Governing Law
Synonyms: Applicable Law، Choice of Law، Proper Law of the Contract
Last updated: 2026-09-25
Short Definition
Governing law (applicable law) is the legal system that governs a contract’s interpretation, validity and effects and the settlement of disputes arising from it; it is usually fixed by an express clause in the contract.
Overview
Legal Basis
Law of Civil Procedure issued by Royal Decree M/1 dated 22/1/1435H (Article 1: courts apply Sharia and laws not conflicting with it). Civil Transactions Law issued by Royal Decree M/191 dated 29/11/1444H, whose issuing decree (clause 6) applies it to commercial transactions where no special provision exists. Arbitration Law issued by Royal Decree M/34 dated 24/5/1433H (Article 38: the tribunal applies the rules agreed by the parties, subject to Sharia and public order).
Practical Example
A Dubai-based investment company leases an office building in Riyadh for five years at SAR 2,400,000 a year, plus 15% VAT (SAR 360,000 a year) because it is a commercial lease. The tenant’s lawyer proposes UAE law as the governing law; the owner refuses, and the parties agree on Saudi law with disputes resolved by arbitration in Riyadh. They document the lease on Ejar (commercial documentation fees of SAR 200 for the first year and SAR 400 for each additional year, i.e. SAR 1,800 for five years). Had UAE law been chosen, VAT, eviction procedures and the registration of rights over the property would still have been governed by Saudi law, and proving foreign law before the tribunal would have added translation and expert costs.
Common Mistakes
- ✗Copying a foreign governing-law clause from an international template into a lease of Saudi property — it does not take ownership, registration or eviction outside mandatory Saudi rules.
- ✗Confusing governing law with jurisdiction — the first sets the substantive rules, the second decides which body hears the dispute.
- ✗Ignoring the Civil Transactions Law — since December 2023 it is the general reference for contracts, and relying only on earlier case practice can mislead.
- ✗Choosing foreign law without costing its proof — the parties must supply translated texts and expert opinions.
- ✗Agreeing terms that breach mandatory rules, such as shortening the limitation period — they have no effect whatever law is chosen.
International Differences
Most countries apply the rule that rights in rem over land are governed by the law of the place where the property is situated, whatever law the contract chooses. In the EU, the Rome I Regulation governs choice of law in contracts and, absent a choice, subjects tenancies of immovable property to the law of the country where the property lies. In Turkey, the Law on International Private and Procedural Law (No. 5718) governs conflicts of law. Gulf states generally apply the law of the property’s location to real-estate matters. Since 2023 the Saudi Civil Transactions Law has provided codified rules that make choosing Saudi law clearer and more predictable.
