The introduction of the Civil Transactions Law (CTL) in the Kingdom of Saudi Arabia marks a significant step toward codifying contract law principles and one of the most crucial aspects of contract law is the termination of contracts, which can arise for various reasons, including mutual consent, breach of obligations, impossibility of performance, or explicit contractual provisions.

The CTL establishes clear guidelines for terminating contracts, ensuring that contractual relationships remain fair and enforceable. Understanding these provisions is essential for businesses and individuals operating in Saudi Arabia, as they dictate the legal consequences and procedures associated with ending a contractual agreement.

Termination by Mutual Consent

Contracts in Saudi Arabia can be terminated through mutual agreement between the parties involved. According to Article 105 of the CTL, if both parties decide that continuing the contract is no longer in their best interest, they may choose to rescind it. This type of termination is relatively straightforward, as it simply requires both parties to reach an agreement on nullifying their contractual obligations. 

Once the contract is terminated through mutual consent, each party is restored to its pre-contractual position, effectively erasing any commitments made under the agreement. This approach to termination is particularly common in commercial transactions, where businesses may need flexibility to adjust to changing circumstances. However, mutual termination should always be documented properly to avoid any future disputes regarding the terms of rescission.

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Exercise of an Option to Terminate

Certain contracts include provisions that grant one or both parties the right to terminate the agreement within a specified period. This is known as an “option to terminate” clause, and it is regulated under Article 106 of the CTL. These clauses allow a party to exit the contract without requiring proof of breach or any external justification. The party seeking termination must provide notice to the other party within the agreed-upon timeframe. Such clauses are particularly useful in long-term contracts, where unforeseen changes may affect the feasibility of continuing the contractual relationship. 

For instance, a loan agreement may include a “cooling-off” period during which the borrower can opt to cancel the contract without penalty. Similarly, employment contracts may have probationary periods that allow either the employer or employee to terminate the agreement within a certain timeframe. The inclusion of termination options provides contractual flexibility while ensuring that all parties are aware of their rights and obligations under the agreement.

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Termination for Breach of Obligation

A contract may be terminated if one of the parties fails to fulfill their obligations under the agreement. Articles 107 and 108 of the CTL distinguish between implicit and explicit rescission. Implicit rescission applies in cases where a contract does not contain a specific termination clause, but one party has significantly breached its obligations. In such cases, the non-breaching party can seek rescission by notifying the breaching party and demonstrating that the failure to perform has caused significant harm. The court will then evaluate whether the breach justifies termination, taking into account the proportionality of the breach and its impact on the contractual relationship.

On the other hand, explicit rescission occurs when a contract includes a provision that allows for termination upon a specific breach. For an explicit termination clause to be enforceable, it must clearly state that termination can occur “without the need for a judicial order.” This wording is crucial, as courts may require clear contractual intent before allowing an immediate termination. By defining clear grounds for termination, Saudi contract law ensures that contractual obligations are upheld while providing mechanisms for redress in cases of breach.

Termination Due to Impossibility of Performance

In some cases, unforeseen events may render the performance of contractual obligations impossible, leading to termination under Article 110 of the CTL. This doctrine acknowledges that neither party should be forced to fulfill a contract that has become impossible to perform due to external factors beyond their control. Examples of such circumstances include natural disasters, changes in government regulations, or economic conditions that fundamentally alter the feasibility of performance. 

Termination due to impossibility of performance is particularly relevant in contracts involving construction, supply chain logistics, and service agreements, where external events can significantly impact contractual execution. In such cases, the law seeks to restore the parties to their original positions, minimizing financial losses and legal disputes. However, to successfully invoke impossibility as a ground for termination, the affected party must demonstrate that performance has become objectively unfeasible and that alternative solutions are not viable. Courts will assess whether the termination is justified based on the specific circumstances of each case.

Effects of Termination

When a contract is terminated, whether through mutual consent, breach, or impossibility, the CTL aims to restore the parties to their original pre-contractual positions. This means that any performance already rendered under the contract must be reversed, and any payments made may need to be refunded.

In contracts involving successive obligations, such as lease agreements or installment-based contracts, termination may not have a retroactive effect. Instead, it may only apply from the moment of termination going forward. Additionally, if one party has suffered losses due to the termination, they may be entitled to compensation. The extent of compensation depends on the nature of the contract and the reason for termination. Courts have the discretion to determine appropriate remedies, balancing fairness and the principle of restoring contractual equilibrium. By establishing these guidelines, the CTL ensures that terminations do not result in unjust enrichment or disproportionate harm to either party.

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Termination in Construction Contracts (Muqawala)

Construction contracts, known as Muqawala contracts, have specific termination provisions under the CTL. Articles 475-478 outline the circumstances under which construction contracts may be terminated. First, a Muqawala contract naturally terminates upon the completion of the agreed-upon work.

However, termination can also occur if either party faces an unforeseen excuse that prevents contract performance. In such cases, the terminating party may be required to compensate the other for any resulting losses. Suppose a contractor has started work but becomes unable to complete it due to circumstances beyond their control. In that case, they are entitled to payment for the work completed and any expenses incurred.

 However, the amount of compensation is limited to the benefit obtained by the employer. These provisions ensure that construction contracts remain fair and enforceable while accounting for the practical challenges that may arise in large-scale projects.

The Civil Transactions Law of Saudi Arabia provides a well-structured framework for contract termination, encompassing various scenarios such as mutual consent, contractual options, breach of obligation, and impossibility of performance. By codifying these principles, the CTL enhances legal certainty and aligns contractual practices with Shari’ah principles. 

Whether in commercial, employment, or construction contracts, the ability to terminate agreements fairly and efficiently is essential for maintaining healthy business relationships and legal compliance. As Saudi Arabia continues to modernize its legal system, these provisions play a crucial role in fostering a stable and predictable contractual environment.