ARTICLE
Key Features of the New Saudi Civil Transactions Law
by Joseph Chedrawe and Catherine Karia, Covington & Burling LLP
Status: Law stated as of 01 Dec 2023 | Jurisdiction: Saudi Arabia
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An Article providing an overview of the new Civil Transactions Law (CTL) that enters into force in the
Kingdom of Saudi Arabia (KSA) on 16 December 2023. The Article highlights key features of the CTL
that will impact the resolution of disputes arising under commercial contracts that are governed by
KSA law.
Saudi Arabia’s New Civil Code As to the CTL specifically, His Royal Highness Mohammed
bin Salman, the Crown Prince and Prime Minister of the
Comes into Force Kingdom of Saudi Arabia, reportedly said that:
On 19 June 2023, the KSA published its new Civil ”The law will have a positive impact on
Transactions Law (CTL), which was signed into law by the business environment and increase its
Royal Decree M/191. The CTL enters into force on 16 attractiveness, and will also contribute to
December 2023 (Jumada II 3, 1445 AH) (Effective Date). regulating economic movement and the stability
The CTL, which is effectively Saudi Arabia’s first-ever Civil of financial rights, in addition to facilitating
Code, consists of 721 Articles covering the law applicable decision-making with regard to investment. It
to civil legal relationships. It includes provisions covering, will also enhance transparency and increase
among other matters, the parties’ rights and obligations the ability to predict judgments in the field of
under both general and specialist (such as construction civil transactions and reducing discrepancies in
and employment) contracts, property rights, financial judicial reasoning to reach prompt justice, apart
transactions, and dispute resolution. from contributing to bringing down disputes.”
The CTL is a welcome development for businesses This Article identifies several key features of the CTL
operating in KSA under contracts governed by Saudi law. that are expected to have an important impact on the
It is expected to provide greater certainty, predictability, commercial risk profile of companies doing business in
and reliability in the application of Saudi law to contractual KSA. Parties should consider conducting a careful and
rights and obligations by courts and arbitral tribunals. systematic review of any existing or prospective contracts
governed by KSA law to identify the potential impacts
The CTL is the third of four key judicial reform legislations of the CTL on their pre-existing contractual rights and
in KSA announced on 8 February 2021, which include the obligations, as well as on any actual or potential disputes.
Civil Status Law, the Law of Evidence, and the proposed
Penal Code for Discretionary Sentences. This judicial
reform is part of a broad legal modernisation trend in CTL Codifies Sharia Law Principles
KSA that has, over the past six years, included specialised
Until now, the law in KSA has been based primarily on
courts, a new class action regime, a book of legal
uncodified Sharia legal principles (or Islamic law), which
principles and court judgments published by the Supreme
is derived from religious texts and traditions and does
Judicial Council, and the enhanced use of technology in
not rely on judicial precedent. The CTL codifies important
the Saudi courts, among others.
legal principles, integrating many established maxims of
Against the backdrop of KSA’s Vision 2030, together these the Sharia into a civil code.
developments demonstrate KSA’s commitment to modern
If the CTL is silent on a specific issue, the 41 Sharia
international business practice.
principles set out in the CTL’s final provisions will apply.
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Key Features of the New Saudi Civil Transactions Law
If none of these 41 Sharia principles are relevant, then provision, or the nature of the underlying transaction
the broader principles of the Sharia that are most requires otherwise.
appropriate for the purposes of the CTL will apply to
According to Article 37, silence by one party does not
determine the issue.
constitute acceptance of the other’s offer except in limited
circumstances, such as where the parties agree or the offer is
Retrospective Effect connected to a former course of dealings between the parties.
The CTL will apply retrospectively to all contracts and
relationships that existed before the Effective Date. The Certainty
fifth recital to the CTL identifies two exceptions to its
Article 43 promotes the principle of certainty over the
retrospective effect:
parties’ legal relationship. It provides that an undertaking
• Where a party invokes an existing statutory provision by the parties to enter into a future contract is only
or judicial principle that conflicts with the provisions of binding if the following conditions are met:
the CTL.
• The essential elements of the contract and the
• A limitation period that was triggered before the timeframe for executing the contract are both specified.
Effective Date.
• The formality conditions, including any conditions
required by statutory provisions under KSA law, must be
Mandatory Provisions agreed in advance.
The CTL contains a limited number of mandatory If these elements are satisfied, but a party refuses to fulfil
provisions that apply regardless of the agreement its promise, the counterparty can request that the court
between the parties, including for example, in respect of render a judgment in lieu of the contract.
the object of the contract (Article 72, CTL; see Object),
hardship (Article 97, CTL; see Hardship), and liquidated Article 42 provides that if the parties do not agree on any
damages (Article 179, CTL; see Liquidated Damages). Any non-essential matters, this will not affect the execution
conflicting agreement by the parties is null and void. of the contract unless the parties have agreed otherwise.
