The KSA Civil Transactions Law Applied: Exceptions to Retrospective Effect

The Civil Transactions Law (the CTL) enacted by Royal Decree No M/191 (the Royal Decree) has been in full effect for over a year, seeding anticipation as to how the landmark legislation is being interpreted and applied by the Saudi Courts. Since the law’s effective date of 16 December 2023 (the Effective Date), cumulating case law is bringing the courts’ application of the CTL into focus.

This week, the Riyadh Commercial Court confirmed that the CTL applies retrospectively to events and relationships pre-dating its Effective Date, with the exception of limitation periods that started to run prior to the Effective Date. 

Riyadh Commercial Court Case No. 4530992132 of 1445H

A recent case was filed by a natural person against a trading services company before the Second Commercial District of the Riyadh Commercial Court. The plaintiff alleged that the defendant failed to comply with the terms of the Mudaraba (i.e. profit-sharing) agreement the parties executed in 2010. 

The defendant denied the allegations, and advanced a procedural defence that the plaintiff’s claim was time-barred as per the statute of limitations in Article 143(1) of the CTL which provides that claims for compensation arising out of harmful acts (i.e. tort claims) may only be heard within three years from the date the plaintiff became aware of the damage and the party responsible for it, and in all cases, not after a ‘longstop date’ of 10 years from the date the damage was inflicted.

The court was persuaded that the defendant breached the parties’ agreement and rejected the defence that the claim was time-barred, citing the exception to the CTL’s retrospective application in Article 5(2) of the Royal Decree which provides that the CTL does not have retrospective effect where a limitation period has started to run prior to the Effective Date.

As a result, the court issued a preliminary judgment ordering the defendant to compensate the plaintiff for the amounts claimed. 

Welcome Clarity in a Period of Transition

The retrospective application of the CTL to events and relationships, whether contractual or otherwise, is a distinct feature enhancing certainty for those previously forced to rely on the array of rules developed by Islamic legal scholars over centuries, many of which were applied inconsistently by the courts. Commercial parties and the legal community are therefore closely tracking judgments rendered by the Saudi Courts interpreting and applying the CTL. 

As regards the CTL’s retrospective effect, there are two exceptions in Article 5 of the Royal Decree which apply when (a) a party invokes a conflicting “statutory provision” or “judicial principle” that relates to the event in question and predates the Effective Date, or (b) a limitation period had already started to run prior to the Effective Date.

The recent judgment is a welcome confirmation of the general principle that any limitation periods contained in the CTL will not apply to claims arising before it came into force. This reflects sound policy by ensuring that parties with pre-existing claims are not left without recourse due to a retrospective curtailment of an existing limitation period (or the introduction of a new limitation period where none existed). Accordingly, Article 143(1) does not preclude pre-existing claims if the damage was first discovered (along with the party responsible), or had occurred, before the Effective Date. For these claims, pre-existing rules regarding limitations continue to apply.

Conclusion

The judgment is a welcome confirmation of the exception to retrospective effect for pre-existing claims. Commercial parties should be careful to seek legal advice in relation to these claims as there are an array of limitation periods pre-dating the CTL that continue to apply notwithstanding its entry into force.