Kingdom of Saudi Arabia Civil Code: General principles of contract law - the formation of contracts

The Saudi Civil Transactions Law ("CTL") was enacted on 19 June 2023 by Royal Decree M/191. The CTL is a landmark piece of legislation for Saudi Arabia as it codifies for the first time the law governing contract and tort in the Kingdom. In this article, which will be the first in a series of three articles on the general principles of contract law under the CTL, we analyse the provisions relating to the formation of contracts and the various factors which may result in a contract being declared null or void.

Read in Arabic

Formation of a contract – offer and acceptance

Articles 32 and 33 codify the rules relating to the formation of contract and provide that a contract is created by offer and acceptance expressed by two or more parties who have the legal capacity to contract, which may be:

1. in writing or
2. oral or
3. implied provided that the law, the agreement itself or the nature of the transaction does not require an express declaration of intent. 

The CTL accordingly recognises the classic requirements for the formation of a contract which will be familiar to both common law and civil law practitioners.

Article 34 provides that an offer of goods accompanied by an indication of price is an offer capable of acceptance (although prices in an advertisement will not amount to an offer unless there is evidence that it is intended to be an offer).

Articles 35 and 36 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 may be withdrawn any time before it is accepted unless the offer has a defined period.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.

Pursuant to Article 37, silence does not amount to acceptance unless - (1) the parties expressly agree or (2) there has been a previous course of dealing and the offer is related to such dealings; or (3) acceptance by silence would be for the sole benefit of the offeree.

With regard to the “domicile” of the contract, Article 38 provides that a contract will be deemed to be formed at the place and time where the offeror receives notice of acceptance by the offeree. Although Article 38 does not say so expressly, this provision will likely have a bearing on which court has jurisdiction to hear any dispute arising under the contract. For example, where the offeror is domiciled in the UK and receives notice of the acceptance of the offer in the UK, this might be sufficient for the UK Courts to have jurisdiction to hear the disputes under the contract if the contract itself is silent on jurisdiction.
 
Article 39 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.

Article 40 deals with contracts of adhesion and provides that a contract of adhesion only requires the acceptance of non-negotiable standard terms drafted by the offeror in order to be formed.

Article 41 codifies the sharia law principle of good faith and requires the contracting parties to negotiate in good faith. Interestingly Article 41 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. This would most likely require the party not acting in good faith to compensate the other party for any costs it incurred in the expectation of entering into the contact (what common law practitioners would call “reliance losses”).

Article 42 provides that, provided the parties agree to the essential terms of the contract, they may agree other details at a later time. Where the parties fall in to dispute as to the non-essential terms, the Court has the power to resolve that dispute and rectify the contract taking into account the nature of the transaction, the provisions of the law and customary practice.

Article 43 provides that where one or both parties promise to enter into a specific type of contract in the future, the essential terms of that contract and the period within which the contract is to be entered into must be agreed in advance alongside any conditions the law requires that contract to have, including formality conditions. For example, if the parties in a shareholder dispute enter into a settlement agreement where one party agrees to buy the other party’s shares, the essential terms of that transaction such as the share price, number of shares and timing of the transfer must be agreed at the time the terms of the settlement agreement are concluded. The share transfer should also be in the appropriate form.

Article 44 deals with contracts where a deposit is paid as security for performance and specifically provides that the deposit will be forfeited if the obligor withdraws from the contract.  

Article 45 recognizes the practice of entering into framework agreements (which are frequently used in sale of goods transactions and service contracts where the parties intend to have a course of dealings) and provides that the terms of a framework agreement will apply alongside any specific terms of the transaction.

Capacity to contract

Article 48 provides that minors, insane and mentally deficient persons do not have capacity to enter into contracts.

Defects in consent

Articles 57 to 69 of the CTL deal with the various situations in which consent may be deemed not to have been given. These include the following:

Mistake

Articles 57 to 60 deal with the concept of contractual mistake. In summary, a contracting party may rescind a contract as the result of a mistake provided that:

1. The mistake relates to a matter of substance. A clerical or mathematical error does not amount to a mistake.
2. The other party either makes the same mistake, or knows of the mistake, or could have detected the mistake

A unilateral mistake, without more, will not be grounds to rescind a contract. Neither can a party rely on a mistake to escape his or her obligations under a contract if this would contradict the principle of good faith.

Deceit

Articles 61 to 63 deal with the concept of deceit, or what common law jurisdictions would classify as misrepresentation.

Article 61 defines deceit as an act where one party deceives another by fraudulent means inducing him or her to enter into the contract. Article 61 also provides that silence may amount to deceit if the innocent party would not have entered into the contract had he or she known the true position.

