Common Mistakes in Commercial Contracts under Saudi Law

Commercial contracts sit at the heart of almost every business transaction. They define the parties' rights, allocate financial and operational risk, set performance standards and provide remedies when obligations are not met.

Despite their importance, businesses often sign agreements containing unclear, incomplete or unsuitable provisions. Many parties focus on the commercial opportunity and treat the contract itself as a routine formality. Problems typically surface only once payment is delayed, performance falls short or the relationship starts to break down.

Businesses operating in Saudi Arabia should ensure their agreements reflect both the applicable legal framework and the practical realities of the deal. The Saudi Civil Transactions Law provides a key legal framework governing contractual rights and obligations in the Kingdom. Below are some of the most common mistakes made when negotiating and drafting Saudi commercial contracts.

International companies often start negotiations with a contract prepared for another jurisdiction. While this can be a useful starting point, foreign templates should never be adopted without checking their compatibility with Saudi law.

A borrowed contract may include concepts, remedies or procedural mechanisms that operate differently under Saudi contract law, or reference courts, regulators or legal doctrines with no direct local equivalent. Particular attention should be paid to governing-law clauses, interest and financing arrangements, penalties and liquidated damages, limitation of liability, termination rights, agency and distribution provisions, and dispute-resolution and enforcement mechanisms.

An agreement should be adapted to the specific transaction and the Saudi legal environment, not simply translated from a foreign precedent.

A surprisingly common error is contracting with the wrong company or describing a party incorrectly. This can happen where a trade name is used instead of the registered legal name, a parent company is named while a subsidiary performs the work, a Saudi branch is confused with its overseas head office, commercial-registration details are incomplete, or someone signs without proper authority.

Each party should be identified by its full legal name, legal form, commercial-registration number, registered address and the capacity of its authorized signatory. Corporate documents and signing authority should be verified before execution, otherwise a party may later dispute its responsibility, or the validity of the person who signed on its behalf.

A vague scope is one of the leading causes of contractual disputes. Descriptions such as "consulting services" or "construction works" are rarely sufficient on their own. The contract should clearly set out what must be delivered, the required standard, relevant deadlines and any exclusions.

A well-drafted scope typically covers technical specifications, key milestones, completion dates and acceptance criteria, together with any other requirements relevant to the particular transaction. Schedules, drawings, proposals and specifications should be clearly incorporated and ranked by priority where multiple documents form part of the agreement, otherwise each party may end up with a different understanding of what the price actually covers.

Payment provisions should cover more than the total contract price. The agreement should specify the currency, VAT treatment, invoicing requirements and payment deadlines, together with any other commercially relevant payment arrangements. It should also state whether the price is fixed or subject to adjustment.

Tax treatment deserves equal attention. Article 25(2) of the GCC Unified VAT Agreement provides, subject to the Agreement and applicable local legislation, that prices advertised in the local market should include VAT. Accordingly, where a commercial agreement is silent on VAT, there may be an argument that the agreed price is VAT-inclusive. Parties should therefore address VAT treatment expressly, together with any applicable withholding tax, customs duties or other relevant government charges.

Many Saudi contracts are prepared bilingually. Where an agreement exists in both Arabic and English, the parties should specify which version prevails in the event of inconsistency.

A literal, word-for-word translation may not capture the intended legal meaning, so defined terms, remedies and technical expressions must be applied consistently across both versions. The parties should confirm that identical clauses, figures, dates and party names appear in each language, that schedules and annexes are translated where necessary, and that any amendments are reflected in both versions. Poor translation can create real uncertainty over the parties' actual obligations and complicate later enforcement.

Contracts frequently impose financial consequences for delay or breach. These provisions should reflect a genuine, commercial allocation of risk, a disproportionate or ambiguous amount may be challenged or adjusted depending on the circumstances and applicable legal principles.

The clause should identify the triggering event, explain how the amount is calculated, state whether a cap applies, confirm whether it is the sole remedy or additional losses may also be claimed, and clarify whether delay caused by the other party is excluded. Penalty or delay-damages provisions should always be coordinated with extension-of-time rights, force majeure and limitation-of-liability clauses so the contract remains internally consistent.

