LEAD UP Spotlight #3 – Recent Legal Reforms in Saudi Arabia
At Lead up, we are committed to providing our clients with the most innovative dispute resolution solutions to fit their specific industry contexts. To do that, we have to stay on top of the recent developments in our clients’ sectors, and analyse these developments in line with our clients’ needs. Every month, in “Lead up Spotlight”, we share with you – our colleagues, clients and prospective partners – our analysis on a recent development relating to dispute resolution in an industry that matters to us and to our clients.
This month’s Lead up Spotlight focuses on the new legal approaches followed in Saudi Arabia.
Saudi Arabia’s Vision 2030 encompasses a comprehensive restructuring of the Kingdom’s legal and judicial systems, marking a departure from its longstanding reliance on uncodified Islamic law. Under this traditional system, judges wielded broad authority, applying Islamic jurisprudence and personal moral beliefs through a practice known as ijtihad. While this approach allowed for flexible interpretation of religious texts, it also led to inconsistencies in judicial rulings, posing challenges for lawyers and hindering the establishment of clear legal precedents.
In recent years, Saudi Arabia has embarked on a path of legal reform, seeking to modernise its judicial framework and enhance predictability in legal proceedings. A central aspect of this transformation has been the transition from an uncodified Islamic legal system to the codification of laws. This shift aims to instil confidence among foreign investors and businesses by providing a more transparent and reliable legal environment.
The fruits of these reform efforts were evident at the recent international conference hosted by the Saudi Center for Commercial Arbitration (SCCA). Minister for Justice Walid Al Samaani shared statistics highlighting the judiciary’s commitment to enforcing arbitral awards. In 2022, over 90% of arbitral awards were honoured following applications to annul, with only five applications resulting in partial or full annulment. Remarkably, none of these annulments were based on violations of Shari’a law or public policy, despite Saudi Arabia’s 2012 Arbitration Law including these exceptions to enforcement. This underscores Saudi Arabia’s serious shift towards adhering to international arbitration standards.
Another significant milestone in this legal modernisation journey was the enactment of the Saudi Civil Transactions Law on 16 December 2023. This law is inspired from other civil codes in the Middle East, notably the codes of Egypt and GCC countries, with adjustments to uphold Islamic Shari’a principles. With a retrospective application, this law governs existing agreements and disputes, ushering in a new era of legal clarity and consistency.[1]
Four key aspects of the New Civil Transactions Law provide insight into Saudi Arabia’s modernisation approach:
1- Good Faith and Abuse of Right
The Civil Transactions Law mandates that contracting parties must act in good faith, both during negotiations and in the execution of contracts. This includes disclosing relevant information and conducting negotiations seriously. Failure to do so may result in liability for damages. Furthermore, the Civil Transactions Law prohibits the abuse of contractual rights, such as using them solely to cause harm or in case the benefit of exercising the contractual right significantly outweighs the harm inflicted on others.
2- Limitation Periods
The Civil Transactions Law establishes a general limitation period of ten years for bringing claims. Consistent with Shari’a principles, the ten years limitation period does not extinguish the right but only bars the judicial remedy should the defendant deny the claim after the lapse of the limitation period.
3- Damages
The Civil Transactions Law recognises loss of profit, and better regulates liquidated damages and moral damages. Prior to the Civil Transactions Law only actual direct losses were compensated. Furthermore, Courts previously had the discretion to increase or decrease the amount of liquidated damages agreed upon between the parties, but the updated law restricts increasing them to cases of fraud or gross negligence. As to moral damages, they were rarely granted previously. Now, they are included within the amount of compensation awarded to the affected party, albeit seemingly applicable only to natural persons and not legal persons.
4- Choice-of-law
The Civil Transactions Law notably lacks explicit provisions regarding the choice of applicable law. Consequently, Saudi Courts are likely to apply Saudi law when assuming jurisdiction, irrespective of any potential agreement between the parties or connection to another legal system. Nevertheless, and despite this silence on the choice of applicable law, the modernisation approach recognises to date two significant exceptions. Firstly, the application of the CISG on international sale of goods as of 1 September 2024, following Saudi Arabia’s recent accession to the CISG. Secondly, the inclusion of an arbitration clause since the Saudi Arbitration Law of 2012 permits the parties to determine the applicable law on their disputes.
Overall, the introduction of the Civil Transactions Law represents a significant step towards modernising Saudi Arabia’s legal system and enhancing its attractiveness as an investment destination. By providing clarity and predictability in legal matters, the Civil Transactions Law, along with the other Saudi legal reforms, aims to create a more conducive environment for business and commerce in the Kingdom.