The Civil Transactions Law, issued by Royal Decree No. M/191 dated 29/11/1444H (18 June 2023) and in force since 16 December 2023, brought the general rules of contract into a single written law. A foreign party drafting a contract for the Saudi market can now read in one text many rules that were previously found only in uncodified Sharia principles and judicial practice. It governs duties before signing, the moment a contract is formed, how it is performed and interpreted, what happens when something goes wrong, and how far the parties may contract out of the default rules. This article explains, from our office in Kuwait and in cooperation with our partners in Saudi Arabia, what the law means for a company negotiating, drafting or performing a commercial contract in the Kingdom, and what to check before signing.
Duties before the contract exists
Negotiation in bad faith carries liability
Article 41 starts from a protective rule: negotiating a contract does not oblige anyone to conclude it. A party may walk away. What the article adds is a limit on how it may do so. A party that negotiates, or ends the negotiation, in bad faith is liable for the harm the other party suffered. The compensation is capped in a specific way: it does not include the loss of the profit expected from the contract being negotiated. The article does not list the heads of recoverable harm. What it excludes is the expected gain, so the claim is for harm suffered, such as wasted costs, not for the deal the other side hoped to make.
The same article says what counts as bad faith. Lack of seriousness in negotiating is bad faith. So is the deliberate failure to make a material disclosure in the contract. In practice, three kinds of conduct can carry a cost, depending on whether they show a lack of seriousness or the concealment of a material fact (they are not bad faith in themselves): opening talks with no real intention of closing in order to extract information or delay a competitor, stringing the other side along while holding a competing offer in reserve, and withdrawing at the last moment after the other side has spent heavily on the strength of your conduct.
Material disclosure is no longer optional
Silence used to be a negotiating tool. Under Article 41(2), deliberately withholding a material disclosure in the contract is itself negotiating in bad faith. The article does not list which facts are material, and we do not claim a settled list exists. The safe working approach is to treat as material any fact that a reasonable counterparty would weigh in deciding whether to contract or on what price: a pending dispute over the asset, a licence that is about to lapse, an existing exclusivity granted to another distributor, a known defect in the goods or the site. If you know it and the other side's decision depends on it, put it in writing before signing.
How to protect yourself in the negotiation stage
Because liability can arise before any contract exists, the negotiation stage deserves its own paper. Three steps are usually enough. First, record in writing at the start whether the talks are exclusive, whether either side may negotiate with others, and who bears its own costs if the talks end. Second, keep a dated record of what was disclosed, and when, so that a later allegation of concealment can be answered. Third, avoid language in emails and term sheets that tells the other side a deal is certain when it is not: reassurance that induces spending is the usual raw material of a bad-faith claim.
Forming the contract: material terms, non-material terms and framework agreements
Agreeing the material terms is enough
Article 42 answers a question that commonly arises in commercial deals: can a contract exist when the parties have left some details open? Under the article, if the parties agree on the material matters and postpone agreement on the non-material matters, that agreement is sufficient to treat the acceptance as meeting the offer. A later disagreement over the non-material matters does not undo the contract, unless the parties made the conclusion of the contract conditional on agreeing those matters. If they cannot agree on the non-material points, the court decides them according to legal provisions, the nature of the dealing and custom.
The practical lesson is that the condition must be written. A signed term sheet that settles price, subject matter and duration, and says "other terms to be agreed", can be a contract. If the parties intend nothing to bind them until the full agreement is signed, the document should say that expressly.
A promise to contract is binding only in limited cases
Article 43 deals with the promise to conclude a contract in the future. Such a promise, by one party or both, is not binding unless the parties have agreed on the material matters of the future contract and the deadline for concluding it, and the conditions of the contract, including any formalities the law requires for it, are satisfied at the time of the promise. If the promisor then fails to perform and the promisee demands performance, a court judgment, if issued, stands in place of the contract.
So a letter of intent that promises to sign a supply or agency contract later may bind its maker if it fixes the material terms and a signing deadline, and a court may in that case issue a judgment that takes the place of the contract itself. A letter that leaves the material terms and the deadline open is not binding in this way.
The deposit
Under Article 44, a deposit paid when the contract is concluded means that only the party who paid it may withdraw, and that on withdrawal he cannot recover it, unless the parties agreed otherwise. If no deadline for withdrawal was set, the court sets one according to custom and the circumstances. A payer who stays silent until the deadline passes, or who fails to perform his obligations before it, is treated as having withdrawn. A commercial party that pays a deposit should say in the contract whether it is an earnest that carries the right to withdraw, or an advance payment of the price, because the law gives the first meaning by default.
