Terminating Commercial Contracts and Compensation

The short answer

Article 107 of the Civil Transactions Law makes notice of default a prior station: after it, a party may seek performance or rescission, with compensation in either case where warranted, and the court may refuse rescission where the unperformed part is of minor importance. Article 108 permits contractual rescission without a judgment but does not waive notice unless the parties expressly agree. Article 111 returns the parties to their pre-contract position, with no retroactive effect for continuous contracts, while Article 113 keeps dispute-resolution and confidentiality clauses alive after rescission.[1]

5 min read

Terminating a commercial contract is not a decision made by reading one clause; it is a path with stations: breach, then notice of default, then performance or rescission, then compensation where appropriate — and effects and clauses that survive rescission. This page draws that map as set by the articles of the Saudi Civil Transactions Law, issued by Royal Decree No. M/191 of 29/11/1444H, as part of Hala Law's business materials — explaining the concepts, not directing anyone to end or keep a specific contract. Source 1

The general rule in Article 107: notice first, then a choice

Article 107 provides that in bilateral contracts, where one party fails to perform its obligation, the other party may — after serving notice of default on the breaching party — seek performance of the contract or its rescission, with compensation in either case where warranted. Three key phrases here: Source 2

Notice of default: notifying the breaching party before escalation — a station that is not skipped. Source 3
A choice: seeking performance or seeking rescission, not rescission alone. Source 4
Where warranted: compensation depends on its grounds being met, not automatic. Source 5

The same article limits rescission: the court may refuse rescission where the part the breaching party failed to perform is of minor importance relative to the obligation. Not every breach justifies demolishing the entire contract. Source 6

Before escalating: the defence of non-performance in Article 114

There is an intermediate step these maps often omit: Article 114 allows, in bilateral contracts where the reciprocal obligations are due, either party to withhold performance of its own obligation for as long as the other party is withholding performance of theirs. Reciprocal withholding is a standalone statutory defence; it neither requires rescission nor necessarily precedes it. Source 7

Contractual rescission in Article 108: without a judgment, but not without notice

Article 108 permits an agreement giving the creditor the right to rescind the contract on the debtor's breach without the need for a court judgment. The text adds an express limit: that agreement does not dispense with notice of default unless the parties expressly agree to waive it. The difference between an automatic-rescission clause that expressly waives notice and one that is silent about it is fundamental to the reading. Source 8

Automatic dissolution for impossibility in Article 110

A contract does not end only through breach. Article 110 provides that in bilateral contracts, where performance of the obligation becomes impossible for a reason not attributable to the debtor, that obligation and its counterpart are extinguished and the contract dissolves automatically. Where the impossibility is partial, only the impossible part and its counterpart are extinguished; the rule extends to temporary impossibility in continuous contracts, and in both cases the court may refuse rescission where the impossible portion is of minor importance. Source 9

The effects of rescission in Articles 111 and 112

Article 111 provides that on rescission or dissolution of the contract the parties return to the position they were in before contracting, and where that is impossible the court may award compensation. Source 10

The same article then adds an exception that covers most ongoing commercial contracts: where the contract is a continuous one, rescission or dissolution has no retroactive effect, and the court may award compensation where warranted. A supply, services or subscription contract performed over a period is not unwound backwards; its effect ends from the moment of rescission. Source 11

Article 112 protects third parties: rescission of the contract cannot be invoked against a party's particular successor who acquired a real right in good faith. Source 12

What survives rescission? Article 113

Article 113 provides that, without prejudice to statutory provisions, neither the dispute-settlement obligation nor the confidentiality obligation lapses on rescission of the contract, unless otherwise agreed. The end of the contract is not the end of all its clauses: a dispute-settlement clause may remain the path for the dispute over the rescission itself, and a confidentiality clause may remain binding after the contractual relationship ends. Source 13

A practical reading map before any step

The table below summarizes the usual examination areas when reading a commercial contract's position — comprehension and documentation questions, not a recommendation of any course: Source 14

Examination area	Reading questions
Contract type	Supply, distribution, services, agency, SaaS, construction, commercial lease? And is it a continuous contract, falling within the Article 111 exception? Source 15
Termination clause	Termination for cause? For convenience? Notice? Cure period? Source 16
Notice of default	Was it sent? Did the sending method match the contract? And does the contract expressly waive it as Article 108 requires? Source 17
The breach	Is the unperformed part of minor importance within the meaning of Article 107? Was it cured? Source 18
Impossibility	Is there a cause not attributable to the debtor that falls under Article 110? Is it total or partial? Source 19
Compensation	Is there a penalty clause? A liability cap? Excluded damages? Source 20
Surviving clauses	Dispute settlement and confidentiality under Article 113, plus whatever else is agreed Source 21

Note that the compensation area intersects with the penalty clause controls in Articles 179 and 180 of the same law, under which an agreed figure may not be due at all, or may be adjusted on the application of the party concerned and on their proof. Source 22

When do you need a licensed lawyer?

