Saudi Arabia's ambitious Vision 2030 has sparked an unprecedented wave of "giga projects"—vast infrastructure projects including NEOM, New Murabba, the Red Sea Project and other notable projects as part of the country's economic diversification plans. In the context of these giga projects, a web of contracts is often formed between employers, contractors, subcontractors, consultants and others. Many of these contracts are governed by Saudi law which, therefore, makes it critical for parties to understand what remedies and damages are available to them under Saudi law as that may have an impact on how contracts are negotiated and structured, how parties manage their contracts and relationships, and how they deal with any potential disputes that arise before, during or after a project.
This article examines how the new Saudi Civil Transactions Law ("CTL"), which reflects Saudi Arabia's broader legal reform agenda under Vision 2030 to align its laws with international and regional standards, governs legal remedies and damages.
This article uses the terms "creditor" and "debtor" as these terms are generally used in the English translation version of CTL. In this regard, a "creditor" refers to a harmed party who can pursue a course of action and "debtor" refers to a breaching party (i.e. a party who has failed to fulfil a particular obligation).
THE SAUDI LEGAL SYSTEM
Saudi Arabia's legal system is rooted in Shariah law, which has long governed contractual and civil relationships through established jurisprudential principles. Historically, the absence of codified civil law in Saudi Arabia created uncertainty for international parties. However, in 2023, Saudi Arabia enacted the CTL, which came into effect on 15 December 2023.
The CTL codifies many principles familiar from modern contract law, while at the same time recognises the application of Shariah law, particularly where the CTL does not expressly deal with a particular matter. Article 1 of the CTL stipulates: "...[i]n cases where none of the provisions of this Law can be applied, the General Rules provided for in the Concluding Provisions shall apply, and in the absence of a relevant general rule, the provisions derived from Sharia that are most consistent with this Law shall apply".
That said, it is important to understand precisely how the CTL and Shariah law are interpreted and applied in contracts that are based on internationally recognised standards, and where the Saudi is the governing law of a contract.
We note that the CTL applies prospectively to contracts executed after its effective date, and to contracts executed prior to its promulgation, except when: (1) there exists a statutory provision and/or judicial principle applicable to the event that conflicts with a provision of this law and it is invoked by a party; or (2) where the limitation period for a claim started to run prior to the date in which the CTL took effect.
SPECIFIC REMEDIES AND DAMAGES UNDER SAUDI LAW
1. Specific Performance and Performance In Kind
While the express recognition of specific performance and performance in kind under the CTL is a significant development, the CTL is still relatively new, and its practical application remains subject to practical judicial application. Therefore, this is an area to watch closely as the courts apply and shape the law in practice.
At the outset, we note that Saudi law recognises the general concept of the freedom of contract and that contracting parties must perform their contract, unless it is mutually agreed otherwise. Articles 94 and 95 of the CTL support these principles and are set out below.
Article 94 states that: "A valid contract may not be terminated or amended except by agreement or pursuant to a legal provision".
Article 95 further states that: "1. A contract shall be implemented as per its provisions and in a manner consistent with good faith practices...2. A contract shall be binding on a contracting party not only in terms of its provisions, but also in relation to other requirements as prescribed by legal provisions, custom, and the nature of the contract".
These provisions also reflect principles of Shariah law, such as Rule 10 of the Concluding Provisions of the CTL, which states that "[c]ontracts and conditions shall be presumed valid and binding".
Further, article 161 of the CTL recognises a debtor's rights to apply for a specific performance order to compel the other side to fulfil their obligations under certain circumstances, subject to a judge's discretion. In this regard, specific performance essentially involves obtaining an order for the other party to perform a certain obligation and it is typically applied where monetary damages are deemed inadequate, such as in cases involving the sale of specific real estate property.
Article 161 of the CTL states: "A debtor shall perform his obligation when it becomes due; if he fails to do so, such obligation shall be enforced against him provided the legal requirements for enforcement are satisfied".
The combined application of the principle of freedom of contract and Article 161 of the CTL means that a debtor's failure to fulfil its contractual obligations may entitle the creditor to seek, and potentially obtain, a specific performance order under Saudi law. For example, an employer could apply for—and be granted—an order compelling a contractor to carry out the agreed work.
However, article 161 of the CTL empowers Saudi courtsto decline issuing an order for specific performance if "the legal requirements for enforcement" are not met. The CTL does not provide an exhaustive list or a precise definition on what constitutes these legal requirements. Instead, the assessment is left to the discretion of the court in light of the specific facts and circumstances of each case. This approach reinforces the principle that specific performance is not granted automatically, and it is subject to judicial discretion. This approach is broadly consistent with the English common law position.
A creditor also has the right to request performance in kind provided that the conditions of Article 164 of the CTL (as out below) has been notified, namely that: (1) the debtor has been duly notified of the performance in kind; (2) the performance in kind is capable of being performed; and (3)such performance is not unduly burdensome on the debtor. In deciding whether to compel performance in kind, a court must carry out a delicate balancing exercise which involves weighing the burden on the debtor against the harm likely to be suffered by the creditor. This is a fact-sensitive inquiry, so Saudi courts have wide discretion in determining whether such relief is appropriate in each case.
Article 164 of the CTL states that: "1. A debtor shall, after being notified, be obligated to perform his obligation in-kind if possible...2. If a performance in-kind is onerous to the debtor, the court may, upon his request, limit the creditor's right to compensation if this does not entail severe harm to the creditor".
Moreover, article 167 of the CTL provides for cases where a contractual obligation consists of performing a particular action—i.e. an obligation "to do" something. These rules are especially relevant in contracts for services and works, or any obligation requiring a party's active performance. Article 167 of the CTL provides that:
"If the obligation is the performance of an action, the
following provisions shall apply:
a) If the agreement or the nature of the action requires that the
debtor perform the obligation himself, the creditor may refuse
performance of the action by any other person.
b) If the debtor fails to perform his obligation, the creditor may
petition the court for permission to perform the obligation at the
debtor's expense if such performance is possible. The creditor
may, in urgent circumstances, perform such obligation at the
debtor's expense without the court's permission.
c) A court ruling shall stand in place of the performance of the
obligation if the nature of the obligation so
requires".
Article 167 of the CTL reflects three key principles set out below:
- Personal performance: If the nature of the obligation—or the contract itself—requires personal execution by the debtor (e.g. in cases involving special skill or trust), the creditor is entitled to reject performance by any other person (i.e. the creditor can require that only the specific debtor must perform the required obligation).
- Substitute performance at debtor's expense: If the debtor fails to perform its obligation, the creditor can request the court's permission to undertake the relevant obligation itself or have the obligation performed by a third party at the debtor's expense. In urgent cases, such as where delay would cause harm or loss, the creditor may act without a court's approval and then seek compensation for the costs.
- Judicial substitution: In certain circumstances, the court may issue a ruling that stands in place of actual performance, in which case the performance would be fulfilled in specific applicable circumstances (e.g. where legal approval is required and it is granted by judicial order).
These provisions offer creditors with practical legal tools to assist in securing performance, subject to appropriate judicial oversight.
Where performance in kind of an obligation cannot occur for any reason, the creditor can seek compensation, or compensation could be awarded by a court. Article 170 of the CTL outlines that "[i]f performance in-kind is not possible, a judgment for compensation shall be issued against the debtor; this shall include cases where performance is delayed by the debtor until the creditor no longer benefits from such performance".
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