The New Saudi Civil Code

The Saudi Civil Code, which came into force on 16 December 2023, marks a significant milestone in the modernization of the Saudi legal system. This comprehensive codification of contract and property law replaces the previously applied Sharia law, bringing about several key changes.

Codification of Contract, Tort, and Property Law

The new Civil Code covers the law of contract, tort, and property. While some Saudi practitioners argue that it essentially codifies existing Saudi case law, it appears to follow the model of the Egyptian Civil Code, which also inspired the civil codes of other GCC countries.

Formation of Contract and Standard Terms of Business

Under the new Civil Code, a contract is formed by offer and acceptance (Article 31). Silence is not considered acceptance (Article 37), implying that parties should be cautious when relying on the legal effects of a non-objection to an amended offer. The Civil Code does not address the incorporation of standard terms of business, suggesting that it is advisable to attach standard terms of business to the contract rather than relying on incorporation by reference.

Interpretation of Contracts

The Civil Code adopts the “objective” doctrine of contract interpretation (Article 104). A contract is only open to judicial interpretation if the wording is unclear. If there is room for interpretation, the joint intention of the parties must be determined, taking into account the context of the negotiations, commercial usage, the type of transaction, and the principle of good faith.

Payment Conditions, Retention Rights, Retention of Title

Unless otherwise agreed by the parties, 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 fulfilled its obligations (Article 114). In a sales contract, the parties can agree on a retention of title, meaning that title to the asset sold only transfers after the full payment of the purchase price (Article 320).

Breach of Contract and Damages

If a party breaches its contractual obligations, the other party can request performance or rescission of the contract, in addition to damages (Article 107). However, a formal reminder must be served on the obligor. Rescission must be declared through a judicial decision (or decision of an arbitral tribunal), unless the parties have agreed to waive this requirement (Article 108).

Limitation Clauses and Liquidated Damages

Contractual liability can be limited or excluded as long as the obligor’s breach is neither fraudulent nor grossly negligent (Article 173 (1)). The parties are free to agree on liquidated damages (Article 178). However, an obligor has the right to establish that no damage has occurred, and the court has the right to reduce liquidated damages if the amount is deemed “excessive” (Article 179).

Force Majeure and Hardship

The Civil Code distinguishes between force majeure and hardship. If a contractual obligation becomes impossible due to reasons beyond the obligor’s control, the obligor is released from its obligation. If performance of a contract becomes onerous due to a general change in circumstances that could not be anticipated when the contract was concluded, the aggrieved party can request a renegotiation.

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). However, an assignment only takes effect after the obligor has either acknowledged it or has been given formal notice (Article 240).

Warranty Claims and Decennial Liability

The Civil Code deals with warranty claims in detail, 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).

No Interest on Loans

The Civil Code bans any kind of interest in lending transactions (Article 385), reflecting the prohibition of “ribâ” under Sharia law.

Prescription

The general prescription period is ten years (Article 295). The Civil Code provides for shorter prescription periods for specific claims. The statutory prescription periods are mandatory and cannot be amended by contract (Article 305).

Conflict of Laws

The Civil Code does not address conflict of laws. A Saudi court will always apply Saudi law and will not recognize a choice of law clause in an international agreement. However, there are two important exceptions. First, Saudi Arabia recently 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), provided the contract contains an arbitration clause.

In conclusion, the new Saudi Civil Code represents a significant step towards the modernization of the Saudi legal system, introducing several key changes and innovations in the law of contract and property. It is expected to have far-reaching implications for legal practice in Saudi Arabia.