Article 12 of the Saudi Law on Security Rights in Movable Assets

Commercial contracts often contain a condition that bars one party from waiving or assigning his receivables to others. This article deals with the effect of such a condition on the security right.

First rule: no condition in an agreement restricting the grantor's right to provide his receivables or assign his rights as security affects:

• the validity of the contract creating the security right; or
• the effectiveness of the security right.

So if the grantor provides his receivables as security despite a condition barring him, the security right remains valid and effective.

Second rule: this does not mean the condition is worthless, since the party who required the restriction in his favor has the right to claim against the grantor for his contractual rights. That is, breaching the condition remains a matter between the grantor and the other party under their contract, without touching the secured party's right.

Practical effect: this article protects the creditor who accepted the receivables as security, so he is not surprised by the invalidity of his security because of a condition in a contract to which he was not a party, while the grantor remains liable to the party who required the restriction. It follows Article 11 on the effectiveness of a security right over a right against a third party from the date he is notified, and precedes Article 13 on collateral that becomes real estate by designation. If your contract contains a condition of this kind and you intend to provide your receivables as security, it is advisable to consult a lawyer specialized in commercial and finance matters.