Key takeaways

- On June 19, Saudi Arabia enacted the long-anticipated Civil Transactions Law. The law will enter into effect on December 16, 2023.

- Crown Prince Mohammed bin Salman announced the intent to enact the Civil Transactions Law in February 2021 alongside the Personal Status Law, the Penal Code for Discretionary Sentences, and the Law of Evidence. These four laws aim to put the Kingdom on the path to codified law, in contrast to traditional uncodified Sharia law and in line with global best practices. They are part of broader judicial reforms and Vision 2030 efforts to relax social and religious norms and improve the Kingdom’s business climate.

- The Law establishes a general, comprehensive civil law framework for the Kingdom for the first time by setting out clear guidelines for contracts, including on what basis they will be considered valid or legally enforceable, how they will be executed, and how they will be terminated.

- The issuance of the Civil Transactions Law indicates a departure from previous methods of adjudicating civil matters. Before the law was passed, judges referred to Shariah law when issuing civil law decisions and were able to use considerable discretion when applying Shariah principles.

- The Law will make the legal system more navigable for foreign companies by reducing ambiguity both in contractual relationships and as it concerns the potential applicability of the law. Companies will now be able to enter into contractual agreements with more certainty and additional legal protections.

Civil Transactions Law overview

 On June 19, Saudi Arabia enacted the long-anticipated Civil Transactions Law. The law will enter into effect on December 16, 2023, 180 days after its official publication.

The Law establishes a general, comprehensive civil law framework for the Kingdom for the first time. It sets out clear guidelines for contracts including on what basis they will be considered valid or legally enforceable, how they will be executed, and how they will be terminated. The Law also lays out various contractual rights and obligations and covers several types of contracts such as sales, lease, agency, and construction contracts. The provisions of the Civil Transactions Law contrast with the previous method of adjudicating civil matters, whereby judges had recourse to Shariah law (which is not codified but rather consists of principles derived from the Quran and other Islamic texts) and had significant discretion in applying this law. The new Law considerably enhances legal certainty and predictability by establishing a common regulatory framework for judges to use in ruling on civil matters, thereby minimizing discrepancies in application. More specifically, the Law will clearly regulate contracts and disputes, relating to:

• Ownership: The Law lays out ownership rights and obligations. It outlines the procedures for property registration, transfers, mortgages, and instances involving the loss of property, and creates a secure legal framework for property transactions.
• Commercial transactions: The Law will govern commercial transactions where there are gaps in commercial law. The Law will apply together with the draft Commercial Transactions Law which has been issued for public consultation.
• Consumer protection: The Law will enhance consumer protection with newly required provisions.
• Compensation: The Law will compensate parties for damages, including for expected earnings and moral damages, two previously areas of uncertainty.
• Alternative dispute resolution: The Law encourages the use of alternative methods of dispute resolution, including mediation and arbitration, to expedite legal proceedings and reduce costs.

The Law is a major milestone in Saudi Arabia’s legal system and in line with the Vision 2030 directive to establish a legal landscape that is compatible with the strategic development of the Kingdom. To facilitate the transition to the new Law, government entities have been instructed to identify any laws under their jurisdiction that contradict the Civil Transactions Law and propose amendments to ensure alignment.

Broader context

The Law was announced by the Crown Prince in February 2021 alongside the Personal Status Law, the Penal Code for Discretionary Sentences, and the Law of Evidence. These four laws, three of which have already been released, aim to put the Kingdom on the path to widely codified law in line with global best practices. They are also part of broader judicial reforms and Vision 2030 efforts to relax social and religious norms and improve the Kingdom’s business climate.

Previous reforms to the legal system have focused on establishing specialized courts, increasing transparency, and investing in technology. In 2017, the Kingdom set up commercial courts to rule on commercial disputes. That same year, it implemented a new class action regime, the first of its kind in the Middle East, designed to streamline the process for class action suits. Moreover, the Kingdom has sought to increase transparency in judicial decision-making. In 2018, the Supreme Judicial Council published a book of legal principles and court judgments, making case decisions publicly available for the first time. The Kingdom has also moved to digitize services, allowing individuals to file claims, and legal representatives to track case progress, through online platforms. Hearings can now also be conducted remotely.

The codification of Saudi’s civil law, furthermore, brings the Kingdom in line with judicial trends we are seeing throughout the Gulf, particularly in the UAE and Qatar, which have developed codified legal regimes of their own.

Considerations for companies

The Civil Transactions Law represents a major change to the Saudi legal system that is consistent with the broader trend in the Saudi judicial landscape toward greater legal certainty, predictability, and codification. The Law, like other judicial reforms in the Kingdom, will make the legal system more navigable for foreign companies by reducing ambiguity both in contractual relationships and as it concerns the potential applicability of the law. As a result, companies will now be able to enter into contractual agreements with more certainty and with additional legal protections.

To benefit fully from the new Law, companies should:

• Understand the intricacies of the Law. Given the Law’s complexity and importance, companies should work closely with legal experts to better understand how the Law will impact future business dealings, companies’ potential obligations and liabilities, and options for contractual dispute resolution, should the need arise.
• Review existing contracts. Companies should review all existing contracts to review how they could incorporate these new legal and contractual protections and determine how this will affect risk management.
• Analyze the broader context. Companies should view the Civil Transactions Law and other legal reforms in the context of broader changes taking place in the Kingdom’s investment landscape – such as the Special Economic Zones program (please see our past ASG Analysis), Regional Headquarters program (ASG Analysis), and Economic Participation Policy (ASG Analysis) – which seek to use a combination of incentives and pressure to increase multinationals’ investment in the Kingdom.