Commercial contracts are the foundation upon which commercial transactions between individuals and companies are based. They provide the legal framework that governs these relationships and clearly defines the rights and obligations of each party. With the increase in commercial activity in Saudi Arabia and the remarkable economic development in recent years, it has become essential to understand everything related to commercial contracts in detail.

In this article, we will learn about commercial contracts in the Saudi system, their most important regulations, provisions, and conditions for validity, and everything related to commercial contracts for a successful and sound business transaction.

What is the definition of commercial contracts in the Saudi Law?

In reality, there is a misunderstanding, or rather a misinterpretation, of the concept of commercial contracts. Most people believe that commercial contracts are a separate category of contracts with their own distinct commercial nature, completely different from civil contracts. However, the truth is that commercial contracts are the same as civil contracts in the Saudi system and do not differ in their principles and the foundation upon which they are based.

What determines that a contract is commercial and not civil is its purpose, meaning it must be for a commercial purpose. Additionally, the nature of the parties and their relationship must be based on a commercial interest. This is what gives it its commercial character and makes it subject to the provisions governing commercial transactions.

Essential Elements and Clauses in Commercial Contracts

For a commercial contract to be legally valid and enforceable, it must contain the essential elements of a contract, which are the fundamental conditions for its formation and validity. These elements are: (consent, subject matter, and cause). There are several necessary clauses that the contract must include, which define the rights and obligations of all parties. These are as follows: - Identification of the contracting parties: This involves clearly defining the status of each party, whether they are individuals, companies, or government entities.

- Subject matter of the contract: This requires a clear and detailed formulation of the nature of the service or product being contracted for.

- Financial consideration: The contract value, payment methods, and agreed-upon payment dates must be clearly and in detail specified.

- Contract duration: The contract's start and end dates must be included, along with any renewal terms and procedures. - Termination and Cancellation: Clarifying the circumstances under which a contract may be terminated before its expiry date, the resulting consequences, and the rights of each party.

- Dispute Resolution: Specifying the competent authority for resolving disputes, which is agreed upon by the contracting parties, whether arbitration or litigation.

- Obligations: Defining the obligations of each contracting party and clearly outlining their responsibilities and assigned tasks.

- Force Majeure: Explaining the exceptional circumstances that may occur and how to address and regulate them.

Omitting or ignoring any of these clauses invalidates the contract and may lead to unnecessary financial losses, problems, and disputes. Therefore, it is essential to ensure that all these clauses are properly covered as outlined.

Types of Commercial Contracts

Commercial contracts in the Saudi legal system vary according to the nature of the commercial activity and the purpose of the contract. These diverse contracts form the foundation upon which commercial relationships are built in an organized and sound manner. The following are the most important commercial contracts and the role of each:

Sales Contract

This is the most common of the commercial contracts. It is based on an agreement whereby the seller commits to transferring ownership of the goods or services to the buyer in exchange for an agreed-upon sum of money specified in the contract. The sales contract also includes the quantity, methods of delivery, payment terms and methods, and payment dates agreed upon by both parties.

Lease Contract

As its name suggests, this contract regulates the rental of properties or premises for commercial activities in exchange for a specific rent and for a specific period. The contract includes the lease term, the rent amount, and any other matters agreed upon by the parties on a case-by-case basis.

Construction Contract

This contract is used to regulate the relationship between a contractor and a client. It defines the mechanism for executing a specific project, such as construction, maintenance, and installation work. The contract clearly defines the service, the agreed-upon timeframe for completion, the required specifications, and the project cost.

Supply Contract

This contract is used to regulate the relationship between suppliers and clients. It obligates the supplier to provide the agreed-upon products or services to the other party under predetermined conditions, which include quantity, specifications, quality, price, and so on. Distribution Agreement

This agreement grants its holder the right to distribute the products of a specific company within a defined geographic area. The agreement outlines the distribution terms, sales objectives, the obligations of both the distributor and the company, and the rights of each party.

Partnership Agreement

This agreement regulates the relationship between two parties involved in a single business activity. It specifies each party's contribution percentage, the methods for dividing profits and losses, and the authority of each partner. This type of agreement is common in projects that rely on diverse expertise or capital.

Agency Agreement

This agreement grants its holder the authority to conduct business transactions and procedures on behalf of another party. The principal authorizes the agent to perform a set of tasks on their behalf, and these tasks and authorities are precisely defined in the agreement.

Franchise Agreement

This agreement, also known as a franchise, allows a party to use a brand and build a complete business system based on it in exchange for a specific fee. The agreement obligates the franchisee to adhere to the brand's operational standards, and the fee is clearly defined.

Financing Agreement

This agreement aims to provide financial support for business activities. It includes the financing amount, repayment methods, and the necessary guarantees for obtaining the financing. Consulting Contract

This contract is used when providing specialized investment services to help companies develop their businesses. It specifies the work location, contract duration, and fee.

Finally, commercial contracts in their various forms represent the cornerstone of regulating commercial transactions, defining the relationship between parties, clarifying and specifying shared objectives, and protecting the rights of each party.

Documenting Commercial Contracts In the Saudi law :

Although notarization is not a prerequisite for the validity of a contract—as a contract is valid and produces its legal effects as soon as the parties sign it (provided its essential elements and conditions are met)—the contract is the law between the contracting parties.

However, the importance of notarization lies in its being a fundamental and necessary procedure for contracts that are eligible for notarization. Notarization grants the contract enforceability before official authorities, and without it, some contracts are not recognized.

The following are the steps for notarizing commercial contracts in the Saudi legal system:

- Agreeing on the contract terms and drafting them precisely to define the rights and obligations of each party.

- Reviewing the contract with a notary public to ensure its compliance with applicable laws and regulations, or notarizing it through the designated contract notarization platform.

- Paying the prescribed fees.

- Officially approving the contract to make it notarized and recognized by all official authorities.

You can contact us at Mohammed Al-Khliwi Law Firm office to handle all these steps on your behalf, ensuring speed and accuracy without the hassle of following up on each step yourself.

Disclaimer: The above content does not constitute legal advice, and the office assumes no legal responsibility. For legal advice, please contact us.