June 26th, 2023 Legal Updates

Overview of the New Civil Code in Saudi Arabia

With its specialized legislation and judicial reforms system, the New Civil Transactions Law (“NCTL” or “Law”) represents a tremendous transformation. The Council of Ministers’ weekly session on 25/11/1444H, corresponding to 13/06/2023G, approved the NCTL and was enacted by Royal Decree no M/191 dated 29/11/1444H. (corresponding to 19/06/2023), which will come into force 180 days following publication in the Official Gazette (i.e., 16 December 2023). The Law represents the most recent legal procedures in light of Islamic Shariah rules. As part of Vision 2030, the Law includes significant reforms to Saudi Arabia’s legal system. These seismic changes will alter and clarify critical areas of civil transaction law. This article aims to provide a brief overview of the main points covered in the NCTL, which will impact all aspects of doing business in KSA, from transacting to dispute resolution.

The NCTL is the third of four major judicial reform bills, comprising the previously announced civil status law, the law of evidence, and the planned penal code for discretionary sentences. These regulations are regarded as a fresh wave of judicial reforms for the Saudi legal system and promotes for achieving and supporting Saudi Vision 2030.

Prior to the enactment of the NCTL, the Kingdom of Saudi Arabia (“KSA”) have been governed primarily by uncodified principles of Sharia law drawn from a vast body of legal rules developed by Islamic scholars. Unfortunately, these uncodified rules were inconsistently applied by the courts in KSA without any clarity on the precedents to be applied in certain transactions or situations.

One of the significant impacts of the NCTL is that it expressly and clearly identifies the basic different aspects and governing principals of contracts, such as the elements of the contract; its formation, validity, effects on the contracting parties; termination; and the provisions relating to damages. The NCTL will govern and protect financial transactions between individuals, develop the legislative environment, create an appealing investment environment, control the relationship between contracting parties, compensate for emotional damage, and ensure no abuse of rights. Apart from helping to reduce conflicts and clearing out the ambiguity, the NCTL will also improve transparency and the ability to foresee judgments in the sphere of civil transactions and reduce inconsistencies in judicial reasoning to obtain speedy justice. There is now a clear reference to the rule of law even though the Saudi courts still maintain some room for application and interpretation

The NCTL further introduces various provisions to clarify the provisions of contract assignment and establishes the rights and obligations that arise after such assignment. These provisions aim to protect the parties involved and enhance their commercial dealings. One notable provision introduced by the NCTL in Article 110 is the doctrine of Force Majeure which is a significant development in the Saudi legal framework. As per the NCLT and similar to the way such doctrine is applied worldwide, the NCTL now allows for the modification or termination of a contract when unforeseen and exceptional circumstances arise, making it impracticable or unduly burdensome for the parties to fulfill their obligations. It provides a legal basis for parties to renegotiate or terminate a contract in cases where an unforeseen event substantially affects the performance of the contract.

Another notable provision established by the NCTL in Article 29 is the rule of Prevention of Abuse of Rights. The provision aims to safeguard rights and prevent illegal activities that harm others. Further, this provision prohibits intentional actions that harm others or exploit contractual rights illegally. It ensures that parties exercise their rights fairly and reasonably and do not engage in acts leading to the infringement upon the rights or interests of third parties. By introducing this rule, the NCTL has now introduced an explicit principle that promotes ethical and responsible behavior in commercial transactions and prevents the misuse of contractual rights resulting in inequitable advantage.   

Furthermore, the NCTL improves the stability of civil transactions and reduces the grounds for canceling or terminating contracts based on validity concerns. The Law provides a clearer set of guidelines on the conditions under which contracts may be deemed invalid and establishes limitations on the cancellation or termination of contracts. This increased stability and more transparent framework help parties to engage in contracts with greater confidence, as they are less likely to face arbitrary cancellations or terminations based on minor or technical issues related to contract validity.

The NCTL also recognizes the Right to Compensation for emotional damages specifically those caused by assaults or acts of others, and makes such right separate from penal charges for libel and slander and clearly independent to consider the context of civil transactions. Pursuant to Article 138 of the NCTL, if a person suffers psychological or reputational harm as a result of another person’s assault or act, the aggrieved party has the right to seek compensation. This provision acknowledges the importance of protecting not only parties’ economic interests but also their emotional well-being and reputation. By providing a legal remedy for emotional damage, the NCTL ensures that parties have recourse when they experience harm beyond the economic aspect of a contract.

