The Saudi Civil Transactions Law marks a significant departure from what was prevailing in the Kingdom. For businesses, it sets up a new framework to investments and operations. Image Credit: Shutterstock

On December 16, Saudi Arabia’s highly anticipated Civil Transactions Law came into effect, and expected to have a favourable impact on the business environment.

This is the third of four laws to be issued as part of the Kingdom’s legal reforms to elevate the legislative environment, in line with the Saudi 2030 Vision. The law applies to all civil and commercial transactions – meaning transactions involving people and businesses, respectively – unless they are otherwise governed by applicable commercial laws.

It has a retrospective effect, which means that it will also apply to transactions signed prior to December 16.

Legislative landscape

Historically, in Saudi Arabia, there was no comprehensive codified system for civil transactions. As a result, most contracts were governed by general Sharia law principles, which caused some degree of uncertainty for a number of reasons.

First of all, Shari'ah law principles are general principles derived from religious texts and traditions, but they are not found in one specific source or code.

Secondly, no principle of binding legal precedence previously existed in Saudi Arabia – meaning lower courts were not bound to rulings issued by appeals courts – and often court decisions were not published.

Finally, judges in the Kingdom applied Sharia law principles on contracts on a case-by-case basis, and the principles were open to interpretation by the judge in question.

Civil Transactions Law’s scope

This is one of the largest pieces of legislation issued in Saudi Arabia and consists of 721 articles, focusing on civil transactions. Family and estate matters are not covered.

The Civil Transactions Law consists of a General Part; a Specific Contract Part; and a third part that lists Sharia law principles.

The General Part contains rules that apply to all civil transactions. The Civil Transactions Law’s General Part contains rules related to entering into contracts, legal representation, interpretation, obligations and performance of contracts, default and breach of contract, fulfilment of obligations, and termination.

It deals with harmful acts, unjustified enrichment, damages and compensation, and regulates the statute of time limitations.

The Specific Contract Part contains a list of contracts that are being codified and regulated. The regulated contracts include sales contracts, barter, gifts, loans, leases, contracting, guarantees, partnerships, and others.

Also codified in this section are Islamic contract concepts, such as Mudaraba, Musharaka and Murabah contracts.

There is also the list of 41 applicable Sharia law principles. These are now explicitly codified and while the Civil Transactions Law is fairly comprehensive, in case of any gaps, these Sharia law principles will apply.

The Civil Transactions Law uses Continental European Civil Law precedence as a basis and combines it with codified Sharia law principles. It is worth noting that, similar to Continental European Law, only certain provisions of the Civil Transactions Law are mandatory, and parties are free to deviate in their contracts from the other provisions.

Importance for foreign investments

By establishing a transparent, robust and comprehensive legal framework, the Civil Transactions Law protects the rights of all parties involved in civil transactions. This ensures that the parties have a clear understanding of their rights and obligations and can rely on a predictable and fair legal system.

This will help foster legal certainty, trust and confidence of domestic and international businesses, reducing disputes and promoting smoother business transactions.

Furthermore, investors from Continental European countries will particularly benefit from the law, given its similarities with the civil transactions laws that they are familiar with from home.

The law is the result of coordinated efforts by the Kingdom's institutions and further cements the monumental developments in the Kingdom's legal landscape. The Kingdom's codification of Sharia principles in alignment with international best practices aims to instil certainty and transparency, attracting foreign investment and promoting economic growth.

This will benefit the country at large and make investments into the Kingdom even more attractive.