Framework agreements
Article 45 defines the framework agreement as a contract in which the parties fix the basic terms that will govern any contracts later concluded between them, and provides that the framework agreement is deemed part of those contracts. This is the legal home of the master supply agreement, the master services agreement and the distribution framework with call-off orders. Two consequences follow. A framework agreement should be drafted as carefully as an ordinary contract, because its terms will be read into every order. And the framework should say what happens when an order conflicts with it, because the law makes the framework part of the order and does not itself rank one above the other.
A word of caution on terminology. Article 42, on material and non-material matters, and Article 45, on framework agreements, are different rules. A memorandum of understanding is not a framework agreement merely because it is called one. Whether it binds depends on what it actually settles: the material terms (Article 42), a promise to contract with a deadline (Article 43), or basic terms for future contracts (Article 45). We read the document, not its title.
Standard-form contracts and incorporated documents
Two further rules matter to anyone using standard terms. Article 40 treats acceptance in an adhesion contract as made when the adhering party acknowledges the offeror's non-negotiable conditions. Article 96 lets the court amend arbitrary conditions in an adhesion contract, or exempt the adhering party from them, as equity requires, and makes any agreement to the contrary void. A supplier with standard terms should not assume every clause will survive. Article 46 adds that an explicit or implicit reference in a contract to a model document, specific rules or another document makes that document part of the contract, which is helpful when you incorporate trade terms, and risky if you never read what you incorporated.
Performing the contract
Binding force and good faith
Article 94 states that a valid contract may be terminated or amended only by agreement or under a legal provision, and that the parties must perform. Article 95 requires a contract to be performed according to its provisions and in a manner consistent with good-faith practices, and says a contract binds a party not only to its provisions but also to the requirements of legal provisions, custom and the nature of the contract. The last point is easy to miss: a party cannot rely only on the literal text if custom or the nature of the contract adds an obligation.
Interpretation
Under Article 104, where the wording of a contract is clear, its meaning may not be set aside on the pretext of interpreting it to find the parties' intent. Where interpretation is needed, the court looks for the parties' common intent and does not stop at the literal meaning of the words, guided by custom, the circumstances of the contract, the nature of the dealing and the trust expected between the parties; the terms of the contract explain one another. Doubt is resolved in favor of the party who bears the burden of the obligation or condition, and in an adhesion contract in favor of the adhering party. The drafting rule is simple: write clearly, define key terms, and do not rely on a later argument about what you meant.
When performance becomes difficult
Exceptional circumstances and the duty to renegotiate
Article 97 is the rule most often misunderstood by foreign parties. If general exceptional circumstances that could not have been foreseen at the time of contracting make performance of a contractual obligation so onerous for the debtor that it threatens him with grave loss, the debtor may, without undue delay, invite the other party to negotiate. The request to negotiate does not entitle the debtor to stop performing. If no agreement is reached within a reasonable period, the court may, after weighing the circumstances and the interests of both parties, reduce the onerous obligation to a reasonable level. Any agreement contrary to the article is void.
The word "general" in the Arabic text of the law matters: the rule is aimed at circumstances that affect the market or the parties' sector broadly, not at a loss peculiar to one party's business. Three points follow. The remedy is a reduction by the court, not a right to walk away. The debtor must raise the issue promptly. And because a contrary agreement is void, a clause that says "no renegotiation under any circumstances" does not remove the rule. A party that suspends performance on its own and calls it hardship risks being the party in breach.
Impossibility and force majeure
Article 110 deals with impossibility. If performance of an obligation in a bilateral contract becomes impossible for a reason beyond the debtor's control, the obligation and its corresponding obligation are extinguished and the contract terminates automatically. If only part is impossible, the extinction covers that part, and the same applies where impossibility is temporary in a time-based contract. In either case the creditor may demand termination, and the court may reject the request if the impaired part is insignificant. Article 125 adds that a person is not liable for harm shown to result from a cause beyond his control, such as force majeure or the fault of a third party or of the injured party, unless agreed otherwise, and Article 174 allows the parties to agree that the effects of force majeure be borne by the debtor. In a commercial contract this means the force majeure clause matters: it can widen or narrow the default allocation of the risk.