This map explains the stations, but it does not tell you which station fits your contract. Reviewing any specific commercial contract — before signing it, or before any termination or rescission step — is precisely the job of a licensed lawyer. Specifically when it comes to: Source 23

assessing whether a given breach is of minor importance relative to the obligation within the meaning of Article 107, Source 24
drafting the notice of default and its method of delivery to match the contract and the law, and reading an automatic-rescission clause against Article 108, Source 25
and reading how rescission works in your specific contract: is it a continuous contract, so that retroactive effect falls away under Article 111? And which clauses survive under Article 113? Source 26

these are matters that turn on the full contract text, the correspondence, and the facts. The party qualified by law for that work is a licensed lawyer or accredited legal consultant — before any step is taken, not after. Source 27

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Frequently asked questions

Can a contract be rescinded immediately on the first breach?

Article 107 makes notice of default a prior station: after serving it on the breaching party, the other party may seek performance of the contract or its rescission, with compensation in either case where warranted. The court may refuse rescission where the part the breaching party failed to perform is of minor importance relative to the obligation, and assessing that in a specific case is a question of substance.[1]

What does a clause deeming the contract rescinded without a judgment mean?

Article 108 permits an agreement giving the creditor the right to rescind on the debtor's breach without the need for a court judgment, but it expressly provides that such an agreement does not dispense with notice of default unless the parties expressly agree to waive it. The difference between a clause that states the waiver and one silent about it is fundamental.[1]

Can performance be withheld instead of rescinding?

Article 114 allows exactly that: in bilateral contracts, where the reciprocal obligations are due, either party may withhold performance of its own obligation for as long as the other party is withholding performance of theirs. It is a standalone defence that precedes escalation to rescission.[1]

What if performance becomes impossible through nobody's fault?

Article 110 provides that where performance of the obligation becomes impossible for a reason not attributable to the debtor, the obligation and its counterpart are extinguished and the contract dissolves automatically. Where the impossibility is partial, only the impossible part and its counterpart are extinguished, and the court may refuse rescission where the impossible portion is of minor importance.[1]

Does everything unwind to the pre-contract position after rescission?

Article 111 returns the parties to the position they were in before contracting, and where that is impossible the court may award compensation. But it excepts continuous contracts: rescission or dissolution has no retroactive effect in them, and the court may award compensation where warranted. Many ongoing commercial contracts fall within that exception.[1]

Do confidentiality and arbitration clauses fall away on rescission?

Article 113 provides that, without prejudice to statutory provisions, neither the dispute-settlement obligation nor the confidentiality obligation lapses on rescission of the contract, unless otherwise agreed. Those clauses may therefore remain in force after the contract itself ends, and reading their scope in a specific contract requires its full text.[1]

Official sources

Source	Article / reference	As of
Civil Transactions Law — Royal Decree No. M/191 of 29/11/1444H, Bureau of Experts at the Council of Ministers	Article 107 (breach: notice of default and seeking performance or rescission), Article 108 (contractual rescission without a judgment), Article 110 (impossibility of performance and automatic dissolution), Article 111 (effects of rescission and dissolution, and the absence of retroactive effect in continuous contracts), Article 112 (a good-faith particular successor), Article 113 (survival of dispute-resolution and confidentiality clauses), and Article 114 (the defence of non-performance)	2026-07-25

Change log

2026-07-06First edition
2026-07-25Corrected against the primary text: replaced the general reference "provisions on performance, rescission and compensation" with article numbers, and added four stations missing from the map — the defence of non-performance in Article 114, automatic dissolution for impossibility in Article 110, the effects of rescission in Article 111 including the absence of retroactive effect in continuous contracts (which covers most ongoing commercial contracts), and the good-faith particular successor in Article 112

Content on this site is general legal information, not legal advice, and is no substitute for consulting a licensed lawyer. We link you to official sources and do not represent any government body.