International Commercial Contracts for Saudi Companies: Choosing the Governing Law and Dispute Resolution Forum, the Impact of Saudi Arabia's Accession to the Vienna Convention on the International Sale of Goods, Arbitration Clauses, Incoterms, Payment Terms, Withholding Tax, and Contract Language.
A Saudi company signs a supply contract with a manufacturer in China, a services agreement with a European company, or a distribution agreement with an American brand. In each case, the foreign party sends its “standard template”: a contract in English, governed by the law of its home country, with disputes submitted to its own courts. Many companies sign because they want to secure the deal, only to discover at the first dispute that international commercial contracts are often won or lost through clauses that no one has carefully reviewed.
This guide explains the key provisions of international commercial contracts from the Saudi party's perspective, including governing law, dispute resolution forums, the Vienna Convention on the International Sale of Goods, arbitration clauses and enforcement of awards, Incoterms, payment terms and currency, withholding tax, and contract language.
What Makes International Commercial Contracts Different?
An international commercial contract is an agreement between parties in different countries or one performed across national borders. It raises questions that do not typically arise in domestic contracts:
- Which law governs the contract? Saudi law, the other party's national law, or a neutral jurisdiction's law.
- Where will disputes be resolved? In the courts of a particular country or through arbitration, and at which seat.
- Can the judgment or award be enforced? A decision that cannot be enforced in the country where the other party's assets are located may have little practical value.
- Who bears shipping and customs risks? These matters are addressed through Incoterms.
- What are the tax implications? For example, withholding tax on payments to non-residents.
- Which language governs? And which version prevails if the texts differ.
Governing Law and Dispute Resolution Forum
It is natural for each party to prefer the law and courts of its home country. However, the Saudi party should understand two practical considerations:
- Saudi courts apply Saudi laws and the principles of Islamic Sharia. Choosing foreign law before a Saudi court may have limited practical effect. The Supreme Court has also ruled that an agreement between the parties does not deprive Saudi courts of jurisdiction over claims brought against a defendant residing in the Kingdom.
- Foreign court judgments may be enforced in Saudi Arabia under applicable agreements governing judgments from Gulf Cooperation Council countries and Arab states. Enforcement of judgments from other foreign courts, however, is not always guaranteed.
For many international contracts, arbitration offers a balanced solution. It allows the parties to select the governing law, seat, and language, and arbitral awards can be enforced in Saudi Arabia and many other countries under the New York Convention, provided they do not violate Islamic Sharia or public policy.
| Option | Advantage | Risk |
|---|---|---|
| Saudi Courts | Convenient for the Saudi party, with judgments directly enforceable in the Kingdom | The foreign party may resist this option, and enforcement abroad may require additional procedures |
| Courts in the Foreign Party's Country | May be more acceptable to the other party | Higher costs and potential difficulties enforcing the judgment in Saudi Arabia |
| Arbitration in Saudi Arabia | Flexibility, enforcement through the Enforcement Court, and access to specialized local arbitration institutions | Arbitration fees and arbitrators' fees |
| Arbitration in a Neutral Seat | International acceptance and enforcement under the New York Convention | Higher costs and review for compliance with Sharia and public policy at the enforcement stage |
The Vienna Convention on the International Sale of Goods: What Has Changed for Saudi Companies?
Saudi Arabia acceded to the United Nations Convention on Contracts for the International Sale of Goods (CISG) in August 2023, and it entered into force in the Kingdom on September 1, 2024. However, Saudi Arabia declared that it would not be bound by Part III of the Convention, which governs the obligations of sellers and buyers, their rights, and remedies for breach.
The practical implication is that, in sales contracts involving a Saudi party, the Convention primarily applies to contract formation, including offers, acceptances, and the time at which a contract is concluded. Obligations concerning delivery, conformity, payment, and damages are determined by the law designated under the applicable conflict-of-law rules or by the parties' agreement. Therefore, do not rely on the Convention to fill gaps in your contract. Expressly define each party's obligations and the remedies available for breach.
Drafting an Effective Arbitration Clause in an International Contract
An ambiguous arbitration clause can be worse than having no clause at all because it may trigger a dispute over how the dispute itself should be resolved. A well-drafted clause should specify:
- The arbitration institution and its rules, such as the Saudi Center for Commercial Arbitration or an international institution.
- The seat of arbitration, which determines the courts with jurisdiction over applications to set aside the award.
- The number of arbitrators and the method of their appointment.
- The language of arbitration.
- The governing law applicable to the substance of the dispute.
- Optional preliminary steps, such as negotiations or mediation within a specified period.
Arbitration in Saudi Arabia is currently governed by the Arbitration Law issued in 1433 AH (2012). A draft of a new arbitration law was also opened for public consultation in October 2025. In practice, Enforcement Courts can enforce arbitral awards through coercive measures, including asset disclosure, attachment of assets, and travel bans. For more details, see our guide to Commercial Arbitration in Saudi Arabia.
Incoterms, Payment, and Currency
Incoterms
In international sales and supply contracts, the Incoterms 2020 rules issued by the International Chamber of Commerce determine who bears shipping, insurance, and customs-clearance costs, as well as when the risk of loss or damage transfers. For example, under EXW, the buyer collects the goods at the seller's premises and assumes responsibility for most subsequent arrangements. Under CIF, the seller pays for carriage and insurance to the destination port, but the risk transfers when the goods are loaded on board the vessel. Always state the rule together with the named place or port and the applicable version, such as “CIF Jeddah Islamic Port, Incoterms 2020.”
Payment and Currency
- Payment method: Advance transfer, letter of credit, or documentary collection, each offering a different level of protection.
