A brief overview of Saudi's Civil Transactions Law

In line with its inspiring journey to reform Saudi Arabia under the Vision 2030, the Civil Transactions Law (CTL) which was approved by Saudi Cabinet in June 2023, came into force from 16 December 2023. Along with the other judicial reforms in KSA, it is evident about KSA’s commitment to modern international business practices which needs to be commended.

The Crown Prince HRH Prince Mohammed bin Salman called the CTL as a ‘remarkable transformation’ and that the law is based on foundations represented by the protection of property, stability and validity of contracts, identification of sources of rights and obligations and their effects, and clarity of legal positions.

A few notable features of the CTL are:

1.???? 721 Articles:

The CTL includes a whopping 721 Articles which cover all civil transactions except those for which there is another specific law, the labour law for instance.

?2.???? Retrospective Effect:

The CTL will apply retrospectively to all contracts which were executed prior to 16 December 2023 except:

?a. where a limitation period was triggered before the Effective Date,

b.? ?a party invokes an existing statutory provision or judicial principle conflicts with the CTL provisions

?3.???? Mandatory Provisions:

The CTL contains few mandatory provisions (for instance Article 72, Article 97, Article 179) which the parties cannot contract out with mutual agreement.

?4.???? Notice for claims

According to Article 175, damages shall only be due after serving a notice to the obligor [that is, the defaulting party], unless the parties agree otherwise, or a contrary statutory provision exists.

?However, Article 176 prescribes certain conditions where a notice of claim is not required, for instance ‘if the object of the obligation is compensation resulting from the wrongful act’.

?5.???? Damages

?A.??? Liquidated damages:

?Article 178 provides for including LDs in the contract or in a subsequent agreement.

?Generally, Shariah principles prohibit recovery of LDs which grossly exceed a party’s actual losses. Considering this, Article 179 imposes few restrictions on the recovery of the LDs:

?a.????? LD shall not become due if a party can prove that the imposing party has not sustained any damage

b.???? The court may reduce the LD if the paying party can show that a LDs were overestimated or that obligation was partially performed.

c.????? The court may increase the LD if the receiving party can show that the actual harm exceeds the amount of LD due to fraud or gross error.

?B.???? Moral Harm:

?Article 138 allows compensation for a ‘natural person’ to moral damages (sensory or? psychological damage) such as damages due to loss of reputation or social standing.

?6.???? Hardship:

?According to Article 97, the parties can renegotiate the contract if due to general exceptional circumstances which were unforeseen at the time of executing the contract, results in the performance of the contractual obligation burdensome for the obligor (vendor) threatening with a heavy loss. ?

?7.???? Termination:

?Articles 105 to 114 details the termination of contract under following situations:

?a.????? Mutual consent

b.???? For convenience

c.????? For default

d.???? Due to impossibility

?8.???? Limitation of liability

?As a common practice, Saudi Courts interpret limitation of liability clauses narrowly indicating to award damages proportionate to actual loss even if such amount exceeds the liability cap. According to Article 173, limitation of liability are valid and enforceable regardless of loss suffered, provided that the defaulting party did not commit deceit or gross negligence.

?Conclusion:

The CTL will vastly affect the Saudi legal landscape and it is advisable for construction companies, consultants, lawyers, arbitrators, suppliers to invest time and effort in absorbing these provisions. It will be an interesting journey as to how the Saudi Courts interpret these provisions and how construction industry would be affected by these 721 Articles.

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