That is, failure to agree on non-essential matters does not
prevent the parties from forming a valid and enforceable
Good Faith
contract unless they have agreed otherwise. The court can
Article 95(1) of the CTL codifies the principle of good faith. determine non-essential matters on which the parties fail
It provides that the parties must execute the contract in to agree.
accordance with its provisions and in a manner consistent
with the requirements of good faith. Object
Additionally, Article 41 of the CTL prohibits parties from Under Article 72 of the CTL, the object of a contract must
negotiating in bad faith, for example by entering into fulfil the following requirements:
negotiations without an intention to reach an agreement. A
party who negotiates in bad faith may be liable in damages, • It must be achievable.
excluding damages for unrealized revenue that the other • It must not violate public order. (The CTL does not
party expected to gain from the negotiated contract. define “public order.”)
• It must be clearly defined, for example concerning its
Contract Formation type or value.
The CTL enunciates important principles of contract The contract is null and void if these requirements are not
formation under KSA law. satisfied.
A party can request that an invalid provision be severed
Offer and Acceptance from the remainder of the contract without causing the
Article 33 of the CTL requires that offer and acceptance entire contract to be invalidated under Article 74 if the
be made by an expression of will between the parties, requesting party can prove that it would not have entered
either verbally, in writing, or implicitly (for example, by into the contract without that particular condition.
the parties’ conduct), unless the contract, a statutory
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Key Features of the New Saudi Civil Transactions Law
Illegality professionals (such as medical doctors, lawyers, and
engineers) in relation to their work and related expenses,
The object of a contract must not violate public order and to periodic renewable rights, such as property rent
(see Object). In addition, under Article 75 of the CTL, if and wages, subject to limited exceptions. Under Saudi
the contract’s underlying object is illegitimate, either law, until recently, there were no limitations of actions. At
expressly, or impliedly by the circumstances surrounding present, the legal position as to triggers for commencing
the contract, then the contract is null and void. the limitation period remains uncertain.
As per the fifth recital of the CTL, the retrospective effect
Consent (Mistake, Deceit, and Duress)
of the CTL does not alter a limitation period that was
The parties must have capacity to consent to the contract triggered before the Effective Date of the CTL, even if
under Article 47 of the CTL. Article 48 states that minors, the CTL applies a different limitation period for the same
as well as insane and mentally deficient persons, do not category of claim (see Retrospective Effect).
have capacity to enter into contracts. The contract may be
The Sharia doctrine that rights are not lost due to the
invalidated if there has been an important defect in a party’s
passage of time is codified by Article 295 of the CTL. The
ability to consent. The CTL identifies multiple circumstances
language used in Article 295 indicates that a party must
where a party can apply to the court to invalidate (or rescind)
deny the claim or right in dispute, in addition to invoking
the contract, including where a party:
a defence based on the expiry of a limitation period. The
• Has made a fundamental mistake, without which that wording of Article 295 is unclear about the practical
party would not have consented to entering into the implications for parties litigating a dispute that is time
contract, and which relates to the characteristics of the barred, given that the right is not extinguished. At this
contract or the capacity of one of the parties (Articles 57 stage, the authors cannot predict how the courts are likely
to 60, CTL). to interpret this provision.
• Fraudulently induces the other party to enter into the
contract (Articles 61 to 62, CTL).
Limitations of Liability
• Coerced the other to enter into the contract (also known
as duress) (Articles 64 to 68, CTL). Article 173 of the CTL confirms that, as a general principle,
limitation of liability clauses are valid and enforceable
under KSA law. This is subject to the important proviso
Notification of Claims that the party whose liability is limited by the clause has
not committed deceit, gross error, or a wrongful act.
Commercial contracts often contain provisions for the
notification of a claim that may arise out of or in relation
to that contract. An issue that frequently occurs is whether Damages
a claimant validly served a notice of claim.
Article 136 of the CTL sets out the general position that
Article 175 of the CTL states that “compensation shall a party is entitled to claim damages that will restore it to
only be due after serving a notice to the debtor [that is, its pre-harm position. Article 137 of the CTL requires that
the defaulting party], unless the parties agree otherwise.” these damages are “proportional” to the loss sustained,
However, Article 176 specifies certain circumstances where and it requires the claimant to take reasonable steps to
a notice of claim is not required, for example, if the parties mitigate its loss. Article 137 includes a reference to lost
agreed explicitly or impliedly that the defaulting party profits, which indicates that these losses are potentially
is considered to be notified by the passage of a specific recoverable under KSA law. The court or tribunal will
period of time. make a final assessment of a party’s damages.
The CTL also confirms the availability of liquidated
Limitation Periods damages and damages for moral harm under KSA law.
