Drafting investment contracts in Saudi Arabia under the Civil Transactions Law and the new Investment Law: types of investment contracts, clauses that protect capital, exit terms, liquidated damages, and contracts with foreign investors.
An investor puts one million riyals into a friend's project on a single page, then discovers a year later that he does not know how his profits are calculated, has no right to see the accounts, and has no way out. This scenario is common, and it happens because investment contract drafting was treated as a formality. In reality, the investment contract is the only safeguard for your capital once it leaves your account.
In this guide we explain the common types of investment contracts in Saudi Arabia, the legal framework that governs them, the clauses that protect capital, exit terms, the limits of liquidated damages, and what is different in contracts with foreign investors under the new Investment Law.
What Is an Investment Contract, and What Are Its Types?
An investment contract is an agreement under which one party provides capital or an asset to another party who manages or operates it, in return for a return or a share of profits or ownership. Its form depends on the nature of the relationship:
| Contract type | Nature | Best suited for |
|---|---|---|
| Mudaraba contract | The investor provides capital and the other party provides work, with profit shared at an agreed ratio | A project run by one person with an investor's money |
| Profit-share investment contract | Funding an existing business in return for a share of net profit for a set period | Expanding an existing business without changing its ownership |
| Equity investment | Subscribing for or buying shares in an existing company | An investor who wants ownership and voting rights |
| Shareholders' or partners' agreement | Governs relations between owners alongside the articles of association | Companies with more than one investor |
| Real estate or operating investment | Investing in or operating land or an asset for a return or a term | Real estate and commercial projects |
Choosing the wrong type is the first drafting mistake, because each type carries different rules on guarantees, losses and exit.
The Legal Framework for Investment Contracts in Saudi Arabia
- The Civil Transactions Law, in force since December 2023: governs contract formation, interpretation, compensation, liquidated damages and exceptional circumstances.
- The Companies Law: governs equity investment, shares and partners' rights, and allows many matters to be set out in the articles of association.
- The Investment Law, in force since February 2025: a unified framework for local and foreign investors, based on registration with the Ministry of Investment instead of licensing.
- Islamic Sharia principles, which directly affect structures such as mudaraba and musharaka, especially on guaranteeing capital.
- The Arbitration Law, where the parties choose arbitration to resolve disputes.
To understand how the Civil Transactions Law affects your contracts in detail, read our article on the Civil Transactions Law and its impact on contracts.
Capital Protection Clauses in Investment Contract Drafting
Subject, Amount and Funding Stages
Define the project precisely, the amount, and whether it is paid at once or in tranches linked to milestones. Linking tranches to performance indicators protects the investor from putting the full amount into a struggling project.
Profit Calculation and Distribution
State whether the share is of net profit or revenue, which expenses are deducted before calculation, and when and how often profits are distributed. A vague phrase like "a share of the profits" without defining profit is the most common trigger of disputes.
Information Rights and Reporting
Provide for periodic financial reports, the investor's right to inspect the books or appoint an independent auditor, and notice of any major liabilities or debts.
Decisions Requiring Investor Consent
Such as borrowing above a set limit, selling key assets, admitting a new partner or changing the business. This list protects the investor without involving them in day-to-day management.
Security
Such as performance guarantees, asset pledges or personal guarantees in some structures. But note: in a Sharia-compliant mudaraba, the managing party does not guarantee the capital unless it acted wrongfully, was negligent or breached the terms, and an absolute guarantee changes the nature of the contract and may invalidate it. Protection here rests on oversight and conditions, not on guaranteeing the amount.
Exit Clauses: How Do You Get Your Money Out?
A contract without an exit mechanism makes the investor a hostage to the project. The key exit clauses are:
- Investment term and what happens when it ends: repayment, renewal or conversion into equity.
- A put option to sell to the other party at a set price or valuation formula on specified events.
- A right of first refusal for existing partners when any party sells its share.
- Tag-along rights for a minority investor if the majority sells, and drag-along rights for the majority on a full acquisition offer.
- Valuation method on exit: an accredited valuer, an earnings multiple or book value.
- Early termination events such as material breach, project failure or bankruptcy.
If the investment takes the form of joining a company as a partner, also read about the essential clauses in partnership contracts.
