The KSA Civil Transactions Law: Impact on key contractual provisions in the context of transactions for the sale and purchase of shares/quota or assets

The KSA Civil Transactions Law (CTL) was enacted on 19 June 2023 by Saudi Arabia Royal Decree No. M191/1444. The CTL is a landmark piece of legislation for the KSA as, for the first time, it codifies the law governing contract and tort in the KSA. In this article we look at how, in practical terms, the provisions in the CTL may impact the drafting and negotiation of sale and purchase agreements for the sale of shares/quota and/or assets.

Whilst the CTL sets out general rules applicable to contracts as well as specific rules applicable to a “Contract of Sale”, which are relevant and provide statutory protections in the context of Sale and Purchase Transactions, the law is not a substitute for a properly drafted sale and purchase agreement that accurately specifies the rights and obligations of and allocates risks between the parties.

Moreover, given the breadth of the areas and legal concepts touched by the CTL, we also anticipate that it will be followed over the coming months and years by additional regulations which, together with judicial interpretation, will add detail and clarity to the CTL itself. For that reason, whilst the CTL provides an indication of how particular issues will be treated going forward it is too early to draw definitive conclusions on many provisions.

Applicability in the context of Sale and Purchase Transactions 

The CTL applies to commercial transactions to the extent that it does not contradict any special provision in commercial laws. To-date, there are no specific codified laws in the KSA applicable to Sale and Purchase Transactions, and the KSA has not yet issued a “Commercial Transactions Law.” If a “Commercial Transactions Law” is issued, its provisions, to the extent that they specifically address transactions for the sale and purchase of shares/quota or assets, will also become relevant and may (in case of inconsistency) prevail over the provision in the CTL.

The provisions related to the “Contract of Sale” (Articles 307 to 360 of the CTL) are particularly relevant in the context of Sale and Purchase Transactions, on the basis that such transactions involve the transfer of ownership of shares/quota or assets (referred to in this article as the “good” or “item”) in consideration “for money”.

Article 307 of the CTL, states that the “Contract of Sale” provisions are applicable in the context of a sale for “money” only, and therefore, would appear not to apply in the context of transfers of shares or assets in consideration of in-kind contributions (e.g., a share for share or share for asset exchange) in respect of which the provisions governing “Barter/Exchange Contract” (Articles 361 to 365 of the CTL) will apply. However, Article 365 states that the provisions related to the “Contract of Sale” will apply to Barter/Exchange Contracts to the extent not inconsistent with the Barter/Exchange Contract’s nature.

Purchase Price  

A recurrent question in KSA Sale and Purchase Transactions is whether the purchase price must be determined and fixed at signing/closing and so whether earn out arrangements (or other price elements with future uncertainly) would be valid and enforceable.

Article 313 of the CTL seems to provide clarity in this respect since it states that “The estimation of the price may only be set on valid bases according to which the price is determined”. Whilst we will need to await further clarity – in the form of additional regulations or judicial interpretation, this text suggests that, in the context of Sale and Purchase Transactions, the price does not need to be specifically determined and fixed at signing or closing and may contain elements of future variability, provided that the basis for calculation of the purchase price is clearly determined at the outset.

If the above proves to be correct, then the CTL would appear to allow a properly constructed and drafted earn out clause.

Warranties

The provisions related to a “Contract of Sale” include statutory “entitlement warranties” that a seller is committed (deemed) to provide to a buyer. These “warranties” should apply in the context of Sale and Purchase Transactions, in addition to any contractual warranties that may be agreed between a buyer and a seller.  

Below are two key seller’s “warranties” provided for in the CTL:

• To transfer the “good/item” free from any right to third parties unknown to the buyer (Articles 321 and 330 of the CTL) and ensuring possession and benefit from the “good/item” without obstacle (Article 324) (Entitlement Warranty):
  • If applied in the context of Sale and Purchase Transactions, the Entitlement Warranty appears to require the seller to transfer the shares or assets free from any encumbrances or rights of third parties. If the Entitlement Warranty is breached, then the buyer may claim damages.
  • The Entitlement Warranty may be limited, increased, or the seller may be exempted from it, by mutual agreement of the parties, except when the breach was a result of the seller’s act or deliberate concealment. Such an exemption would not prejudice the buyer’s right to claim a refund of the price, unless the seller proves that the buyer was aware of the cause of the third party’s entitlement at the time of sale. (Article 337 of the CTL).
• To transfer the “good/item” free from any defect that decreases its value or hinders its benefit as contractually agreed (Article 338 of the CTL) (Defects Warranty):
  • If applied in the context of Sale and Purchase Transactions, the Defects Warranty appears to require the seller to ensure that there are no facts or events that affect the purchase value or hinder the buyer’s benefit from the purchase. Whilst the above statutory warranties provide some degree of protection to buyers in the context of Sale and Purchase Transactions, they use very general language and so will not be a substitute for detailed and specific contractual warranties and indemnities in favour of the buyer in the legally binding sale and purchase agreement.

The CTL does not include a clear distinction between warranties, indemnities, and misrepresentation akin to those that apply in common law jurisdictions, but instead, refers generally to compensation, specific “warranties” depending on the type of contract, and to other concepts such as deliberate concealment and deceit (which includes deliberate silence on facts or circumstances as further detailed below).

