The New KSA Civil Code: Termination of Contracts
Author: Amr Reda Abdullatif before the new Civil Transactions Law of the Kingdom of Saudi Arabia (referred to as the “KSA Civil Code”), there were no detailed rules on termination (or fish) at law in Saudi Arabia. As with other areas of Saudi law, the courts would interpret termination provisions in contracts in line with Sharia principles, as informed by various sources of jurisprudence.
The new KSA Civil Code now provides greater certainty through clear, codified provisions on how parties can terminate a contract, and the practical effects of such a decision on the parties’ contractual positions. This article sets out the key Articles within the KSA Civil Code which govern termination and rescission.
Options for Termination of a Contract
Cancellation by ad hoc mutual agreement
The starting position for termination of contracts under the KSA Civil Code is that contracting parties may agree to cancel a contract or a part of the contract. This option allows for flexibility and amicable resolution if both parties are in agreement.
Initial right of rescission: unilateral option to terminate
The KSA Civil Code also permits parties to agree on limited rights for one party to rescind the contract unilaterally. This means the parties can include an option for a party to rescind the contract within a specified period after signing. If the contract does not specify a time period, the court or arbitral tribunal can specify one based on custom and the contract’s conditions. To exercise this right, the withdrawing party must provide notice to the other party.
This contractual right to terminate will be lost if the party with the right expressly or impliedly forfeits the option, or the time period for exercising the option lapses. However, the forfeiture of one party’s option does not extinguish the right of the other party to rescind if they were also provided such a right under the contract.
Explicit vs. implicit rescission: breach of obligations
The KSA Civil Code draws a distinction between implicit and explicit rights of rescission set out within a contract. Article 107 sets out an implicit rescission clause which parties can rely on to terminate a contract in the event of breach of obligations, while Article 108 permits parties to explicitly agree on a rescission mechanism for breach of obligations.
Article 107 – Implicit Rescission
If the parties do not provide an explicit rescission clause, a creditor (the obligee) can rely on the KSA Civil Code to rescind the contract for breach. The creditor must first give notice to the debtor (the obligor) of their failure to comply with a contractual obligation.
Following this, the creditor must apply to the court for rescission or alternatively for an order of specific performance. The court then has discretion to accept or reject the request, taking into account the significance of the breach by the debtor. The court can reject the request if the breach is “of little significance in relation to the obligation.” If requested, the court can also consider whether compensation is due to the rescinding party in addition to rescission.
An implicit rescission clause therefore provides the court with broad scope to interpret the correct course of action. Crucially, the court must consider whether the breach is minor, such that rescission of the entire contract would be unreasonable, offering the debtor some protection against an unjustified termination by the creditor.
Article 108 – Explicit Rescission
The KSA Civil Code also allows parties to agree on a contractual right to rescind in the event of a debtor’s breach of obligations. In this case, the creditor can rescind the contract without the need for a judicial ruling. The parties can also contractually agree not to require the rescinding party to provide notice of the breach prior to rescinding the contract (i.e., automatic termination upon the occurrence of a specific event).
A clause removing the requirement for the court’s involvement and removing notice requirements will require careful drafting to give effect to the parties’ intentions. It is currently unclear whether it is necessary to expressly state there is no need for a judicial ruling in the rescission clause, or whether simply stating a party has the right to terminate is sufficient to fall under Article 108. Until this issue is clarified, it would be prudent to include express reference in the rescission clause that it can be exercised “without the need for a judicial order.”
Impossibility of performance
The KSA Civil Code further provides that if the performance of an obligation becomes impossible due to events outside the debtor’s control, the obligation is extinguished and the contract is automatically terminated.
Where part of the performance becomes impossible, the obligation is extinguished only in respect of the impossible part. However, the creditor can apply to the court to rescind the contract if they believe non-performance of that part of the contract is fundamental to the contract. The court then has discretion to reject the request for rescission if the impossible part of the contract is “of little significance in relation to the obligation.”
Effects of Rescission or Termination
Following rescission or termination of the contract, the contracting parties should be restored to their status quo before entering the contract. Where this is impracticable, the court may, but is not obliged to, award compensation.
Importantly, the KSA Civil Code expressly provides that obligations relating to settling disputes and confidentiality will continue to apply following rescission of the contract (unless the parties agree otherwise). Accordingly, it would appear that other contractual provisions (e.g., as to exclusion or limitation of liability, or contractual damages) may not survive termination of the contract in the absence of express language to that effect.
Muqawala Contracts
The KSA Civil Code also sets out specific provisions that govern various different types of contract, including the termination of those specific types of contract.
One such example is its provision for Muqawala contracts, i.e., agreements for construction services.
Under the KSA Civil Code, each party to a Muqawala contract has the right to request termination of the contract if performance has become impossible due to factors outside the parties’ control, and the party requesting termination must compensate the other party for any damage arising out of the termination.
In addition, where a contractor has started work and later becomes incapable of completing the works due to “a cause in which he played no part,” the contractor will be entitled to recover for the value of work that it has completed and the expenses it has incurred up until that point. However, the value that can be recovered is capped at the benefit the employer has derived from the contractor’s work.
It is also worth noting that a contractor is unlikely to be able to recoup damages for loss of future profits even in the event their contract is terminated unlawfully by the employer as such damages are likely to be considered too uncertain to be recoverable under Sharia principles.
Summary
The KSA Civil Code provides far greater certainty regarding rights of termination than under the current uncodified law. The KSA Civil Code provides a clear foundation of rules for terminating and rescinding contracts, including specific provisions relevant to Muqawala contracts. While issues surrounding termination and rescission of contracts will always be a complicated matter for parties to navigate, these provisions should help give parties greater clarity on where they stand in the event that their contractual relationship needs to be unwound.