In our previous publication, we introduced the Civil
Transactions Law (the "CTL") of the Kingdom of Saudi
Arabia (the "Kingdom"). This article continues our CTL
series by delving into the application of the CTL in commercial
transactions, providing further insights into various aspects
covered by the CTL.
Before the enactment of the CTL, contracts were generally governed
by uncodified general principles of Islamic Shari'ah Law. The
CTL is the first codified legislation in the Kingdom's history
regulating contracts, ensuring they align with Islamic Shari'ah
Law jurisprudence, while addressing modern commercial needs for
more clarity and predictability. The CTL regulates 18 types of
contracts. In this article, we focus on two types of contracts: the
contract of sale and the exchange contract.
The contract of sale, is defined in the CTL as "a contract
under which a seller transfers ownership of the sold item to a
buyer in return for a cash amount." The contract of exchange
is defined as "a contract under which the parties transfer to
each other ownership of property other than cash." Article 365
states that "[a] contract of exchange shall be subject to the
provisions governing the contract of sale in a manner not
inconsistent with the nature of the exchange contract."
Formation of a Contract of Sale or a Contract of Exchange
A valid contract of sale or contract of exchange requires:
- Mutual Consent: Both parties must mutually agree to the terms of the contract through offer (Ijab) and acceptance (Qabul).
- Competent Parties: Both the buyer and the seller must have the legal capacity (sound mind and legal age) to enter into a contract.
- Subject Matter: The subject of the sale must be defined, and it must be lawful and permissible under Islamic law. The CTL clarifies, however, that if the buyer's knowledge of the subject matter is indicated in the contract of sale, the buyer shall not have the right to demand nullification of the contract due to lack of knowledge, unless the buyer can show deceit by the seller.
- Consideration (Thaman): The price or consideration for the sold item must be defined and agreed upon. Estimation of the sale price may be made based on valid pricing criteria. The CTL clarifies that even if the price for the sold item is not stated by the parties, the sale shall not be nullified if the circumstances indicate that the parties intended to apply the market price, or the price applied in the usual dealings between the parties.
- Delivery (Tasleem / Qabd): The item sold must be deliverable.
If the item cannot be delivered or is nonexistent at the time of
the contract, the sale may be deemed void. The CTL clarifies,
however, that the following shall be deemed delivery:
- If the parties agree to the case in which the buyer is deemed to have taken delivery.
- If a legal provision provides for the case in which the buyer is deemed to have taken delivery.
- If, with the buyer's consent, the seller retains the sold item in his possession after the sale for a reason other than ownership.
Seller and Buyer Obligations and Warranties
The CTL imposes specific obligations on both the seller and the
buyer and includes statutory warranties. These obligations and
warranties should be applicable, in addition to any agreed upon
contractual obligations and warranties (which should be included in
the contract).
ENTITLEMENT WARRANTY:
The Seller warrants that the purchased item is free from any
third-party rights. The purchased item must be transferred free
from any unknown right to a third party. The parties, however, can
agree to limit the seller's warranty to only cases where the
third-party right arise from the seller's acts or the
seller's deliberate concealment. An agreement to relieve the
seller from warranty of title shall not preclude the buyer's
right of recourse against the seller for the amount paid, unless it
is established that the buyer was aware of the third-party right at
the time of the sale.
FREE FROM DEFECTS WARRANTY:
The seller warrants that the purchased item is free from any
defects that would diminish its value or render it unfit for its
intended use. If a defect is discovered in purchased goods, the
buyer may cancel the contract or claim the price difference from
the seller unless the seller replaces the item by an identical one
free from defects.
This warranty is not applicable, however, in the following
circumstances:
- The defect was known to the buyer at the time of the sale or would have been discovered by a reasonable person upon inspection, unless the seller warrants to the buyer that the product is free from a certain defect, or the seller deliberately conceals the defect.
- The defect is customarily acceptable.
- information that indicates an individual's membership of civil associations or institutions.
- The defect occurs after delivery, unless the cause of it existed prior to delivery.
- The sale was made at auction by judicial or administrative authorities.
Nonetheless, the CTL places an obligation on the buyer to
inspect the condition of the purchased items promptly upon
delivery. Failure to notify the seller of any defects within a
reasonable timeframe will result in the buyer being deemed to have
accepted the purchase item as is.
A 180 day statute of limitation is applicable to claim for warranty
against defects, unless a longer period has been agreed upon or it
can be proven that the concealment of a defect was a fraudulent act
by the seller.
FREE FROM DAMAGE DELIVERY:
The seller must deliver the purchased item free from damage. If
a purchased item is damaged before delivery due to the actions of
the seller or a third party (not the buyer), the buyer will have
the following options:
- cancel the sale;
- accept the damaged item and recourse for compensation from the responsible party; or
- information that indicates an individual's membership of civil associations or institutions.
- terminate the sale of the damaged part of the item only.
If a purchased item is destroyed before delivery due to force
majeure or any reason not attributable to the parties of the sale
or a third party, the sale is terminated and the buyer must be
reimbursed. If only part of the sold item is destroyed, the buyer
can terminate the sale for that damaged portion alone or choose to
cancel the entire transaction.
BUYER'S FINANCIAL RESPONSIBILITIES:
Unless agreed otherwise, the buyer must pay the price of the
purchased item prior to delivery. If there is a deadline for the
payment and the seller stipulates that the sale will be terminated
if no payment is made by said deadline, the sale shall be deemed
terminated if the buyer fails to meet the deadline, and the seller
so elects, without the need for notification. The buyer is
responsible for covering the costs of payment, delivery, the sale
contract, and registration unless agreed otherwise.
Conclusion
The CTL provides a legal framework for contracts in Saudi Arabia, including contract of sale and contract of exchange, and outlines rights and obligations of the parties involved. This framework ensures that these contracts are legally binding and enforceable. While integrating Islamic Shari'ah law principles, this framework also promotes consistency and predictability by creating a standardized set of rules and principles which helps mitigate disputes arising from these contracts and provides legal recourse and remedies for breaches or conflicts. It specifies the essential elements required for the contract to be valid and enforceable and helps parties understand their warranties and obligations and the legal consequences of their actions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.