Saudi Arabia’s new Civil Code to transform business ecosystem as influx of multinationals set up under HQ mandate

The move marks the kingdom’s first-ever Civil Code, which took effect in December 2023 and represents a landmark development that is opening the door for significant expansion across Saudi Arabia’s business landscape.

“This is one of the many announcements that makes us excited – although still quite recent, [it] indicates the kingdom’s openness and also awareness of the needs of businesses expanding in this market,” Alex Nicholls, Director of Expansion at AstroLabs told Arabian Business.

As a result, the code has created an environment that enables businesses to think of the kingdom as “their key destination of growth” and creates “a sense of safety and stability for businesses to invest in Saudi,” said Nicholls.

The new Civil Code adds much-needed clarity and consistency to the legal framework governing commercial and civil transactions, according to legal experts. Historically, most contracts in Saudi Arabia were governed by general principles of Sharia law open to interpretation, noted Christian Both, Partner at Addleshaw Goddard. This caused uncertainty, as judges applied principles on a case-by-case basis without binding legal precedence.

“The [Civil Transaction Code] is a key piece of legislation to help foster legal certainty, trust and confidence of domestic and international businesses, reducing disputes and promoting smoother business transactions,” said Both.

The new law is set to have a “far-reaching impact” on the kingdom’s business environment by attracting foreign investors, he said. European investors, in particular, are poised to benefit from it given its similarities with the civil transactions laws they are familiar with in their own countries.

“This will benefit the country at large and make investments into the kingdom even more attractive,” added Both.

Saudi Arabia’s first-ever civil transaction code

The Civil Code comprehensively codifies Sharia principles into a standardised framework. As Anton Mikel, partner at Legal Advisors Abdulaziz Alajlan & Partners in association with Baker & McKenzie said, this allows “individuals and corporations to analyse their legal position with more certainty and thus foster a more stable and predictable business environment.”

Rami Bou Raad, a senior associate at the firm, said Saudi Arabia has taken a concerted effort to modernise its legal system in line with international best practices over the past decade as part of Vision 2030. This includes establishing new commercial courts and passing laws modeled on global standards.

The Civil Code’s introduction is the latest milestone in this modernisation process. It protects parties’ rights in civil transactions by establishing a transparent framework for understanding rights and obligations. This ensures smooth commercial dealings based on a foreseeable, fair system according to Both.

“The new law is as of yet untested, and it remains to be seen how the courts will interpret and implement provisions. However, it is widely believed that the issuance of the new law is a significant positive legal development in the kingdom,” said Mikel.

Under the new law, the traditional scope of recoverable damages have been expanded. “The general rule under Saudi law is that in order to be recoverable, damages for breach of contract must be actual, direct and quantifiable,” said Bou Raad.

“What constitutes actual and direct damage in a given case is a matter as to which the Saudi court will have discretion, but in principle there must be a high degree of certainty that a quantifiable, monetary loss has resulted or rarely will inevitably result from the breach in question without regard to other factors not attributable to the party in breach,” he explained.

However, this emphasis on certainty makes it challenging to recover compensation for most kinds of losses that are classified as consequential, he added. This could include loss of anticipated profits and loss of production because their occurrence is considered to be inherently uncertain or depend on events that are not directly related to the breach.

“Future profits, for example are ordinarily considered to be a function of a range of factors, such as market conditions, that make them inherently speculative and thus not the sort of damage that can properly be compensated,” said Bou Raad.

Saudi’s Regional HQ mandate attracts over 200 global businesses

This comes as Saudi Arabia’s regional headquarters mandate went into effect earlier this month. The programme requires companies looking to operate in the country to move their HQs to the kingdom or risk losing out on lucrative government contracts.

“By encouraging foreign firms to establish regional headquarters, Saudi Arabia is fostering a deeper commitment and understanding of the local market, culture and business ecosystem. This approach is likely to result in more sustainable and mutually beneficial business relationships,” said Nicholls.

AstroLabs has already witnessed an influx of foreign firms moving into the Saudi market. “Over 200 global companies have established their regional headquarters in Riyadh by the end of 2023,” he revealed. Some of these include global giants like Apple, Google and Siemens.

For businesses, the stability and predictability ushered in by the new code is driving greater interest. The firm has seen an “upward trend from companies across key Vision 2030 industries, including construction, fintech, tourism, gaming, energy, and e-commerce.”

This influx of talent and capital provides opportunities to contribute to Saudi Arabia’s ambitious megaprojects while also enjoying long-term tax and visa incentives. For the Kingdom, the mandate furthers goals of forming sustainable commercial ties, diversifying its oil-reliant economy and generating jobs, he added.

As the Kingdom activates once-in-a-lifetime chances to engage in one of the world’s fastest developing economies, the new Civil Code marks a major development welcoming businesses to realise their potential as driving forces of Vision 2030.