The Saudi Arabian civil transactions law: another key reform in line with best international judicial practices

The Saudi Arabian Civil Transactions Law (the “Law”) was enacted by Royal Decree no. M/191 on 19 June 2023 and is expected to become effective on the 16th of December 2023.

The Law is the first civil code for the Kingdom. Prior to its enactment, civil transactions were governed by public principles of Islamic Law (Sharia).

The Law applies to all civil transactions except those governed by a individually issued laws (such as labor law etc). Furthermore, to the extent that the Law does not cover a specific provision or where further clarity is needed, 41 Sharia based rules of interpretations constitute the fallback position.

This Article highlights the key provisions related to contracts and tort, including the formation of contracts, their interpretation, the rescission/nullity grounds, indemnification and liability provisions etc.

Formation of contracts- Binding Effect
The Law sets out the essential elements for the formation of a contract which are familiar to common law and civil law jurisdictions. A contract is created by an offer followed by an acceptance between parties having the legal capacity. The Law also recognizes that the parties are bound by the terms of the contract and the parties should fulfil the agreed terms of the contract, except in specific instances stipulated by law, such as general unforeseen and exceptional events where the obligation to execute would result in enormous losses. In such cases, the parties would have to renegotiate, failing which the court may reduce the obligation.

Good faith
The Law urges the principle of good faith and states that the parties should negotiate and execute their contracts in good faith (Article 40). For instance, a party conducting negotiations with no intention of signing a contract or that terminates the negotiation in bad faith or omits a substantial statement in a contract, would have to indemnify the other party for direct damages incurred.

Contract interpretation
Similarly to other regional civil codes, the Law provides that if the language of the contract is clear, there is no room for interpretation or amendment. The parties are bound by the terms of the contract.

If there is room to interpret the contract, interpretation will be made based on various factors including the common will of the parties, the circumstances and nature of the contract etc.

Contract Rescission-Nullity
The Law provides for grounds of rescission of contracts, including the following:

– Fraud: a party may rescind a contract if it was induced to conclude it through fraudulent means. The affected party should prove that there was fraud, cheating or unfair dealing. The fraud should concern a material term and should have been made by the other party or be known or should have been known by the other party.

– Mistake: a party may rescind a contract if there is mistake regarding a material term, which was also either made by the other party, or is known or could have been detected by the other party.

-Coercion: a party may rescind a contract if it was induced by the other party to conclude it through material or moral coercion. Coercion can also be a ground for rescission if it is committed by a third party when the other contracting party was aware of it. In all cases, coercion should be the reason the affected party concluded the contract.

– Illegality: a contract will be considered null when its object is illegal, such as a contract involving gambling or the sale alcohol.

Indemnification and Liability
According to the Law, a party that causes damages should indemnify the affected party so as to bring him back to the same situation had the damage not occurred. The concept of compensation for moral damages is also recognized.

The Law allows the parties to limit or exclude liability for damage caused by delay or breach or failure to perform. However similarly to other civil codes, liability cannot be excluded or limited in specific cases mentioned by law, such as fraud, gross error, death or injury to a person.

Enrichment without cause
The Law also imposes an obligation to compensate on any person (even without capacity) that gets enriched without a cause at the expense of another person. Compensation shall be for the loss effectively suffered.

Liquidated damages
While the Law recognizes the concept of liquidated damages as a fixed compensation agreed upon in advance by the parties in case of delays or non-performance, the court can be requested to reduce such compensation if it is deemed too high or if the related duties are fulfilled.

Dispute Resolution
The Law encourages recognizes alternative dispute resolution, such as mediation and arbitration, to resolve civil disputes in a more an efficient, cost effective and expedited way.

Conclusion

The Civil Transactions Law will promote a business friendly environment by enhancing transparency and ensuring certainty and stability in contractual dealings. By clearly determining the conditions of formation of a contract and what amounts to a validly formed contract, The Law constitutes a positive development in setting a clear and transparent legislative framework consistent with civil codes of most GCC and middle eastern jurisdictions.