Mohammed Negm
Al Tamimi & Company, Riyadh
m.negm@tamimi.com

Introduction

The new Saudi Civil Transactions Law (the ‘Law’) entered into force in December 2023.^[1] It constitutes the first comprehensive civil codification in the Kingdom, comprising 721 articles governing contracts, obligations and other civil rights.

The Law enhances legal stability by establishing clear principles for contract interpretation and enforcement, thereby fostering investment attractiveness and reshaping cross-border litigation in the Kingdom. The codification also aligns with Saudi Arabia’s Vision 2030 judicial reform programme. The Crown Prince has emphasised that the Law will reinforce transparency, ensure predictability of judgments and reduce disparities in judicial reasoning, thereby promoting swift and equitable justice.

This new framework is designed to align with international standards while preserving the identity of the Saudi legal system, which remains rooted in Islamic Sharia.

Given the breadth of reforms introduced by the Law, this article does not attempt to cover all of its provisions. Instead, it focuses on two of its most significant aspects: party autonomy and its limits, and the doctrines of force majeure and hardship, both of which are central to maintaining contractual balance and ensuring transactional stability. Before addressing these two principles, the article will briefly outline the legislative and historical background that paved the way for this codification. Other equally important aspects of the Law will be addressed in future articles.

Legislative and historical background

For decades, transactions and contracts in Saudi Arabia were governed by principles of Islamic Sharia (specifically Hanbali jurisprudence), without the existence of a unified civil codification. Judges relied on their own interpretations of Islamic jurisprudence when resolving disputes, which sometimes resulted in inconsistent judgments and reduced predictability, given the absence of binding precedent.

Saudi Arabia’s recent legal reforms highlighted the need for codification to unify principles and enhance predictability. In 2021, the government announced a package of major reform statutes, including the Law of Evidence and the Personal Status Law, culminating in the issuance of the Civil Transactions Law in June 2023.

Despite the issuance of this new codification, Islamic Sharia remains the ultimate source of reference. The legislature ensured that many established Sharia principles were incorporated directly into the Law. Article 1 explicitly provides that, in the absence of a statutory provision, recourse shall be had to a set of 41 codified jurisprudential principles annexed at the end of the Law. If these prove insufficient, the most appropriate rules of Islamic Sharia applicable to the subject matter of the dispute shall apply. In this way, the Law achieves a balance between modern civil codification and the continuity of Sharia-based principles.

One of the important features of the Law is its limited retroactive effect. It applies to contracts and dispositions concluded before its entry into force, subject to two exceptions: (1) where a party demonstrates that retroactive application would conflict with an existing statutory provision or a firmly established judicial principle; or (2) where a statutory limitation period had already commenced prior to its entry into force. In practice, this means that limitation periods expressly regulated under earlier statutes continue to run under those statutes if they had already started before the Law came into effect. Conversely, where no statutory limitation applied before, the limitation periods introduced by the Law begin to run from its entry into force.^[2] In other words, most existing contracts will fall under the scope of the new Law, thereby ensuring uniformity of standards, while at the same time preserving vested rights and safeguarding transactions that were nearing expiry under the previous regime.

General rules of contracts

Party autonomy and its limits

The Law enshrines the principle of party autonomy (freedom of contract) as the cornerstone of contract formation and obligations. A contract is binding on the parties once its Sharia and statutory elements – offer and acceptance – are satisfied. The Law affirms that contracts must be performed in accordance with their content and in line with the requirements of good faith.

However, contractual freedom is not absolute. It is constrained by public policy, derived from both Sharia and statutory law. The Law prescribes several mandatory provisions that cannot be derogated from by agreement, in order to safeguard contractual balance. For example, parties cannot agree on terms that contravene the requirements of legality in subject matter or purpose. The subject of the obligation must be lawful and not contrary to Sharia or the Law; otherwise, the contract is void. Likewise, agreements involving usury (riba) or excessive uncertainty (gharar) remain prohibited. The new codification does not alter the longstanding prohibition on interest-bearing arrangements.

Furthermore, the Law does not allow parties to exclude certain statutory protections designed to safeguard weaker parties or the public interest. For instance, the hardship doctrine under Article 97 is characterised as a mandatory rule of economic public policy. The Law explicitly invalidates any prior agreement by which a party waives the right to request renegotiation in the event of exceptional and unforeseeable circumstances. Similarly, no party may pre-emptively exempt itself from liability for fraud or gross negligence. Any contractual clause purporting to exonerate a party from fraud or gross negligence is deemed void for contravening the Law. The same principle applies to tortious liability: prior agreements excluding liability for wrongful acts are invalid, thereby ensuring the protection of injured parties.

