A New Perspective: Comparative Analysis of Construction Laws in the Civil Codes of KSA and China
China Focus
On June 19, 2023, Saudi Arabia enacted the Civil Transactions Law by Royal Decree No. (D/191) of 1444 A.H. (KSA Civil Code), effective from December 16, 2023.
Law Update: Issue 370 - From Africa to Asia: Legal Narratives of Change and Continuity
Justin ZhangSenior Counsel,Dispute Resolution - China Group
On June 19, 2023, Saudi Arabia enacted the Civil Transactions Law by Royal Decree No. (D/191) of 1444 A.H. (KSA Civil Code), effective from December 16, 2023. This first-ever Civil Code of KSA, comprising 720 articles, codifies various aspects of Sharia Law and provides greater certainty and predictability in legal matters previously governed by uncodified Sharia principles.
China also introduced the Civil Code of the People’s Republic of China (Adopted at the Third Session of the Thirteenth National People’s Congress on May 28, 2020 (China Civil Code) effective January 1, 2021. This comprehensive code replaces and supersedes various prior statutes concerning civil and commercial transactions, including a previously standalone contract law.
Considering the two countries’ shared roots in civil law system, it is intriguing to observe the similarities and distinctive differences between the two civil codes, thereby providing a fresh comparative perspective on the KSA Civil Code. This article focuses on the laws governing construction projects in both countries, specifically under their respective civil codes.
Although there is no specific construction law in the KSA, various provisions under the KSA Civil Code govern construction works. These include general provisions applicable to all contracts and specific provisions related to construction contracts (Article 461 to 478)
Similarly, the China Civil Code includes a dedicated chapter on construction contracts, along with other provisions applying to all contracts including construction contracts.
However, unlike the KSA, China has additional dedicated construction laws chiefly including the following:
Construction Law of the People's Republic of China: This law addresses construction licenses and permits, contractor qualifications, contract awarding and performance, and issues arising from construction projects including construction supervision, quality, and safety, etc.
Administrative Measures for General Contracting of Housing Construction and Municipal Infrastructure Projects: This regulation sets out the mandatory and optional provisions specifically applicable to contracts adopting the model of engineering, procurement and construction or design and build.
These laws, considered as special provisions, supplement the China Civil Code in respect of construction issues.
While not the primary focus of this article, it is worth noting that public works construction and engineering projects in the KSA are subject to the Government Tenders and Procurement Law (GTPL), which applies to all projects by KSA government authorities, ministries, departments, public institutions, and public bodies with independent corporate personality. Similarly, in China, projects of public nature or significant importance are subject to the "Law of China on Bid Invitation and Bidding 1999."
As with the China counterpart, the KSA Civil Code allows parties to set contract terms at their discretion but enforces mandatory principles such as good faith and prohibition of rights abuse.
Mandatory PrinciplesBoth civil codes require contracting parties to perform their contractual obligations in good faith and prohibit the abuse of rights.
Good FaithBoth civil codes include an overarching duty for parties to perform contracts in good faith (Article 95 of the KSA Civil Code and Article 7 of the China Civil Code). The good-faith obligation in both laws extends to the negotiation and conclusion of a contract. The KSA Civil Code specifically mandates conducting negotiations in good faith (Article 41). An example of acting in "bad faith" includes "lack of serious intent in negotiation or intentional withholding of substantial statements affecting the validity of the contract." A party negotiating or terminating negotiations in bad faith is liable for damages incurred by the other party. In comparison, the China Civil Code provides a broader scope of obligations for a party acting in good faith "during the course of concluding a contract" (Article 500). The law provides examples of bad faith including engaging in consultations with malicious intent under the guise of concluding a contract, and/or intentionally concealing material facts or providing false information concerning the conclusion of the contract.
Abuse of Rights: Both codes prohibit rights abuse, which is often considered contrary to the principle of acting in good faith. Article 29(2) of the KSA Civil Code clarifies what constitutes "abusive" conduct:a) If the right is exercised solely to harm others.b) If the benefit of exercising the right is substantially disproportionate to the harm it causes others; or c) If the right is exercised unlawfully or for an unintended purpose.
Similarly, the China Civil Code also prohibits the abuse of rights (Article 132), stating that "No person of the civil law shall abuse his civil-law rights and harm the interests of the state, the public interest, or the lawful rights and interests of others.", but without providing further details as to what may amount to an abuse of right.
In the context of construction, it is common to see employers issue directions for nominating certain subcontractors or imposing variations without agreeing to corresponding compensation. Exercising such rights in a wrongful or arbitrary manner may fall within the categories captured by this mandatory principle, amounting to an abuse of rights. Additionally, when it comes to a contractor’s claims under a construction contract, these principles may also provide a ground for a contractor to overcome a time-bar provision (which may otherwise obstruct a contractor’s claim), especially when the contractor has, despite failing to serve the prescribed notice, otherwise made the employer aware of the circumstances giving rise to the claims.
