Saudi Arabia’s Civil Transactions Law (CTL) will come into force on 16 December 2023. Enacted in June 2023 by Saudi Arabia Royal Decree No. M191/1444, the CTL is a groundbreaking piece and a vital part of Saudi Vision 2030. Saudi Arabia has continued to intensify its efforts at social and economic reform, introducing a series of new laws and regulations, including the new Companies Law, Government Tenders and Procurement Law, Private Sector Participation Law, and Environmental Law.
The CTL is the most important of these laws. Its enactment and implementation will shape the country’s legal environment for civil and commercial transactions, and serve as a major step to align the country with mature international legal systems, attracting global investors and fostering a more transparent legal environment.
Legal environment
Senior Counsel
Zhong Lun Law Firm
In accordance with tradition, Sharia law serves as the fundamental legal framework of Saudi Arabia. It governs most civil and commercial transactions in the country.
Sharia law, drawing from diverse sources, often articulates broad principles that grant Saudi courts significant discretionary power when applying these principles. Saudi courts may use judicial discretion and established legal principles collectively to review and interpret commercial documents. Such flexibility, coupled with the lack of binding precedents, the absence of a bulletin system of court judgments, and the free exercise of discretion by government authorities, makes it exceedingly difficult to accurately predict the correct interpretation and eventual enforceability of a contract. This is often a concern for enterprises investing in Saudi Arabia.
The enactment of the CTL will alleviate this situation by creating a legal environment with greater certainty for enterprises and individual investors. The new law, comprising an extensive 721 articles, marks Saudi Arabia’s first codification of the rules governing contracts, torts and property ownership. It addresses various contract-related issues, including contract formation and elements such as validity, conditions, rights and obligations, force majeure and the impossibility of performance, invalidity and cancellation, remedies, liability limitations, compensation, termination and assignment.
For contractual issues that are not specifically regulated or require further clarification under the CTL, the 41 Sharia rules listed in article 720 of the law will be applied. Their application will consider a contract’s nature, conditions and exceptionality, but must not conflict with the CTL.
The Saudi government has been instructed to review other laws to assess the impact of the CTL on them and propose necessary amendments to such laws according to the CTL.
Contract provisions
Equity partner
Zhong Lun Law Firm
The CTL contains specific rules on service contracts, as detailed in articles 461 to 478, which apply to construction, engineering and similar agreements. Contents concerning contract price adjustment, design and quantity changes, sub-contracting and termination are worth the attention of Chinese construction enterprises.
Price adjustment limits. For unit rate contracts, under article 470 of the CTL, if a contract is agreed to be measured in units while, in real practice, the contractor finds the workload required to execute the agreed design will largely exceed estimated quantities, the contractor should immediately notify the owner and specify the increased workload. If the contractor fails to fulfil this obligations, it will lose its right to claim extra costs for any excess over the estimated quantity. If the increase in quantities is substantial, the owner is entitled to terminate the contract and suspend its execution.
For lump sum contracts, under article 471 of the CTL, in contracts based on agreed designs, even if the price of materials, labour or other costs rises, the contractor cannot demand an increase in the contract price. According to the second paragraph of article 471, a contractor cannot demand an increase in contract price due to design modifications or supplements, unless the cost increase is caused by the owner’s error, or permitted by the owner.
Subcontracting. Contractors are allowed to subcontract the entire project. Unlike China, which prohibits subcontracting an entire project, Saudi Arabia maintains an open mind. According to article 473 of the CTL, a contractor may subcontract all or part of a project unless otherwise provided by law, by agreement, or required by the nature of the work, or the identity of the contractor is a consideration (to the contract).
Contract termination. According to article 466 of the CTL, if a contractor breaches a contract, the owner may issue a warning, requiring the rectification of the relevant parts of the project within a reasonable period. If the contractor fails to comply, the owner may hire another contractor to complete or rectify the relevant parts of the project, with the expenses borne by the original contractor. Alternatively, the owner can issue a notice to terminate the contract. If defects cannot be rectified, or if the contractor delays the commencement or completion of work to the extent that it becomes impossible to meet the agreed deadline, the owner also has a right to issue a notice for immediate termination of the contract.
Conclusion
In general, the CLT clarifies many issues and is a welcomed code that substantially improves and optimises the Saudi legal environment, offering greater clarity and predictability for investors and contractors.
However, it cannot be ignored that the new law is quite extensive. Saudi courts will likely require a considerable amount of time to fully understand and apply its provisions. During this transition period, companies should be even more cautious and consult professionals to keep their projects on track.
Wang Jihong is a senior counsel and Liu Ying is an equity partner at Zhong Lun Law Firm
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