Article 4 of the Saudi Commercial Pledge Law

This article implicitly distinguishes between two matters: the formation of the pledge contract between its two parties, and its effectiveness against third parties, meaning the ability to rely on it against persons who are not parties to it. The article specifies how a pledge becomes effective against third parties.

This happens in one of two ways:

• Public notice: Announcing the pledge in the manner prescribed by law.
• Transfer of possession of the pledged asset: To the pledgee, or to the custodian (the official text uses a variant spelling of the word). The custodian, under Article 1, is a person whom the pledgor and the pledgee agree will possess the pledged asset or preserve it.

The article requires that this be done in accordance with the provisions of the Law of Security Rights over Movable Assets. So the details of public notice, its procedures and the conditions for transfer of possession are learned from that law, not from this article.

The article was amended by Royal Decree No. M/94 dated 15/8/1441 AH to take its current wording, which refers to the Law of Security Rights over Movable Assets.

The article is connected to Article 3, which treats the pledge as effective from the date of its contract, not from the date the debt is established, and to Article 5, which prevents changing the custodian except by agreement of the pledgor and the pledgee and gives the custodian the right to claim compensation for damages from such a change.

The article matters in practice: a pledgee who wants to rely on its pledge against others needs public notice or transfer of possession under the law referred to. To know the appropriate procedure in a particular case, it is advisable to consult a lawyer specialized in commercial or finance matters.