On December 16, 2023, the Civil Code, consisting of 721 articles, came into force by Royal Decree M/191 dated 29/11/1444 H. By codifying most of the important principles for civil law transactions in Saudi Arabia, this law creates more clarity about the legal situation and, in turn, should promote uniform interpretation and application. At the same time, its mandatory application will limit the range of case law that can influence legal decisions. This is one of the most important changes providing and legal security and certainty for foreign investors and traders and is considered a major legislative revolution as it contains provisions that affect all civil law transactions.
The aim of the new law is to protect the property of the individual, define the restrictions contained therein and the rights arising therefrom, such as usufruct, rights of use and easements, in such a way that the rights of partners, neighbors, heirs and others are safeguarded. It regulates rights, obligations, and the complicated distribution of risks between the contracting parties, in the event of torts and other legal relationships. It contains detailed regulations on civil law contracts, their invalidity and termination. In its structure, the law appears to be similar to Egyptian civil law, as is the case in other Gulf states.
1. Conclusion of a contract
According to the Civil Code, a contract is concluded by offer and acceptance pursuant to Art. 31 of the new Civil Code. Silence in accordance with Art. 37 of the Civil Code is not equivalent to acceptance. It has no explanatory content and therefore has no effect in legal transactions.
2. Binding nature and Interpretation of the contract
The law confirms the essential elements of a binding contract, recognizes that the contract is the law of the parties, and that the contracting parties are bound to fulfil their contractual obligations (Art. 104 of the Civil Code). In doing so, the contracting parties must be guided by good faith in the performance of the contract, considering common usage. If there is room for an interpretation of the contract, the common intention of the contracting parties at the time the contract was concluded must be considered, without limiting oneself to the literal meaning of the clauses.
3. General terms and conditions
The Civil Code does not contain any explicit provisions on the inclusion of general terms and conditions. Accordingly, these are not automatically part of the contract, even if they could be acknowledged online or similar, but should be expressly acknowledged and signed by both contracting parties in addition to the actual contract.
4. Retention of title and right of retention
In accordance with Art. 34 of the Civil Code, the purchase price must be paid in advance in the case of a delivery transaction, unless the parties have agreed otherwise in the contract. A right of retention pursuant to Art. 114 of the Civil Code exists for each party to the service to be rendered until the other party has rendered its service, and the inclusion of a contractual clause on retention of title is possible pursuant to Art. 320 of the Civil Code.
5. Assignment of rights
A creditor may assign a right without having to obtain the debtor’s consent, provided that the right is assignable (Article 238 of the Civil Code). From a Sharia’a perspective, this is a controversial issue. However, an assignment only becomes effective once the debtor has either acknowledged it or received formal notification (Article 240 sequitur Civil Code).
6. Defaults in performance / withdrawal
If there are defaults in the performance of the contract, the new law contains provisions on warranty and defective performance. In addition to compensation for damages, the compliant party can demand fulfillment or withdrawal from the contract from the party in breach. Unless expressly excluded by the parties, the statutory right of rescission must be declared by a court decision. A refusal by the court to rescind the contract is only possible if it is not a material breach of contract. The degree of materiality that leads to a breach of contract can be contractually defined in advance by the parties.
The Civil Code also provides for the right to reduce the purchase price as a warranty right. This regulation can be contractually amended if the seller has fraudulently concealed the defect.
7. Compensation for damages – loss of profit
In the event of damaging events, the law contains provisions on compensation for damages pursuant to Art. 107 of the Civil Code. In addition, the law specifies how compensation and damages are to be calculated, namely in the amount of the compensation that would normally have been provided for at the time the contract was concluded. Further, it now also provides a specific regulation for the reimbursement of “lost profits” in accordance with Art. 137 of the Civil Code.
8. Tortious liability
The Civil Code provides that contractual liability may be limited or excluded if the debtor has not acted fraudulently or with gross negligence. Liability in tort cannot be excluded or even limited. A definition of the term “gross negligence” is essentially left to the courts. The extent to which tortious and contractual claims can coexist has not yet been conclusively regulated.
Pursuant to Art. 178 of the Civil Code, the parties may contractually stipulate liquidated damages in advance. Such lump-sum compensation may not become due or may be reduced if the creditor has not suffered any damage or if the agreed compensation was excessive (art. 179 Civil Code). In the event of fraudulent or grossly negligent behavior, the injured party may demand compensation in excess of the agreed amount.
9. Limitation period
The general limitation period is ten years (Art. 295 of the Civil Code), although shorter limitation periods apply to civil law claims, e.g. five years. The statutory limitation periods are mandatory and cannot be changed by contract.
10. Construction and service contracts
The execution of construction work is dealt with in detail in the law. This includes design and quantity changes, subcontracting and termination. The law also deals with the usufructuary right, the right of use, the right of easement and the right of way. In accordance with the principle of ten-year liability, the contractor and the engineer are jointly and severally liable for a period of ten years for defects that could jeopardize the stability or structure of a building.
11. Force majeure
If a contractual obligation becomes impossible for reasons beyond the control of the contracting party, the latter may be released from its obligation to fulfill the contract. In the case of a bilateral contract, this also applies to the other contracting party. The law also provides for the possibility of “renegotiating” a contract if the fulfillment of the contract becomes considerably more difficult due to changes in general circumstances.
12. Interest on loans
Art. 385 of the Civil Code prohibits interest of any kind in loan transactions. The extent to which this prohibition is limited by the courts to loan agreements or applies as a general principle of the prohibition of interest is still unclear.
13. Conflict of laws rule
The Civil Code does not contain a conflict of laws rule. Therefore, it remains the case that Saudi courts always apply Saudi law and do not recognize any choice of law clause in an international agreement. However, as of September 2024, international contracts will be governed by the CISG due to Saudi Arabia’s accession to the United Nations Convention on Contracts for the International Sale of Goods (CISG), unless the parties have agreed otherwise.
14. Conclusion
The introduction of a flexible methodology for the establishment of professional companies, which is of interest to the foreign investor, has an impact on the entire market. Although the individual company is subject to greater supervision, it offers local and foreign freelancers the opportunity to combine professional expertise and financing to be able to better serve and support the market.
