INTRODUCING THE NEW KSA CIVIL CODE

On June 19, 2023, the Kingdom of Saudi Arabia enacted the Civil Transactions Law (the “KSA Civil Code” or the “Code”) promulgated by Royal Decree M/191 dated 18 June 2023 (Dhul-Qi’dah 29 1444 AH). The Code, which enters into force on December 16, 2023 (Jumada II 3, 1445 AH), marks a significant step forward in Saudi Arabia’s legal landscape as it seeks to integrate Islamic principles into modern legal concepts, aiming to streamline transactions and promote economic growth. The KSA Civil Code covers a range of topics, from contracts and property rights to financial transactions and dispute resolution.

By addressing contemporary issues and introducing more business-friendly legal mechanisms, the KSA Civil Code reflects Saudi Arabia’s desire to attract investment and encourage more business activity as part of its wider Vision 2030 agenda. The Code will therefore be at the heart of the transformation of Saudi Arabia’s economy.

This article is the first of a series in which we will explain key aspects of the KSA Civil Code that will play a central role in commercial life in Saudi Arabia.

The Position Prior to the KSA Civil Code Coming into Effect

Before the enactment of the KSA Civil Code, the laws in Saudi Arabia are enacted based on the Basic Law of Governance, promulgated by Royal Decree A/90 dated March 2, 1992 (Sha’ban 27, 1412 AH), as amended (the “Basic Law”). The Basic Law provides that Sharia Law (i.e., Islamic Law) governs the legal sphere in Saudi Arabia, as informed by the Quran and Sunna (prophetic teachings of the Prophet Mohammed PBUH). The interpretation of Sharia Law in Saudi Arabia is in turn subject to the four schools of Islamic Jurisprudence, of which the Hanbali school is the most dominant.

The current system is largely uncodified and does not rely on judicial precedent. Instead, texts written by, for example, the Hanbali school are predominantly relied upon to ascertain legal positions. Consequently, Sharia Law, as applied in Saudi Arabia in relation to commercial contracts, could be said to have the following characteristics:

• Lack of codification: Sharia Law is derived from religious texts and traditions as opposed to codified laws and regulations.

• Interpretation and application: The interpretation of Islamic principles in Sharia Law can vary among scholars and jurists which can create uncertainty about the outcome of specific commercial situations.

• Limited precedent: Sharia Law does not rely on a system of binding precedent. This allows future judicial decisions to diverge from past decisions in similar cases.

By codifying many of the key principles governing civil transactions in Saudi Arabia, the Code provides greater clarity over legal positions, and should also in turn encourage consistency of interpretation and application and limit the range of jurisprudence that can influence legal decisions. On the other hand, the Code does not alter the position regarding judicial precedent, hence there remains scope for divergent decisions in future.

Retrospective Application of the KSA Civil Code

Once the KSA Civil Code comes into force on December 16, 2023, it will have retrospective effect, meaning it will apply to events or situations that occurred and contracts that have been executed before then. Parties must prepare accordingly by taking the Code’s provisions into account ahead of December 16, 2023. As existing contracts will be interpreted in light of the Code, parties to those contracts will need to familiarize themselves with the potential impacts of the Code on interpretations of their contracts in Saudi Arabia.

However, there are two exceptions to the Code’s retrospective applicability; the KSA Civil Code will not be applied retrospectively where: (i) a contracting party can prove that such application would contradict an existing “statutory provision” or “judicial principle”; or (ii) the limitation period in respect of a given right had begun to run prior to December 16, 2023.^[1]

With respect to the first exception, the onus will be on the party resisting the retrospective application of a certain provision of the KSA Civil Code to prove it would contradict existing statutory provisions or judicial principles. In the first instance, it would be reasonable to expect that a decision-maker would try to find an application of the provision on the facts in accordance with existing statute and principles. If this is not possible, the courts could simply refuse to apply the provision retrospectively in the specific scenario before them, while still retaining the power to enforce it retrospectively on alternative facts in a different case.

