On 16 December 2023, the Saudi Civil Transactions Law (CTL) entered into force; an unprecedently comprehensive codified law that covers, inter alia, the areas of contract, tort, property and personal rights; the first modern civil code in the history of the Kingdom of Saudi Arabia (KSA). The CTL will also apply to commercial transactions to the extent that its rules do not conflict with other special laws, e.g. the anticipated Commercial Transactions Law, a draft of which has already been issued for public advice and feedback.
However, that’s not the only exciting legal news in KSA. Within weeks after the publication of the CTL in Um al-Qora, the Official Gazette, the Saudi Cabinet finally approved KSA’s accession to the United Nations Convention on Contracts for the International Sale of Goods (CISG), after years of negotiations, and joint workshops, with the UNCITRAL.
This piece attempts to highlight the most significant impacts of the two bodies of law on the rules governing sales contracts in KSA, as well as examples of their significant similarities and differences. Reference will be made to the existing caselaw on sales contracts, which applied uncodified Sharia Law up until the CTL entered into force.
The Mandatory Uniform Application
For decades, successfully more than any other uniform legal instrument, CISG managed to transcend solid legal barriers embedded in the legal systems of its contracting states. Credit is due, primarily, to CISG Article 7 (1), which sets a mandatory rule for national courts and arbitral tribunals to abandon their national perspectives while interpreting the CISG, and mandates paying regard to the international character, and to the need to promote uniformity in its application, and the observance of good faith in international trade.
To emphasize the uniquely autonomous nature of CISG, its Article 7 (2) exceptionally permits courts to resort to domestic law, only if the general principles of the CISG cannot be used as a gap-filler in matters that CISG did not expressly settle. Consequently, doctrines that qualify as general principles, albeit alien to, or rejected by, respective national courts must be applied, e.g. good faith in the parties’ conduct and dealings, estoppel, and considering the parties’ contributory conduct to a contractual breach while assessing damages.
KSA opted not to be bound by CISG Part III, KSA courts will only need to apply general principles derived from CISG Parts I and II. Except in the event that the parties agreed to ‘opt in’ Part III, which they can, the general principles derived from Part III will not be applied, e.g. the aggrieved party’s duty to mitigate the loss caused by the other party’s conduct. In such case, a Saudi court will apply CLT Article 137 to determine the nature and limitations of the aggrieved party’s duty.
Moreover, the international character of CISG and the need to promote uniformity dictate that Saudi courts must observe and follow the application and interpretation of CISG in other contracting states in determining the proper application of the convention. Such practice will be novel to KSA courts, as KSA judges tend not to apply foreign law, or consider international jurisprudence relevant, in their review of cases brought before them. However, KSA courts are expected to permit the parties to meet the burden of proof that a certain maxim is considered a general principle of CISG, and it should, therefore, prevail.
Another challenge that KSA courts will face, as do their counterparts in the other six Arab contracting states is the discrepancies between the Arabic CISG text and the other UN official languages. This may impair the uniformity of application.
Opting Out of Part III
KSA declared a reservation under CISG Article 92 with regard to CISG Part III, which comprises the rules governing the performance of the contract, inter alia, the parties’ rights, obligations and remedies. It is, therefore, reasonably expected that KSA will accept and ratify CISG Part III in the near future, to receive the full benefits of acceding to the CISG. The decision to exclude Part III is solely due to CISG Article 78 on Interest.
Until the reservation on Part III is removed, it is inevitable that KSA courts will exclusively rely on the CTL for matters related to the parties’ rights, obligations and remedies in international sales contracts governed by the CISG. This is the case, especially that KSA courts do not recognize the concept of conflict of laws, as conflict may only exist between the different schools of Sharia.
Differences and Similarities
Formation of Contract
CISG Part II (formation of contracts) prevalently corresponds with the CTL provisions and existing KSA caselaw. For example, CTL Article 35 and CISG 16 consider an offer irrevocable throughout the fixed time indicated in the offer for acceptance. Furthermore, CTL Article 37 and CISG Article 18 expressly state that silence does not constitute acceptance unless otherwise evident in the practice between the parties; this was also the case under the Saudi caselaw. Generally, CTL and CISG, both, require the parties to act in a coherent and non-contradictory manner throughout the formation and performance of the contract, by applying the estoppel principle in CISG, and the doctrine of ‘man sa‘a fy naqd ma tam ‘ala yadaihee fasa‘ayoho mardood ‘alayhee’ (also known as ‘non concedit venire contra factum propriu’) in Sharia.
Moreover, the formation of a contract under both, CISG Article 11 and CTL Article 33, do not require any form for the offer and acceptance or the contract. This was also the rule under the caselaw, as an offer to contract (or acceptance) need not be in writing to conclude a contract.
However, CTL and CISG are not identical. For example, their stances differ on whether a display of goods constitutes an offer. Whereas, CTL Article 34 considers such display sufficient to constitute an offer, if coupled with the price and the intention to offer, CISG Article 14 does not consider it as such, if not addressed to specific persons and absent sufficient definiteness, i.e. missing the essential terms of the contract, including quantity.
Hardship and Impossibility (Part III)
CISG embraces both, impossibility as well as hardship, as excuses for non-performance. A change of circumstances that could have not been reasonably expected, rendering performance excessively onerous (“hardship”), may qualify as an exempting “impediment” under CISG Article 79. On the other hand, the CTL, as most Arab countries’ civil codes, draws a much harder line between force majeure and hardship. Hardship is caused by exceptional circumstances which render the contractual obligation excessively burdensome, while an event of force majeure renders the performance of an obligation impossible.
In the CTL, a force majeure event rendering the performance impossible will result in the exemption of performing the obligation (and its counter-obligation) altogether – CTL Article 294, in addition to the termination of the contract ipso facto – CLT 110 (1). The parties are free to allocate the risk of force majeure as they deem fit – CLT 125 and CLT 174.
On the other hand, hardship caused by unforeseeable events does not result in exempting the burdened party from performance, but it permits such party to invite the other party to renegotiate the contract in order to reduce the extraordinarily burdensome obligation to a reasonable level. The debtor may resort to court/arbitration to re-introduce the contractual balance, if necessary – CLT Article 97; and the parties may not agree otherwise.
Anticipatory Avoidance of Contract (Part III)
CISG Article 72 allows a party to avoid the contract (one-sided right to terminate), if it is clear that the other party will commit a fundamental breach before the latter’s performance due date. So, despite the non-occurrence of an actual breach, the other party may withhold performance of his due obligations. The doctrine of ‘anticipatory avoidance’ finds no equivalent in Saudi caselaw or the CTL.
Aside from the far-reaching effects on the Saudi legal system and jurisprudence, as a whole, both legislative bodies will substantially change the legal rules governing sales contracts in KSA, as we know it. However, the substantial impact of CISG will only occur when KSA completes its accession to the treaty in its entirety by accepting CISG Part III.
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