What the Civil Transactions Law changed for commercial contracts in Saudi Arabia, and the assumptions from other legal systems that do not carry over.
Since the Civil Transactions Law took effect in December 2023, Saudi Arabia has had a codified general law of obligations and contracts, drawn from Islamic jurisprudence and written into articles that judges apply. It gives foreign businesses more predictability than before, but it does not turn Saudi law into English or French law. Several habits from other systems, such as relying on interest clauses or unlimited liquidated damages, need rethinking.
How to test a claim like this
Test any assumption about a Saudi contract against the text of the Civil Transactions Law, any special law that governs the contract type (for example commercial agency, government procurement or real estate), and the mandatory principles of Sharia that Saudi courts apply. If your adviser cannot point to where a rule comes from, ask again, because the law is recent and practice is still settling.
Myth 1: Saudi contract law is unwritten, so outcomes are unpredictable.
Reality: The Civil Transactions Law now codifies rules on formation, validity, interpretation, performance, breach, compensation and limitation. Courts still apply Sharia principles where the code is silent, but the core rules are written down.
How to check it yourself: Ask your lawyer which articles of the Civil Transactions Law govern each key clause in your draft.
Myth 2: Anything the parties agree will be enforced as written.
Reality: Freedom of contract is broad, but clauses that conflict with mandatory rules or public order are void. Interest on money, for example, is generally not enforced, and contracts involving excessive uncertainty can be challenged.
How to check it yourself: Have each payment, late-payment and financing clause reviewed for enforceability in the Kingdom.
Myth 3: Liquidated damages clauses are enforced to the full amount.
Reality: The law recognises agreed compensation, but a court can reduce it if it is shown to be excessive relative to the actual harm, and a party can argue that no harm occurred. Delay penalties in construction contracts are the common test case.
How to check it yourself: Keep records that show the real loss a delay or breach causes, not only the clause.
Myth 4: Contracts must be in Arabic to be valid.
Reality: Contracts between private parties can be written in other languages, but courts and many government bodies work in Arabic, so a certified Arabic translation will be needed in a dispute or registration. Bilingual contracts should state which version prevails.
How to check it yourself: Commission a legal translation of important contracts at signing rather than during a dispute.
Myth 5: Lost profits and consequential losses are always recoverable.
Reality: Compensation is tied to harm that is a direct result of the breach. Speculative or remote losses are harder to recover than in some other systems, which makes clear drafting of recoverable heads of loss more important.
How to check it yourself: Ask your lawyer how the Civil Transactions Law treats each type of loss you want to recover.
Myth 6: The new law applies to every contract, whenever it was signed.
Reality: The law contains transitional provisions, and contracts concluded before it took effect may be governed partly by the rules in force at the time. Special laws, such as those on commercial agency or government tenders, continue to apply to their subject matter.
How to check it yourself: For older contracts, ask which regime governs formation and which governs later performance.
What this changes in your decision
- Review template contracts for clauses that rely on interest or unrestricted penalties.
- Keep evidence of actual loss as a project runs, so agreed compensation can be defended.
- Use bilingual contracts with a stated prevailing language for Saudi counterparties.
- State recoverable losses and limitation of liability explicitly and have them checked under Saudi law.
- Instruct a Saudi-licensed lawyer to review key contracts, since practice under the new law is still developing.
Domira works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.
Frequently Asked Questions
What is the Saudi Civil Transactions Law?
It is a codified law of obligations and contracts that took effect in December 2023. It sets out rules on how contracts are formed, interpreted and performed, what happens on breach, how compensation is assessed, liability for harm and limitation periods, drawing on Islamic jurisprudence. Special laws still govern particular contract types. A Saudi lawyer can explain how it applies to your agreements.
Are interest clauses enforceable in Saudi contracts?
Saudi courts generally do not enforce interest on money, in line with Sharia principles, so a clause charging interest on late payment may not be upheld. Businesses instead use structures such as Sharia-compliant financing, early-payment discounts or agreed compensation for proven loss. Ask a Saudi-licensed lawyer to design late-payment protection that a court will recognise.
Can a Saudi court reduce a delay penalty in a construction contract?
Under the Civil Transactions Law, agreed compensation can be reduced if it is shown to be excessive compared with the actual harm, and a party may argue the other suffered no harm at all. Government contracts have their own penalty rules. Keep records of the real impact of delays so the clause can be defended or challenged on evidence.
Have a Property Question?
Domira can help you navigate property, financing and investment decisions in Saudi Arabia. Speak with our team for an initial consultation.