CMS guide on the new KSA Civil Code – Fourth Edition - Commercial Contracts

Further to our recent introductory articles on the general principles of contract law available here); construction law (available here) and corporate transactions (available here); we have continued with our assessment of Royal Decree No. M/191 (the “Civil Code”), this time focusing on those chapters applicable to the technology and media sector.

Set out below is a summary overview of the key provisions of the Civil Code relevant to commercial contracts in general terms, across various sectors which are supported by CMS including technology and media. 

Elements of Contract

The Civil Code comprehensively codifies crucial elements of both nominate and innominate contracts, with provisions covering:^[1]

• Formation of contracts
• Consent and expression of will of contracting parties
• Capacity of contracting parties
• Termination
• Damages

Previously the rules regarding commercial contracts were uncodified and derived from Shariah principles. Whilst such principles and uncodified rules have a well-established history, the absence of codification could prove off-putting to businesses looking to invest in the Kingdom due to a perceived lack of certainty as to how contracts might be interpreted judicially. The Civil Code therefore brings much welcomed clarity to all civil transactions and is consistent with the Saudi government’s vision to drive economic growth at full-speed over this decade.

Interpretation of a Contract

The Civil Code explicitly reduces the scope for extraneous interpretation of coherent contract terms, stating that “when the wording of the contract is clear, it may not be deviated from under the pretext of interpreting it to seek the will of the contracting parties”.^[2]

However, where drafting is ambiguous or self-contradictory, the Saudi courts will have wide scope for interpretation. The rules of interpretation are provided for in the Civil Code, which says that when it is necessary to interpret a contract, it shall be necessary to identify “the common will of the contracting parties” and the court should “go beyond the literal meaning of the words” to do so.^[3] Considerations for the court in this activity are identified as:

• General custom
• The conditions of the contract
• The nature of the transaction
• Customary dealings between the contracting parties
• The honesty and trust which should exist between the contracting parties

Consequently, ensuring that the language of contracts is precise and internally consistent is extremely important in avoiding disputes where parties appeal to custom and the will of the court, rather than what is written (or was intended to be written) in the contract. This is important to an even further degree where the contract diverges from typical custom or past dealings between the parties or has some other unusual aspect.

Businesses active in KSA may wish to take the Civil Code as a prompt to revisit their standard contracting terms and conduct a review for clarity, alongside preparing for other new laws with commercial impact such as the Saudi Data Protection Law,^[4] and the likelihood of a new Consumer Protection Law being introduced before long.^[5]

Contracts of Adhesion

A contract of adhesion is a contract prepared on standard terms on a “take it or leave it” basis, typically where there is a lack of balance between the negotiating position of the parties (such as between a corporate and a consumer, or a multinational organisation and a small local business customer).

In contracts of adhesion, the Civil Code provides that,“doubt shall be interpreted in favour of the compliant party”,^[6] and the courts retain the power to amend abusive clauses or exempt the compliant party therefrom.^[7] This means that businesses drafting standard terms that are not intended to be negotiated needs to ensure that the terms are not ambiguous (as the ambiguity is likely to be interpreted in favour of the counterparty) and that the terms are not abusive (such as providing for excessive remedies for breach, attempting to avoid reasonable liability for non-performance or breach, not clearly defining the obligations of the party, and so on).

Exercise of Right

A key addition to the Civil Code is an obligation on contracting parties to maintain good faith and not abuse their rights in relation to commercial contracts. Rights “may not be abused”, if they are intended to cause harm to others, or if the benefit of using them is absolutely disproportionate to the harm suffered by others, or if used for any reason other than its lawful purpose.^[8]

Similarly, a contract “shall be executed in accordance with its terms and in a manner consistent with the requirements of good faith”.^[9]

Whilst a duty of good faith was generally understood to exist, with the duty now in codified form acting and exercising discretion non-capriciously is arguably even more important in the Kingdom. The Civil Code is aligned with other established civil codes in the region such as that of the UAE, where a good faith duty is also found.^[10]

Force Majeure

The Civil Code includes provision for force majeure relief. This has been defined as follows:

“In the event of exceptional circumstances of a general character which could not have been foreseen at the time of entering into the contract and as a result of which the performance of the contractual obligation becomes burdensome for the debtor such as to threaten him with exorbitant loss”.^[11]

The Civil Code states that a right of relief in such circumstances is mandatory, with any agreement to the contrary deemed void.^[12]

If an event of force majeure arises, the debtor may request to renegotiate the impacted obligation. If the matter is not settled within a reasonable period, the court retains the power to step in and “reduce the burdensome obligation to a reasonable level”.^[13]

It should be noted that there appears to be a high threshold before a force majeure event occurs, however. In addition to rendering the performance of the obligation “burdensome”, the event must:

• Be an exceptional circumstance
• Be of a general character
• Be unforeseeable at the time of entering into the contract.

