CMS guide on the new KSA Civil Code – Second Edition – Construction Principles

Introduction

As set out in our recent Law Now (available here), from 16 December 2023 onwards, civil relationships within the Kingdom will now be governed by the articles of its new Civil Code^[1] (the “Civil Code”); which represents a departure from the Kingdom’s previous system whereby civil relations were essentially governed by uncodified Shari’ah principles. One of the principal areas covered by the Civil Code is construction – which previously had not been codified (other than in respect of discrete points or contracts procured by the Government).

Given the rapid rise of new construction projects in the Kingdom, the Civil Code will be of particular relevance to funders, developers, contractors, consultants, and all other parties with an interest in construction contracts governed by KSA law, including those entered into prior to 16 December 2023 given the Civil Code’s retrospective effect.   

This Law Now considers the key provisions of the Civil Code as they relate to construction contracts, and addresses:

1. The definition of a construction contract.
2. Contractor’s obligations.
3. Variations.
4. Taking Over.
5. Contractor’s breaches.
6. Miscellaneous provisions.  

Construction Contracts

The provisions considered below apply to all construction contracts, which is now defined under the Civil Code as one under which the contractor undertakes to do something or perform work in exchange for payment;^[2] irrespective of whether the materials are provided by the contractor itself or the employer.^[3] It’s therefore unlikely that any contract entered into in a construction context will fall out with the provisions of the Civil Code.

Contractor’s Obligations

In the absence of any agreement to the contrary, the contractor’s key obligations are that:

1. the contractor shall be responsible for the provision of materials (if required);^[4]
2. the contractor shall be responsible for the provision of the plant and machinery required for the works;^[5]
3. if the materials are provided by the employer, the contractor will be responsible for the preservation of these;^[6]
4.  the works will be at the contractor’s risk before they are handed over and if they are damaged for any reason beyond the contractor’s control, the contractor will not be entitled to payment unless, at the time of the damage, the employer was in breach of its obligation to take over the work;^[7] and
5.  the contractor will be required to complete the works within the period agreed or (if no deadline is specified) within a reasonable period.^[8]   

Risk allocation is undoubtedly a contentious topic, particularly where contract terms are unclear. As such, the above provisions will likely assist in providing clarity to the parties where there is no obvious answer in the contract.

Variations

Most standard form contracts have prescribed timeframes in respect of the notification of claims, including claims for additional works. In the absence of these, and where contracts are based on pre-set measurements (such as a lump sum price) and such measurements are exceeded when the works are performed, the contractor must immediately inform the employer of the increased costs. Any failure by the contractor to do so could result in the forfeiture of its claim for additional payment.^[9] Accordingly, the late notification of claims could have severe consequences. 

Additionally, where the design of the works is modified or added to, there shall be no entitlement to additional payments unless the change arose from the employer’s request or mistake and there is an agreement as to the increased value.^[10] However, if the additional works are caused by exceptional circumstances, then a court may in certain circumstances, and after balancing the interests of both parties, increase or decrease the contract price.^[11]

Taking Over

Construction contracts will conclude when the contractor completes the works agreed upon.^[12]

When the works are completed and ready for taking over, the employer’s obligations will be as follows:

1. The employer will be obliged immediately to take over the works when the contractor has completed them and placed them at the employer’s disposal. If the employer fails to take over in such circumstances and the works are damaged, the employer will not be entitled to compensation from the contractor.^[13]
2. Upon taking over (unless otherwise agreed) the employer will be obliged to pay the contractor for the works.^[14]  

Contractor’s breaches

Where the contractor breaches the contract the employer may give notice requiring the breach to be remedied within a reasonable period. If the contractor fails to comply with this notice, the employer may (with the approval of the court) appoint a replacement contractor to complete or correct the works at the expense of the original contractor – or may request the termination of the contract.^[15]

Additionally, the employer may request the immediate termination of the contact if:

1. it is impossible for a breach to be remedied;
2. if the contractor fails to commence the work on time; or
3. if the contractor will not be able to complete the works by the time for completion.^[16]

Miscellaneous provisions

There are a number of other provisions in the Civil Code which apply to construction contracts, most of which align with the civil codes of the other GCC states. Some of these include that:

1. Where no remuneration is specified, the contractor will be entitled to the value of the works / materials.^[17]
2. Subcontracting is permissible; although even where a subcontractor is appointed, the contractor remains liable to the employer.^[18]
3. Importantly, there is no right for the contractor to advance claims on the basis of escalation. The Civil Code expressly excludes any claim resulting from increases in the costs of materials and labour.^[19]
4. Where the balance of the parties’ obligations is impacted by exceptional and unforeseeable circumstances which undermines the costing of the works, the court may balance the interests of the parties and:
   1. adjust the period for performance;
   2. adjust the contract price; or
   3. terminate the contract.^[20]

Comment

Companies involved in the construction industry in the Kingdom need to be aware of the contents of the Civil Code, particularly those which apply to construction contracts. The Civil Code sets out an overarching set of principles applicable to the construction sector, which is a welcome development – particularly where works may have commenced without a finalised contract being in place.

Of course, it should be noted that the provisions of the Civil Code will largely be subject to the parties’ specific agreements. As such, contracting entities will still need to ensure that their agreements are properly drafted and negotiated to best ensure the smooth delivery of the associated projects.
 

^[1] Royal Decree No. M/191.

^[2] Article 461.

^[3] Article 462.

^[4] Article 463(1).

^[5] Article 464.

^[6] Article 463(2).

^[7] Article 467(1).

^[8] Article 465.

^[9] Article 470(1).

^[10] Article 471(2).

^[11] Article 471(3).

^[12] Article 475.

^[13] Article 468.

^[14] Article 469(1).

^[15] Article 466(1).

^[16] Article 466(2).

^[17] Article 472.

^[18] Article 473.

^[19] Article 471(1).

^[20] Article 471(3).