CMS guide on the new KSA Civil Code - First Edition – Contractual Principles

Introduction

On 19 June 2023, Royal Decree No. M/191 (the “Civil Code”) was published in the Kingdom of Saudi Arabia’s official gazette. The Civil Code provides that it will come into effect 180 days after its publication, resulting in a commencement date of 16 December 2023 (the “Commencement Date”).

It contains over 700 individual articles, covering (amongst other things) the law applicable to civil relationships, obligations and rights; and contracts (general and specialist), which represents a departure from the Kingdom’s previous system whereby civil relations were essentially governed by Shari’ah law.

This current Law Now examines some key headline provisions included in the Civil Code pertaining to contract law. In subsequent months and in the lead up to the Commencement Date we will take a deeper dive in a series of Law Nows covering how the Civil Code deals with issues arising in respect of:

1. construction;
2. real estate;
3. corporate transactions; and
4. technology and media,

Application

The preamble to the Civil Code states that its provisions shall apply to all cases from the Commencement Date – such that contracts entered into before then will also be captured by its terms. A possible exemption to this exists (for contracts entered into prior to the Commencement Date) in circumstances where an earlier statutory provision or judicial principle contradicts an article of the Civil Code which one of the parties relies upon. However, given that the new legislation reflects the first real codification of civil law in the Kingdom, the scope for a party to rely upon a contradicting statutory principle is likely to be remote.

Key Contractual principles

Conclusion of contracts

The usual provisions setting out the manner in which a contract may be formed are included in the Civil Code. Contracts may be entered into orally or in writing, noting that silence may be considered to be an acceptance where an offer relates to the parties’ previous dealings.^[1]

An important point to note is that where one party negotiates in bad faith and fails to enter into the contract, that party may be required to compensate the other (excluding profit). Bad faith will be present where a party enters the negotiation with no intention of reaching an agreement, or fails to inform the other party of a material term required.^[2]

Defects and errors

Once a contract has been entered into, the parties shall be bound by its terms, unless of course some defect in its formation can be identified – for instance, where one of the parties was lacking in capacity.^[3] Aside from this the key issue that will undermine a contract’s validity will be where a misrepresentation (by words, acts or silence) has occurred.^[4]

Where a party makes a fundamental mistake when concluding a contract, without which it would not have consented to the contract, that party can apply for the invalidation of the contract. However, any mistake won’t be considered for this purpose unless the other contracting party makes the same mistake, knows of its occurrence, or could have easily detected it. Mere arithmetical or clerical mistakes shall not alter what the parties actually intended.^[5]

Interpretation 

Generally speaking, interpretation exercises may only be undertaken where there is some ambiguity in the contractual provision in question. If the wording used is clear, it must be applied. Of course, where there is an ambiguity in the wording used, the parties’ intentions may be assessed (which shall be guided by (amongst other things) custom, the circumstances of the contract, the nature of the transaction and the parties’ dealings). In all cases, any doubt shall be interpreted in favour of the party having the obligation.^[6]

The usual good faith principle common in other civil law systems also applies in that the contract shall be executed in accordance with its terms and in a manner consistent with the requirements of good faith. In applying this principle, a contract shall not be limited to binding the contracting party to its terms, but consideration will also be given to statutory provisions, customs and the nature of the contract.^[7] 

In circumstances where a contract was concluded by adhesion and contains abusive clauses, a court may amend those particular provisions or exempt the compliant party “as required by justice”. This is a mandatory provision that cannot be departed from.^[8]

The court also has a further power to reduce a burdensome obligation on a contracting party where exceptional circumstances occur that were not foreseen when the contract was concluded after “weighing the interests of both parties”. However, before a court can make such an order the parties are required to promptly seek to negotiate a resolution.^[9]

Unsurprisingly, the majority of other key contractual principles are similar to those seen in the civil codes of the other GCC states including, for example, that a contract shall not entail an obligation on a third party but can confer a right,^[10] that a right to compensation arises where a party is unjustly enriched,^[11] and a requirement for consent in order to assign a contract.^[12]

Termination

The Civil Code permits the parties to consent to the termination of a contract, specifying that the terms of the contract shall apply to the termination.^[13] Arguably these provisions permit the inclusion of termination provisions in contracts, and provide for these to be applied in line with the parties’ agreement.

Additionally, where one of the parties fails to adhere to its obligations, the innocent party may (after giving notice) request the courts to require that the defaulting party perform its obligations or that the contract be terminated.^[14] As an alternative to this process, the Civil Code permits the inclusion of provisions in the contract permitting the cancellation of the Contract (on the basis of one party’s failure to comply with its obligations) without the need for any judicial intervention.^[15]

Comment

The issuance of the Civil Code is clearly welcome development, bringing the Kingdom into line with its GCC counterparts and other civil law jurisdictions across the globe. This should offer an enhanced degree of comfort to the international business community that a clear codified set of principles will apply to their contractual relations in the Kingdom, which will serve to promote its rapid rise as a regional hub for business and investment.

^[1] Articles 33 & 37.

^[2] Article 41.

^[3] Articles 47 – 49.

^[4] Article 61.

^[5] Articles 57 -59.

^[6] Article 104.

^[7] Article 95.

^[8] Article 96.

^[9] Article 97.

^[10] Article 99.

^[11] Article 144.

^[12] Article 255.

^[13] Article 105.

^[14] Article 107.

^[15] Article 108.