The Kingdom of Saudi Arabia recently issued the new civil transactions law on June 19, 2023, by Royal Decree M/191, with a grace period of six months, meaning the Law will be effective in December 2023.
The new Law brings significant changes and updates to the legal framework governing civil transactions within the Kingdom. It promotes deviation from Shariaa law to a codified system, covers contracting and interpretation matters, Compensation and moral damages, and other key matters that lacked jurisprudence and interpretation.
The Civil Transaction Law incorporates the most modern legal practices while considering the aims and principles of Islamic Law and Saudi culture.
The new Law has a retrospective effect, which means that it will apply in most cases for contracts signed before the effective date in a condition that it will not contradict a Shari’a principle.
The new civil transaction law covers all matters related to contracts. It regulates all contractual aspects, including the elements of the agreement, its validity, good faith negotiations, binding effect, rights and obligations, provisions, and other legal matters.
The new Law recognizes that the contract is the Law of the parties and that the contracting parties must fulfill what the agreement requires. Furthermore, according to the Law, the parties must execute their obligations following the contract and in a manner consistent with the requirements of good faith.
The Law will apply to all matters addressed directly in the contract. If the issue still needs to be addressed and there is any ambiguity or room for interpretation, the new Law’s general rules will apply. If it still needs to be addressed, the general rules of Islamic Law most appropriate to the CTL provisions and aims will apply.
The main idea is to stick to the contract and not deviate from it unless there is room for interpretation.
This provision of the Law may help the parties resolve contract interpretation issues when the contract’s language is unclear and open to more than one interpretation.
Compensation and Moral Damages
Civil transaction law includes specific and applicable provisions related to compensating damages when parties are in delay, default, or any damage caused by the other party.
The compensation is set and agreed at the time of signing the contract. However, the court or tribunal authority can reduce pre-agreed payment if the agreed settlement was exaggerated or the original obligation was partially performed.
The CTL also recognizes the right to compensation for expected earnings and moral damages or business reputation, which have historically been uncertain in Saudi law-governed contracts. Thus, the new law now sets a clear frame for claiming the indirect damages by recognizing them.
As for ownership, the new Law covers all matters relating to it, including gaining, transferring, and losing ownership of assets and the associated rights and restrictions.
The new civil transaction law is considered one of the significant reforms in line with the Kingdom’s vision of 2030, and it creates an environment of transparency and reliability in the Saudi legal system.
The significant impact of this new Law is the encouragement of foreign investment in Saudi Arabia and the ease of doing business, having more fair and transparent laws being applied.