CMS Guide to Consequential Loss in Saudi Arabia

The enactment of the Civil Transactions Law issued pursuant to Royal Decree No. M/191 dated 
29/11/1444H (corresponding to 19 June 2023) which came into force on 02/06/1445H (corresponding to 15 December 2023) (CTL) introduced a new damages regime under the Saudi law as follows:

Article 136

Compensation shall fully cover the harm; it shall restore the aggrieved party to his original position or the position he would have been in had the harm not occurred.

Article 137

The harm for which a person is liable for compensation shall be determined according to the aggrieved party's loss, whether the loss is incurred or in the form of lost profits, if such loss is a natural result of the harmful act. Such loss shall be deemed a natural result of the harmful act if the aggrieved party is unable to avoid such harm by exercising the level of care a reasonable person would exercise under similar circumstances.

Article 180

If the amount of compensation is not specified in a contract or a legal provision, it shall be determined by the court in accordance with the provisions of Articles 136, 137, 138, and 139 of this Law. However, if the obligation arises from the contract, the debtor who has not committed any act of fraud or gross negligence shall be liable only for compensating harm that could have been anticipated at the time of contracting.

As is apparent from the text above, the term “consequential loss” does not feature in the CTL. Moreover, the term is not defined under Saudi law or treated consistently as a legal concept. Notwithstanding, parties frequently seek to recover what is referred to in Arabic as "الأضرار غير المباشرة" (indirect damages) before the Saudi courts. 1  Although Saudi courts appear to accept that such damages are recoverable, no substantive guidance has been provided regarding the threshold for proximity or the types of costs that are recoverable under this category.  2

Exclusions for ‘consequential loss’ are widely used throughout Saudi Arabia, including in the energy and construction sectors.

Contractual provisions that exclude consequential loss are generally enforceable under Saudi law, subject to some exceptions. The CTL expressly provides that the following types of damage cannot be excluded: 

• fraud or gross negligence (Article 173(1) of the CTL);
• a harmful act (Article 173 (2) of the CTL); and
• criminal liability (Article 119 of the CTL).

Parties should also be aware of Article 97 of the CTL, which provides that in case of an extraordinary event which was unforeseeable at the time of contracting and which makes fulfilment of a contractual obligation excessively onerous on the part of the debtor in such a way that it may cause heavy losses, the debtor may, without undue delay, invite the other party to negotiate. If no agreement is reached, the relevant Saudi court may reduce the onerous obligation to a reasonable level. Given Article 97(4) provides that any agreement to the contrary shall be deemed null and void, parties will wish to pay careful attention when drafting limitation of liability clauses (including exclusion of consequential loss clauses) so as not to fall foul of this provision.

Examples of consequential loss exclusion clauses from infrastructure and construction contracts are:

Example 1:
Neither Party shall be liable to the other Party by way of indemnity or by reason of any breach of the Contract or by reason of tort for any Consequential Losses that may be suffered by the other, whether such liability arises from the Contract or otherwise.

“Consequential Loss” means the loss of profits, use, production, business opportunity, interest payments or any claims for special or consequential losses, expenses or damage or for consequential loss of any nature.

Example 2: 
The Contractor shall not be liable to the Employer, for any consequential damages, including but not limited to loss of profit or products, whether such liability is based, or claimed to be based upon any breach of either Party's obligations under this Contract, or whether such liability is based, or claimed to be based, upon any negligent act or omission of a Party or its Agents.

Example 3:
Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 1 [Delay Damages], Sub-Clause 2 [Indemnities] and Sub-Clause 3 [Intellectual and Industrial Property Rights] and where such loss or damage is recoverable as an insurance proceed under Clause 4 [Insurance].

As set out in question 1 above, Saudi law does not provide a definition of ‘consequential loss’. Accordingly, what is meant by ‘consequential loss’ when used in a contractual exclusion clause will be a matter of contractual interpretation (to be applied at the discretion of the judge(s) or arbitrator(s) (as applicable).

To that end:

• Article 104(1) of the CTL provides that “If a statement in a contract is unambiguous, the meaning thereof may not be altered on grounds of interpretation to meet the intent of the contracting parties.”
• If a contract is ambiguous, such that it is “subject to interpretation”, Article 104(2) of the CTL provides that “the mutual intent of the contracting parties must be met rather than relying solely on the literal meaning of the text; the interpretation shall take into consideration custom, the circumstances of the contract, the nature of the dealing, the nature of previous dealings between the contracting parties, and the status of the contracting parties and the expected level of trust between them. All of the contract terms must be consistent and must not contradict each other.”
• In the event there remains doubt as to the true construction or interpretation of the relevant clause, Article 104(3) of the CTL provides that any doubt shall be construed in favour of the party bearing the burden of the obligation or stipulation.

Accordingly, where contracting parties have expressly referred to consequential loss in an exclusion of liability clause, and clearly defined what the term includes, that definition is likely to be accepted by the court or tribunal applying Saudi law (unless it is considered to be unlawful or unfair).

Where the term ‘consequential loss’ is not defined, a Saudi court or arbitrator applying Saudi law will seek to meet the mutual intent of the parties in construing that term, based on the criterion prescribed by Article 104(2) of the CTL. Accordingly, the term ‘consequential loss’ will be construed on a case-by-case basis by a Saudi court or arbitrator applying Saudi law.

It is therefore advisable to clearly define the term consequential loss to avoid potentially unintended interpretations.

It is generally accepted in KSA that the contract is the law of parties, and the Saudi courts will ordinarily uphold the contract (unless it is found to be unlawful or unfair). Therefore, contracting parties are entitled to list the heads of loss which a party is entitled to recover, including alongside consequential losses, and the Saudi courts should not intervene (unless the clause or contract are affected by ambiguity, fraud, or some other exceptional circumstances warranting intervention). 

There is nothing in the CTL or under the Saudi law generally that suggests the exclusion of consequential loss will have an impact on non-damages claims; however, this position is yet to be tested by the Saudi courts.