Overview of the New Saudi Arabia Civil Transactions Law

This article touches upon the salient features of the new Saudi Civil Law and provides key insights for those doing business in KSA.

The much-anticipated Sharia-based civil transactions law (the Saudi Civil Law) was officially issued on 18 June 2023 and will take effect after 180 days from its issuance (i.e. 15 December 2023). This is a continuation of the legal reforms currently ongoing in Saudi Arabia as part of its 2030 vision, which aims, amid other goals, to provide an attractive environment for entrepreneurs and investors and enhance business and consumer trust and confidence in the Kingdom’s ever expanding economy.

Prior to this new law being published, there was no specific legislation regulating legal contracting between parties. KSA law recognised the principle of freedom of contracting, but only to the extent that they were not at odds with any mandatory rule under the Sharia. The Kingdom, unlike other Middle East States had not (until now) codified the principles of the Sharia, which, occasionally, contain different schools of opinion in relation to the rules applicable to contracts and transactions. The publication of the new law is thus a significant development and will give more certainty to individuals and entities doing business in KSA with respect to the legal principles applicable to their business relations and transactions.

 

OVERVIEW OF THE SAUDI CIVIL LAW

The Saudi Civil Law is modelled after other civil codes prevailing in the Middle East region, particularly Egypt and other GCC countries, but with some changes to ensure that the fundamental Islamic Shariah principles are embraced under the new law. It contains a comprehensive set of rules applicable to contracting from formation to termination as well as the effects of contracts and defects leading to voidance of contracts, such as deceit, duress and exploitation. It goes on to regulate specific types of contracts, including, for example, leases, sale, employment, and construction contracts. The law also regulates tort, unjust enrichment and abuse of right(s) as well as other important legal principles that remained a grey area before its issuance, such as moral damages and the statute of limitation. There is also a specific section regulating property rights in addition to a section that encompasses a set of general Sharia rules, which are very useful in interpreting contracts and legal instruments.

 

KEY CHANGES AND IMPACT

Some of the key changes under the new Law include:

Limitation of liability

The common practice in the Saudi Courts did not favour the enforcement of limitation of liability clauses if the loss in question exceeds the stated limit of liability. In other words, the Saudi Courts interpret limitation of liability clauses narrowly, and are more inclined to award damages that are proportionate with the loss actually suffered, even if the amount of such loss exceeded the cap on liability. However, under the Saudi Civil Law, limitation of liability clauses will be enforceable, regardless of the loss suffered, to the extent that the defaulting party has not committed deceit or gross negligence.

Liquidated damages (LDs)

In a similar vein, the Saudi Courts had the power to either reduce or increase the amount of LDs, pursuant to the case, if the affected party is able to demonstrate that the amount of LDs is exaggerated, or is disproportionate to the amount of the actual loss. However, under the Saudi Civil Law, the Saudi Courts’ power to increase the LDs will be limited to the cases where the defaulting party is found liable of fraud or gross negligence.

Compensation

Under the current regime, the Saudi Courts awarded only actual direct losses. Any indirect or consequential loss, including loss of profit, were not compensable. Under the Saudi Civil Law, loss of profits can be awarded in a contractual setting to the extent that it can be established that such loss is a direct result of the breach in question and could have been reasonably anticipated at the time of contracting.

Remedies for Moral Damages

The Saudi Courts awarded moral damages in rare instances, which were subject to the Court’s discretion. The Saudi Civil Law defines moral damages and mandates that these be included within the amount of compensation awarded to the affected party. However, it appears from the relevant provisions of the Saudi Civil Law that such remedy will be available to natural persons only, to the exclusion of legal entities (companies etc.).

Statute of limitation

Time bar is not generally regulated under Saudi law. Pursuant to the Sharia, rights are not extinguished due to any lapse in time. While the Saudi Civil Law confirms this principle, it sets out limitation periods that will apply only if the person against whom an action is brought denies the claim or the right in question. In other words, a time bar may not operate as a sole defence to discharge a respondent from a claim, but the respondent must deny the claim or right in the first instance.

The general limitation period is 10 years, but there are other shorter periods that will apply to certain specific cases as stipulated in the law.

 

CONCLUSION

The new Saudi Civil Law will change the legal landscape in the KSA and will be an important reference for all legal practitioners advising on Saudi law. The new law is a lengthy piece of legislation that covers multiple areas from property rights to contracts, obligations and tort, with a view to limiting inconsistencies between court decisions and enhancing the ability to anticipate judgements in the realm of civil and business transactions.

The new Saudi Civil Law will come into force in December 2023. In addition, it will apply with retrospective effect on all cases and facts occurred before its coming into force unless the said law contradicts another legal provision or an established judicial precedent that the concerned party wishes to apply. Accordingly, it is a mandatory law with general application, but may be departed from with respect to the issues arising before its coming into force as specified. Also, the statutory limitation periods under the Saudi Civil Law will start to run from the effective date of the new Law, even if the commencement date occurs earlier.

For more information on the application of the new Saudi Civil Law and how it might impact your business, please contact Andrew Mackenzie, Partner, Head of Litigation, Arbitration and Investigations, Middle East.