The second exception to retrospective application of the Code applies to limitation periods in effect prior to the entry into force of the Code. As a result, limitation periods which have started to run prior to December 16, 2023, will remain unchanged once the Code enters into force and will not be adjusted by the Code. For example, if a claim under an existing contract had a limitation period of five years, and that limitation period started to run prior to December 16, 2023, the limitation period will remain five years, even if the KSA Civil Code imposes a shorter or longer limitation period for the same type of claim.^[2] Similarly, the limitation periods set out in the Code cannot be used to establish a claim where the previously applicable limitation period had already expired prior to December 16, 2023. For example, if a two-year limitation period expired in mid-2023, the Code could not be relied upon to establish a claim in 2024 even if the relevant limitation period under the Code is longer and would still be running.

Interpretation of the KSA Civil Code

There is no conclusive information yet on how the KSA Civil Code will be interpreted. However, contracting parties should bear in mind that the civil codes enacted in other GCC countries, such as the UAE, Qatar, or Kuwait, could offer some general insight to the extent that such civil codes contain similar provisions. Indeed, several of these codes, for example the UAE Civil Code, were introduced with similar aims to modernize the countries’ legal systems to accommodate contemporary societal needs and economic realities. Based on those codes’ similar intentions, it is possible that similarly drafted provisions in the KSA Civil Code might be interpreted consistently with those in other GCC codes.

For instance, an overarching principle in the UAE Civil Code, as well as the new KSA Civil Code is the principle of good faith. The principle of good faith is set out in Article 95(1) of the KSA Civil Code, which states:

The contract must be executed in accordance with its provisions, and in a manner consistent with the requirements of good faith.^[3]

Similarly, the concept of good faith is enshrined in Article 246(1) of the UAE Civil Code, which provides as follows:

The contract shall be implemented, according to the provisions contained therein and in a manner consistent with the requirements of good faith.

Since the good faith principle is drafted in an almost identical manner under both civil codes, it will be worth considering, when seeking to apply Article 95(1) of the KSA Civil Code, how its equivalent provision has been applied elsewhere, e.g., in the UAE the provision has been interpreted to the effect that parties will be expected to act honestly, reasonably and with integrity when fulfilling their contractual obligations.

Nevertheless, while the GCC countries share some cultural similarities, each nation also has its own cultural nuances that can influence legal interpretations and applications. Therefore, although the application of a certain rule in other GCC countries may offer some insight of how it could be applied under the KSA Civil Code, this will not be definitive. Ultimately, and as discussed further below, Sharia Law remains the ultimate authority in Saudi Arabia, in line with its own specific constitutional and regulatory framework.

Mandatory Provisions

Another important element to bear in mind relating to the KSA Civil Code is the existence of mandatory provisions. These are provisions that cannot be contracted out of by the parties involved and which will take precedence over any contractual terms in a contract. An example of this is the principle of good faith discussed above. Mandatory provisions are intended to protect interests and maintain fairness meaning that they cannot be circumvented through private agreements. The consequence of violating mandatory provisions can ultimately be the invalidation of a provision in a contract.

That said, it would appear that only a limited number of provisions in the KSA Civil Code are identified as being mandatory (i.e., they will apply notwithstanding any agreement to the contrary). As such, for the most part the KSA Civil Code should be read as supplementing, rather than replacing, the parties’ contractual bargain.

Summary

The KSA Civil Code is a welcome development in Saudi law which will promote increased certainty for businesses and provide a more stable operating environment. However, while it is possible to infer possible interpretations of key provisions based on how other GCC civil codes have been interpreted, it remains to be seen how Saudi courts and arbitral tribunals will apply the provisions.

Ahead of December 16, 2023, parties should familiarize themselves with key provisions in the Code, noting their retrospective effect on pre-existing contracts (subject to the limited exceptions discussed above). Of particular importance in this regard are the mandatory provisions within the Code, which take precedence over contractual terms.

Finally, it is worth noting that Saudi Arabia is also developing a new Commercial Transactions Law to regulate specific types of transactions. It remains to be seen how this will complement the KSA Civil Code, but it is likely to be an important accompanying source of law as Saudi Arabia looks to encourage a more business-friendly environment.

Further Information

Shearman & Sterling, in association with the Law Firm of Dr. Sultan Almasoud, provides advice and advocacy to companies across multiple impact areas. We would be pleased to answer any questions or to provide further analysis on the new KSA Civil Code.