Consistent with other GCC jurisdictions, the CTL does not recognize the concept of innocent misrepresentation. In order for a claim of deceit to succeed, some element of fraud, cheating or unfair dealing must be proved.

Articles 62 and 63 provide that the deceived party may rescind the contract if:

1. The deceit relates to a matter of substance (in other words a material term);
2. The deceit is committed by the other contracting party. Where the deceit is committed by a third party, the contract may only be rescinded if the other contracting party knew of the deceit or ought to have been aware of it.

Duress

Articles 64 to 68 deal with the concept of duress.

Article 64 defines duress as “coercion of a person by material or moral means to perform a contract without [their] consent”.

Article 65 goes on to state that duress will arise where a contracting party is confronted with circumstances that lead him or her to believe they, or others, will be subject to imminent danger to “life, honor or property”.

In order for duress to give rise to a right to rescind the contract, it must be the reason the innocent party entered into the contract. In circumstances where the duress is committed by a third party, the contract may only be rescinded if the other contracting party was aware of it.

Pursuant to Article 68 the Court has a broad discretion to remedy unfairness that had been caused by an obvious weakness or need of the innocent party, and may annul the contract, reduce the obligation of the innocent party or increase the obligation of the other party. The time limit for bringing an action to annul or modify a contract on the grounds of unfairness is 180 days from the time the contract is concluded.

Illegality

Article 72 provides that the object of a contract must:

1. Be possible;
2. Not be in breach of public order;
3. Be defined in nature, type or quantity. 

A contract will be void if the objects of the contract do not meet these requirements.

Article 74 provides that if a provision of a contract is illegal, this will not invalidate the contract as a whole unless either party can show that he or she would not have entered into the contract without that provision.

Notwithstanding the above a contract will be deemed null and void if the object of the contract is unlawful. Contracts for the sale of alcohol or objectionable material would fall into this category.

Revocation and nullity

Articles 77 to 80 of the CTL deal with the right to revoke a contract and provide that:

1. Where the law recognizes the right of one of the contracting parties to revoke the contract, the other party cannot avail himself of that right;
2. The right to revoke the contract is extinguished by an express or implied ratification of the contract;
3. Proceedings to nullify a contract must be commenced within one year from the date the act giving rise to the right to revoke the contract was known. Where the nullity arises as a result of a lack of capacity or duress, nullity proceedings must be commenced within one year from the date the capacity became full, or the duress no longer exists;
4. The contracting party that has the right to revoke the contract can be notified by an interested party in order for the former to decide  to do so, failing which within 90 days of the notification, the right to revoke will be lost.

Article 81 deals with the situation where a contract is void (for example, due to illegality or some other reason) and provides that every interested party may invoke the nullity, or the court may, of its own accord, declare the contract null. Nullity proceedings must be commenced within 10 years from the date of the conclusion of the contract.

Articles 82 to 86 deal with the effects of revocation and nullity, and provide that:

1. Where a contract is void or is annulled , the parties are to be reinstated to the position they occupied prior to the contract. If that is not possible, compensation for damages may be awarded;
2. Where a particular provision of a contract is invalid or voidable, only that provision shall be revoked, unless the contract would not have been concluded but for that provision, in which case the entire contract will be revoked.

Agency

Articles 87 to 93 of the CTL deal with agency and contracting.

Article 87 confirms that, unless the law provides otherwise, a contract may be concluded by an agent on behalf of a principal.

Articles 88 to 91 codify the traditional principles relating to contracts concluded by agents and provide:

1. An agent may not act beyond the scope of his authority;
2. Where an agent enters into a contract, the agent’s personal capacity shall be taken into account for vices of consent;
3. If an agent is acting within the bounds of his authority:
   1. the principal may not argue that the contract was concluded by the agent without his express permission
   2. the rights and obligations of the contract shell devolve to the principal
4. If a party entering into a contract does not state at the time the contract is made that he is contracting in his capacity as agent, the effect of the contract will not attach to the principal unless it can be proved that the person who contracted with the agent knew that person was an agent;
5. If the agent and the other contracting party are not aware, at the time the contract is made that the agency has been terminated, then the contract will still attach to the principal.

Conclusion

The provisions of the CTL which deal with the formation of contracts and the various instances where contracts will be deemed not to have been formed are largely uncontroversial and are consistent with the civil codes of most of the jurisdictions across the GCC. 

While it remains to be seen how the courts will interpret these provisions, the CTL on its face provides clear guidance on what amounts to a valid contract and what does not. This should be welcome news to those conducting business in the Kingdom or with Saudi counterparties and is a very positive step forward in the development of a business-friendly environment in the Kingdom.