Disclosure Letter/Schedule

A Disclosure Letter/Schedule is written by the seller to the buyer to set out details of the ways in which the warranties given in the sale and purchase agreement are untrue, or where there is some important information of which the buyer should be aware. The key purpose of the disclosure letter is to allocate risk between the seller and the buyer. The buyer cannot generally make a claim against the seller for matters that are appropriately, and sufficiently disclosed.  

The Disclosure Letter is particularly relevant in the context of the Entitlement Warranty and Defects Warranty under the CTL, given that, on the assumption that they apply to Sale and Purchase Transactions:

1. The Entitlement Warranty requires that the seller must hand over the item sold free of any/all third party’s right of which the buyer is unaware (Article 321-2 of the CTL).
2. The Defects Warranty does not apply if the buyer is aware of the defect at the time of sale or would be able to detect the defect if he examined the object of the sale as a “usual careful person.” In the context of Sale and Purchase Transactions, this raises important questions in relation to the nature and extent of due diligence a buyer would be expected to undertake and the need for a buyer to require an express guarantee to the effect that the item sold is free from any defect and/or protection in the event that the seller deliberately conceals such a defect (Article 339 of the CTL).

It is therefore in both parties' interests to ensure that disclosures are as full, accurate and specific as possible: This will reduce the seller’s exposure to warranty claims, and the buyer can assess potential problems and, if necessary, negotiate a reduction in the purchase price or inclusion of express guarantees (akin to indemnities in other jurisdictions) as referred to above.

Limitation of Liability

Under Sharia principles, Saudi courts have previously typically awarded damages calculated by reference to the actual loss suffered regardless of any contractually agreed liability cap.  

From its wording, it appears that the CTL will alter this position since, as a general principle, a limitation of liability clause will be enforceable, except in the case of fraud or gross fault (article 173 of the CTL). Moreover, as discussed above, the provisions related to the “Contract of Sale” also allow the exemption of the seller from its Entitlement Warranty provided any recovery/disturbance by a third party is not due to the seller’s act or deliberate concealment (Article 337 of the CTL), and from his Defects Warranty except in the case of deliberate concealment by the seller (Article 337 of the CTL). 

Based on these provisions in the CTL, a limitation of liability clause in the context of a Sale and Purchase Transaction should, in principle, be valid and enforceable (including, liability caps for warranties, and individual/basket de minimis provisions for warranty claims). Again, we will need to await additional regulations and/or decisions of the KSA Courts to see to what extent these provisions will be upheld. 

All the above should be considered when drafting and negotiating limitation of liability clauses, to ensure that the limitation of liability is clearly stated and for the parties to understand the impact of exceptions provided by the CTL.

Limitation period

Under Sharia principles, rights are not extinguished merely due to the lapse of time. Whilst the CTL follows this principle it introduces a limitation period for the exercise of rights (e.g., Article 295 of the CTL).

The general limitation period under the CTL is 10 years. The date of commencement of this period is when the right falls due for performance, and only applies if the person against whom a claim is brought denies it (Article 295 of the CTL).

It should be noted however, that the provisions related to the Defects Warranty apply a much shorter limitation period that requires any claim to be commenced within 180 days from the date of delivery of the item of the sale, unless otherwise agreed between the parties and provided that a seller may not rely on the limitation period if the defect was concealed or in case of an act of deceit (Article 344 of the CTL).

The limitation period for commencing nullity proceedings for deceit is one (1) year from the date of knowledge of the basis for seeking such annulment, and more generally, and except for diminished capacity, after ten (10) years from the contract date (Article 79 of the CTL).

Based on the above, a limitation period clause on claims and more particularly with respect to warranty claims relating to a Sale and Purchase Transaction should be valid and enforceable, and the parties should take into consideration the above statutory provisions when drafting and negotiating a limitation period clause.

Annulment / Termination  

The CTL sets out various instances where a party may seek to annul or terminate a contract of sale, including incapacity, deceit, mistake, defects, etc. We have set out below the key considerations applicable in the case of deceit and defects, being key causes for annulment or termination in the context a Sale and Purchase Transaction.

Annulment for Deceit

As a general principle under the CTL, a party may seek to annul a contract in the event of deceit in a material element, by the other party, noting that deliberate silence on a fact or circumstance may constitute deceit (Articles 61 and 62 of the CTL).

This general principle must be read in conjunction with the provisions related to the “Contract of Sale,” which states that a buyer who has knowledge of the “item sold” cannot request the annulment of the sale contract due to lack of knowledge, unless he proves that the seller deceived him (Article 308 of the CTL).

Termination for Defects 

Under the provisions related to the “Contract of Sale,” in case of a defect, the buyer may either seek to terminate the sale contract or seek price difference compensation (Article 338).

As discussed earlier, the Defects Warranty does not apply in situations where the buyer is aware of the defect at the time of sale or would have been able to detect the defect if he examines the item of the sale as a “usual careful person”, unless the seller provides an express guarantee to the effect that the item sold is free from any defect and deliberately conceals such defect (Article 339 of the CTL).

The buyer is required to notify the seller within a reasonable period of becoming aware of the defect, failing which the item sold is deemed sold with the defect (Article 340 of the CTL). If the buyer accepts the defect implicitly or explicitly, the right to seek to terminate or claim compensation ceases (Article 341 of the CTL).

The above termination provisions for deceit or defects are relevant in the context of a Sale and Purchase Transaction but are likely to need to be supplemented by additional express provisions to stipulate the right of either party to annul/terminate the contract and the consequences of such annulment/termination.