Commercial relationships often change after signing, the customer may request additional work, specifications may shift, or unforeseen circumstances may raise the cost of performance. Without a clear variation procedure, the parties may later disagree over whether extra work was authorised and whether extra payment is owed.

A sound variation clause should identify who may request or approve a change, whether approval must be in writing, how price and timeline adjustments will be calculated, whether work must continue while pricing is being agreed, and what records must be kept. Staff without proper authority should never be able to create significant commitments through informal emails or verbal instructions.

Many agreements require formal notice before a party can exercise a contractual right, for delay, force majeure, additional-payment claims, variations, breach, suspension, termination, renewal or dispute escalation. The contract should specify the permitted method of delivery, the addresses for service, and when a notice is deemed received.

A party may hold a valid substantive claim yet still weaken its position by failing to give notice in the required manner or within the contractual timeframe. Project teams should understand these provisions and keep reliable records of all formal communications.

Termination carries serious financial and operational consequences, and a clause that simply permits termination for "breach" is often insufficient. The agreement should distinguish between material and minor breaches, remediable breaches, immediate termination events, termination on notice, termination for convenience, insolvency-related events, extended force majeure, and regulatory or licensing failures.

It should also address what happens afterward: outstanding payments, return of property, handover of work, treatment of partially completed deliverables, continuing confidentiality obligations, intellectual-property rights, release of guarantees, and survival of liability and dispute-resolution clauses. Without clear post-termination wording, ending the agreement can create a second dispute instead of resolving the first.

Agreements involving software, designs, reports, technical material or other work product should clearly allocate intellectual-property rights, including existing, newly developed and third-party IP. The clause should confirm whether ownership is transferred or licensed and address any other commercially relevant IP matters. Registration and protection of trademarks and other IP assets in Saudi Arabia should also be considered before entering the market.

Confidentiality provisions deserve similar care and should address permitted use and disclosure, data security, duration and appropriate remedies. Where personal data is involved, standard confidentiality wording alone is unlikely to be sufficient; businesses should also consider compliance with Saudi Arabia's Personal Data Protection Law (PDPL) and its Implementing Regulations.

A limitation clause should allocate risk in a commercially reasonable and understandable way. The agreement should address the overall liability cap, treatment of indirect or consequential loss, key exclusions from the cap and any other commercially relevant liability issues.

This clause should be read together with indemnities, warranties, penalties and termination rights, since inconsistent drafting across these provisions can create internal contradictions. No party should agree to unlimited liability without fully understanding the potential financial exposure.

A force majeure clause should do more than list generic events, it should explain how such an event actually affects each party's obligations. The clause should define qualifying events, require that the event be beyond the affected party's control, and set out notice obligations, evidence and mitigation requirements, suspension of performance, allocation of additional costs, extension of deadlines and termination rights if the event persists. Genuine force majeure should be clearly distinguished from ordinary commercial hardship, rising costs or supplier failure.

Dispute-resolution clauses are often left until the end of negotiations, yet they can determine how effectively contractual rights are ultimately enforced. The parties should decide between Saudi court proceedings, arbitration, negotiation, mediation or a multi-tier process.

Where arbitration is chosen, the clause should normally specify the arbitral institution or rules, seat, language and number of arbitrators. Parties may also consider institutional arbitration administered by the Saudi Center for Commercial Arbitration (SCCA). Saudi arbitration is governed by the Saudi Arbitration Law, which recognizes party agreement on arbitral procedure, subject to the applicable legal framework and public-policy requirements. An incomplete clause can trigger preliminary disputes over where and how the underlying dispute should be heard.

Before executing a commercial agreement, a business should:

Most commercial disputes do not arise because a party set out to act unfairly, they arise because important issues were never clearly addressed when the agreement was negotiated.

Businesses operating in Saudi Arabia should avoid relying blindly on standard templates or contracts drafted for other jurisdictions. Each agreement should reflect the applicable Saudi legal framework, the parties' commercial objectives and the specific operational risks of the transaction.

Careful drafting at the outset provides greater certainty, improves contract administration and significantly reduces the likelihood of costly disputes down the line.