Saudi contracts after CTL
Termination without a court order under the Saudi Civil Transactions Law: Do pre-existing Saudi law governed contracts need updating? An analysis by Norton Rose Fulbright.
Prior to the issuance of the Saudi Civil Transactions Law (the CTL), termination of contracts was historically governed by uncodified Sharia‑based principles, meaning judges had broad latitude in assessing whether a breach justified termination and whether the terminating party could effect the termination unilaterally. As a result, judicial practice varied, and outcomes differed depending on the court’s interpretation of general principles rather than specific statutory rules. With the introduction of the CTL, this discretion has been intentionally narrowed, as discussed below.
The retroactive application of the CTL has often raised a practical question for project and commercial contracts: must parties amend contracts entered into before the CTL came into force to include express wording entitling a party to terminate the contract without obtaining a court order?
THE DEFAULT POSITION: JUDICIAL INVOLVEMENT
The default position under the CTL is that a contract is binding on both parties and may not be unilaterally terminated (Article 94). A party’s substantive right to seek termination of a bilateral contract arises under Article 105, where the other party has failed to perform its obligations. Article 107 then provides that, as a default, a party wishing to terminate a contract for a breach must seek a judicial ruling to that effect. This is consistent with the approach taken in many civil law jurisdictions, where the sanctity of the contract is protected by requiring judicial oversight of its dissolution.
THE CONTRACTUAL EXCEPTION: ARTICLE 108
Article 108 of the CTL permits the parties to agree that the creditor (i.e. the innocent party) shall have the right to terminate the contract upon the breaching party defaulting on its obligations without the need for a judicial ruling. However, even where such an agreement exists, Article 108 maintains that notice must still be given to the breaching party, unless the parties have expressly agreed to dispense with the notice requirement as well. Article 108 therefore requires two distinct levels of express agreement. First, the parties must agree that termination may occur without a court order. Second, if the parties also wish to waive the requirement for prior notice, a further express agreement to that effect is necessary.
APPLICATION TO CONTRACTS ENTERED INTO BEFORE THE CTL CAME INTO FORCE
The retroactive application of the CTL has important consequences for pre-existing contracts. Where a contract was entered into before the CTL came into force and it does not contain an express clause permitting termination without a court order, the default position under Article 107 will apply, meaning that the innocent party will need to seek judicial termination in the event of a breach. The mere inclusion of a general termination for breach clause (for example, one stating that a party “may terminate the contract in the event of a material breach”) may not, without more, be sufficient to satisfy the requirements of Article 108. The CTL contemplates that an express agreement is needed for extrajudicial termination, and a clause that is silent on the question of whether a court order is required is unlikely to meet this threshold.
Even if a contract contains termination by notice for defined defaults, it is prudent to add language stating that termination “takes effect upon service of the notice and without the need for a court order.” This reduces the risk that a counterparty argues the clause is merely a right to seek termination rather than to effect it unilaterally.
In the construction sector, whilst FIDIC forms are structured around cure periods and termination by written notice, FIDIC’s internal mechanics do not answer the Saudi‑law question of whether a court order is a precondition to effectiveness. In our assessment, FIDIC‑compliant notice and cure alone should not be treated as a complete substitute for an express “no‑court‑order” clause under Saudi law.
PRACTICAL RECOMMENDATIONS
Parties to contracts governed by Saudi law that were entered into before the CTL came into force should consider reviewing their termination provisions in light of Articles 94, 105, 107 and 108. Where the intention is that a party should be able to terminate the contract for breach without the need to apply to a court, the contract should be amended (by way of a side letter or formal amendment agreement) to include clear and express wording to that effect. The amendment should also address whether the requirement for notice prior to termination is to be maintained or waived, bearing in mind that an express agreement is required to dispense with the notice obligation under Article 108.
In the event that a party seeks to unilaterally terminate a Saudi law governed contract which does not contain express and clear wording disposing of the necessity of a court order, the terminating party may be faced with a claim in respect of wrongful termination. Such a claim may result in either (1) the payment of damages or other relief ordered in respect of wrongful termination if successful (noting that jurisprudence in this regard remains in development), or (2) at the very least, even if eventually unsuccessful, the incurrence of time and cost on the part of the terminating party in dealing with such a claim.
For new contracts, parties should ensure that their termination clauses are drafted with Article 108 in mind. A well-drafted clause would expressly state that the innocent party has the right to terminate the contract upon the other party’s breach without the need for a judicial ruling, specify the notice requirements applicable to such termination (or expressly waive them), and set out the consequences of termination in accordance with Article 111 of the CTL.
CONCLUSION
The introduction of the CTL has brought welcome clarity to the law governing contractual termination in the Kingdom of Saudi Arabia. However, the default rule requiring judicial termination, coupled with the broad retroactive application of the CTL, means that parties to pre-existing contracts cannot assume that their existing termination clauses will permit extrajudicial termination. An express agreement compliant with Article 108 is required, and parties are well advised to review and update contracts accordingly.
Text by:
- Robin Springthorpe, head of aviation disputes, Norton Rose Fulbright, Riyadh
- Ahmed Bobat, counsel, Norton Rose Fulbright, Riyadh
- Faisal Aldhayaan, senior associate, Norton Rose Fulbright, Riyadh
- Sarah Sheppard, associate, Norton Rose Fulbright, Dubai