Subcontracting Articles 473 and 474 of the KSA Civil Code regulate subcontracting. Generally, subcontracting is permissible in the KSA, subject to the following caveats:
It is barred by statutory provisions;
It is contrary to the parties' agreement; or
The nature of the work requires otherwise, or where the contractor's personality is a matter of consideration.
In comparison, while in general permitting subcontracting, the China Civil Code contains some notable differences as follows:
Sub-subcontracting by a subcontractor is prohibited;
Subcontracting to a third party who lacks the legally required qualifications is prohibited;
The main structure of the project must be completed by the contractor itself (without subcontracting).
The KSA Civil Code also stress the contract privity. Article 474 of the KSA Civil Code states that a subcontractor shall have no claim against the employer for payment except in the case of assignment of right; meanwhile, the main contractor remains liable to the employer despite the subcontracting.
In contrast, the China Civil Code requires subcontractors to be jointly and severally liable towards the employer, despite there being no contractual privity between the subcontractor and the employer. This is a notable difference from the KSA Civil Code.
Liquidated Damages (LDs) Liquidated Damages (LDs) are predetermined, fixed amounts that one party must pay to another if a specific milestone is not met by the agreed-upon date in a contract. Provisions of LDs are a common feature of construction contracts. Article 178 of the KSA Civil Code outlines the conditions under which LDs are applicable in Saudi law, allowing parties to include LD clauses in their contracts. However, Article 179 sets out several key restrictions on claiming LDs:
The agreed LD rate does not apply if it can be demonstrated that the party imposing the LDs did not experience any loss.
The court or an arbitral tribunal may reduce the LD rate if it is proven that the rate is excessively high or if the contractual obligations were only partially fulfilled.
The court or arbitral tribunal may increase the LD rate to cover the actual damages incurred if it is shown that the real harm exceeded the LD amount due to fraud or gross error.
These provisions are mirrored in the China Civil Code of China (Article 585). Further, the article under China Civil Code clarifies that the payment of LDs for delayed performance (such as the delay of construction projects) does not exempt the breaching party (such as a contractor) from fulfilling their remaining contractual obligations.
Payment under Construction ContractsArticles 470 to 472 of the KSA Civil Code deal with payments under construction contracts for unit-price and lump-sum contracts.
In summary, under a unit-price contract the contractor is entitled to additional payment for quantities of work exceeding what was agreed, provided that the employer is immediately notified about the expected additional price (Article 470(1)). Under a lump-sum contract, the contractor is not entitled to additional payment for cost fluctuations but may require additional payment for design changes (due to the employer's mistake or with the employer's permission). Article 472 also provides for "fair remuneration" in the absence of a contractual pricing regime (i.e., akin to a quantum meruit claim).
Aside from the above, the KSA Civil Code largely leaves it to the parties to agree the payment mechanism including relief for lack of payment.
In comparison, the China Civil Code does not distinguish between unit-price or lump-sum contracts. It generally provides the contractor’s right to additional payment (and an extension of time in some circumstances) in various scenarios such as:
The employer's failure to provide required materials, access, or funds.
Suspension or slow progress attributable to the employer.
Variations instructed or caused by the employer, etc. (Articles 803 to 805).
A distinctive feature in the China Civil Code is the mandatory provision concerning the contractor’s priority right to payments. Article 806 provides that where the employer fails to pay the contract price, the contractor may either negotiate with the employer for the project to be sold off or request the courts to sell the project by way of auction. Nonetheless, for commercial housing projects, the contractor’s right of priority is subordinate to a property buyer’s right to demand delivery of the property or a refund of the purchase price. There is no equivalent relief available to a contractor under the KSA Civil Code.
Frustration Under both civil codes, there are provisions that are akin to contract frustration doctrine.
In terms of construction contracts, Article 471(3) of the KSA Civil Code provides that if the contractual balance "collapses due to general exceptional circumstances" that were unforeseeable, the court (or arbitral tribunal) has the power to extend the performance period for the contractor, adjust the remuneration, or terminate the contract to redress the balance. There is a similar mechanism under the China Civil Code that applies to contracts in general including construction contracts.
Article 533 of China Civil Code provides that “where a fundamental condition upon which the contract is concluded is significantly changed” due to unforeseen reasons that” is not one of the commercial risks”, and the continued performance would become “obviously unfair”, the affected party may seek to renegotiate the agreement, and failing which, the parties may request the court or an arbitration tribunal to rectify or terminate the contract.
In view of the above, both laws offer similar remedies in the event of special unforeseeable circumstances, allowing the parties to either adjust the contract terms or seek a court order for amending or even terminating the agreement. The KSA Civil Code further specifies that the court has the authority not only to terminate the contract but also to extend deadlines or modify the contract price.
The key differences lie with the criteria for invoking such relief:
While both codes require the circumstances to be unforeseeable, the KSA Civil Code highlights the "public" nature of these circumstances, whereas the China Civil Code specifically excludes "commercial risks."
Both codes require that such special circumstances significantly impact the contract performance. In this regard, the KSA Civil Code stipulates that the "financial assessment" under the contract must be affected, while the China Civil Code sets a higher bar, requiring a change in the "fundamental conditions" and that continued performance becomes "unfair" to one party.
