The codification of contract and civil principles under the Civil Transaction Law is a historic first for Saudi Arabia. Lawyers in the country believe the law will create a sophisticated and internationalised legal market, as more global capital pours in.

 

In June last year, Saudi Arabia took another step towards modernisation under its Vision 2030, by codifying its basic contractual principles into one document, the Civil Transactions Law (CTL). For the first time in its rich history, the country codified general Sharia principles such as contract, torts, damages, limitation of liability, liquidated damages, and assignment into one clear document with 720 articles.

The CTL came into force in December amid strong enthusiasm from within and beyond Saudi’s borders. Although still nascent and untested, lawyers in the country believe that the law will have a substantial impact on foreign investment as it streamlines the country’s legal framework, aligns its laws with international standards, brings predictability in judicial proceedings and sets clear legal guidelines in the adjudication of civil and commercial disputes.

For the legal industry, the CTL means more work from existing businesses in the country and increasing interest from global investors with their eyes on the kingdom.

“The new law will affect all practice areas, including international arbitration and local litigation. All transactions and disputes in the Saudi market will need to be analysed in light of the new law,” says Mahmoud Abdel-Baky, a partner in Gibson, Dunn & Crutcher’s recently opened Saudi office.

This also means more competition in the legal market, as more global investment will see more international law firms set up shop in Saudi’s recently opened legal market.

Anton Mikel, a partner in Abdulaziz Alajlan & Partners, global law firm Baker McKenzie’s association firm in Saudi Arabia, agrees, explaining that it was earlier harder for international law firms to do business in the country as law firms operating in the kingdom relied primarily on various schools of Islamic Law to interpret the Sharia, which poses a large entry barrier for foreign lawyers.

“As most of these rules are now codified and indexed in the CTL, we expect that international law firms would be more incentivised to enter the Saudi market,” Mikel says.

CHANGING LEGAL MARKET

As the CTL is put to test, companies operating in Saudi Arabia will need to understand and comply with its new provisions, leading to an increased demand for legal services.

“The introduction of a comprehensive new law governing civil and commercial transactions will create a surge in demand for legal advisory services. Companies operating in Saudi Arabia, both domestic and international, will need guidance from experienced lawyers to understand the implications of the new law, ensure compliance, and navigate the changing regulatory landscape,” says Abdel-Baky.

“The major concern will be around contract enforceability and the potential impact of the new law on the enforceability of existing contracts. Clients should review and renegotiate critical contracts to align them with the new legal framework,” he adds.

Mikel explains that his clients’ concerns with the CTL fall under three broad categories: Retroactivity, damages and contractual limitations on liability.

“Unlike other laws, the CTL applies retroactively, with two exceptions: The first exception carves out claims which arose prior to the CTL going into effect and 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 of whether the CTL requires a different outcome.” Mikel advises his clients.

The CTL appears to expand the traditional scope of recoverable damage, including provisions for loss of profit and “moral damages” recovery, he explains.

The CTL also allows contractual limitations on liability, with certain exceptions and conditions, modifying the prevailing view under the Sharia, where such limits were generally unenforceable, Mikel explains.

The new law is also poised to change the commercial arbitration market in the country. With codified and well-defined principles, as judicial precedents evolve, the CTL will provide a reliable and stable legal framework for businesses to conduct international arbitration.

“The CTL provides more transparency and predictability in adjudicating civil disputes in the kingdom. These features will likely attract more foreign investors to the kingdom and thus increase the flow of cases administered by the Saudi Center for Commercial Arbitration (SCCA),” says Mikel.

“There has been a concerted and wide-ranging effort by the Saudi authorities to modernise the judicial system and the arbitration regime to make them more transparent and efficient and to be in step with best international practices. This has significantly improved the standard and quality of adjudication in the kingdom,” he adds.

The codification is also to attract more global capital to the country, as it looks to diversify its economy beyond oil. This will bring more international law firms with strong cross-border practices.

 

“As the law aims to facilitate international transactions and align Saudi laws with global standards, it will create more opportunities for cross-border legal work. International law firms with expertise in cross-border matters and a global network will be well-positioned to assist clients with investments, joint ventures, and other transactions involving Saudi entities.”

- Mahmoud Abdel-Baky, Gibson, Dunn & Crutcher

 

“As the law aims to facilitate international transactions and align Saudi laws with global standards, it will create more opportunities for cross-border legal work. International law firms with expertise in cross-border matters and a global network will be well-positioned to assist clients with investments, joint ventures, and other transactions involving Saudi entities,” explains Abdel-Baky.

The modern and predictable framework will also give comfort to international law firms that had previously hesitated due to concerns about legal uncertainties.

As a result of these factors, the Saudi legal market is likely to become more competitive and diverse, with an influx of international law firms vying for a share of the growing demand for legal services.

Abdel-Baky explains that heightened competition will lead to competitive pricing, specialisation, talent war and innovation in Saudi’s legal market.

The market may also see more mergers and consolidations. “Smaller local firms may seek to merge or forge alliances with larger international firms to gain access to resources, expertise, and global networks,” he adds.

LONG WAY TO GO

While the CTL is a significant step towards modernising the legal framework and improving the investment climate in Saudi Arabia, there are several other potential changes and reforms that could further enhance the attractiveness of the country for domestic and international investors.

Abdel-Baky says that the Saudi authorities need to keep doing more of what they are already doing, to stay on track with Vision 2030 goals.

This includes continued alignment with international standards, further liberalisation of foreign ownership restrictions, streamlining of the regulatory process, development of specialised courts and tribunals, and further strengthening of corporate governance and transparency norms.

“Simplifying and expediting various regulatory processes, such as business registration, licensing, and approvals, could reduce bureaucratic hurdles and enhance the ease of doing business in the country. I would note though that the kingdom has improved significantly those processes over the past few years,” explains Adbel-Baky.

“Enhancing corporate governance standards, promoting greater transparency in business transactions and reporting, and combating corruption could improve the overall business environment and instil confidence in investors,” Adbel-Baky says.

“In addition to the Civil Transactions Law, a comprehensive review and modernisation of other relevant laws, such as those governing foreign investment, taxation, labour, and bankruptcy, could create a more cohesive and investor-friendly legal framework,” he adds.