Kingdom of Saudi Arabia Civil Code: Retrospective time bars may extinguish legacy claims subject to arbitration

The KSA Civil Code comes into force on 19 December 2023 with a retrospective effect, including time bars on claims to which the Civil Code applies. The Civil Code’s express exception for pre-existing claims already subject to time bars may apply in some cases, however that exception is unlikely to cover pre-existing claims subject to arbitration clauses. Contractors and other parties with existing claims should act urgently over the coming months to mitigate the risk of losing their entitlements.

Our previous commentaries set out the background to the new KSA Civil Code. Subject to limited exceptions, Royal Decree M/191 states that the Civil Code will retrospectively apply 180 days from when it was published.

Overview of time bars in the Civil Code

The Civil Code states:

• a claim for compensation arising from a “harmful act” shall not be heard after 3 years from when the claimant became aware that damage had occurred and knew who was responsible. In all cases, the claim shall not be heard after 10 years from when the damage occurred (Article 143).
• a claim for compensation arising from “unjust enrichment”, “undue payment” or “negotiorum gestio” shall not be heard after 3 years from when the claimant had knowledge of its entitlement. In all cases, the claim shall not be heard after 10 years from when the entitlement arose (Article 159).
• a claim for payment by an engineering firm or another profession against the denying debtor shall not be heard after 5 years from when the payment is due (Article 296).
• unless another time bar is set by the Civil Code (as above) or an exception applies (discussed further below), all claims shall not be heard after the lapse of 10 years (Article 295).

Care should be taken in identifying which of the above time bars applies to a particular claim. For example, there may be debate as to which category covers certain case. Nonetheless, the key point is that the catch-all time bar of 10 years will apply if none of the shorter time bars apply to a particular claim.

Express exception concerning pre-existing time bars

The Royal Decree by which the Civil Code was enacted sets out (at Article Fifth (2)) an exception to the code applying retrospectively, namely that where time bars under existing laws had started to run, those existing time bars would apply and not the new time bars set out in the Civil Code. For example, the existing Commercial Court Law provides a time bar of 5 years (at Article 24) concerning cases in respect of which “the court has jurisdiction to hear”.

As such, if disputes under the relevant contract are to be heard by the Commercial Court, the existing time bar under the Commercial Court Law would apply to the claim and the exception in the new Civil Code referred to above would have been enlivened. For example, where one of the 3-year time bars referred to above would otherwise apply under the Civil Code (e.g. “harmful acts” or “unjust enrichment”), a party would still have 5 years to bring the claim (and potentially longer if it can demonstrate it qualifies for an extension under the categories specified in Article 24 of the Commercial Court Law).

Application to compensation claims subject to arbitration

Importantly, the time bar in the Commercial Courts Law is stated to apply to cases in respect of which “the court has jurisdiction to hear”. Where the contract includes a binding arbitration clause, the default jurisdiction of the Commercial Court (or indeed any Saudi court) to hear and determine disputes arising under that contract has been excluded under Saudi law.

Specifically, the Arbitration Law states (at Article 11) “a court before which a dispute, which is the subject of an arbitration agreement, is filed shall dismiss the case if the defendant raises such defense before any other claim or defense”. As such, the Commercial Court does not have “jurisdiction to hear” disputes arising under contracts containing arbitration clauses where the defendant has raised a challenge on that basis in accordance with the applicable procedures.

The time bars exception to the retrospective application of the Civil Code referred to above only arises where time bars under existing laws had started to run. It follows therefore that the exception cannot apply where existing laws did not impose a time bar on claims prior to the Civil Code coming into effect. Furthermore, as noted above, the Civil Code applies retrospectively from the date it comes into effect and nothing in the Civil Code suggests that time bar periods are only calculated from that date.

As a consequence, there is a major risk that existing claims subject to arbitration clauses will be immediately extinguished in mid-December 2023 if the new time bars in the Civil Code have expired.

Claimants (and their lawyers) may argue that the above conclusion cannot be correct. They may say that it is unjust for their claims to be extinguished retrospectively when no time bar applied to such claims previously. They may also say that, notwithstanding its specific language, the time bar in the Commercial Court Law does apply to claims subject to arbitration. That said, the Royal Decree contains clear language that the Civil Code (including the new time bars) “applies to all cases” from the date it comes into effect, unless one of the stated exceptions apply.

In summary, unless claimants can point to a pre-existing law setting a time bar applicable to claims subject to arbitration, such arguments are at risk of not being accepted by Arbitral Tribunals, who may conclude that claimants have lost their entitlements upon the time bar expiring.

What can claimants do to avoid their compensation claims being extinguished?

Claimants can take a number of steps to mitigate the risk of their compensation claims being dismissed by reason of the application of the time bars in the Civil Code.

First and foremost, claimants can issue legal proceedings to enforce their claims prior to the expiry of the time bar (e.g. 3, 5 or 10 years) or prior to mid-December (when the Civil Code comes into effect). In respect of claims arising from contracts with an arbitration clause, this approach would involve commencing arbitration proceedings against the party responsible for the damage.

In addition, the Civil Code sets out other steps that may result in extension of the time bar, including:

• Good faith negotiations with the counterparty upon completion the time bar period;
• Obtaining the counterparty’s acknowledgement of the entitlement, expressly or implicitly;
• Being able to demonstrate there was a moral impediment that precluded a claim being filed.

Suffice to say that the onus of demonstrating that an extension should be granted on the basis of any of the above grounds rests with the claimant and depends on the discretion of the appointed Arbitral Tribunal.  As such, we recommend that claimants only rely on obtaining an extension to the time bar where it has not been possible to commence legal proceedings prior to the time bar’s expiry and as a last resort.

Conclusion

The KSA Civil Code seeks to give commercial parties greater certainty in respect of their rights and obligations, including the efficient resolution of claims. That said, the retrospective effect of the Civil Code may have particular consequences for parties to existing contracts containing arbitration clauses. Where parties have pending claims, we recommend that they review their legal position urgently in the coming months to avoid unwelcome consequences.