Abdulaziz Alajlan & Partners – Legal Advisors explores how the Civil Transactions Law codifies general Sharia principles
Sharia, or traditional Islamic Law, forms the basis of the Saudi legal system. The Shariah is derived from the Holy Quran and the Sunna (words and deeds) of the Prophet Mohammed, as interpreted by influential scholars of Islamic jurisprudence. The Shariah consists of precepts that are often expressed as general principles. There are four main schools of Islamic Law that interpret such precepts. The Hanbali school of Islamic jurisprudence is the most influential in Saudi Arabia.
Additionally, Saudi courts and other adjudicatory authorities do not, in general, report their decisions, and previous decision of the courts and other adjudicatory authorities of Saudi Arabia are not considered to establish a binding precedent for the decision of later cases.
The foregoing factors make for a fairly flexible system, but it is important to keep in mind, however, that such flexibility, combined with the absence of any established system of legal precedent and the great degree of discretion judges can exercise in construing and applying general Sharia principles, oftentimes makes it rather difficult to apply clearly established rules to a particular situation or to predict an outcome with the degree of certainty which one might expect under other legal systems.
In order to limit judicial discretion and increase predictability in legal proceedings, the Civil Transactions Law (‘CTL’) was issued by Royal Decree No (M/191) dated 29/11/1444H (corresponding to 19 June 2023). The CTL went into force on 15 December 2023. The CTL consists of 720 articles and covers essential types of contracts and torts.
Prior to the CTL, there was no civil or commercial code or other comprehensive statement of basic contractual principles in Saudi Arabia. The CTL is meant to fulfil this role. The CTL codifies general Sharia principles and clarifies and explains these principles and how to implement them. The new law is as yet untested, and it remains to be seen how the courts will interpret and implement its provisions.
The CTL applies retroactively, with two exceptions: the first exception carves out claims which: (i) arose prior to the CTL going into effect, and (ii) are subject to a law or regulation that is different from the CTL and which one of the parties demands that it apply to the claim at issue. The second exception applies to statutes of limitation that triggered prior to the CTL going into effect; under this scenario, the statute of limitation would apply regardless whether the CTL requires a different outcome.
The CTL appears to expand the traditional scope of recoverable damages. The general rule under Saudi law is that in order to be recoverable, damages for breach of contract must be actual, direct and quantifiable. What constitutes actual and direct damage in a given case is a matter as to which the Saudi court will have discretion, but in principle there must be a high degree of certainty that a quantifiable, monetary loss has resulted or (rarely) will inevitably result from the breach in question without regard to other factors not attributable to the party in breach. For example, reasonable costs incurred in repairing or replacing nonconforming or undelivered products or materials, or in remedying defective workmanship or damage caused to property are generally regarded as direct damages that are recoverable. This emphasis on certainty, however, makes it quite difficult to recover compensation for most kinds of losses that are classified as consequential, such as loss of anticipated profits, loss of production and the like because (except in rare cases) their occurrence is considered to be inherently uncertain or to depend on events or contingencies not directly related to the breach. Future profits, for example, are ordinarily considered to be a function of a range of factors, such as market conditions, that make them inherently speculative and thus not the sort of damage that can properly be compensated.
The CTL, however, explicitly recognises lost profits. Article 137 states: ‘the damage for which a party may be held liable shall be to the extent of the loss and loss of profits suffered by the injured party, if such damage was a natural result of the harmful act, or if the injured party could not have avoided the same by exerting reasonable efforts normally required under the circumstances.’
There is no experience yet in how Saudi courts will interpret and implement Article 137. Therefore, it is as yet unclear whether Article 137 breaks with the traditional approach to damages and permits somewhat speculative future profits or it is simply a restatement of the traditional view.
Moreover, recovery of ‘moral damage’ is permitted under the CTL, which is a significant departure from the traditional approach. Such damages include physical or psychological harm inflicted on a natural person as a result of any prejudice to his/her body, freedom, honour, reputation, or social status. The courts have not yet addressed the evidentiary requirements necessary to demonstrate entitlement to compensation for moral damage.
Historically, contractual limitations on, or exclusions of, liability generally may not be enforceable. Sharia considers such limitations to be in the nature of waivers of rights that have not yet accrued, and hence may not be enforced, on the basis that the waiver cannot be sufficiently informed. However, if the maximum quantum and nature of a specific potential future liability can be predicted with certainty, such liability could exceptionally be enforced.
The CTL appears in Article 173 to modify this view, holding that contractual provisions limiting or excluding liability arising explicitly from failure to perform – or a delay in performing – obligations are enforceable with the following two exceptions:
- Gross negligence or deceit; and
- Harmful act (tort).
The CTL affirms the traditional position under Saudi law that penalty and liquidated damages are enforceable, unless the defendant can establish that the amount payable under the clause grossly exceeds the direct damages actually caused by its breach, or vice-versa. Liquidated damages would not be awarded if the liable party can show that the party to be compensated has not suffered any harm.
Historically, Sharia did not recognise that legal rights terminated due to the passage of time. Therefore, a claimant could file a claim against the counterparty at any time in the future. However, this approach has recently been modified. Commercial claims were historically not subject to a statute of limitations. However, a new Law of Commercial Courts came into effect in June 2020, which imposed a five-Hijri year statute of limitations on commercial claims (approximately four years and 10 months of the Gregorian calendar).
The CTL imposes additional statutes of limitation on various claims. For example: a claim for undue enrichment is subject to a three-year statute of limitations. If no statute of limitation is specified for a claim, the default period is 10 years. It is not permissible to agree to shorten or extend the limitation periods.
Courts do not have to raise the limitation defence sua sponte.
Finally, a promise to perform was not enforceable historically. Under the CTL, promises are enforceable if all the material terms of the intended contract are specified, along with the time frame within which it must be concluded. (Article 43).