Saudi Arabian Law Overview

The Civil Transactions Regulation

Since the creation of the Kingdom of Saudi Arabia on 23 September 1932, it has been the government’s express policy that the country is governed by Islamic law. This was confirmed in 1992 by the Basic Law of Rule, which is, in effect, the country’s constitution. The Islamic law texts that Saudi jurists regard as authoritative were compiled during the 13th to 17th centuries CE. As such, they reflect the concerns of a pre-industrial society and do not address many commercial or economic issues. They are also written in ancient Arabic, which requires special training to understand – the equivalent of reading Blackstone’s commentaries in their original language.

There are numerous areas of law where Islamic law offers few or no guidelines, and where government-made legislation is, therefore, the only law. However, until recently the Saudi government was reluctant to legislate in areas where a given subject matter is covered in some detail in the authoritative Islamic law texts. This has changed with an ambitious reform programme under the supervision of the Main Committee for the Preparation of Judicial Legislation, who have been working on a modern model of legislation consistent with Islamic law rules as interpreted in Saudi Arabia, with reference benchmarking to the legislation of Egypt, Jordan, Kuwait, and the UAE, and additional benchmarking to French and Omani law and the US Uniform Commercial Code.

To date, the following consolidating Regulations have been enacted:

• The Evidence Regulation, Royal Decree No M/43 of 26 Jumada Awwal 1443 Hejra corresponding to 30 December 2021;
• the Personal Status Regulation, Royal Decree No M/73 of 6 Shaban 1443 Hejra corresponding to 9 March 2022; and
• the Civil Transactions Regulation, Royal Decree No M/191 of 29 Shawwal 1444 Hejra corresponding to 18 June 2023.
  

These new regulations are primarily a codification of Islamic law rules with guidance from internationally accepted principles where Islamic law is silent or unclear. Therefore, they are not a radical departure from existing Saudi law, but, rather, have consolidated and clarified rules, with some changes where this is possible without conflicting with Islamic law. For example, Article 385 of the Civil Transactions Regulation confirms the Islamic law rule that agreements to charge or pay interest are void. On the other hand, Article 137 permits awarding damages for loss of earnings, which was traditionally opposed by the Saudi judiciary without being based on a clear Islamic law prohibition.

The Civil Transactions Regulation will enter into force on 20 December 2023, with retroactive effect save that it is open to a party to rely on a previous conflicting regulation or judicial principle. It codifies Saudi Arabian contract law, liabilities for harm caused other than in contract, and property rights. There is a section on general principles of contract law, and another section covering nominate contracts.



Areas of law which are covered by existing legislation remain largely unaffected, and the following are excluded from the Civil Transactions Regulation, either expressly or by comprehensive legislation:



• Capital markets law;
• Carriage of goods or passengers by air, by road, or by sea;
• Company law;
• Employment contracts;
• Government contracts;
• Insolvency;
• Insurance;
• Intellectual property rights;
• Ownership of real estate units;
• Personal property pledges;
• Real estate mortgages; and
• Waqfs (Islamic endowments).

Banking and finance contracts are neither excluded from the Regulation, nor are they governed by existing legislation. One must, therefore, assume that the Civil Transactions Regulation applies to banking and finance contracts, at least for the time being.

The Civil Transactions Regulation is divided into three books, with Book One covering obligations in general, Book Two covering nominate contracts, and Book Three covering property rights. The final part sets out 41 Islamic law maxims which may be invoked where statutes are silent in point.

In Book One, Articles 30 to 114 set out general principles of contract law. Article 104 confirms the established rule that unambiguous contract terms must be applied as written. Courts may only seek to ascertain the parties’ common intention if the contract wording is unclear. In such situations, judges may have regard to, for example, custom, the circumstances and nature of the transaction, and equality in bargaining power. The Regulation allows the courts to amend one-sided contracts, and agreements to the contrary are void. Similarly, in exceptional circumstances exposing one of the parties to heavy losses, re-negotiation may be demanded by the affected party, and if no agreement is reached the courts may adjust the terms.

While previously contracts had to be performed within their terms, the Civil Transactions Regulation adds the requirement that this must be done in good faith. The concept of good faith (husn al-nīya) is not covered in the Islamic law texts, and there is no definition of the term in the Civil Transactions Regulation or other regulations. However, since 2017 there have been more than twenty judgments of the Commercial Court which include the following policy statement in essentially identical terms: “It is well settled in jurisprudence and judicial practice that good faith should be protected at all stages of the contract in order to give effect to the agreed principle, whereby the intention [of the parties] is directed to not harming others generally, and the counterparty in particular.” This falls short of the common law concept of utmost good faith, but appears to require contracting parties to ensure that their counterparties are not unfairly disadvantaged by the contract.

Performance is not just governed by the contract terms but also includes custom and the nature of the contract. There also is a risk for a party who discontinues contractual negotiations in bad faith to be liable for the other party’s expenses which were wasted in the negotiations, although there is no liability for the loss of the innocent party’s anticipated profits. Articles 64 to 67 cover duress, which includes a threat to a person’s property, while under Islamic law only fear of injury to persons was considered sufficient to constitute duress.

