Legality of Civil Transactions law in Saudi Arabia

Saudi Arabia Civil Transactions law

The Kingdom of Saudi Arabia (KSA) Civil Transactions Law enacted on 19 June 2023, by Royal Decree M/191, has now been published in the official gazette. It will come into effect 180 days from the date of publication, i.e. around 16 December 2023. The Law with seven chapters and 720 articles is one of the biggest legislative issuances in KSA's history. It is a significant achievement for KSA as, before this new law, Islamic law (Shari'a) got chiefly from the standards of the Holy Qur'an and the Sunnah (prophetic lessons of the Prophet Muhammad) governed agreements in KSA. This codification will significantly affect legally binding relationships in KSA, both broadly and globally. It is definitely a seismic shift for KSA, supported by its Vision 2030, to draw in significant speculation to the country when KSA is likewise in equal carrying out its Regional Headquarters Programme (RHQ). It gives assimilation to the different worldwide treaties and agreements to which KSA is a party, as well as bringing the governance of everyday transactions closer to global best practices.

Main Principal

The broad structure of the Law covers a scope of regions within business transactions to aid in facilitation and investment. The principal gives transparency, efficiency and stability to contemporary business policies in KSA. Besides, they give increasing consistency of legal decisions and potential disputes.

Binding force of contracts

The Law affirms the fundamental components of a binding contract and recognizes that the contract is the law of the parties and that the contracting parties should satisfy what the contract requires of them.  This is like other civil code jurisdictions in the Middle East which recognize that the parties are limited by the terms and conditions of the contract they have concurred.

The Law likewise recognizes that the parties should execute their obligations in accordance with the contract and in a manner that is consistent with the prerequisites of good faith. As indicated by the Law, the contract will not be bound to commit the contracting party to its contents, yet will likewise manage its requirements as per the Law, customs, and justice according to the idea of the commitment.

Contract interpretation

consistent with civil codes in other Middle Eastern jurisdictions, the Law tends to the position assuming there is uncertainty and there is space to interpret the contract. The starting position is that if the language of the contract is clear, then it isn't admissible to deviate from it. The parties will consequently be bound by the particulars of their contracts where the language is clear.

In any case, in the event that there is space to interpret the contract, then the common will of the contracting parties should be considered ceaselessly at the literal meaning of the terms, taking into consideration the nature of the managing and the trust and integrity that should exist between the contracting parties as per the custom. Hence, pre-contract correspondence can be considered to track down the common will of the parties in an effort to determine a vagueness. This position is similar to other civil codes in the Middle East and this provision of the Law might assist the parties resolve contract interpretation issues when the language of the contract isn't clear and open to more than one understanding.

Compensation

The Law includes useful provisions for the guidelines of damages where a party is in default or in delay. In accordance with civil codes in other jurisdictions, the Law gives grounds that the parties might agree and fix compensation in advance, stipulating this in the contract. In this manner, as is typical in construction and engineering contracts, the Law likewise addresses liquidated damages as a form of remedy.

These liquidated damages may not fall due or might be decreased in the event that the creditor has not experienced a loss or the agreed compensation was exaggerated or the original obligation was partially performed. KSA has therefore embraced a position similar to Qatar and Kuwait that gives the court or tribunal authority to diminish pre-agreed compensation assuming that specific criteria are fulfilled. The Law clarifies that this is a compulsory provision and hence can't be superseded by the particulars of the contract. At last, the Law sets out the test for the recuperation of compensation and damages, and this should be the compensation that would normally have been predicted at the time of the contract. It is interesting to take note that there is no express reference to "loss of profit" being recoverable. It is not yet clear how this standard on the recovery of damages will be applied by the courts or tribunals determining breach of contract disputes.

Construction contracts

Execution of work is canvassed exhaustively in the Law. This incorporates design and quantity changes, subcontracting, and termination. These provisions should be carefully considered for clients operating in the construction and engineering sector and how they apply to the parties' contracts for work.

Conclusively, the introduction of the Law is a welcomed administrative shift in KSA. It will be a viable method for eliminating vulnerability and theory on contractual development and how key legal risks will be settled in KSA. The codification of these key legal risks ought likewise to give efficiency, familiarity, and greater solace to investors hoping to carry on with work in KSA. The embracing of contemporary strategic policies and the rising transparency reflects KSA's obligation to be at the front line of worldwide business transactions. The retrospective nature of this new law likewise should be considered by all parties. Entities should review and perhaps redraft their existing contractual agreements, all the more so assuming they have any potential issues that issues that remain unsolved after the Effective Date.