New Civil Code for the Kingdom of Saudi Arabia

By Shahed Ahmed, Senior Associate, Fenwick Elliott

On 19 June 2023, the Kingdom of Saudi Arabia (“KSA”) enacted the new Civil Transactions Law (the “KSA Civil Code”) via Royal Decree No. M/191. 

As many will be aware, KSA’s legal system to date has predominantly been based on principles of Islamic Shari’ah. Therefore, the introduction of the KSA Civil Code is a significant development in its legal landscape as it has codified – for the first time – a law that governs civil and commercial transactions in KSA. 

The KSA Civil Code consists of 721 articles and is split into five sections:

1. Introduction;
2. Obligations;
3. Nominate contracts;
4. In-kind rights (relating to property/co-ownership rights); and
5. Final provisions.

This article considers some of the key provisions of the KSA Civil Code. Unsurprisingly, these are generally consistent with corresponding laws of other civil law jurisdictions. Unless otherwise stated, any references to “Article” are references to Articles of the KSA Civil Code.

Effective Date

Pursuant to Article 721, the KSA Civil Code comes into effect on 16 December 2023 (the “Effective Date”), following which, any contradicting provisions will be abolished. Accordingly, all new contracts signed on or after the Effective Date will be subject to the KSA Civil Code and contracting parties’ rights, obligations and liabilities will be interpreted on that basis. 

For existing contracts, the KSA Civil Code will have retrospective effect; albeit, this is subject to two exceptions.

First, in circumstances where “any statutory provision or judicial term, relating to the case, contradicts the provisions of this law, and one of the parties adheres to it”. In other words, where a party proves that the application of the KSA Civil Code would contradict an established Shari’ah principle that predates the Effective Date, that Shari’ah principle will apply rather than the KSA Civil Code.

Second, the KSA Civil Code will not apply if the relevant provision relates to a statutory limitation period that started to run prior to the date upon which the new law has come into force. In other words, when a limitation period has already commenced before the Effective Date, the KSA Civil Code does not apply retrospectively. As an example, KSA’s Commercial Courts Law specifies a five-year limitation period for commercial claims. If such limitation period has already commenced in respect of commercial claim, then based on this exception, the KSA Civil Code would not apply.

Islamic Shari’ah

The enactment of the KSA Civil Code does not necessarily mean that Islamic Shari’ah will no longer apply.  

Notwithstanding that Article 1 confirms that the KSA Civil Code will apply “to all matters”, it also states that, where there is no relevant statutory provision, relevant Islamic Shari’ah shall be applied by default.  In this regard, Article 720 sets out 41 fundamental Islamic maxims that will apply to such circumstances. Put simply, these maxims are applicable in case the codified provisions do not cover a specific issue. In addition, Islamic Shari’ah may indirectly apply by virtue of a party seeking to rely upon a “statutory provision or judicial term” as described above. 

Ultimately, given the sacrosanct nature of Islamic Shari’ah, it is anticipated that local Courts in particular (and possibly Tribunals) may still rely upon Islamic Shari’ah principles when seeking to understand, interpret, and apply the KSA Civil Code. Indeed, the Courts may choose to adopt a narrow interpretation of Article 1 and apply Shari’ah whenever the KSA Civil Code does not make relevant provision in respect of a matter brought before them.

Effects of a Contract

A key principle of Islamic Shari’ah is that a contract is the “law” of the parties and accordingly they are generally bound by what they have agreed. Put simply, a Court or Tribunal is likely to recognise and enforce the terms agreed between the parties subject to any Shari’ah prohibitions. This principle has now been codified pursuant to Article 94, which provides, amongst other things, (i) that a contract may only be revoked or altered by mutual consent or for reasons provided by law, and (ii) each of the contracting parties must fulfil their obligations under the Contract.

Good Faith

A fundamental principle of Islamic Shari’ah is good faith, which is set out in Article 95. Similar to other civil law jurisdictions, it provides that a contract must be performed in accordance with the contract and in a manner consistent with the requirements of good faith. 

Interpretation of a Contract

Consistent with the Islamic Shari’ah principle that a contract is the “law” of the parties (and other civil law jurisdictions), Article 104 provides that, if the language of the Contract is clear, the starting point would be to apply such terms, i.e., its meaning will not be altered. As such, the first port of call for a Court or Tribunal interpreting the parties’ rights and obligations will be the underlying contract.

In the event that there is scope to interpret the contract, a Court or Tribunal will seek to ascertain the common will of the parties and, in doing so, Article 104 provides guidance by setting out criteria that should apply. These include custom, circumstances of the contract, nature of the transaction, and the trust that should exist between the parties.

Compensation and Limitation Periods

Articles 136 through 143 relate to compensation.  

