3/19/24, 9:32 AM Construction under the KSA Civil Code Part 2: Unconscionable Contracts | Simmons & Simmons

Construction under the KSA Civil Code Part 2:

Unconscionable Contracts
A serialised guide to key provisions of the Saudi Civil Code relating
to construction in the Kingdom.

13 February 2024 Publication Share Publication

An analysis of the provisions of the Saudi Civil Code

relating to the formation of construction contracts.
In June 2023, Saudi Arabia announced its new Civil Transactions Law by way of Royal Decree
No. M/191 (the Code). The Code came into force in December 2023 and effectively represents
the first codification of the laws relating to contract and tort in the Kingdom.

In this series of articles, we explore certain key provisions of the Code relevant to our clients
engaged in construction projects in Saudi Arabia. This Part 2 focusses on the concepts of
"duress" at the time of contract execution, unconscionable contracts and best practice when
negotiating and agreeing contract obligations.

Except where otherwise stated, translations of the Code are taken from the English
translation produced by the Official Translation Department of the Bureau of Experts at the
Council of Ministers.
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Duress
A common complaint from clients operating in the region is in relation to contract terms that
are presented as a fait accompli, on a non-negotiable basis. Attempts to agree alternative
terms or soften onerous obligations are rejected and parties may feel pressured to accept the
proffered terms as they want to avoid losing out on the commercial opportunity.

However, if they do so, it is not uncommon for these parties to run into difficulties later,
when faced with performing the onerous obligations they agreed to in the contract.
Performance is often at considerable additional cost, loss, or delay.

At that point, parties may seek ways to avoid their obligations and a common question is
whether this "take it or leave it" approach to contract tendering would constitute some form
of "duress" that would afford relief from compliance with onerous contract terms.

Article 67 of the Code does provide for nullification of contracts that are concluded under
duress, but such arguments are unlikely to be successful in a commercial context. Article 64
of the Code confirms that duress requires "the unlawful act of threatening a person using
physical or moral means to coerce said person to act against his will", whilst Article 65 describes
duress occurring where:

...the life, honour, or property of the party under duress is threatened with serious and imminent
danger, or if the threat is made against others and the party under duress would not have
concluded the contract in the absence of such duress.

Clearly, these criteria are unlikely to be satisfied by commercial parties during normal
contractual negotiations. It would be difficult to prove that a commercial party has been
forced to enter into a particular contract in the ordinary course of business, particularly
given they have the freedom to refuse to contract on the terms offered.

Accordingly, duress is unlikely to provide any assistance to parties faced with having to
perform onerous obligations to which they freely agreed.

Unconscionable contracts
In contrast, however, Article 68 potentially provides relief where "a contracting party exploits
the apparent vulnerability or urgent need of the other contracting party in order to conclude an
unconscionable contract".

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Examples of this may include:

1. a party compelled to agree to less favourable financial terms to avoid insolvency;

2. an agreement to make additional extra-contractual payments demanded to ensure the

delivery of critical goods or materials; or

3. parties being held to ransom mid-contract with the threat of discontinuation of

performance.

If these circumstances exist, a court (or tribunal) has the power to amend the parties'
obligations or, in certain circumstances, nullify the contract.

However, Article 68 is not the panacea of bad commercial bargains; it is intended to offer
exceptional relief, available only in limited circumstances:

First, Article 68 makes clear that the contract must have arisen out of an "apparent
vulnerability or urgent need" of one party. This is less likely to exist in the case of a
commercial entity, particularly at the outset of a project, except in very rare circumstances.

Second, a claim for relief under Article 68 must be filed within 180 days from the date of
execution of the contract. This indicates that the availability of relief is directly tied to the
urgent circumstances existing at or closely around the time of contract. Relief is unlikely to
be available to parties seeking belatedly to avoid contractual obligations in long-term
contracts, such as those for construction projects.

Third, Article 69 expressly makes clear that, in matters of pricing, "unconscionability" will
not arise in circumstances that are considered "usual practice...according to custom". Market
pressures such as non-exceptional price fluctuations, supply and demand and compromises
during commercial negotiations are unlikely to be considered outside usual practice or
custom. Accordingly, an assertion of "unconscionability" will rarely assist a party looking to
revise a contract price agreed during ordinary commercial negotiations. The Code does not
exist to relieve a party from its bad commercial bargain.

Key takeaways and best practice

As with all contracts, parties should familiarise themselves with their proposed contractual
obligations prior to execution of their contract. Parties should satisfy themselves that these
obligations are not only clear and achievable in principle, but achievable for the price
tendered.

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Where possible, parties should seek advice on:

the allocation of responsibilities under the proposed contract;

key areas of risk in the performance of the proposed contract; and

the potential consequences of failing to perform their contractual obligations.

Parties should consider carefully whether the risks of contractual terms offered are
disproportionate to the commercial opportunity in question.

When concluding contracts, parties should not assume that they will be able to obtain relief
from the performance of their contractual obligations under the Code, or that Saudi law will
relieve them from their bad commercial bargain.

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This document (and any information accessed through links in this document) is provided for information
purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking
or refraining from any action as a result of the contents of this document.

Applicable law
Middle East, Saudi Arabia

Sector focus
Energy, Natural Resources and Infrastructure
Real estate
Construction

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