Breach of Contract in Saudi Arabia: Your Remedies Under the Civil Transactions Law

Step 1: Notice

Under the Civil Transactions Law, if one party fails to perform its contractual obligations, the other party must first notify it of the failure. Only then can it ask the court for:

• specific performance, meaning an order to perform; or
• rescission of the contract, with compensation where appropriate.

The court has discretion. It may refuse rescission if the breach is of little significance compared with the obligation as a whole.

In practice, send a clear written notice: identify the obligation, describe the failure, give a reasonable deadline, and state what you will do if it is not met.

Step 2: Is there an express termination clause?

The parties can agree in the contract that it may be rescinded for breach without a court order. They can also agree that no prior notice is needed.

If your contract has such a clause, follow it exactly. If it does not, you will generally need the court to rescind under the Civil Transactions Law.

Impossibility

• If performance becomes impossible for reasons outside the debtor's control, the obligation is extinguished and the contract ends automatically.
• If only part of the performance becomes impossible, the creditor may ask the court to rescind if that part is fundamental. The court may refuse if it is of little significance.

Exceptional circumstances

Where general, unforeseeable exceptional circumstances make performance so burdensome that the obligor faces an exorbitant loss, the obligor may ask to renegotiate. It must continue performing in the meantime. If no agreement is reached, the court may reduce the burdensome obligation to a reasonable level.

What happens after rescission

• The parties should be restored to their position before the contract. If that is impracticable, the court may award compensation.
• Dispute-resolution and confidentiality obligations survive rescission unless the parties agreed otherwise. Other clauses, such as liability caps, may not survive without express wording.

Agreed compensation (liquidated damages)

• Parties may agree the amount of compensation in advance, except where the obligation is to pay a sum of money.
• Agreed compensation is not payable if the debtor proves the creditor suffered no harm.
• The court may reduce it if it is exaggerated, or if the obligation was partly performed.
• It may be increased where the debtor's fraud or gross negligence caused harm exceeding the agreed amount.

Example: A Khobar logistics company contracts a supplier to deliver 20 forklifts by 1 March, with agreed compensation of SAR 2,000 per day of delay. The supplier delivers 45 days late. The company claims SAR 90,000. The supplier argues that the company leased replacement forklifts at a much lower cost, so the agreed amount is exaggerated. Under the agreed-compensation rules, the court may reduce it to reflect the actual harm.

Time limits

• Different Civil Transactions Law limitation periods may apply depending on the type of claim.
• Commercial claims are subject to filing time limits, with exceptions that depend on the facts.

Do not rely on the longest period. Evidence and the defendant's assets do not improve with time.

For the party accused of breach

Respond to a breach notice in writing, with your reasons and evidence. If the delay was caused by the other side, for example late approvals, late payment or changed instructions, record it at the time. If the agreed compensation is out of proportion to the actual harm, the agreed-compensation rules may allow it to be reduced.