Liquidated Damages and Exceptional Circumstances in Investment Contracts
The Civil Transactions Law allows the parties to set compensation in advance in the contract, but it sets important limits:
- Agreed compensation is not due if the obligor proves the obligee suffered no harm.
- The court may reduce it on the obligor's request if it is excessive or part of the obligation was performed.
- The court may increase it on the obligee's request in proportion to the harm if the excess harm resulted from fraud or gross error.
- Any agreement contrary to these rules is void.
The law also allows the court, where general exceptional circumstances that could not have been foreseen make performance excessively onerous, to reduce the obligation to a reasonable level. An inflated penalty clause therefore does not protect the investor as much as expected; a realistic compensation clause with strong oversight and exit terms works better.
Investment Contracts with Foreign Investors
The new Investment Law has made market entry easier for foreign investors, but their contracts need attention to additional points:
- Registration with the Ministry of Investment and the requirements of the target activity, as some activities have sector-specific conditions.
- Contract language: a bilingual contract stating which version prevails in case of discrepancy.
- Governing law and forum: Saudi courts, or arbitration at the Saudi Center for Commercial Arbitration or an international center.
- Transfer of profits and capital, its timing and currency.
- Due diligence before signing, to verify the legal and financial position of the investee company.
For foreign investors, Nova Legal offers legal consultations for foreign investment, and you can read our foreign investor's guide to company formation.
Common Investment Contract Drafting Mistakes, and When You Need a Lawyer
- A one-page contract stating only the amount and ratio, without defining profit or an exit mechanism.
- Requiring a capital guarantee in a mudaraba contract, which conflicts with its nature.
- No information rights, so the investor relies only on what they are told.
- A contract inconsistent with the company's articles of association, so the private agreement conflicts with the official document.
- No dispute resolution forum, so the disagreement starts with a fight over jurisdiction.
- Signing before legal due diligence on the project or company.
- To draft your contract or review one offered to you, request our investment contract drafting service.
- Before joining any company, request legal due diligence for companies, or read our guide to legal due diligence.
- If you have a project idea and are looking for funding, read you have a project idea but no capital.
- If you choose arbitration, see our guide to commercial arbitration in Saudi Arabia.
Frequently Asked Questions
What is the difference between an investment contract and a partnership contract?
A partnership contract usually makes both parties co-owners and co-managers, while an investment contract focuses on providing capital in return for a share of profits or ownership, defining the investor's role in management and their rights to information and exit.
Can the investor's capital be guaranteed in a mudaraba contract?
In a Sharia-compliant mudaraba, the managing party does not guarantee the capital unless it acted wrongfully, was negligent or breached the terms, and an absolute guarantee changes the nature of the contract. The investor can be protected by other means, such as performance-linked security, oversight rights and exit terms.
Is a liquidated damages clause enforceable in an investment contract?
Yes. The Civil Transactions Law allows parties to agree on compensation in advance, but the court may reduce it if it is excessive or the obligation was partly performed, and it is not due if the obligor proves the obligee suffered no harm.
Does a foreign investor need a license to enter into an investment contract in Saudi Arabia?
Under the Investment Law in force since February 2025, investment activity is based on registration with the Ministry of Investment instead of licensing, while sector-specific requirements still apply to some activities.
What is the most important clause protecting the investor?
There is no single clause, but the strongest protection comes from a clear profit calculation method, the right to inspect accounts, exit and valuation terms, and a defined dispute resolution forum such as arbitration or the competent court.
Your capital deserves a contract that protects it before it leaves your account
We draft your investment contract or review the one offered to you, and set the profit, oversight and exit terms in line with Saudi law.
info@novalegal.sa | Al Sahaba Road, Al-Ishbiliyah District, Riyadh
Conclusion: Investment Contract Drafting Decides the Fate of Your Capital
Getting investment contract drafting right starts with choosing the right contract type, then defining profit precisely, protecting information rights, listing decisions that need your consent, setting a clear exit mechanism, and a realistic liquidated damages clause that holds up in court.
The Nova Legal team in Riyadh drafts and reviews investment contracts and shareholders' agreements for local and foreign investors through our investment contract drafting service and our legal consultations for foreign investment service. Address: Al Sahaba Road, Al-Ishbiliyah District, Riyadh – Building 2/2 Al Hamra City, Second Floor, Office 202.
