KSA’s new civil transactions law

A landmark in the Saudi Arabia’s legislative history, the new Law will have a significant impact on contractual relationships and obligations in the Kingdom. Hourani & Partners offers commentary on the main principles of the Law.

The (the “Law”) was enacted in the Kingdom of Saudi Arabia on June 18, 2023. The Law is expected to come into effect 180 days following enactment and represents one of the most significant legal developments in the Kingdom in recent memory.

Previously, principles for contracting in the Kingdom were derived from Shari’ah, which created significant uncertainty regarding the contract formation and liabilities. Many Shari’ah principles are incorporated into the Law. Nonetheless, codification of these principles will remove much of the uncertainty and create a more hospitable landscape for contracting parties.

Set out below are some of the main principles of the Law that arise during the life of a contract: application of the Law, formation, performance and termination.

Application

The Law applies to all civil transactions in the Kingdom except those governed by separate statutes, such as employment contracts or endowments. Application is retroactive—the Law will apply to transactions entered into before or after December 2023, with few exceptions.

The Law codifies a list of 41 Shari’ah principles which apply in the absence of a more specific statutory provision. These principles include, inter alia:

• Preference is given to purposes and meanings over words and construction.
• The application of a statement is preferable to non-application.
• Debt is outstanding until payment.
• If a duty cannot be fulfilled except by a particular act, such act becomes a duty.

In the absence of an applicable provision in this list or elsewhere in the Law, the broader principles of Shari’ah apply.

Formation

Under the Law, a contract requires two elements: (a) consent and (b) object and cause.

Consent

Consent is the exchange of offer and acceptance, either orally or in writing, and may be implied from the circumstances. For example, a restaurant patron who orders and eats food from a menu consents to pay the listed prices. Offer and acceptance may occur if the parties agree on the essential terms of a contract and leave certain details to be agreed later.

An offer may be terminated, and no contract formed, in the following circumstances:

• Withdrawal of an offer before acceptance, except in case of an offer with a defined period;
• Express or implied rejection by the offeree (including a purported acceptance which amends the terms of the original offer);
• Either party’s death or loss of legal capacity before acceptance reaches the offeror;
• The offeree’s failure to definitively accept the offer; or
• Lapse of the period defined by the offeror for acceptance without a response from the offeree.

Furthermore, consent must be free of certain defects, namely:

• Mistake: A party may rescind a contract if there has been a substantive mistake, provided that the other party makes the same mistake, was aware of the mistake, or could have detected the mistake.
• Deceit: Deceit occurs when one party induces the other to consent to a contract through fraudulent means, such that the other party would not have otherwise consented. The deceived party may only rescind the contract if the deceit is a matter of substance without which such party would not have entered into the contract. If the deceit was committed by a third party, recission is permissible if the other contracting party was or should have been aware of it.
• Duress: Duress is defined as “coercion of a person […] without the right of so doing to perform an act without his consent”. Duress may serve as the basis for recission of a contract if, as a result of the duress, the affected party believed that “a grievous and imminent danger to life, honor or property threatened him or others” when accounting for the affected party’s age, marital status, health and any other relevant circumstances. As with deceit, duress by a third party may only serve as a basis for recission if the other contracting party knew or should have known of it.
• Lesion: Lesion is defined as “the unreasonable increase or decrease in consideration” as determined by relevant local customs. Lesion may only serve as a basis for recission if the contract is for property for a person who is incompetent or lacks legal capacity. Annulment proceedings may be avoided if the other party makes an offer for adequate compensation to cover the lesion.

Object and cause

A contract’s object is the product, service or other right to which the contract relates. The object may be virtually anything, provided the object is:

• possible;
• not be in breach of public order; and
• of a defined nature, type, quantity or otherwise as may be agreed between the parties.

If the object does not fulfill all of the above criteria, the contract is void.

A contract must be based on a cause which is permissible under Saudi law. If the cause is unlawful, whether expressly stated in the contract or implied from the circumstances (e.g., a contract for the importation of alcohol), the contract is void. However, a Saudi court will assume a cause is lawful unless evidence to the contrary is provided.

Notwithstanding the above, where one or more individual provisions of a contract are unlawful, such provision(s) are void. However, the remainder of the contract remains valid unless either party can prove it would not have entered into the contract but for the unlawful provision.

In addition, a person must have legal capacity to contract. An individual has legal capacity unless she is a minor (under age eighteen) or affected by a mental impairment. As an exception, dispositions of property by minors above the “age of discernment” (seven years old) or mentally impaired persons are valid if entirely beneficial to her. If simultaneously beneficial and detrimental, such dispositions are valid but may be annulled by the disposer’s legal guardian, or (if a minor) by the disposer herself upon reaching age eighteen.

Performance

A contract must be performed according to its terms and in good faith. Parties’ obligations include not only what is expressly included in the contract, but also those required by law, custom or the nature of the contract.

Obligations and rights of third parties

A contract may not bind a third party, even if a contracting party has agreed to induce a third party’s performance. If the third party fails to perform its obligations, the party who agreed to procure performance is liable for the failure.

However, a contract may create a right in a third party who has an interest in the performance. Unless there in an agreement to the contrary, the third party may demand performance directly from the obligor. Likewise, the obligor may apply defenses directly against the third party.

Termination

A contract may be terminated by mutual consent.

Other options for termination include:

• Optional Condition: A contract may include an option allowing a party to withdraw from the contract within a specified period. Upon one party’s withdrawal, the contract is considered terminated.
• Breach: If one party breaches a material obligation under the contract, the other party may request the competent court to order performance or termination. In either case, the breaching party may be liable for damages resulting from the breach. In addition, if the court considers performance unduly burdensome, it may order the breaching party to pay compensation to the other in lieu of performance.
• Impossibility: If performance becomes impossible for reasons beyond the affected party’s control, then the contract is automatically terminated. If partial performance is possible, then the contract is terminated only to the extent of the impossibility. However, in the event of partial impossibility, which is material to the contract, the unaffected party may request termination of the entire contract.

If a contract is rescinded or terminated, each party should be restored to its pre-contract position. If restoration is impossible, the court may order either party to compensate the other.

Contracts in relation to a particular subject matter

The Law also contains many provisions applicable to contracts of various subject matters, including leases, loans, construction contracts and agencies.

Conclusion

The Civil Transactions Law lays a welcome framework for contractual certainty that was previously absent in the Kingdom. Together with a multitude of other legal updates—including the updated Companies Law and the new Personal Data Protection Law—we expect the Law will create a more business-friendly environment on the heels of Vision 2030. We will provide further updates as various provisions of the Law are tested before the courts.

Authored by: Edoardo Betto*, Amgad Husein*, Ellen Ray
Originally published via The Oath  –Click Here

 
*Member of ZH Partner – Relationship firm in Saudi Arabia