The new Civil Transaction Law plays a vital role in streamlining legal processes and enhancing transparency and efficiency in civil and—to a certain extent—commercial transactions.
On 13 June, the Saudi Council of Ministers chaired approved the Kingdom’s new Civil Transaction Law, after the law had been cleared by the Consultative Assembly (Shura Council) in May 2022. With the new law the Saudi legislator introduced a comprehensive overhaul of the Saudi legal system. The Saudi legislator enacting statutory provisions governing civil transaction marks a fundamental change in the Saudi legal system and shifts Saudi civil law away from sharia law to a codified legal regime. Moreover, the development marks a significant turning point in the Middle East and North Africa (MENA) region at large. After Oman introduced a civil code in 2014, Saudi Arabia was the last MENA jurisdiction where sharia law governed civil transactions. Now the entire region—aside from the ADGM where the laws of England and Wales apply—follows the civil law model.
The law was published in the Saudi Office Gazette on 19 June 2023 as Royal Decree M/191 of 29/11/1444H. It will enter into force after a grace period of six months following its publication. We expect executive regulations for the law to be issued within this grace period.
Over centuries, the legal system of the Kingdom was governed by sharia law as stemmed from the quran, sunnah, and hadith as interrupted by scholars of Islamic jurisprudence. Sharia regulations are often presented broadly and leave courts with discretion to determine how they should be Interpreted and applied on a case-by-case basis. This has lead to a comparatively high level of inconsistency in court decision in Saudi Arabia and, consequently, introduced considerable ambiguity in the judicial process.
The new Civil Transaction Law brings the potential of a more consistent interpretation and application of Saudi law governing civil transactions. This could in turn lead more consistent and predictable court decisions, which of course would raise Saudi Arabia’s appeal to investors. Still, legislative reform is only one step in the process. Administrative and judicial reforms need to follow and didactic and common interpretations of legal provisions and concepts need to be developed by the courts and universities to unfold the potential of the reform.
Overall the new law can be seen as an attempt to introduce a contemporary and effective civil code while preserving sharia law as the fundament of the law. This balancing act has been attempted in many MENA jurisdictions to varying success. It remains to be seen how the reform process in Saudi Arabia will develop.
The new law governs contractual and non-contractual obligations in civil and commercial matters. While the primary focus of the new law is no private legal relation ships, it applies to commercial relationships where the Saudi Commercial Transaction Law does not or not conclusively govern a matter.
The new Civil Transactions Law regulates all aspects of contractual obligations, including the elements of contracts, means of concluding contracts, their validity, binding effects, invalidity, termination and dissolution. Furthermore, it deals with matters of ownership and in fact possession such as transfer of ownership over real and movable assets as well as other dispositions over property such as lease contracts.
Furthermore, the law regulates non-contractual obligations including tort and unjust enrichment.
The nature and scope of remedies have been widely expanded under the new Civil Transaction Law. Under the old civil transactions regime remedies were limited to the right to rescind a contract, indemnification, and damages for actual and direct losses. With the new regime new remedies such as the right to claim indirect damages such as loss of future profits or business reputation were introduced.
Furthermore, the New Civil Transaction Law clarifies when and to which extend lost profits may be recovered. Courts in principle had authority to award indirect damages such as loss of profit under the old regime. Still, claims for indirect damages were problematic under the old regime and such damages were only very restrictively awarded due to potential legal challenges to such claims under sharia law. This is rooted in the conflict between two principles of sharia law. The principle of full restitution may require recovery of indirect damages such as loss of profit. On the other hand the prohibition of speculation limits to which extend indirect damages may be considered. The new Civil Transaction Law now introduces clear, common, and broader standards for claims for indirect damages. This clarification as well as the expansion of what types of indirect damages may be claimed will be attractive in particular to investors from western influenced legal systems.
The new Civil Transaction Law plays a vital role in streamlining legal processes and enhancing transparency and efficiency in civil and—to a certain extent—commercial transactions. Moreover, the Saudi Civil Transaction Law and the increased reliability of the Saudi legal system introduced with it will likely have a positive impact on foreign investment in Saudi Arabia. This effect will likely be more pronounced for investors from western influenced jurisdictions as the new Civil Transaction Law is highly influenced by western style civil law.
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