Article 295 of the CTL sets out a general limitation period
of ten years within which claims must be raised. The CTL Liquidated Damages
also specifies shorter limitation periods for particular Liquidated damages (LDs) are a pre-agreed, fixed sum
types of claims. For example, Article 296 applies a payable by one party to another in the event of a failure to
five-year limitation period to the rights of self-employed complete a specified milestone by a contractually agreed
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Key Features of the New Saudi Civil Transactions Law
date. LDs are common in construction contracts but can contract have changed and one party has become unduly
also arise in other commercial contracts. burdened.
Sharia principles generally prohibit the recovery of LDs Article 97 of the CTL permits a party to request the re-
that grossly exceed a party’s actual damages. Article 178 negotiation of the contract if exceptional circumstances
of the CTL clarifies the availability of LDs under KSA law, arise that result in that party’s performance of its
expressly permitting parties to include LDs clauses in their contractual obligations becoming burdensome to the
contracts. However, Article 179 of the CTL imposes several extent that it threatens that party with a heavy or grave
important limitations on the recovery of LDs: loss. The circumstances must have been unforeseeable
when the contract was entered into.
• The agreed rate of LDs does not apply if a party can
show that the party levying LDs did not suffer loss. The requesting party must request the re-negotiation
• The court or arbitral tribunal may reduce the rate of without undue delay and must continue to perform
LDs if the paying party can show that the contractual its contractual obligations during the re-negotiation
rate is unreasonably high or the obligation was partially process. If the parties cannot reach an agreement within
fulfilled. a reasonable period of time, the affected party can
apply to the court to reduce the onerous obligation to a
• The court or arbitral tribunal may increase the rate of reasonable level.
LDs to the actual harm suffered if the receiving party
can show that the actual harm exceeded the amount of Importantly, this provision of the CTL is mandatory, and
LDs as a result of fraud or gross error. any contrary agreement between the parties is void.
Damages for Moral Harm Suspension of Contractual
Article 138 of the CTL expressly permits a court, in its Performance
discretion, to award damages for intangible “moral harm,”
such as damages for loss of reputation. The language Article 114 of the CTL permits a party to suspend the
of the CTL suggests that moral harm damages can only performance of their contractual obligations as a result
be claimed by natural persons rather than legal persons of their counterparty’s breach or failure to perform its
(that is, companies). Natural persons can claim moral corresponding obligations.
harm damages for harm suffered to the individual’s
reputation, honour, or social standing, and for physical Additional Payments for Variations
and psychological harm.
Commercial contracts for the supply of goods or services,
particularly construction contracts, may contain a
Force Majeure contractual entitlement for the supplying party to request
Commercial contracts often entitle a party to seek relief an extension of time, an additional payment, or both as
from performing its contractual obligations, either a result of a valid variation to the original scope of the
temporarily or permanently, without incurring liability, contract.
on the occurrence of specific circumstances beyond its In the absence of an express contractual price adjustment
control. These are referred to as force majeure events. mechanism, Article 471 of the CTL restricts a party’s ability
Article 125 of the CTL provides that a party is not liable to claim additional payments from its counterparty in the
for damages arising due to circumstances beyond their event of a variation:
control, such as force majeure events, the fault of a • If the parties have agreed to a lump sum contract, a
third party, or the default of their counterparty, unless party cannot claim for a price increase, even if the costs
otherwise agreed. of materials, wages, or other expenses have increased.
• A party cannot claim an increased payment where
Hardship the scope of a contract has been modified or added
to, unless due to a default by its counterparty or if the
The hardship doctrine permits the re-balancing of counterparty consents.
a contract when the circumstances underlying the
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Key Features of the New Saudi Civil Transactions Law
Termination after providing notice to the defaulting party, request
that the court order performance or termination of the
The CTL provides for a range of termination rights. contract. In either case, the innocent party can claim
damages.
Termination by Mutual Consent The availability of this right is subject to the court’s
Article 105 of the CTL permits the parties to terminate a discretion. Although currently untested, the wording of
contract, in whole or in part, by mutual agreement. Article 107 indicates that a court may reject a request
to terminate the contract if the default is minor when
Termination for Convenience compared to the obligation in question.
Article 106 of the CTL allows the parties to include As an alternative to making a judicial request for
a withdrawal option in their contract, permitting termination under Article 107, Article 108 of the CTL
termination for convenience. The party exercising a confirms that a contract may include provisions permitting
contractual right to terminate must provide notice to termination, without judicial intervention, if either party
its counterparty within a time limit that is stated in the fails to perform its obligations.
contract or, in the absence of an express contractual time
limit, specified by the court. Termination for Impossibility
The CTL permits a party to terminate a contract where
Termination for Default the performance of a party’s contractual obligations
Article 107 of the CTL provides that, where a party fails becomes impossible due to a reason beyond their
to perform a contractual obligation, the other party may, control (Article 110, CTL).
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