- Currency and which party bears exchange-rate fluctuations.
- Late-payment charges: These should be drafted in accordance with Islamic Sharia where the contract is to be enforced in Saudi Arabia, as interest-based charges are not awarded by Saudi courts.
- Guarantees: Such as a bank guarantee or parent company guarantee.
Withholding Tax on Payments to Foreign Parties
When a Saudi company pays a party that is non-resident in the Kingdom, it will generally need to withhold tax from the payment and remit it to the Zakat, Tax and Customs Authority (ZATCA). Common rates include:
| Payment Type | Withholding Tax Rate |
|---|---|
| Management fees | 20% |
| Royalties and franchise fees | 15% |
| Other unclassified services | 15% |
| Technical and consulting services | 5% |
| Rent and air or sea freight | 5% |
The tax must be remitted within the first ten days of the month following payment. The contract should clearly answer one key question: Is the agreed price tax-inclusive or net of withholding tax? If the foreign party requires a net payment, the Saudi company may have to bear the tax in addition to the contract price. Double taxation treaties may reduce the applicable rate in certain circumstances, so consult a tax adviser before signing.
Contract Language and Other Provisions You Should Not Overlook
- Bilingual contracts: Specify which version prevails in the event of discrepancies. If a dispute is brought before a Saudi authority, Arabic text will be relied upon. It is therefore preferable to make the Arabic version an integral part of the contract rather than translate it later.
- Force majeure: Clearly define qualifying events, notice periods, and their effect on contractual obligations.
- Limitation of liability: Set a compensation cap and address the exclusion of indirect damages.
- Intellectual property and confidentiality in technology, manufacturing, and distribution agreements.
- Compliance: Anti-bribery requirements, international sanctions, and export controls.
- Termination: Grounds for termination and its consequences, particularly in distribution and agency agreements. For distribution arrangements within the Kingdom, see our guide to the Commercial Agencies Law.
Common Mistakes in International Contracts and When to Consult a Lawyer
- Signing the foreign party's standard template without reviewing the governing law and dispute resolution forum.
- Choosing foreign courts and later encountering difficulties enforcing their judgments in Saudi Arabia.
- Using an incomplete arbitration clause that fails to identify the institution or seat.
- Relying on the Vienna Convention to fill gaps in the seller's and buyer's obligations despite Saudi Arabia's reservation concerning Part III.
- Overlooking withholding tax when pricing the contract.
- Drafting a late-payment penalty as interest that may not be awarded by Saudi courts.
- Using an inaccurate Arabic version prepared later that differs from the original contract.
- To draft an international contract or review the foreign party's template, request our International Commercial Contract Drafting and Review service.
- For accurate legal translation, request our Legal Translation of Contracts and Official Documents service, or read about Certified Legal Translation in Riyadh.
- If a dispute has already arisen, request our Commercial Arbitration Hearing Representation service.
- For supply contracts specifically, see our guide to Supply Contracts in Saudi Arabia.
Frequently Asked Questions
Will Saudi courts apply foreign law if the parties choose it?
Saudi courts apply Saudi laws and the principles of Islamic Sharia, and choosing foreign law may have limited practical effect before them. Arbitration is often preferable when the parties wish to select a different governing law.
Is Saudi Arabia a party to the Vienna Convention on the International Sale of Goods?
Yes. The Convention entered into force in Saudi Arabia on September 1, 2024. However, the Kingdom made a reservation concerning Part III, which governs the obligations of buyers and sellers, so the Convention primarily applies to contract formation.
Are foreign arbitral awards enforceable in Saudi Arabia?
Yes. Saudi Arabia is a party to the New York Convention, and Enforcement Courts can enforce foreign arbitral awards provided they do not violate Islamic Sharia, public policy, or a final Saudi judgment.
What is the withholding tax rate on payments to a foreign company?
The rate depends on the type of payment: 20% for management fees, 15% for royalties and unclassified services, and 5% for technical and consulting services, rent, and freight. Double taxation treaties may reduce the rate in certain cases.
Must an international contract be written in Arabic?
Not in every case. However, Saudi authorities rely on Arabic text, so a bilingual contract specifying which version prevails in the event of discrepancies is preferable to a later translation that may differ from the original.
Do Not Sign the Foreign Party's Template Before We Review It
We review international contracts and redraft governing law, arbitration, payment, tax, and liability clauses in Arabic, English, and Chinese to protect your position before signing.
info@novalegal.sa | Sahaba Road, Ishbiliyah District, Riyadh
Conclusion: International Commercial Contracts Are Won or Lost Before Signing
Successful international commercial contracts for Saudi parties begin with selecting a dispute resolution forum whose decisions can be enforced, often arbitration supported by a carefully drafted clause. The parties should then expressly define their obligations rather than rely on the Vienna Convention to fill gaps, specify the applicable Incoterms, establish payment terms, address withholding tax, and prepare an accurate Arabic version.
The Nova Legal team in Riyadh provides international commercial contract drafting and review services for Saudi and foreign companies, alongside legal consultations on foreign investment. Address: Sahaba Road, Ishbiliyah District, Riyadh – Building 2/2, Al Hamra City, Second Floor, Office 202.
Official Sources and References
- UNCITRAL – Saudi Arabia's Accession to the Convention on the International Sale of Goods
- Bureau of Experts at the Council of Ministers – Arbitration Law and Enforcement Law
- Zakat, Tax and Customs Authority – Withholding Tax
- Saudi Center for Commercial Arbitration
- DailyJus – 2025 Arbitration Year in Review: Saudi Arabia