Force majeure and hardship

Force majeure

Force majeure is an unforeseeable, irresistible event that makes contractual performance impossible. A debtor is not liable for damages if it proves that the harm arose from a cause beyond its control and which it could not prevent – such as force majeure, the act of a third party or the act of the creditor.

In practical terms, if exceptional events occur – such as natural disasters, war or sudden government decrees – that make contractual performance impossible, the affected party is relieved from contractual liability. Where performance becomes impossible due to a circumstance beyond the debtor’s control, the contract is terminated automatically and the obligation extinguished. If impossibility is only partial, the obligation is discharged only in respect of the impossible portion.

For example, if a supplier’s factory is destroyed by an unforeseen flood, the supplier’s obligation to deliver the goods is terminated and the supplier is released from liability. In the same way, circumstances that render performance unlawful (such as the sudden imposition of an export ban) are treated as force majeure. Such measures suspend contractual performance for the duration of the ban and may ultimately justify termination if the prohibition persists.

Importantly, the exemption includes relief from liability for damages caused by breach resulting from force majeure, unless the parties agree otherwise. Parties are thus free to contractually allocate certain consequences of force majeure, which makes it essential to specify such allocations clearly in their contracts – for instance, by agreeing in advance on how certain costs will be shared during a force majeure event.

Hardship doctrine (exceptional circumstances)

The hardship doctrine represents a situation distinct from force majeure. While force majeure renders performance impossible, hardship arises when performance is still possible but excessively burdensome, causing severe loss without reaching impossibility.

For hardship to apply, there must be exceptional, general circumstances that could not have been foreseen at the time of contracting, and that render performance so burdensome as to threaten the debtor with substantial loss. In such cases, the debtor may request renegotiation with the creditor to restore contractual balance and mitigate the burden. The debtor must initiate renegotiation without undue delay and continue to perform its obligations during negotiations – failure to do so constitutes a breach.

If the parties cannot reach an agreement within a reasonable time, the debtor may refer the matter to the court. The court is vested with broad discretion to restore contractual equilibrium, guided by considerations of justice. This may include reducing the onerous obligation to a reasonable level, adjusting delivery quantities, extending performance deadlines or even revising the price in long-term contracts. In extreme cases, where continued performance would be illogical or unfair despite adjustment, the court may order termination of the contract.

A key condition under the Law is that hardship must arise from circumstances of a general nature, affecting society or an entire sector, not circumstances personal to the debtor alone. For example, a global inflationary surge in raw material costs or a pandemic qualifies as a general hardship; by contrast, the loss of a debtor’s clients or internal management failures do not. This limitation prevents abuse and confines the doctrine to extraordinary, systemic disruptions.^[3]

Importantly, the Law prohibits parties from contracting out of this protection. Any contractual clause that purports to deny a debtor the right to seek adjustment in the event of hardship is deemed void. Thus, a provision declaring that price or time limits are immutable regardless of exceptional circumstances is invalid to the extent it conflicts with the Law.

The codification of force majeure and hardship provisions demonstrates the legislature’s commitment to contractual justice in the face of uncontrollable events, while harmonising Saudi law with international legal trends. Parties in Saudi Arabia now have a clear legal framework to rely upon during catastrophic events or major economic crises, where previously they depended on broad Sharia principles that judges applied with varying interpretations. For international counterparties, this represents an additional assurance that contracts in Saudi Arabia will not become a trap in times of crisis. Instead, there is a statutory safeguard that allows for fair adjustment of obligations while preserving contracts wherever possible.

Of course, it remains advisable for contracting parties to anticipate such events by expressly addressing force majeure and hardship in their agreements – for example, through detailed clauses dealing with pandemics, supply chain disruptions or price volatility. However, even in their absence, the Law now provides a statutory safety net to ensure justice and predictability.

Conclusion

The Law has reshaped the legal framework of contracts and civil transactions in the Kingdom, introducing unified rules that enhance transparency and consistency in the business environment.

From a practical perspective, the Law makes Saudi law more accessible in cross-border disputes. Principles such as freedom of contract – subject to public policy and Sharia – together with force majeure and hardship, are comparable to doctrines in other jurisdictions. Yet they remain firmly grounded in Sharia principles.

This careful balance between tradition and modernisation has rendered Saudi law both ‘investor-friendly’ for the international business community seeking legal certainty, and reassuring for the Saudi business sector, which values stability of transactions underpinned by justice derived from the Kingdom’s faith and society.