On 16 December 2023, the new Saudi Civil Code will come into force. The Civil Code provides a comprehensive codification of the law of contract and property. It replaces Sharia law that the Saudi courts applied in the past. The Civil Code is a milestone in the modernization of the Saudi legal system.
A Codification of the Law of Contract, Tort, and Property
On 16 December 2023, the new Saudi Civil Code will come into force. It covers the law of contract, tort, and property. Although some Saudi practitioners claim that the Civil Code essentially codifies existing Saudi case law, the law appears to follow the model of the Egyptian Civil Code (that also inspired the civil codes of the other GCC countries).
Formation of Contract and Standard Terms of Business
A contract is made by offer and acceptance (Article 31 Civil Code). Silence in principle is not tantamount to acceptance (Article 37 Civil Code). This means that parties should be careful in relying on the legal effects of a non-objection to an amended offer.
The Civil Code does not deal with the incorporation of standard terms of business. In the light of this, it is advisable to attach standard terms of business to the contract and not to rely on incorporation by reference (e.g. if the standard terms can be downloaded from the internet). There is no statutory oversight of standard terms of business in transactions between enterprises. To the extent the Civil Code provides for statutory oversight of standard terms of business, this is limited to so-called contracts of adhesion (Article 40 Civil Code). In a contract of adhesion, a consumer submits to the contractual terms of a provider of essential goods and facilities.
Interpretation of Contracts
The Civil Code follows the “objective” doctrine of contract interpretation (Article 104). A contract is only susceptible to judicial interpretation if the wording is not clear. In the event there is room for interpretation, the parties’ joint intention must be determined. This means, for example, that the context of the negotiations must be taken into consideration, as well as commercial usage, the type of transaction and the principle of good faith. Moreover, a contract clause must be interpreted in the context of the entire agreement.
Payment Conditions, Retention Rights, Retention of Title
Unless the parties agree otherwise, the Civil Code provides that the purchase price in a supply transaction must be paid in advance (Article 345).
In a bilateral contract, either party can withhold performance until the other party has performed its obligations (Article 114 Civil Code).
In a sales contract, the parties can agree on a retention of title so that title to the asset sold only transfers after the purchase price has been paid in full (Article 320 Civil Code). The Civil Code is silent as to whether such an arrangement also takes effect vis a vis a third party creditor in the event of the buyer’s insolvency.
Breach of Contract and Damages
If a party is in breach of its contractual obligations, the other party can request performance or rescission of the contract in addition to damages (Article 107 Civil Code). The precondition is that a formal reminder is served on the obligor.
Rescission must be declared through a judicial decision (or decision of an arbitral tribunal), provided the parties have not agreed to waive this requirement (Article 108 Civil Code). The court can decline to rescind the contract in the event the breach is immaterial only. The parties are free to agree on rescission by service of a notice of termination (and, in practice, it is advisable to do so). In addition, the parties are free to determine the materiality threshold.
Damages are calculated on the basis of the hypothetical assumption that the obligor has duly performed its contractual obligations (Article 136 Civil Code). Notably, damages also include loss of profit (Article 137 Civil Code). The latter is a major innovation, as in the past Saudi courts have been reluctant to award loss of profit, arguing that this conflicted with the prohibition of speculation (gharar) under Sharia law.
Limitation Clauses and Liquidated Damages
According to Article 173 (1) Civil Code, contractual liability can be limited or excluded as long as the obligor’s breach is neither fraudulent nor grossly negligent. Liability in tort cannot be limited. This should bring some clarity to the – controversial – discussion on exclusion clauses under Saudi law. The definition of “gross negligence” is, however, essentially left to the courts. The Civil Code, moreover, is silent on the relationship between contractual and tortious liability (“cumul” vs “non-cumul”).
The parties are free to agree on liquidated damages (Article 178 Civil Code). An obligor has, however, the right to establish that no damage has occurred, and the court has the right to reduce liquidated damages in case the amount is deemed “excessive” (Article 179 Civil Code). A claimant has the right to claim damages in excess of the agreed amount if the breach was fraudulent or grossly negligent.
Force Majeure and Hardship
The Civil Code distinguishes between force majeure and hardship.
If a contractual obligation is rendered impossible due to reasons that are out of the obligor’s control, the obligor is released from its obligation. Under a bilateral contract, also the corresponding obligation of the other party lapses (Articles 110 and 294 Civil Code).
If performance of a contract is rendered onerous due to a general change in circumstances which could not be anticipated when the contract was concluded, so that that the obligor is facing a “material disadvantage”, the aggrieved party can request a renegotiation. If the renegotiation fails, the court may reduce the obligation to an “adequate level”. This incorporates the principle of imprévision that is common in the Arab civil codes.
Assignment of Rights
A creditor can assign a right without the need to obtain the obligor’s consent, as long as the right is assignable (Article 238 Civil Code). This is a controversial issue from the perspective of Sharia law. However, an assignment takes effect only after the obligor has either acknowledged it or has been given formal notice (Article 240 sequitur Civil Code).
Warranty Claims and Decennial Liability
The Civil Code deals with warranty claims in detail in Articles 338 sequitur, providing the buyer with the right to either request a reduction of the purchase price or to rescind the contract. The statutory warranty regime can be amended contractually as long as the seller has not concealed the defect fraudulently (Article 343 Civil Code).
The Civil Code does not deal with decennial liability and leaves this question to the Building Code (2017) and implementing regulations. Pursuant to the principle of decennial liability, the contractor and the engineer are jointly and severally liable for a period of ten years for defects which potentially endanger the stability of a building or fixed structure.
No Interest on Loans
Article 385 Civil Code bans any kind of interest in lending transactions. This is a repercussion of the ban of “ribâ” under Sharia law. It remains to be seen whether the courts limit this prohibition to lending transactions or whether they will apply it as a general principle prohibiting interest.
The general prescription period is ten years (Article 295 Civil Code). The Civil Code provides for shorter prescription periods for specific claims (e.g. five years for the honorarium of free professions or regular payments such as wages or rental payments). The statutory prescription periods are mandatory and cannot be amended by contract (Article 305 Civil Code).
Conflict of Laws
The Civil Code does not deal with conflict of laws. A Saudi court will always apply Saudi law and will not recognize a choice of law clause in an international agreement. This principle persists. However, there are two important exceptions. First, Saudi Arabia recently has acceded to the CISG. As from 1 September 2024, international sales will be subject to the CISG, unless the parties have agreed otherwise. Second, the Saudi Arbitration Law (2012) permits the parties to determine the law applicable to the dispute (Art. 38 Arbitration Law). This means that the parties can validly agree on the proper law of the contract, provided the contract contains an arbitration clause.
If you would like more information about this topic then please contact us.
BERLIN | AMERELLER Rechtsanwälte | Kurfuerstenhöfe, Spreeufer 5, 10178 | Berlin, Germany |T: +49 30 609 895 660
CAIRO | MENA Associates in association with AMERELLER | Downtown: Immobilia Building | 26 A Sherif St. | Office No. 1029 | Postal Code 11121 | Cairo, Egypt | T +20 2 2395 0442 | +20 2 2393 6946
Sheikh Zayed office: Polygon Business Park | 7-3B1 SODIC-West | Sheikh Zayed | Postal Code 12451| Cairo, Egypt
This client alert is a public document for informational purposes only and should not be construed as legal advice. Readers should not act upon the information provided here without consulting with professional legal counsel. This material may be considered advertising under certain rules of professional conduct. Copyright © 2023