The Civil Transactions Law: What It Changes for Contracts and Compensation

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Apply the Civil Transactions Law periods (ten years general, five, one, and three for tort) to your case in the Hijri calendar with the limitation period calculator.

Issuance, entry into force and scope

The Civil Transactions Law was issued by Royal Decree No. (M/191) dated 29/11/1444H (June 18, 2023) and published in the Official Gazette on 1/12/1444H (June 19, 2023). Its Article 721, the last article of the law, provides that it takes effect 180 days after its publication, which means from December 2023.

The law covers persons, things and property, obligations and their sources (contract, harmful acts, unjust enrichment and statute), the effects, transfer and extinction of obligations, named contracts such as sale, lease and construction contracts, and rights in rem such as ownership, together with general legal maxims in its final provisions.

How does the law apply?

The law's provisions apply to all matters they address in wording or in substance. Where there is no applicable provision, the general maxims in its final provisions apply, and where there is no applicable maxim, the rules derived from Islamic Sharia most consistent with the law apply (Article 1). These maxims include “in contracts, what counts is intent and meaning, not wording and form” and “the default in contracts and conditions is validity and bindingness.”

The royal decree issuing the law provides that it applies to facts that occurred before it took effect, except where a statutory provision or judicial principle relating to the facts conflicts with it and a party relies on it, or where the matter concerns a time-bar period that began running before the law took effect. It also applies to commercial transactions to the extent consistent with their nature, where commercial laws contain no specific provision.

Key effects on contracts

• Hardship: if general exceptional circumstances arise that could not have been foreseen at the time of contracting and make performance so onerous that it threatens the debtor with a heavy loss, the debtor may invite the other party to negotiate without suspending performance. If no agreement is reached within a reasonable time, the court may reduce the onerous obligation to a reasonable level, and any agreement to the contrary is void (Article 97). This means clauses that entirely bar the debtor from seeking to restore balance in this situation need review.
• Termination: in bilateral contracts, if one party fails to perform, the other party may, after serving notice, demand performance or termination with compensation where warranted, and the court may refuse termination if the unperformed part is of minor importance (Article 107).
• Agreed compensation (penalty clause): the parties may agree in advance on the amount of compensation unless the obligation is a sum of money (Article 178). It is not due if the debtor proves the creditor suffered no harm; the court may reduce it if it is excessive or the obligation was partly performed, and increase it if the harm exceeded it due to the debtor's fraud or gross fault (Article 179).
• In contractual obligations, a debtor who committed no fraud or gross fault is liable only for harm that could normally have been foreseen at the time of contracting (Article 180).

Harmful acts and unjust enrichment

The law sets a general rule: every fault that causes harm to another obliges the person who committed it to pay compensation (Article 120). Compensable harm is measured by the loss the injured party suffered and the gain it missed, where this is a natural result of the harmful act (Article 137). A claim for compensation for a harmful act is not heard once three years have passed from the date the injured party learned of the harm and of the person responsible, and in all cases once ten years have passed from the date the harm occurred (Article 143).

Anyone who is enriched without a legitimate cause at another's expense must, within the limits of that enrichment, compensate the other person for their loss, and this obligation remains even if the enrichment later ceases (Article 144).

Time-bar periods

A right is not extinguished by the passage of time, but a claim to it is not heard against a party who denies it after ten years, except where a statutory provision or exception applies (Article 295). The law sets a five-year period for the rights of liberal professionals such as doctors, lawyers and engineers, and for recurring periodic rights such as real estate rent and wages (Article 296), and a one-year period for certain other rights, including traders' rights for goods and services supplied to persons who do not trade in them (Article 297). This is without prejudice to specific statutory provisions, such as the limitation period under the Commercial Courts Law; read the limitation period for commercial claims.

What should individuals and companies review?

• Standard contract templates, especially clauses on agreed compensation, termination and limitation of liability.
• Hardship and force majeure clauses, to make sure they do not conflict with mandatory provisions such as Article 97.
• The notice mechanism between the parties and the approved channels for it.
• The age of debts and claims, and the time-bar periods that apply to each type.
• Documenting harm, its causes and its value as it occurs.

The outcome in each case depends on the contract wording, the facts and the documents. Existing contracts can be reviewed in light of the law through our Contract Drafting & Review service.