Articles 118 to 143 cover liabilities for harm caused other than in contract, what would be considered tort or delict in other legal systems. The basis of liability is set out in Article 120: “Every default causing harm to another shall oblige the person who committed it to make compensation”. This reflects the basic Islamic law principle that any claim for damages requires a claimant to prove that there is a fault or error on the defendant’s part, that the claimant has suffered harm, and that there is a causal connection between the defendant’s fault and the harm suffered by the claimant, which is based on the two traditions of the Prophet Mohammed (Hadiths) “harm must not be done, nor harm done in return” (lā ḍarar wa lā ḍirār) and “harm must be removed” (al-ḍarar yuzāl). The wrongful act can be a breach of contract or duty, or loss of, or damage to, property, or personal injury.

Articles 164 to 169 cover specific performance, Articles 170 to 180 performance by way of compensation, and Articles 181 to 196 securities for the performance of an obligation. In the past, it was difficult to obtain orders for specific performance from the Saudi courts, and even more difficult to enforce such orders. Therefore, it is welcomed that this right has been enshrined by statute. Liquidated damages agreements and penalty clauses are valid under Islamic law, provided the claimant has suffered some demonstrable loss, the liquidated damages are not excessive, and they do not constitute a disguised form of interest. This has been confirmed by Article 178 and 179 of the Civil Transactions Regulation.

Articles 197 to 258 cover incidental characteristics of an obligation, such as conditions and deferment, multiple parties to obligations, and assignments. The sections on assignments are particularly helpful, because previously assignments as understood in common law jurisdictions were not covered by Islamic law or Saudi Arabian regulations, requiring tri-partite agreements in order to be enforceable. The new sections bring much-needed clarity and simplicity to a previously complex area of law.

Articles 259 to 306 cover the expiration of obligations, including performance, substituted performance, set-off, discharge and time bars. Time bars are scattered throughout the Civil Transactions Regulation. All time bars under Saudi Arabian law are procedural in nature, and not substantive. This is confirmed by Article 295 of the Civil Transactions Regulation, which states that a right shall not expire by effluxion of time. Therefore, while a claimant may be barred from bringing an action in Saudi Arabia, their right of action may not be time barred in other jurisdictions with more favourable time bar regimes, and may always be relied on as a defence.

Article 129 establishes the principle of vicarious liability, which previously was much more restricted under Saudi Arabian law than, for example, in common law jurisdictions. Under Article 137, claims for lost earnings are permitted, which previously were not awarded by Saudi courts. It remains to be seen whether Article 137 will be interpreted to cover loss of unearned income and pure loss of profit claims, which would be a clear break with past judicial rulings. On the other hand, moral damages have been awarded by the Saudi Arabian courts in recent years, mostly in actions against government agencies, and the right to moral damages is confirmed by Article 138.

Articles 144 to 159 govern unjust enrichment. Article 145 sets out the general principle that someone who has received a payment to which they are not entitled must return it, with the other articles expanding on the principle. Interestingly, the Islamic law right in respect of misappropriation of property (ghasb) does not appear in the Civil Transactions Regulation, but this can still be invoked under Islamic law, of course.



Book Two covers nominate contracts, namely:

• Sales;
• Barter contracts;
• Gifts;
• Loans of fungibles;
• Contracts of composition;
• Racing contracts;
• Leases;
• Gratuitous loans of non-fungibles;
• Muqawala contracts (contracting);
• Agency;
• Bailment;
• Escrow agreements (stakeholding):
• Partnerships that are not governed by the Companies Regulation, such as mudaraba and musharaka;
• Guarantees.



Most of the rules will be familiar to someone conversant with Saudi Arabian contract law, which can be summed up in the maxim “the contract is the law of the parties” (al ‘aqd shari’at al muta’aqidayn), meaning that, in general, the parties to a contract are free to agree to the terms of their choosing, provided that these terms are not at odds with established Islamic law principles or regulations. The following are examples where the Civil Transactions Regulation has clarified or even changed Saudi Arabian law:

• Under Article 315 sales with reference to future market rates are valid.
• Article 320 (1) makes reservation of title clauses in sale contracts valid, which was previously uncertain.
• Article 472 provides that a muqawala contract (contracting) without a specified fee being agreed shall be valid based on an assessment of a fair fee.
• Article 503 of the Civil Transactions Regulation confirms the Islamic law rule that an agency contract may be terminated unilaterally by the principal, but Article 504 provides that termination of an agency for reward at an inappropriate time or without justification entitles the agent to compensation for harm suffered as a result thereof.
• Articles 550 to 577 are a useful summary of the partnership contracts of mudaraba and musharaka, which are popular Islamic finance tools.
• Article 583 makes guarantees of future debts valid, provided the guaranteed amount is specified, but the guarantor may withdraw before the debt is incurred.
• Article 591 requires a creditor to first exhaust their remedies against a debtor before being entitled to claim under a guarantee, unless the guarantor is jointly liable with the debtor.

Book Three is relatively short, covering property rights in just over 100 articles. Article 608 confirms the well-established position that the owner alone has the right to use, exploit and make dispositions over the thing owned, thus negating any concept of beneficial ownership being severable from legal ownership. Articles 611 to 618 deal with restrictions on ownership, and Articles 619 to 639 with joint ownership. The acquisition of property is covered by Articles 641 to 654. The right of pre-emption is dealt with in Articles 658 to 672. Rights deriving from ownership are covered by Articles 679 to 718, including easements.

The 41 maxims set out in Article 720 of the Civil Transactions Regulation are a curious throwback to traditional Islamic law. The maxims are well known, but require a knowledge of Islamic law to be understood properly. They will be confusing to someone without such background knowledge.