Rechtsanwalt, Legal Director
Out-Law Guide 9 min. read
12 Jan 2024, 3:45 pm
The Civil Transactions Law in Saudi Arabia codifies principles of Sharia and has implications for businesses that enter into commercial contracts in the country, including contractors engaged on construction projects.
Saudi Arabia enacted the Civil Transactions Law on 19 June 2023 by Royal Decree N191/1444 (the Civil Code). It entered into force on 16 December 2023 (the effective date).
The Civil Code is a manifestation of Saudi Arabia’s broader Vision 2030 initiative aimed at modernising the Kingdom’s legal framework, attracting foreign investment, and fostering economic growth. This is the first time that Saudi Arabia has distilled its Sharia principles into a codal system, similar to those of other jurisdictions in the region such as the UAE and Qatar. There are many similarities between the civil codes of these countries and the Civil Code due to their foundation in Sharia but also some notable differences that parties need to be aware of.
The Civil Code contains 721 articles, covering matters including contract formation, execution and termination, acts causing harm – similar to tortious acts – as well as loss and damages and specific provisions tailored to contract types such as construction, agency, insurance, and partnership contracts.
The Civil Code applies retrospectively to events that occurred and relationships that existed, whether contractual or otherwise, prior to the effective date except if: any “statutory provision” or “judicial principle” that relates to the event in question contradicts the provision of the Civil Code, and one of the parties relies upon it; or a limitation period had already started to run prior to the effective date.
This means that the default position is that the terms of the Civil Code will apply to pre-existing contractual relationships – it is for the party relying upon a conflicting statutory provision, judicial principle, or limitation period, to assert and prove that fact.
The terms of the Civil Code also govern relationships that are personal or private rather than only commercial in nature. For commercial matters in particular, the Civil Code states that it applies in a manner that does not contradict the nature of the commercial transaction in question and to the extent that it does not contradict what is specifically provided for in other laws governing commercial matters.
When it comes to contractual interpretation going forward, Article 1 sets out a hierarchy of application: first, provisions of the Civil Code, second, the “overall rules” – described by some as Sharia-inspired legal maxims – as listed in Article 720 of the Civil Code, and third, the provisions of the Islamic Sharia that are “most appropriate”. Article 1 goes on to add that “[t]he application of the provisions of this Law shall be without prejudice to the special statutory provisions”, which are understood to be other specialised laws.
The Civil Code commits the general guidelines for the interpretation of contracts under Saudi law to paper, which will assist courts and tribunals in resolving disputes regarding contractual interpretation and should thereby facilitate the enforcement of those contractual terms and lead to greater certainty for all concerned. As is the case under other civil codes, such as the UAE Civil Code, the literal interpretation of contracts is paramount so that the clear words of the contract must be applied in the first instance under Article 104. However, if there is room for interpretation, then the common will of the parties must be ascertained by looking at custom, the circumstances of the contract, the nature of the transaction, and the usual course of dealing between the parties. This provision brings in a number of pre-existing principles of Sharia, indicating that this area of law has been codified rather than modified.
There are no major surprises in the section of the Civil Code dealing with formation of contracts. Articles 32 and 33 detail the rules for contract creation, namely the need for an offer and acceptance of that offer between parties with legal capacity. It is possible to create a contractual relationship in writing, orally, or through implied actions unless specific circumstances require an explicit declaration of intent.
Parties should be mindful that Article 37 specifies that silence does not automatically indicate acceptance, except under certain conditions. However, silence can be interpreted as acceptance when there is a history of dealings between the contracting parties and the current offer is related to those dealings, or if the offer is purely for the benefit of the recipient. Therefore, ignoring correspondence with a counterparty in the hope that silence will be interpreted as disagreement is not a safe course of action. Rather, the most prudent response will be to respond with explicit disagreement.
Article 48 addresses the capacity to contract, which provides that individuals who are minors, mentally incapacitated, or suffering from mental deficiencies, lack the capacity to enter into contracts.
The Civil Code further addresses, in Articles 57 to 69, where consent is wanting by virtue of a mistake, fraud or duress. A contract is considered void if: the mistake is substantial, known by or easily detectable by the other party, and not merely a unilateral mistake; the actions or deliberate silence of one party deceptively induce another to enter into a contract; and/or involved coercion by material or moral means. Duress caused by a third party can only lead to contract rescission if the other contracting party was aware of it.
Once a valid contract is underfoot, parties need to be aware of certain additional requirements of Saudi law now codified and similar to those in other Middle Eastern jurisdictions, applicable throughout the life of the contract and which are implied rather than express.
Article 95 of the Civil Code codifies the Sharia principle of good faith, deriving from the Sharia principle of Ihsan. It provides that: a contract must be carried out “in accordance with its terms and in a manner consistent with the requirements of good faith”; and the contract is not limited to binding the contracting party to its terms, but it also includes requirements arising out of statutory provisions, custom and the nature of the contract. The wording is very similar to that of Article 246 of the UAE Civil Code. Parties can expect the principle of good faith to be applied under Saudi law through all stages of the life of their relationship, from negotiation and performance through to termination of the contract.
