SAUDI ARABIA Trends and Developments Contributed by: Zeyad Khoshaim, Abdullah Alajlan and Kamil Mehiz, Khoshaim & Associates
Principle of good faith and fair dealing A transformative aspect of the CTL is the codification of good faith as a mandatory principle in contractual relations. Good faith governs all stages of contractual dealings. • Negotiation – parties must deal honestly and avoid misleading each other. • Performance – parties are expected to co-operate and refrain from opportunistic behaviour. • Enforcement – courts and arbitrators will construe contracts to uphold fairness. Bad faith conduct, such as withdrawing from nego - tiations without valid reasons or abusing contractual rights, may attract liability. The codification of good faith aligns Saudi law with major civil law jurisdictions and enhances investor confidence by fostering transparent commercial rela - tionships. Consent and its defects The CTL specifies circumstances invalidating con - sent, such as error, fraud, misrepresentation, duress or coercion. If consent is defective, contracts may be void or subject to annulment, depending on severity. This protection is vital for cross-border transactions where parties rely on accurate information and free will. Saudi Arabian law thus allows courts and arbitral tribunals applying Saudi law to examine evidence and determine whether defects invalidate agreements. Force majeure and hardship In recognition of the risks associated with long-term or complex contracts – particularly in the context of Saudi Arabia’s Vision 2030 – the CTL codifies the doc - trines of force majeure and hardship. • Force majeure – excuses non-performance when extraordinary, unforeseeable events render obliga - tions impossible (eg, natural disasters, wars). • Hardship – permits judicial or arbitral adjustment of contractual terms where performance becomes excessively burdensome, although not impossible.
These provisions mitigate risk and promote contractu - al stability, especially relevant given the region’s geo - political volatility and global supply chain disruptions. Unjust enrichment and abuse of rights The CTL prohibits parties from unjustly benefiting at others’ expense and prevents the exercise of rights solely intended to harm another party. Remedies include restitution and damages. This reinforces equitable principles in commercial dealings and safe - guards against opportunistic behaviour. The CTL’s Impact on International Arbitration Saudi Arabia is emerging as an arbitration-friendly jurisdiction, with international arbitration often pre - ferred for resolving cross-border disputes. The CTL influences arbitration in several material ways. Substantive law certainty The CTL provides arbitrators with a clear and compre - hensive legal framework to govern civil disputes. This codification reduces interpretive uncertainty inherent under the previous uncodified system, improving the predictability of arbitral awards. Interpretation of contracts and consent The CTL guides arbitrators in assessing contract validity, interpreting ambiguous terms and evaluating consent defects (see – eg, Article 104 CTL). This facili - tates consistent decision-making aligned with both Shari’ah and codified civil law principles. Practical Considerations for International Investors Contract drafting strategies To benefit from the CTL’s clarity, investors should: • ensure contracts explicitly conform to Shari’ah and CTL provisions; • include comprehensive force majeure and hardship clauses, referencing CTL criteria; • be aware of good faith and fair dealing obligations; • include the right to terminate the contract in cases of material breaches without the need for a court order; and • specify arbitration clauses selecting the applica - ble law as Saudi law under the CTL and identify preferred arbitration institutions, such as the Saudi Centre for Commercial Arbitration (SCCA).
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