30 August 2023

Mohamad Firas Badawi

The new Saudi Civil Transactions law has impacted the guarantees in the Banking Sector.


Riyadh: The Civil Transactions Law (Law) was enacted on 19 June 2023, by Royal Decree M/191 and was published in the official gazette. It is set to be effective within 180 days from its publication date which is around 15 December 2023. The Law has included 7 chapters and 720 articles and is considered one of the most important issuance of laws in the KSA.


This Law is actually considered as a cornerstone in the history of the Kingdom, as previously the Islamic Law was set in force as derived from the principles of the Holy Qur’an and was to be followed in all the contracts. Therefore this shift to the new Law, will have a large impact on contractual relationships and is tightly linked to the Kingdom Vision 2030. The legislator aimed to attract vital investment while the kingdom is also displaying out its Regional Headquarters Programme (RHQ) which directly enhances the governance of the daily transactions to the level of international standards and practices and provides supportive materials to the treaties and agreements to which the Kingdom is a party.

The main concepts of the New Law:


1.       Binding force of contracts

The Law affirms the fundamental components of a legally binding contract, acknowledges that the contract is a legal obligation of the parties and that the contracting parties are obligated to fulfill all duties set forth in the contract. This is comparable to other Middle Eastern states with civil codes that acknowledge that parties to a contract are obligated by the terms of that contract. This is subject to the Law's mandatory exceptions, which are briefly discussed below.

The Law also acknowledges that the parties must carry out the responsibilities in a way that is consistent with the terms of the contract and the criteria of good faith. According to the legislation, the contract must also address the conditions imposed under the Law, customs, and justice in accordance with the nature of the obligation. It must also commit the contracting party to its contents.

The law requires that the other party be contacted as soon as possible to begin negotiations if general unexpected and extraordinary circumstances take place that make it difficult, though not impossible, for the parties to carry out their obligations under the contract. If an agreement cannot be reached within an appropriate span of time, the court may, under the circumstances and after weighing the interests of the two parties, appropriately limit the exhaustive obligation. This is an essential right that cannot be waived by the parties, and any provision of the contract that does so will be deemed void and of no force or effect.


2.     Contract interpretation

The Law addresses the situation if there is an ambiguity and that there is room for interpreting the contract, which is consistent with civil codes in other Middle Eastern jurisdictions. The idea behind this concept is that if the contract's text is straightforward, it is not permitted to stray from it. Therefore, when the language is clear, the parties will be held to the terms of their contracts.


Nonetheless, if there is room for interpretation, the common intent of the contracting parties must be taken into account rather than just the literal meaning of the terms, taking into account the nature of the dealing and the trust and integrity that must exist between the contracting parties in accordance with customs. As a result, pre-contractual contact may be used to ascertain the parties' shared intentions in an effort to clear up any uncertainty. This viewpoint is consistent with other Middle Eastern civil codes, and the Law's provision may assist the parties in resolving questions of contract interpretation when the text of the agreement is ambiguous and subject to different readings.


3.     Compensation

The Law contains significant provisions about the procedures for awarding damages where one party is delayed or in default. The Law gives grounds for the parties to reach an agreement and fix compensation in advance by including such language in the contract, which is consistent with civil codes in other jurisdictions. Therefore, the Law also covers liquidated damages as a type of remedy, as is usual in building and engineering contracts.

If the creditor has not experienced a loss, the negotiated compensation was exaggerated, or the initial obligation was partially fulfilled, these liquidated damages may not be called for or may be reduced. As a result, KSA has adopted a stance comparable to that of Qatar and Kuwait, which provides the court or tribunal the right to lower previously agreed-upon compensation provided certain conditions are met.

The Law makes it obvious that this is a mandatory clause, and as such, the contract's provisions are inapplicable. Last but not least, the Law lays forth the criteria for recovering damages and compensation, and this must be the remuneration that would have typically been anticipated at the time of the contract. It's noteworthy to observe that "loss of profit" isn't explicitly mentioned as something that can be recovered.

It is unclear how the courts or tribunals adjudicating contract breach issues will apply this rule on the recovery of damages.


4.     Construction contracts

The Law covers work performance in extensive detail. Subcontracting, termination, and modifications to the design and quantity are all included in this. For customers in the engineering and construction industries, it will be important to carefully analyze how these clauses relate to the parties' work contracts.


5.     The Law’s impact

Contracts that were signed before December 16, 2023 are consistently subject to the Law's retroactive application. To the extent that it does not conflict with such contracts, taking into consideration their nature and the circumstances and exceptions for each of them, this includes the responsibilities of both parties for clauses that are covered by the Law, including risk allocation.

The only exception will be in cases where a party can convincingly show that applying the Law will go against a principle of Sharia'a. Given that the Law and Sharia'a are at odds in the areas in question, the burden of proof in such situations will be on the party requesting reliance on Sharia'a to show why it should be implemented. All provisions that conflict with the Law shall be repealed following the Date the law became Effective.


Contracts entered into after 16 December 2023 will therefore be governed by the Law rather than Sharia'a, including any subsequent disputes.  When the Law is unable to address a particular clause in a contract or when more clarification is required, the final chapter of the Law's 41 defined Sharia'a maxims takes precedence.


The foundation for any Sharia'a application required to fill in any gaps is provided by these 41 maxims. These maxims include: in contracts, certainty is not removed by doubt; freedom from liability is presumed; customs are regarded as part of a contract; ignorance is not a defense for non-compliance; an individual's rights are not removed by necessity; and intention and meaning are given precedence over text and formation.

The Law's implementation represents a much-welcomed regulatory change in the Kingdom. It will go some way toward removing doubt and rumors about the creation of contracts and how significant legal risks will be handled in Saudi Arabia. Investors seeking to conduct business in the KSA could benefit from efficiency, familiarity, and increased comfort as a result of the codification of these significant legal concerns.


ALKETBI team frequently provides legal assistance and advice on contracts and agreements as per the laws of the GCC, if in doubt or require help 

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