Not only must a party exercise its rights in good faith, it must also not abuse its rights. Article 29 of the Civil Code provides that “no right may be exercised wrongfully” and lists specific examples of when this may be the case. Specifically, if a right is exercised only to cause harm to others; if the benefit generated from exercising the right is completely disproportionate to the harm it causes to others; or if the right is exercised for an unlawful purpose or in an unlawful manner. As such, even when carrying out a contractual right, parties must keep this principle in mind and consider the purpose of their actions and the harm likely to be suffered as a consequence.
Article 97 of the Civil Code codifies provisions relating to ‘exceptional unforeseen circumstances’, allowing the court to reduce a burdensome obligation in the absence of agreement between the parties. In the event of exceptional circumstances of a general character, which could not have been foreseen at the time of entering into the contract and as a result of which the performance of a contractual obligation becomes unduly burdensome for the debtor such as to threaten them with exorbitant loss, they may seek to renegotiate that term with the counterparty. However, a request to renegotiate does not permit the requesting party to stop performing the obligation. If the parties cannot renegotiate the obligation, the court has the power to restore the obligation to a reasonable level. There is also a provision of a similar nature under the muqawala section of the Civil Code, which relates specifically to contracts to make a thing or perform any work in consideration of compensation – including construction contracts.
This wording of Article 97 is similar to Article 249 of the UAE Civil Code but is more detailed, expressly requiring the parties to attempt negotiation of the burden before the court intervenes.
Article 173 of the Civil Code allows parties to limit liability but, similar to other civil law jurisdictions, not in the event of fraud or gross error. In the Saudi Civil Code, it is also not possible to exclude liability arising from a harmful act (tort).
Parties to construction contracts in the Middle East will be familiar with a form of strict liability known as ‘decennial liability’. Whereas Article 880 of the UAE Civil Code expressly holds contractors and consultants liable for decennial liability in the event of structural failures occurring within 10 years, the Civil Code is silent on this issue. However, although the Civil Code does not impose decennial liability, this liability is very much alive in the country.
The Implementing Regulations of the Saudi Building Code Application Law, also known as the "Building Regulations", enshrine decennial liability in Article 29. It stipulates: “The Supervising designer who supervising the implementation of the construction and the contractor shall be jointly responsible for compensating the owner for ten years – from the date of issuance of the occupancy certificate – for the total or partial demolition of the buildings they constructed or the facilities they built and for every hidden defect that threatens the durability and safety of the building.”
As such, contractors and consultants involved in the construction and design of construction works in Saudi Arabia should be aware that structural failures for construction works are fully covered under the no-fault regime of decennial liability.
Under Article 178, it is possible for parties to agree a pre-determination of damages in their contracts, as long as the object of the obligation is not pecuniary. The Civil Code also grants the Saudi courts the ability to adjust pre-determined damages to reflect the actual loss suffered. The damages can be reduced if the court or tribunal considers this appropriate but can only be increased in cases of fraud or gross error on the part of the debtor. This approach is different to that of some other legal systems in the Middle East, such as the UAE, which allow the court to increase pre-agreed damages in wider circumstances not limited to gross error or fraud.
The Civil Code expressly allows compensation for loss of profits under Article 137 and moral damages under Article 138. These provisions appear under the ‘Harmful Acts’ section of the Civil Code and appear to also apply to contractual agreements, as is the case under the UAE Civil Code, subject to the caveat made under Article 180 that the damage compensated must be foreseeable at the time of entering into the contract, except in cases of fraud or gross error.
The Saudi legal regime is based on the Hanbali school of Islamic Law which disallows the recovery of interest. As such, interest is treated as usury (riba) and is strictly prohibited in any form as a matter of Saudi public policy. Consequently, Saudi courts have not awarded interest irrespective of any agreement to the contrary or applicable foreign law provisions.
The Civil Code does not deal with ‘interest’ in general terms. It is therefore assumed that the situation has not changed from that prior to the Civil Code, and so contractual provisions entitling the recovery of interest in the Kingdom remain unenforceable, and the Saudi courts will not award interest. Interestingly, without explicitly referring to the word ‘interest’, Article 385 provides that, with respect to loans, any term at the time of contracting, or when deferring payment, that includes an increase in the repayment of the loan is void.
General provisions of the Civil Code dealing with termination of contracts can be found in Articles 105 (termination by mutual consent), Article 106 (exercise of an option to terminate), Article 107 (termination for breach of an obligation) and Article 110 (termination due to impossibility of performance).
Bespoke to construction contracts, the Civil Code outlines the termination possibilities for muqawala contracts encompassing the following scenarios (Article 475-478):
As such, parties to construction contracts must consider the particular provisions in the muqawala section of the Civil Code as of particular application when faced with termination of their agreements.
Co-written by Melissa McLaren, Mary Ghali, Jack Tivey, and Zaid Abu Dahab of Pinsent Masons.
Rechtsanwalt, Legal Director