The Relationship Between Contract Theory & Saudi Civil Law
Contract Theory and Saudi Civil Law
Last December, Saudi Arabia’s commercial and civil contracts experienced a historic paradigm shift. Recently, Saudi business contracts were inserted into the Civil Code. The first Civil Code of its kind in Saudi Arabia discussed the theory of contracts. A well-defined map for contractors – from negotiations to contract execution – was created by this new civil transactions law.
Khalaf Bandar Law is here to explain how this affects businesses in Saudi Arabia.
How Does This New Civil Law Work?
This law consists of more than seven hundred legal articles divided into three sections. The first section addresses the theory of obligation and its sources. The second section discusses the most common contracts, including:
- Sale contracts
- Swap contracts
- Endowment contracts
- Loan contracts
- Peace contracts
- Competition contracts
- Lease contracts
- Contractor contracts
- Employment contracts
- Agency contracts
- Depositary contracts
- Custody contracts
- Partnership contracts
- Sponsorship contracts
The third section discussed the rights of businesses, their owners, and consumers by establishing forty-one rules. Islamic Sharia Law provides the basis for these rules. By doing so, current Saudi law has made case law more structured than before.
Negotiations and the Principle of Good Faith vs. Bad Faith
The most important point of the Civil Code is the organization of negotiations. In the past, negotiations were considered a matter of jurisprudence. This means it was subject to the court’s judgment, particularly in the matter of negotiation in bad faith. The idea was that a lack of a principle of good faith allowed for negotiations in bad faith.
In article 2/41 of the Act, the new civil transitions law defines it as bad faith not to be serious in negotiating in such a way as to compensate only for the resulting damage.
Example of a Breach of Good Faith in Saudi Law
Let us suppose a factory called Company A starts negotiations with Company B.
- Company B deliberately lengthens the negotiation time by demanding Company A to manufacture several samples and models.
- Company B then decides they no longer need the services of Company A.
From our professional perspective, Company A is entitled to compensation for the value of the samples and models manufactured for this purpose. Although there is no literal breach of contract, the principle of good faith has been breached.
Future Saudi Business Contracts Have a Legitimized Principle of Good Faith
The promise of contracting is one of the most contentious topics in commercial contracts. This is because trade needs speed and speed requires trust. If the Kingdom’s trade system does not rely on trust, the economy will stall.
The commercial jurisdiction of the administrative judiciary regulates this. This judiciary believes that the promise of contracting is not binding. This view is one of the opinions of scholars in the Islamic Sharia and has been settled for some time until the promulgation of the Civil Code.
The qualitative development here is that the Saudi legislative body has recognized the promise of contracting to be the same as official Saudi business contracts. They legitimized them because this type of contract caused the American economy to rise when they started to allow it.
It has become one of Mali’s hedging tools to ensure future price stability. This law has been classified as a type of derivative.
The Principle of Good Faith in Islamic Laws
For example, we have unpublished research that was conducted in the aftermath of the oil crisis in April. We had concluded that the rules of the Islamic Sharia did not prohibit this type of contract, and thus, means there can be a breach of contract. This is why Saudi courts and laws approved the direction of the Saudi legislature in this regard.
Commitment, Stability, and Speed are all included in Framework Agreements.
The Civil Code approved the framework conventions defined by the Saudi judiciary and recognized their importance. However, their explicit expression in the Civil Code lends them the status of legislation and is stronger than jurisprudence.
Framework conventions are an agreement by which contractors outline their future contracts, which are to be contracted and negotiated. They serve as the constitution for subsequent contracts. All subsequent contracts must not contravene the Framework Convention. This would ensure the speedy conclusion and implementation of subsequent contracts and preserve each contract’s autonomy from each other, making it an area of flexibility to operate.
How the Saudi Law Attorneys at Khalaf Bandar Law Firm Can Help
The legal process of joining contracts, framework agreements, or even negotiations has been challenging due to legislative developments in Saudi Arabia. Saudi courts aim to ensure transaction stability, strengthen trust and credit, and accelerate the economic system.
The team at Khalaf Bandar Law Firm can help. We have extensive experience in helping individuals, institutions, and ventures enrolled in Saudi agreements that are from Saudi Arabia and abroad. Whether you want to start a negotiation or approve a contract, we can help. Contact us today to schedule a consultation and learn more.