If taken literally, this is a high threshold. One may question how many claimed force majeure events are genuinely “unforeseeable”.

However, this approach is similar to the approach taken in the UAE Civil Code. Parties which may need to rely on potential force majeure relief will therefore want to consider whether it is sensible to draft enhanced rights of relief into their contracts, rather than relying on the legal right of relief.

Termination

Where either or both parties wish to cease a commercial contract, the Civil Code establishes four grounds for termination:^[14]

• Termination by mutual consent
• Termination by either party exercising their right to withdraw in accordance with the terms of the contract
• Termination by either party following breach of contract by the other party
• Impossibility of performance of the contract

In both cases of recission or termination of a commercial contract, the parties will be restored to their status quo ante before entering into the contract.^[15] In cases of successive contracts, the recission or termination will not have a retroactive effect, and a court may order compensation if required.^[16]

Given that the Civil Code does not mention any materiality threshold in connection with the principle of termination for breach, it is recommended to consider drafting termination provisions in the contract on the basis that the parties agree such provisions represent their exclusive rights to terminate and that any other legal right to terminate is excluded, in order to avoid “hair trigger” termination claims. Whether such an approach will be considered effective or not by Saudi courts remains to be seen.

It may also be prudent in certain types of contract to define what is, or is not, considered to render performance of the contract “impossible” (for example, to exclude events which the party affected should have taken measures to prevent or mitigate in advance).

Compensation for Damage and Duty to Mitigate

The Civil Code sets out that damaged parties will be compensated by “returning the damaged to the situation in which he was or would have been without the damage” .^[17] This approach is consistent with the principle of recission and differs from the approach taken in some other jurisdictions of considering what the position of the wronged party would have been if the contract had been performed. The Civil Code provides that the wrongdoing party is liable for damages to the extent that the wronged party has, “suffered loss and loss of profits, if the damage was a natural result of the harmful act”.^[18]

Historically, damages that would be considered to be “indirect” or “consequential” under Common Law have not been easy to recover in Gulf courts even if they could have been anticipated or foreseen. Therefore it could be a reasonable starting point to suppose that if there is an analogous concept in Common Law to the above measure of damages, the closest would be the concept of “direct” damages. However, the relevant Article goes on to state that damage is considered to be a “natural result” if, “the damaged is unable to avoid it by exerting reasonable effort as required by the circumstances of a normal person”.^[19] This does potentially seem to open the door to recovery of indirect or consequential losses to some extent, although recoverability of any loss is tempered by the duty to exert reasonable efforts to mitigate the loss.

Limitation Period

Another important development is the codification of a general limitation period for bringing, “the lawsuit against the denier”, which stands at ten (10) years.^[20] We await further clarification on precisely when the period begins to run, how related claims are considered, and so on, both in commentary on the Civil Code and in practice, but it is worth noting that the Civil Code provides for deviations from this standard limitation period to be set down in statutory provisions. It is therefore possible that certain categories of claim or contract will be subject to different limitation periods. By way of example, the UAE Civil Code creates a fifteen (15) year general limitation period but the UAE Commercial Code provides for a five (5) year period for applicable commercial contract claims.

Concluding remarks

In addition to the Civil Code, a draft commercial code is also being prepared for public consultation in Saudi Arabia which, assuming it comes into  effect at some point, will supplement the Civil Code in respect of commercial contracts and transactions. Whilst we await further information on when this will be published, we expect to continue to see developments in this space throughout 2024.

Legal developments in the Kingdom have come at pace throughout the last couple of years and businesses would be well advised, if they have not been incrementally addressing the developments to take stock and consider whether they are complying with all key laws and whether their standard terms and practices are due a refresh.

Co-authored by Rupert Nodder, Trainee Solicitor at CMS.
 

^[1] Articles 30 - 149

^[2] Article 104(1)

^[3] Article 104(2)

^[4] Laws and Regulations (sdaia.gov.sa)

^[5] Consumer Protection System (ncc.gov.sa) – Note the whole document may only be available in Arabic, but some sections have been translated to English via this website. Use your browser translate option on the website to see these. 

^[6] Article 104(3)

^[7] Article 96

^[8] Article 29

^[9] Article 95(1)

^[10] Article 246(1) UAE Civil Code

^[11] Article 97(1)

^[12] Article 97(4)

^[13] Article 97(3)

^[14] Articles 105-110

^[15] Article 111(1)

^[16] Article 111(2)

^[17] Article 136

^[18] Article 137

^[19] Article 137

^[20] Article 295