Breach and termination
Under Article 107, if a party to a bilateral contract fails to perform, the other may, after notifying the breaching party, demand performance or termination and claim compensation in either case where applicable; the court may dismiss a termination petition where the unperformed part is insignificant compared to the obligation. Article 108 allows the parties to agree that the creditor may terminate without a court ruling on the debtor's breach, but the creditor must still notify the debtor of the intention to terminate unless the parties expressly agreed otherwise. An automatic-termination clause therefore does not save the notice. Article 114 allows a party to withhold its own performance when the other fails to perform a corresponding obligation that is due. Article 111 restores the parties to their prior position after termination, with compensation if that is impossible, and provides that termination of a time-based contract does not operate retroactively. Article 113 keeps clauses on dispute settlement and non-disclosure alive after termination, unless agreed otherwise.
Limiting and fixing liability
Exclusion clauses
Article 173 permits an agreement exempting the debtor from compensation for harm caused by non-performance or delay, but not where the harm results from fraud or gross negligence of the debtor, and it forbids any agreement exempting a party from liability for a harmful act. A limitation of liability clause is therefore valid for ordinary breach of contract, and cannot be used to cover fraud, gross negligence or a harmful act.
Agreed damages
Under Article 178, the parties may fix the amount of compensation in advance, in the contract or in a later agreement, unless the subject of the obligation is a sum of money, and the right to the compensation does not require notice. Article 179 limits what the clause can do: the compensation is not payable if the debtor proves the creditor suffered no harm; the court may reduce it on the debtor's petition if the debtor proves it was excessive or that the original obligation was partly performed; and the court may increase it on the creditor's petition, up to the harm, where fraud or gross negligence of the debtor caused harm exceeding the agreed amount. Any agreement contrary to the article is void. A liquidated damages clause is useful, but it is not a fixed price for breach, and it cannot be used to fix compensation in advance where the obligation is to pay a sum of money.
Unconscionable contracts
Article 68 allows the court, on a petition by the injured party, to reduce his obligations, increase those of the other party or nullify the contract where one party exploited the other's apparent vulnerability or urgent need to obtain an unconscionable contract. The claim must be filed within 180 days of concluding the contract, or it is not heard. Article 2 requires periods in the law to be counted by the Hijri calendar, so the date should be calculated carefully.
What we review before you sign
We review the contract and the process around it. For the negotiation stage, we check what was said and what was withheld, whether exclusivity and cost allocation were recorded, and whether a disclosure schedule is needed. For the contract, we check whether it will be read as a final agreement, a promise to contract or a framework; the clause on termination notice; the hardship, impossibility and force majeure provisions against Articles 97, 110, 125 and 174; the limitation and liquidated damages clauses against Articles 173, 178 and 179; any standard terms against Article 96; the governing law and dispute resolution clauses; and the formalities the specific type of contract requires. We provide this service from our office in Kuwait, in cooperation with our partners in Saudi Arabia.
Read also: Qatar Commercial Contracts: Civil Code Guide for Investors | Entering Saudi Arabia: The New Investment Law Explained
Frequently asked questions
Can I be liable for a contract that was never signed?
Yes. Under Article 41, a party that negotiates, or ends negotiations, in bad faith is liable for the harm to the other party, but the compensation does not include the loss of the profit expected from the contract.
Can I be held liable for withholding information during negotiation?
Yes, if the information is material. Article 41(2) treats the deliberate failure to make a material disclosure in the contract as negotiating in bad faith.
Is a memorandum of understanding binding in Saudi Arabia?
It depends on its content. It may form a contract if it settles the material terms (Article 42), it may be an enforceable promise if it fixes the material terms and a deadline and meets the required conditions (Article 43), or it may be a framework agreement (Article 45). A document that leaves the material terms open is unlikely to bind.
Can I stop performing if events make the contract too costly?
No, not on your own. Under Article 97 you may invite the other party to negotiate without undue delay, but the request does not allow you to stop performing, and the court may reduce the obligation to a reasonable level if there is no agreement within a reasonable period.
Can we cap our liability or fix damages in advance?
Yes within limits. A limitation clause cannot exclude liability for fraud or gross negligence (Article 173), and agreed damages can be reduced if excessive or if no harm occurred, and increased in cases of fraud or gross negligence (Article 179). Advance fixing does not apply where the obligation is to pay a sum of money (Article 178).
Do you help draft commercial contracts in Saudi Arabia?
Yes. From our office in Kuwait, in cooperation with our partners in Saudi Arabia, we draft and review commercial contracts for the Saudi market.