Official sources cited: 5
Before a business signs a commercial contract, whether it is a supply, services, or partnership arrangement, it matters to understand what that contract actually obliges the business to do, and what happens if the other party fails to meet its own obligations. The Civil Transactions Law is the general legal framework that governs much of this today in Saudi Arabia. Its provisions apply to commercial transactions in so far as they do not conflict with the nature of the commercial transaction and no special provision exists in the commercial laws.
Under the Civil Transactions Law, issued under Royal Decree No. M/191 dated 29/11/1444H, corresponding to 18 June 2023, and officially published on 1/12/1444H, corresponding to 19 June 2023, a contract is concluded by the concurrence of an offer and an acceptance to create a legal effect, subject to any legal provisions governing how the contract must be concluded (Article 31). A clearly drafted contract reduces the chance of a later disagreement over what the parties actually agreed, because a written contract serves as evidence of what was agreed, and Article 66 of the Law of Evidence requires any transaction worth more than SAR 100,000 or its equivalent, or of unspecified value, to be proved in writing, subject to the exceptions the law sets out.
The specific terms of a commercial contract vary with its type, but there are general aspects worth addressing clearly in any commercial contract, including:
These are general aspects worth addressing, not an exhaustive list of everything a commercial contract must cover, since that depends on the nature of the transaction and its parties.
In a contract binding on both parties, if one party fails to perform its obligation, the other party may, after notifying the defaulting party, demand performance or termination of the contract, and may claim compensation in either case where warranted. The court may refuse termination if the unperformed part is of minor importance relative to the obligation (Article 107). The contract may give the creditor a right to terminate on breach without a court ruling, but that agreement does not remove the need for notice unless the parties expressly agree to waive it (Article 108). Where performance in kind is impossible, compensation is awarded against the debtor, unless the debtor establishes that the non performance was due to a cause beyond its control (Article 170). The parties may fix the amount of compensation in advance, in the contract or a later agreement, unless the obligation is to pay a sum of money (Article 178). Agreed compensation is not payable if the debtor proves the creditor suffered no harm. The court may reduce it at the debtor's request if it was excessive or the original obligation was partly performed, and may increase it at the creditor's request up to the actual harm if the excess resulted from the debtor's fraud or gross fault. Any agreement contrary to these rules is void (Article 179).
Before signing any commercial contract, it is worth making sure every term has actually been read, confirming that the person signing on behalf of the other party genuinely has authority to do so, setting out payment and performance terms precisely, reviewing the provisions on ending or terminating the contract, and keeping a record of the correspondence exchanged during negotiation.
The larger or more complex a transaction is, the more it involves a cross border element, the more ambiguous a term appears, or the more a disagreement has already arisen over performance, the more it is worth having the contract reviewed with legal input, whether before signing or once a dispute has emerged.
The Civil Transactions Law is the general legal framework that governs many commercial contract matters in Saudi Arabia today, since its provisions apply to commercial transactions in so far as they do not conflict with the nature of the commercial transaction and no special provision exists in the commercial laws. It was issued under Royal Decree No. M/191 dated 29/11/1444H, corresponding to 18 June 2023, and officially published on 1/12/1444H, corresponding to 19 June 2023.
Where a transaction is worth more than SAR 100,000 or its equivalent, or is of unspecified value, Article 66 of the Law of Evidence requires it to be proved in writing, subject to the exceptions the law sets out. The contract itself is concluded by the concurrence of an offer and an acceptance to create a legal effect, subject to any legal provisions governing how the contract must be concluded (Article 31 of the Civil Transactions Law). Clear drafting of a written contract reduces the chance of a later disagreement over what the parties actually agreed, because the written contract serves as evidence of what was agreed.
The specific terms vary with the type of contract, but it is worth addressing clearly the subject matter of the contract and the mutual obligations of the parties, how, when, and where each obligation is to be performed, and what happens if performance in kind becomes impossible. The Civil Transactions Law requires a contract to be performed as agreed and in a manner consistent with good faith (Article 95), and it supplies a default rule for the place of performance when the contract does not specify it (Article 277). These are general aspects rather than an exhaustive list, since what a contract covers depends on the nature of the transaction and its parties.
In a contract binding on both parties, if one party fails to perform its obligation, the other party may, after notifying the defaulting party, demand performance or termination of the contract, and may claim compensation in either case where warranted; the court may refuse termination if the unperformed part is of minor importance relative to the obligation (Article 107 of the Civil Transactions Law). The contract may give the creditor a right to terminate on breach without a court ruling, but that agreement does not remove the need for notice unless the parties expressly agree to waive it (Article 108).
Yes, the parties may fix the amount of compensation in advance, in the contract or a later agreement, unless the obligation is to pay a sum of money (Article 178 of the Civil Transactions Law). Agreed compensation is not payable if the debtor proves the creditor suffered no harm, and the court may reduce it at the debtor's request if it was excessive or the original obligation was partly performed. The court may also increase it at the creditor's request up to the actual harm if the excess resulted from the debtor's fraud or gross fault, and any agreement contrary to these rules is void (Article 179).
Before signing, it is worth making sure every term has actually been read, confirming that the person signing on behalf of the other party genuinely has authority to do so, setting out payment and performance terms precisely, reviewing the provisions on ending or terminating the contract, and keeping a record of the correspondence exchanged during negotiation. The larger or more complex a transaction is, the more it involves a cross border element, or the more ambiguous a term appears, the more it is worth having the contract reviewed with legal input before signing.
