An Overview of the New Civil Transactions Law in Saudi Arabia

Executive Summary

1. Saudi Arabia’s first civil code “Civil Transaction Law” will come into effect on December 16, 2023

2. The promulgation of the “Civil Transaction Law” is the beginning of a comprehensive reform of the Saudi civil law system, which will have a huge impact on various commercial activities in Saudi Arabia.

3. This new law has retrospective effect and therefore applies in almost all cases to contracts signed prior to 16 December 2023. 

Introduction

The long-awaited “Civil Transaction Law” (CTL) was officially published in the Saudi Official Gazette on 19 June 2023, and will come into force 180 days after its publication (December 16, 2023). Various government authorities have been requested to review the existing laws, including the Commercial Court Law (2020) and the Movable Property Security Law (2020), to assess the impact of CTL and to propose corresponding amendments to ensure they are not in conflict with the new law.

CTL is the third piece of legislation among the 4 major judicial modernization reforms proposed by HRH Crown Prince in 2021. The first two laws – “the Personal Status Law” (laws governing marriage and family) and the “the Law of Evidence” have already been promulgated. The final one – “the Penal Code for Discretionary Sanctions” is expected to be published soon.

Impact

CTL is the first civil code in Saudi Arabia. Prior to this new Law, contracts in KSA were governed by the basic principles of Islamic law (Shariah), based on the “Quran” and “Hadith”. Some Islamic law scholars opposed the codification of the laws because they were worried that the process of codification may contain subjective interpretations of Islamic law and distort its original meaning.

However, the lack of clarity on rules governing civil transactions, and the absence of a clear legal framework for individuals and businesses was seen as hindering the foreign investment and the modern social development of Saudi Arabia.  The reforms will help with the predictability of court rulings, increase  the level of integrity and efficiency of judicial institutions and will help clarify the lines of accountability and ensure the consistency of legal references in a way that limits widespread discrepancies in court rulings. As the first civil code in Saudi Arabia, the opening clause of CTL specifies the rules of interpretation:

• All civil activities will be governed by CTL;

• For matters not covered by the provisions of CTL, the 41 Shariah maxims enumerated in Article 720 shall apply. (In practice, these 41 Shariah maxims have been widely used by judges or arbitrators in Saudi Arabia);

• For matters that cannot be determined by these 41 Shariah maxims, the “most appropriate principle” of Shariah will apply.

CTL is one of the largest pieces of legislation that has been issued in KSA and consists of seven chapters and 721 articles in total. 

Main Features

1. Legal capacity

CTL provides clear definitions for both natural and judicial persons.  Legal capacity is one key factor to determine the validity of a transaction.

Article 14 of CTL defines a natural person who does not have full legal capacity as follows:

a. Any person who has reached the age of discretion (7-year-old) but has not reached the age of majority (18-year-old).

b. Any person who is mentally deficient but not reached insanity.

c. Any person under custody for being delinquent or negligent.

2. Contracts

CTL provides a guideline for the validity of contracts, such as the importance of mutual consent and the contracting parties must execute their respective obligations written in the contract and in a manner that is consistent with the requirements of good faith.

Unless the following elements are contained within a contract, it will be considered null or void:

1.   expression of intention

2.   capacity to contract

3. consent is free from defects (mistakes, fraud, duress, unfairness)

3. Pre-existing contractual relationships

CTL has retrospective effect.  Any preexisting contractual relationships prior to the Effective Date (December 16, 2023) will still be governed by CTL. Sharia rules may still apply to certain aspects of contracts executed between now and the Effective Date, Saudi courts will continue to decide pending cases under Sharia.

4. Personal rights and obligations

In accordance with CTL, personal obligations are derived from the following sources: 1. The contract. 2.Unilateral act. 3.Harmful Act (Tort) 4. Unjustified Enrichment. 5.The law.

With regard to a harmful act, even if a person is not aware of the act, they are bound to make good the damage except in the following circumstances:

• In the lawful defense of self, honor or property, provided that his defense shall not exceed the amount necessary to defend the assault.

• In order to avoid greater harm to him or others.

• The damage arose from a cause beyond his control, such as force majeure, the fault of a third party, or the fault of the aggrieved party.

• A public servant performs it in implementation of a statutory provision, or an order issued to him by his superior, and it is proved that he had reasonable grounds to believe that his work was legitimate, and that he was cautious in his work.

Prior to CTL, civil liabilities and damages were subject to the basic rules of Shariah. A key change to highlight is that persons may seek compensation for moral damage under CTL which includes physical or emotional pain, loss of reputation, or damage to one’s dignity. 

5. Statute of limitations

A statute of limitations is a law passed by a legislative body to set the maximum time after an event within which legal proceedings may be initiated. When the time which is specified in a statute of limitations runs out, a claim might no longer be filed or, if it is filed, it may be subject to dismissal if a defense is raised that the claim is time-barred as having been filed after the statutory limitation period.

In Shariah there is no time limit for the aggrieved party to exercise its rights. Therefore, even if the dispute happened dozens of years ago, a claim may still be brought to the Shariah Courts in Saudi Arabia. The new law has made a major breakthrough by setting the statute of limitations to 10 years except in the following circumstances:

• The rights of self-employed, such as doctors, lawyers and engineers, for the work they performed related to their profession and the expenses they spent; (statute of limitations:5 years)

• Periodic renewable rights, such as real estate rent, wages, annuities, and the like (statute of limitations:5 years);

• The rights of the traders regarding goods and services provided to persons who do not trade in them (statute of limitations:1 year);

• The rights of the owners of establishments designed to accommodate guests, restaurants and the like that arising from practicing these activities(statute of limitations:1 year); and

• The rights of the employees in terms of daily and non-daily wages and the price of things they provide(statute of limitations:1 year).

6. Nominate Contract (العقود المسامة)

A Nominate Contract is a contract that is distinguished by a particular name, such as sale, insurance, or lease. CTL has an entire section (300 articles) about nominate contracts. In addition to the typical nominate contract seen in other civil codes, it also incorporates Islamic contract concepts, such as Musharaka contract, Mudarabah contract and Murabah contract and land lease contracts to protect Saudi Arabia’s agricultural development.

7. In-kind rights (الحقوق العنية)

The definition of in-kind rights in the civil law is that the owner enjoys direct control and exclusive rights over specific things according to law. The parties are not allowed to create the types and contents of in-kind rights except those expressly stipulated by law. The new CTL does not distinguish usufruct rights and security interests. Rather, it classifies usufruct rights and security interests as rights derived from ownership, including easement, water flow rights, sewage discharge rights, etc; The Islamic concept Waqf (Article 698) is mentioned in relation to security interests. It remains to be seen how this rule will be applied by the courts or tribunals determining the damage to in-kind rights. 

Conclusion

The promulgation of CTL is the beginning of a comprehensive reform of the civil law system in Saudi Arabia, which will have a huge impact on various commercial activities in Saudi Arabia.

 It is worth noting that the Saudi Ministry of Justice has already circulated a draft “Commercial Transactions Law” for public consultation in 2022. When it comes into effect, the Commercial Transactions Law will apply together with the CTL to commercial transactions, and the provisions of the Commercial Transactions Law will prevail in the event of conflict.

In view of its complexity and its retrospective effect, it is strongly recommended that all companies operating in Saudi Arabia study this law carefully and fully evaluate its direct and long-term impact on their business. Abdulaziz Bin Ali Law Firm will also conduct a series of webinars on the CTL especially the interpretation of Article 720.

This article contains general statements in relation to CTL and should not be construed in any way as legal advice. Formal legal advice should be sought on a case by case basis. If you have any questions about CTL, please free to contact us.