In summary, the KSA Civil Code provides for compensation to be paid for damages suffered with a view to returning the innocent party “to the situation in which he was or would have been without the damage” (Article 136). In doing so, the Court or Tribunal will be required to determine the extent to which the innocent party has suffered a loss as a natural result of the harmful act (Article 137). Interestingly, Article 137 appears to refer to “loss of profits”, which indicates that such losses are recoverable.

Pursuant to Shari’ah, rights are not extinguished due to any lapse in time. Whilst this principle is confirmed in the KSA Civil Code, limitation periods are codified. Under Article 295 of the KSA Civil Code, a general limitation period of 10 years is confirmed subject to any other applicable statutory period or where the listed exceptions therein specify a shorter period. It should be noted, however, the language of Article 295 implies that the limitation period applies where a person against whom the action is brought denies the right.        

Limitation of Liability

Consistent with other civil law jurisdictions, Article 178 provides that the parties may, in advance, agree the amount of compensation payable. It follows that this ability to agree would include or cover liquidated damages in respect of delay, a common feature of construction contracts. The principle of damages for delay is reinforced under Article 172 although equally it appears to provide an exemption for liability if a party can prove that the delay is “due to a cause beyond his control”.

Notwithstanding, any pre-agreed amount of compensation, however, is subject to the power of adjustment under Article 179. This allows the Court or a Tribunal, upon the application of either of the parties, to vary the agreement so as to make the compensation equal to the loss suffered. Conditions apply and in particular where a party is seeking to increase the agreed compensation, this appears to be restricted to circumstances where the additional damage caused is due to fraud or gross error.

Where the underlying contract does not contain a pre-agreed amount of compensation, Article 180 requires the Court or a Tribunal to (i) determine the damages pursuant to Articles 136-139 relating to compensation, or where it relates to an obligation under the contract, and (ii) to determine the amount of compensation based on foreseeability unless the defaulting party has committed fraud or gross error.

Other Key Provisions of the KSA Civil Code

Abuse of Rights

Article 29 confirms that abuse of the exercise of a right is prohibited. There are three grounds under which an exercise of a right shall be considered unlawful. These are (i) if the use is intended solely to cause damage to others; (ii) or if the benefit is disproportionate to the harm that will be suffered by the other; or (iii) if the benefit itself is unlawful. 

Contracts of Adhesion

 Article 96 provides that, if a contract is made by way of adhesion and contains unfair provisions, it is permissible for a Court or Tribunal to vary those provisions or to exempt the adhering party therefrom in accordance with the requirements of justice. 

Force Majeure

Article 97 is similar to other civil law jurisdictions whereby in “exceptional circumstances of a public nature” under which it becomes “oppressive” for the obliging party to perform its obligations and there is a risk of “grave loss”, it can apply to the Court to reduce the oppressive obligation. The KSA Civil Code introduces an additional step; the obliging party is required to approach the other party to renegotiate the terms of the Contract and only if an agreement cannot be reached can an application be made to the Court.

Termination

Articles 105 to 114 make provision for termination and annulment of a contract. In summary, there are four grounds under which a contract may be terminated, namely (i) by mutual consent (Article 105); (ii) via the exercising by a party of an option to terminate (Article 106); (iii) for breach of an obligation (Article 107); and (iv) impossibility (Article 110).

Suspension

Article 114 of the KSA Civil Code provides a statutory right to suspend performance of one’s obligations if the other party has failed to carry out its obligations. 

Unjust Enrichment

Article 144 of the KSA Civil Code prohibits unjust enrichment in which case the guilty person is required to compensate the other for any losses incurred even if the enrichment is subsequently removed.

Conclusion

Underpinned by its Vision 2030 to continue modernising KSA and attract further investment to the country, the new KSA Civil Code is a significant shift in the legal landscape in KSA. It is consistent with other civil law jurisdictions and reinforces important internationally recognised principles and further provides clarity as to the rights, obligations, and liabilities of contracting parties. At the very least, the KSA Civil Code will enhance confidence in the region and hopefully improve predictability for parties contracting in KSA. 

The above being said, there is scope for different interpretations of the KSA Civil Code. It will take a number of Court judgments to ascertain how provisions of the KSA Civil Code will be applied. Even then, given there is no concept of binding precedent in KSA, it is likely that some uncertainty will always remain. Parties should, therefore, continue to ensure their rights, obligations and liabilities are unambiguously set out in the contract.

As an aside, it is noteworthy that a draft Commercial Code is in circulation for public consultation in KSA. The Commercial Code, when it comes into effect, will supplement and apply to commercial transactions in parallel to the KSA Civil Code. 

Disclaimer: The author has relied upon an unofficial translation of the KSA Civil Code; therefore, the contents of this article must be considered in that context.

Next article