On 19 June 2023, Saudi Arabia published the long-awaited Civil Transactions Law (the KSA Civil Code) after it was signed into law by Royal Decree No M/191 (Royal Decree). The KSA Civil Code is a comprehensive law that will govern all aspects of civil (and, to some extent, commercial) transactions in the Kingdom.
Since the establishment of modern Saudi Arabia in 1932, civil and commercial transactions in the Kingdom have been governed primarily by uncodified principles of Sharia law, drawn from a vast body of rules developed by Islamic scholars over centuries. Many of these rules were applied inconsistently by the courts especially in the absence of a system of binding precedent. The result of these factors has been considerable uncertainty in predicting the enforceability of certain agreements and the outcome of many disputes heard in the Saudi courts. But this is all about to change with the promulgation of the KSA Civil Code.
Entry into force
Article 721 of the KSA Civil Code provides that the law will enter into force 180 days after its publication in the Saudi Official Gazette—that is, 16 December 2023 (Effective Date). All provisions that contradict the KSA Civil Code will be abolished upon its entry into force.
The KSA Civil Code applies to all matters explicitly or implicitly covered by its provisions. In the absence of a relevant provision, the second port of call is a set of Sharia-inspired legal maxims found in the last chapter of the KSA Civil Code. If these legal maxims do not provide an answer, then the rules derived from Sharia that are “most suitable for” the KSA Civil Code shall apply.
Impact on pre-existing relationships
The Royal Decree provides that the KSA Civil Code applies retrospectively to events that occurred and relationships that existed, whether contractual or otherwise, prior to the Effective Date except where (a) a party invokes a conflicting “statutory provision” or “judicial principle” that relates to the event in question and predates the Effective Date, or (b) a limitation period had already started to run prior to the Effective Date.
This means that the KSA Civil Code creates a rebuttable presumption that pre-existing relationships and disputes will automatically be governed by the provisions of the KSA Civil Code as of the Effective Date instead of the uncodified rules of Sharia. A party resisting the retrospective application of a certain provision of the KSA Civil Code will therefore have the burden of proving the existence of a conflicting statutory provision or judicial principle.
However, this presumption in favour of applying the KSA Civil Code retrospectively does not kick in until 16 December 2023. This means that, until the Effective Date, Saudi courts will continue to decide pending cases in light of the uncodified rules of civil transactions under Sharia. It also means that Sharia rules may still apply to certain aspects of contracts executed between now and the Effective Date. Parties considering entering into new contracts may want to postpone this step until the KSA Civil Code has entered into force to ensure that all aspects relating to the contract, including contract ‘formation’, are governed by the KSA Civil Code.
The KSA Civil Code will apply to commercial transactions to the extent that does not contradict (a) any special provision in another law governing commercial matters, and/or (b) the nature of the commercial transaction in question. It is worth noting that the Saudi government has already circulated a draft “Commercial Transactions Law” for public consultation in preparation for its official promulgation. When it comes into effect, the Commercial Transactions Law will apply together with the KSA Civil Code to commercial transactions, but the provisions of the Commercial Transactions Law will take precedence in the event of conflict with the KSA Civil Code.
The KSA Civil Code is a significant milestone in the Kingdom’s legislative reforms and heralds a new era in the understanding and application of Saudi law in line with international best practice. It will also change the way in which commercial parties manage risk under Saudi law and will undoubtedly buttress the growing interest of investors in the Saudi market.