renegotiate the burdensome contractual term with its counterparty. However, a request to renegotiate does not permit the requesting party to stop performing the obligation. Parties are likely to be expected to not only negotiate but to do so in ‘good faith’. A failure to negotiate in good faith, which might also amount to a failure to properly mitigate its losses, may expose that party to a claim for compensation.

If the parties cannot renegotiate the obligation, the court has the power to restore the obligation to a reasonable level, which might result in the parties ‘sharing’ the cost of dealing with the global shock or one party being excused from complying with an overly onerous obligation.

Impact of Article 471(3)

Article 471(3) is contained within the muqawala section of the Civil Code which deals specifically with contracts “to make a thing or perform any work”, including construction contracts. Similar to article 97, article 471(3) seeks to address the consequences of unforeseeable “exceptional circumstances of a general character”.

Many of the considerations discussed above in respect of article 97 are equally applicable to article 471(3). Unlike article 97, however, article 471(3) provides relief where the exceptional circumstances have severely prejudiced the contractual balance between the obligations of the contractor and employer and undermined the basis of the financial estimate of the contract. A party seeking relief under this article may need to consider the rates built into its tender or contract pricing and demonstrate how the underlying assumptions have been undermined by the exceptional circumstances.

Using the example described in the section on article 97 above, this might be achieved by evidencing that: a party’s contract rates sufficiently accounted for potential risk factors expected in the course of an ordinary contractual relationship, such as inflation; its financial estimate did not account for a war causing a global supply-side shock; and that the war was unforeseeable at the time of tender.

In such circumstances, the court is entitled to order the restoration of the contractual balance. In the course of doing so, article 471(3) specifically envisages that a court might provide a party with an extension of time, increase or decrease the contract price, or order the contract to be terminated. Notably, as compared with article 97, article 471(3) does not require a party to first attempt to negotiate the relief sought, before proceeding to court, but it lacks ‘mandatory’ language, potentially leaving open the possibility for parties to exclude its operation through express wording in their contract.

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