The doctrines of good faith and abuse of right under Saudi law

The legal system of Saudi Arabia is based primarily on Shari’a law. Uniquely in the Arab world, it has incorporated a vast body of Shari’a principles—derived from the teachings of the Hanbali school of thought—in an uncodified form. These principles are the foundation of Saudi law, including the rules governing civil and commercial transactions.

Here we focus on two key principles that are often cited in private law disputes governed by Saudi law: ‘good faith’ and ‘abuse of right’.

Good faith and abuse of right: well-rooted in Shari’a

Good faith is a fundamental doctrine of Saudi law, originating from the Shari’a law maxim that “there shall be neither harming nor reciprocation of harm”. Under Shari’a, a covenant of good faith is implied in all contracts. Saudi law attaches significant weight to this relatively broad duty as a means of ensuring compliance with contractual obligations, thus giving effect to the principle that “contracts must be kept”.

Saudi courts recognise the principle of good faith as an overarching principle applying to all stages of a contract including contract negotiation, formation, performance, interpretation and termination. By contrast, most Arab civil codes limit the duty of good faith to the ‘performance’ of the contract.

Contracting parties are presumed to have acted in good faith and the party alleging a breach of that duty bears the burden of proof. As is the case in most civil law jurisdictions, an exhaustive definition of good (or, bad) faith is lacking under Saudi law. Saudi courts have therefore interpreted good faith on a case-by-case basis in view of the parties’ conduct and the totality of circumstances, with particular regard to the knowledge of each party. The absence of an exhaustive definition of good faith gives the judge the necessary flexibility to balance the rights of the parties and restore the economic balance of the contract following a breach. This does not mean, however, that the duty of good faith is meant to alter the parties’ obligations or rewrite the contract.

Although good faith does not lend itself to precise definition, Saudi court decisions provide some guidance as to what this duty may imply. A review of Saudi case law indicates that the following conduct is contrary to the duty of good faith:

• threats by the employer in a construction contract to descope the works awarded to the contractor in response to the contractor’s request for an extension of time on account of delay caused by unforeseen circumstances;
• acquiring title to a commercial instrument at a price lower than its value by taking unfair advantage of the circumstances of the endorser;
• refusal by the employer in a construction contract to make payments to the contractor in respect of additional works on the pretext that a payment certificate had not been issued despite evidence of the employer’s agreement to make the said payment in consideration of the additional works;
• failure to disclose known defects in contracts for the sale of goods; and
• contradictory behaviour by a contracting party to the detriment of its counterparty.

References to good faith can also be found in Saudi legislation. For example, Article 77 of the Government Tenders and Procurements Law (“GTPL”) of 2006 provided that contractors and government bodies must perform their obligations “in good faith and as required for the proper functioning and interest of the public utility”. Although the express wording on good faith has not been carried over to the new GTPL of 2019, the concept arguably still applies under the new GTPL as a matter of general Shari’a law.

Unless legislation provided for a specific sanction for failing to act in good faith, a breach of the duty would normally influence the remedies granted by courts, especially the valuation of damages.

While the obligation to act in good faith is primarily a corrective legal tool in the domain of contract law, Saudi courts have occasionally referenced the good faith doctrine in non-contractual settings, including criminal violations. For example, they have ruled that the following conduct constituted a breach of good faith:

• a trader conducting fraudulent transactions, issuing cheques without a sufficient and drawable balance, concealing money, failing to update business accounts and failure to abide by commercial regulations; and
• a public servant who knowingly issues an official document on the basis of false statements.

These decisions show that Saudi courts may equate good faith with breach of contract as well as breach of fiduciary or statutory duty.

A somewhat similar principle under Saudi law provides that a party’s conduct, despite stemming from a contractual and/or statutory right, may qualify as a harmful act because it was exercised in an abusive manner. The role of this principle, known as ‘abuse of right’, is to prevent malicious conduct when there is evidence of an ulterior motive to inflict harm under the guise of exercising a right at law or under contract. The abuse of right doctrine is equally rooted in Shari’a and viewed as a manifestation of good faith. However, the prohibition on abuse of right is a general theory of Shari’a law, which means that its application transcends financial transactions and applies to all areas of law.

Saudi courts have set out the following test for a finding of abuse of right:

• the use of a right in a manner intended to cause harm; or
• the use of a right to obtain an advantage that is disproportionate or negligible in comparison to the harm suffered by another party.

Compared to breaches of good faith, an abuse of right claim is typically more difficult to establish because it invites the judge to examine evidence of intent and/or determine that, on balance, an otherwise valid exercise of a right is unlawful because it has caused disproportionate harm to another party. For these reasons, courts in Arab jurisdictions have generally set a high threshold for an abuse of right claim to succeed. While Saudi courts have not provided detailed guidance on the applicable standard of proof, they are relatively slow to find that an exercise of right was abusive.

In addition, Saudi courts have not always clearly distinguished between good faith and abuse of right claims, suggesting that they can be used interchangeably particularly in the context of contractual disputes. For example, the following conduct constitutes an abuse of right under Saudi law:

• a governmental body’s exercise of a contractual right to withhold a contractor’s bank guarantee following termination of an administrative contract despite retaining other contractor payments that exceed the cost of rectifying the contractor’s breaches; and
• malicious prosecution, including when a litigant knowingly brings proceedings in a forum lacking jurisdiction to cause its opponent to incur costs.

Some neighbouring jurisdictions have adopted relatively broader definitions of abuse of right. For example, Article 106 of the UAE Civil Transactions Law provides additional grounds for an abuse of right—that is, exercising a right in a manner that (i) offends Shari’a, public policy or morals, or (ii) exceeds the bounds of usage and custom. That said, Saudi courts can treat abuse of right claims in an equally broad manner given the generality of the doctrine under Saudi law, provided the claimant meets the requisite standard of proof.

Future developments

The Saudi government is in the process of drafting the Kingdom’s first civil transactions law (the “Saudi CTL”), as announced in early 2021. The prominence of the good faith and abuse of right doctrines under Shari’a law strongly suggests that they will be expressly articulated in the Saudi CTL. While the current draft has not been published as at the date of writing, it is expected that the drafters will be guided by the civil codes of neighbouring jurisdictions in setting out the duty of good faith and the prohibition on the abusive exercise of rights. Many of these civil codes have either replicated or substantially followed the text of Articles 5 (abuse of right) and 148 (good faith) of the Egyptian Civil Code (see, for example, the civil codes of the UAE (Arts 106 and 246(1)), Jordan (Arts 66 and 202), Kuwait (Arts 30 and 197), Bahrain (Arts 28 and 129), Libya (Arts 5 and 148(1)), Qatar (Arts 63 and 172(1)), Iraq (Arts 7 and 150(1)) and Syria (Arts 6 and 149(1)).

Conclusion

The passing of the Saudi CTL, which is expected to take place in 2022, will be a welcome and major change to Saudi law. While the codification of the good faith and abuse of right doctrines may promote greater consistency in their application, giving parties some measure of legal certainty, Saudi courts will likely retain a considerable margin of discretion in interpreting their meaning and defining their limits. It is yet to be seen whether the codification process results in markedly different concepts to what exists today in other Arab jurisdictions.

This is part of a series of blog posts on managing risk in commercial and construction disputes under Saudi law. Click here to see other posts in the series.