Defects and Decennial Liability PeriodDecennial liability is a standard feature in the construction laws of the Middle East jurisdictions. It refers to a mandatory 10-year liability period for defects that compromise the structural integrity of a building or result in total or partial collapse. This liability cannot be waived or restricted through contractual agreement or the selection of foreign law.
Although the KSA Civil Code does not specifically address decennial liability, such liability still applies in the KSA, as it is provided the Saudi Building Code Application Law and its implementing regulations.
The China Civil Code does not have a comparable concept of decennial liability. Instead, Article 802 establishes the contractor's liability for a "reasonable period of use of the project." In essence, the contractor shall remain liable for personal injuries and property damages attributable to the contractor's work, not only during the construction stage but also for a “reasonable” period after the completed project in put into use. The specifics of the reasonable period of use, depending on the nature and components of the project, are outlined in other regulations, such as the Construction Law and the accompanying guidelines
Termination Articles 105 to 114 of the KSA Civil Code deal with the termination of contracts (which also applies to construction contracts). These provisions identify four circumstances where a contract may be terminated:
By parties’ mutual consent (Article 105);
By a party’s exercise of an agreed option to terminate (Article 106);
For breach of contract (Article 107);
Due to the impossibility of performance (Articles 110 and 476).
The China Civil Code has similar provisions allowing the contract to terminated under the scenarios of a) and c) above. For instance, the China Civil Code recognizes the parties’ mutual consent for terminating the agreement, including to agree in advance the specific circumstances giving rise to the contract termination (Article 562). Further, the contract termination by reason of a party’s breach of contract is provided in Article 563.
The differences posed by the China Civil Code mainly lie with the scenarios of b) and d) above.
Regarding scenario b), under the KSA Civil Code, an "option" refers to a pre-agreed right for a party to withdraw from the contract, provided it is exercised within a time frame agreed upon by the parties or specified by the court. In the construction context, one possible scenario could involve a letter of acceptance (or letter of intent) stating that one party may terminate the contract if a formal agreement is not executed within a specific period. Such an arrangement whereby a party retains an option to terminate would be enforceable under the KSA Civil Code.
In contrast, the China Civil Code does not provide an equivalent mechanism for a party to exercise an option to terminate the contract. Instead, the parties may agree on a "condition" that, once met, automatically triggers the termination of the contract. Under this arrangement, there is no requirement for one party to notify the other or to exercise the right of termination within a specific time frame (Article 158).
As for item d), instead of using the term "impossibility of performance," the China Civil Code provides for a party's right to terminate the contract when "the purpose of a contract cannot be achieved due to force majeure" (Article 563). This indicates that a force majeure event does not automatically lead to termination. Instead, the event must be severe enough to prevent the contract's purpose from being fulfilled, which is somewhat akin to the "impossibility" of performance. In this respect, the contract termination mechanisms in both civil codes are more similar than different.
With the newly released KSA Civil Code, the KSA jurisdiction is now firmly classified as part of the civil law system. In comparison, China has long been regarded as a typical civil law jurisdiction. The construction regulations under the KSA Civil Code are among the most important laws governing construction projects. China, building on its Civil Code, has introduced various special laws, such as the Construction Law, to supplement the more general provisions in the Civil Code.
Moreover, various judicial judgments in China since the introduction of the civil code have provided significant guidance on the interpretation and practical implications of the Civil Code's provisions. However, given its relatively recent introduction, the KSA Civil Code has been rarely tested through court judgments.
Therefore, compared to the KSA jurisdiction, there is more clarity regarding construction regulations in China, owing to the special laws and judicial judgments that supplement the civil code's provisions. For Chinese contractors, particularly those new to the KSA jurisdiction, it is crucial not to assume that experiences based on China's construction laws will apply similarly in the KSA, despite their common civil law roots.
Indeed, there are notable similarities in key areas such as subcontracting, liquidated damages, contract termination, and frustration of contract/exceptional circumstances. However, significant differences stand out regarding the following key issues:
The KSA, like other regional civil law jurisdictions, has imposed a 10-year decennial liability on the contractors (though not through the KSA Civil Code). China does not adopt this concept but imposes equally stringent obligations on contractors regarding their liability for the "reasonable use" period of the project, which, depending on the project's nature and usage, could be longer than 10 years.
Additionally, the China Civil Code's requirement for subcontractors’ joint liability to the employer (despite the lack of contract privity) is novel from the Middle Eastern perspective. The KSA Civil Code emphasizes contract privity, shielding subcontractors from direct claims by the employer. From a main contractor’s perspective, it is crucial to establish appropriate contractual mechanisms to ensure that the employer’s claims arising from subcontractor defaults can be smoothly transferred to the subcontractors.
Most interestingly, under the China Civil Code, the contractor's protection against non-payment, which includes the right to sell or auction the property to recover payments owed by the employer. This provides a level of security to the contractor that is not available under the laws of the KSA and indeed, of the wider region.
For further information,please contact Justin Zhang.
Published in September 2024
