The introduction of Saudi Arabia’s Civil Transaction Law which came into force on 16 December 2023, marks a historic shift in the Kingdom’s legal framework. This law, which codifies civil transactions for the first time, has far-reaching implications for various industries, particularly construction. The new code contains 721 articles, covering matters including contract formation, execution, termination, contractual obligations, torts claim, and specific contracts, such as those for sale, leases, agency and construction contracts (known as ‘muqawala’ contracts).

Civil Transactions law – A Step Toward Legal Certainty

For decades, Saudi Arabia relied on uncodified Sharia principles to govern civil transactions, leading to inconsistencies in judicial decisions. The Civil Transaction Law, introduces a unified legal framework that codifies these principles, offering clarity and predictability for businesses and individuals. This is particularly significant for the construction sector, where long-term contracts and complex projects require a stable legal foundation.

However, the new CTL has not displaced Sharia law. According to Art.1 of the Code, if there is no applicable text in the Code, the general rules in the Concluding Provisions shall apply. if there is no applicable general rules, then the provisions derived from the Shari’ah most appropriate to this law shall be applied.

Furthermore, The CLT has retrospective effect, meaning it applies to events that occurred and contracts that were signed before 16 December 2023, except where:

• A contracting party can demonstrate that applying the Code would conflict with existing ‘statutory provision’ or ‘judicial principle’; or
• The limitation period in respect of a given right had begun to run before 16 December 2023.

Contract Formation

According to Art.  31 of the CLT, contracts are formed through offer and acceptance. Moreover, Art. 32 & 33 of the CTL codify the rules relating to the formation of contract, and provide that a contract is created by offer and acceptance be made by an expression of will between two or more parties who have the legal capacity to contract, either verbally, in writing, or implicitly unless the contract, a statutory provision, or the nature of the underlying transaction requires otherwise. Moreover, according to Art. 34 of the CLT an offer of goods accompanied by an indication of price is an offer capable of acceptance.

Withdrawal and Nullification of Offers

Art. 35 & 36 of the CTL deal with the withdrawal and termination of offers and provide that an offer:

1. may be withdrawn any time before it is accepted unless the offer has a defined period. If there is no defined period, the offeror must notify the offeree of the withdrawal. If withdrawal occurs without notification, the offeror shall be liable to compensate the other party for damages if any, excluding expected profit loss.
2. may be nullified by:
   1. the other party expressly or impliedly rejecting it. Any amendment to the offer by the offeree shall be deemed rejection.
   2. the loss of legal capacity or death of either party before acceptance of the offer.
   3. if it is not accepted or lapses after a defined period.

Silence and domicile

According to Art. 37 of the CTL, silence by one party does not constitute acceptance unless there is prior agreement, evidence of acceptance, or a history of transactions between the parties. Moreover, pursuant to Art.38 of the CTL, a contract will be deemed to be formed at the place and time where the offeror receives notice of acceptance by the offeree.

Contracts by way of Public Auction

Art. 39 of the CTL deals with contracts by way of public auction and provides that a contract is only formed when the auction is completed. A bid will be nullified by a higher bid even if that bid is void, or by closing of the auction before completion.

Good Faith in Negotiation

Art. 41 of the CTL provides that if a contracting party does not negotiate in good faith and enters a negotiation with no intention of concluding a contract, that party shall be liable to compensate the other party for damages if any, excluding expected profit loss. Moreover, Art. 46 of the CTL allows for the incorporation of terms from external documents, such as standard form contracts, provided the parties explicitly or implicitly reference them. 

Legal Capacity for Contracting

Under Art. 48 of the CTL, minors and individuals with mental illness, and those deemed mentally deficient lack the legal capacity to enter into contracts. 

Defects in Consent

The CTL deal with defects in consent where consent in a contract may be invalidated from Art. 57 to 69, including Mistake, Deceit, and Duress.

Revocation and Nullity

Revocation Rights

Extinguished by ratification (express/implied).  And must be commenced within 1 year from the date the capacity became full or the duress no longer exists.

Nullity

For example, in case where the contract is void contracts (e.g., illegality) can be challenged by any interested party or courts.  Nullity proceedings must be commenced within 10 years from the date of the conclusion of the contract. 

Conclusion 

The Contract Transaction Law (CTL) offering clarity on contract validity, defects in consent, and remedies. While judicial interpretations may evolve, the CTL provides a structured framework for businesses in Saudi Arabia, promoting transparency and fairness in commercial dealings.