Saudi Arabia’s Civil Code: impossibility of performance and corresponding obligations

Consistent with other civil law codes in the region, article 114 of the Saudi Civil Code also specifically addresses the scenario where a party to the contract, rather than an ‘external’ event, is the source of the hindrance – providing the possibility for parties to suspend performance of an obligation where its counterparty refrains from performing its own “corresponding” obligation.

These provisions are to be distinguished from other parts of the Civil Code that provide a process through which parties may be able to redress the effects of exceptional unforeseen circumstances.

Article 110 – impossibility of performance

Article 110 of the Civil Code provides relief in circumstances where, as a result of any circumstance beyond their control, a party’s obligations under contract become impossible to perform.

Pursuant to article 110(1), where a party’s obligations are ‘wholly’ impossible, its obligations and its counterparty’s corresponding obligations are extinguished, and the contract is automatically terminated. The circumstances to which article 110(1) might apply are likely limited to events which affect the very ‘core’ of the contract. For example, an entire construction contract may become ‘wholly’ impossible if significant archaeological findings are made on the construction site, leading to a permanent and indefinite halt of the entire project.

Whereas article 110(1) effects automatic termination of the entire contract, if an obligation is only “partially” impossible, article 110(2) provides for the automatic extinction of the impossible part only, as well as its corresponding obligation.

For example, in a construction contract for the development of 100 luxury villas, after commencing works, a contractor may discover unsuitable or dangerous subsurface conditions or water channels, that could not be remedied at any cost, affecting only a section of the villas. Here, article 110(2) might apply to sever the requirement for the contractor to build, and the employer to pay, for the affected section of the works, whilst retaining the balance of the contract relating to the unaffected villas.

In such circumstances, article 110(2) also allows the employer to request recission of the entire contract, although a court can reject such a request if the recission of the impossible parts are of little significance to the balance of the contract. While this will ultimately depend on the specific facts of the project, a court might intervene to reject a request for recission where the dangerous subsurface conditions only affect a small number of the villas. Equally, however, if the affected villas, although small in number, have some significance to the project as a whole, that may sway a court’s opinion.

Impossibility and emergency excuse – muqawala contracts

Articles 476 and 477 are 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. Broadly speaking, these provisions provide parties with avenues to terminate a construction contract and are not limited to the types of ‘global’ circumstances captured by the Civil Code’s regime for ‘unforeseeable exceptional events’. However, as these articles lack ‘mandatory’ language, it is possible for parties to exclude their operation through express wording in their contract.

Article 476 provides that either party may request the contract’s termination in the event of an “emergency excuse” related to the performance of the contract. If a party requests termination in this way, they are required to compensate the other party for the damage arising from the termination.

Pursuant to article 477, if a contractor commences contracted work and then becomes incapable of completing it due to a cause that they played no part in, they are entitled to the value of the work completed, in addition to expenses incurred for incomplete works, up to the amount of the benefit the employer has derived. In some circumstances, there may be a difference between the value of the contractor’s work completed and the benefit derived by the employer.

For example, if the works completed were defective and required substantial costs to rectify, this might reduce the amount a contractor would be able to recover under this article of the Civil Code, as the benefit provided to the employer might be less than the sum of the contractor’s work and any expenses incurred.

Article 114 – corresponding obligations

Consistent with other civil codes in the region, the Civil Code also recognises the principle of reciprocity within contractual relationships.

Pursuant to article 114, where a contract prescribes “corresponding” obligations, either of the contracting parties may refrain from performing its obligation as long as the other contracting party refrains from performing its own obligation.

While it ultimately depends on the manner in which a construction contract is structured, an example of a “corresponding” obligation to which this article might apply is where an employer agreed to obtain governmental approvals required to complete certain works and failed to do so. In such circumstances, a contractor may be permitted to suspend performance of the corresponding works. While this article provides a direct right to suspend works, parties to construction contracts should remain cautious exercising this article, as wrongful suspension may lead to a party becoming liable for the resulting delay.

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