Definition of Commercial Contract and Classification Criteria

A commercial contract is a legally binding agreement between two or more parties to execute commercial work or exchange goods and services for financial consideration.

Classification criteria include nature of activity (sale, purchase, services), time duration (short or long term), financial value (small or large contracts), contracting parties (companies, individuals, governments), and place of execution (local or international). They are also classified by legal form (written or oral) and degree of complexity (simple or complex).

Difference Between Commercial and Civil Contracts

Distinction between commercial and civil contracts:

In terms of nature and purpose: Commercial contracts primarily aim to achieve profit and conduct commercial activity like buying and selling for resale, while civil contracts meet personal and consumer needs of individuals without commercial intent.

In terms of contracting parties: Commercial contracts occur between merchants or between merchant and non-merchant for commercial purposes, while civil contracts occur between ordinary individuals for personal or family purposes.

In terms of applicable law: Commercial contracts are subject to commerce law provisions and specialized commercial courts, while civil contracts apply civil transaction systems and general courts.

In terms of procedures and formalities: Commercial contracts feature speed and flexibility in execution and litigation with flexible proof rules, while civil contracts require more complex procedures and strict formalities in documentation and proof.

In terms of liability and guarantees: Commercial contracts carry broader joint liability with legal presumptions favoring merchants, while civil contracts are limited to specific personal liability.

Types and Examples of Commercial Contracts

Types of commercial contracts:

• Commercial sale contract: Includes sale of goods and commodities for commercial purposes and resale
• Supply contract: Supplier commits to provide client with specific products or services according to agreed specifications
• Commercial lease contract: Includes leasing real estate or equipment for use in commercial activities
• Partnership contract: Regulates relationship between partners and distribution of profits, losses, and responsibilities
• Commercial agency contract: Authorizes agent to conduct specific commercial activities on behalf of principal
• Transportation contract: Includes transportation of goods or persons by various means of transport
• Commercial insurance contract: Provides insurance coverage for commercial assets against various risks
• Professional services contract: Relates to providing specialized services such as consulting, maintenance, and marketing
• Financing contract: Regulates lending or financing commercial activities with specified interest and guarantees
• Commercial franchise contract: Grants right to use trademark and business system for specified fees

Conditions and Elements of Commercial Contract

What are the conditions of commercial contract?

• Both parties must be legally qualified to conclude commercial contracts and not prohibited from conducting commercial activity
• Both parties' consent must be free and without defects such as coercion, mistake, or gross deception
• Contract subject must be lawful, executable, and not contrary to public order and morals
• Clearly define obligations and rights of each party with designation of contract subject and financial consideration
• The reason for contracting must be lawful and clearly defined
• Document contract in writing with signature, especially for large or long-term transactions
• Determine contract duration and renewal or termination conditions when necessary

What are the elements of commercial contract?

• There must be clear and specific offer from one party including all basic conditions
• Acceptance must be explicit and matching the offer without modification in essential conditions
• Clearly and accurately determine financial consideration or mutual benefit between parties
• Identify contract parties by their full names and complete legal capacities
• Determine contract subject and obligations required to be performed by each party
• State lawful reason and purpose for concluding commercial contract
• Determine contract time period and start and end dates
• Include penalty clauses and dispute resolution mechanisms when necessary

How to Write and Prepare Commercial Contract

Steps to prepare a solid commercial contract:

• Clearly define contract title, such as "Commercial Sale Contract" or "Supply Contract" or "Services Contract"
• Identify contracting parties with full names, addresses, and legal capacities (natural or legal person)
• Write introduction explaining contract background, purpose of conclusion, and relationship between parties
• Detailed description of contract subject whether goods or services with precise specifications
• Determine financial value, payment methods, due dates, and currency used
• Clarify delivery and receipt conditions, schedules, locations, and related responsibilities
• Include terms and conditions including guarantees, responsibilities, termination conditions, and compensations
• Determine contract duration and start and end dates and possibility of renewal
• State applicable law and competent court for dispute resolution
• Final signature from all parties with date and place notation and witness seal when needed

Tax Implications for Commercial Contracts

How much is commercial contract tax in Saudi Arabia?

Taxes applied to commercial contracts in Saudi Arabia:

Value Added Tax:

• General rate: 15% on goods and services

Additional obligations:

• Electronic invoicing is mandatory
• Tax registration for establishments (revenues over 375,000 SAR)
• Quarterly tax returns

Nullification and Termination of Commercial Contract

When is commercial contract nullified?

Commercial contract is nullified in the following cases:

• If there is defect in one party's consent due to coercion, fraud, mistake, or gross deception
• If one party is not legally qualified to contract, such as minor, person under guardianship, or bankrupt
• If contract subject is unlawful or contrary to public order and morals
• If reason for contracting is unlawful or fictitious
• If required legal form is not fulfilled such as mandatory documentation or registration

When does commercial contract end?

Commercial contract ends in the following cases:

• Expiry of period specified in contract or fulfillment of terminating condition
• Completion of all agreed obligations
• Mutual agreement between parties to terminate contract
• Material breach of obligations by one party
• Impossibility of execution due to force majeure or exceptional circumstances