Moreover, the NCTL determines in Articles 295 to 306 the Statute of Limitations. The law grants parties a ten-year deadline to assert their rights in court. This provision ensures that parties have a reasonable timeframe to initiate legal proceedings and seek redress for any disputes or violations of their rights. Setting a specific timeframe for lawsuits provides clarity and promotes legal certainty especially with regard to contract assignments.

Additionally, one of the primary goals of the NCTL is to safeguard property rights and define the constraints associated with them, such as the right of Utility (Article 679), Use (Article 694), and Easement (Article 699). By clarifying the rights and limitations related to property, the law aims to protect the interests of parties involved in contract assignments. This provision ensures that parties clearly understand their property rights and the legal framework within which they operate, reducing the likelihood of disputes and promoting smoother transactions. 

The NCTL, resolves the differences in considering lost profits within the civil dealings system. Article 137 has provided a framework that allows the aggrieved party to claim compensation for lost profits from the person responsible for the damage. However, it is important to meet the legal requirements outlined in the law, including establishing a causal link between the actions of the person causing the damage and the financial losses suffered by the aggrieved party. We will still need to see how the Saudi courts will apply this rule in particular given that in other civil law jurisdictions each legal system has its own criteria in defining and calculating financial losses including loss of profit.

The NCTL also introduced the concept of nominal contracts. Nominal contracts comprise clauses describing everything linked to contracts, such as contract elements, legality, impacts on contractors, and contract nullity and termination provisions. The contracts covered by the law include title transfer contracts (Sale Contract Articles 307 to 360, Donation Agreement Articles 366 to 381, Loan Agreement Contracts Articles 382 to 390, and Reconciliation Contracts Articles 391 to 402), Contracts resulting from benefits (Lease Contracts Articles 407 to 450, Borrowing Contracts Articles 451 to 460), Contracts resulting from work (Contracting Contracts Articles 461 to 478, Mandate contracts Articles 480 to 505, Deposit Contracts Articles 506 to 516, and Custody Contracts Articles 517 to 527), Participation Contracts (Company Contracts Articles 529 to 549, Speculative Contracts Articles 550 to 565, and Output Sharing Contract Articles 566 to 577), Suretyship Agreement Articles 578 to 606.

A significant issue of immediate relevance to alert is that the preamble of the NCTL recognized the retroactive effect (on existing contracts and contracts signed prior 16 December 2023) except where a contracting party proves that such provisions contradict with the Islamic laws (Sharia). Moreover, unlike lost of profits and moral damages, the NCTL’s position on payment of interest is less clear. Pursuant to Article 385, however, any condition to repay amounts that exceed the capital in loan agreements, either at the time of conclusion of the agreement or at the time of the deferred payment, is considered null and void. Further, Article 1 refers to the rules derived from Shariah which are consistent with the NCTL as the source of law in the absence of an applicable provision of the NCTL or a rule of general principles enclosed in the last chapter of the NCTL. 

In conclusion, the implications and impact of the NCTL on the Saudi legal system and society are positively substantial. The Law will enhance the transparency and predictability of the legal system leading to having clarity on the outcome of court decisions within the context of contracts and transactions between the parties in KSA, which will encourage foreign investment and hopefully boost economic growth. The NCTL will also provide greater legal protection for individuals and businesses, increasing trust in the legal system and promoting a more stable society. However, implementing the law will require significant resources and capacity-building efforts to ensure the legal system can effectively enforce the new provisions. Overall, the NCTL represents a major step forward for judicial reform in Saudi Arabia and will have a positive impact on the Saudi legal system and the society in Saudi Arabia.

This article provides the reader with an overview of key provisions of the New Civil Transactions Law (NCTL). For brevity purposes, certain legislative provisions and definitions have been paraphrased. Therefore, this article does not, and is not intended to, constitute legal advice.  Any legal advice or opinion has to be customized to take into consideration all facts that varies on a case-by-case basis. Our team would be delighted to advise and assist you in better understanding the material impact that the NCTL could have on your contracts, agreements and transactions governed by Saudi laws, and to ensure that going forward all your transactions are in compliance with the NCTL.

Authors: Fadi Daher, Partner and Alain Elia.

For further information, please contact Fadi Daher (fadi.daher@glaco.com) and Amr Hammad (amr.hammad@glaco.com).