Navigating Saudi Supreme Court guidelines for Force Majeure and COVID-19

The concept of Force Measure is recognised across a number of Saudi Laws, including the Labor Law, the Government Tenders and Procurement Law, the Mining Investment Law, and the Civil Aviation Law. In addition, there is a separate, but similar, concept that is recognised in Saudi Law and by the Saudi Courts that businesses need to be aware of during the COVID-19 pandemic. This is the concept of Emergency Circumstances, which is applied in situations where it is not possible for a party to perform its obligations under a contract without suffering an unusual or unforeseen loss. In such circumstances, the Courts are empowered to alter the terms of the contract in order to ensure that the party affected does not suffer such loss or to alleviate its worst effects, for the duration of the impact of the pandemic.

The pandemic has given rise to many situations where businesses have been adversely affected in their ability to deliver on their obligations under existing contracts, and have either suffered, or have faced the prospect of incurring, loss and damage. In such circumstances, many affected parties have initiated legal action through the Courts, with the Courts called upon to decide whether the situation amounts to a Force Majeureor to Emergency Circumstances.

Up until December 2020, there was no clear definition of either of these two concepts and no guidelines or instructions for the Courts to follow. This position changed however with the Saudi Supreme Court issuing Decision No. (45 / M) dated 05/08/1442 (corresponding to 23 December 2020), in which it distinguished between Force Majeureand Emergency Circumstances and set down guidelines for the Courts and affected parties to follow in crisis situations resulting from COVID-19.

In its decision, the Supreme Court held that the COVID-19 pandemic will be considered to amount to Emergency Circumstances if, in the particular circumstances of the contract they are dealing with, it is not possible for a party to perform its obligations under the contract without facing an unusual loss. The Court also concluded that the related concept of Force Majeure would only apply if performance of the relevant contract had become impossible. In doing so, the Court has therefore drawn a clear distinction between the two concepts, setting a useful judicial precedent for the Courts to use and rely upon when handling cases resulting from the COVID-19 pandemic.

The Saudi Supreme Court decision outlined four guidelines in case of Emergency Circumstances and Force Majeure:

First: In order to apply the judicial principle to the affected contracts and commitments, the following conditions must be met:

  1. The contract must have been entered into before the precautionary measures resulting from the pandemic were introduced, and the performance of the contract must have continued during the course of the pandemic;
  2. The impact of the pandemic on the contract must be direct and not capable of being avoided;
  3. The impact of the pandemic on the contract must be independent of any other cause (by which the Court appears to have meant that the issues arising under the contract should be caused by the pandemic, and not by any other cause);
  4. The damaged party should not have waived its rights in relation to the matters complained of, or arrived at a settlement of those matters with its counterparty; and
  5. The impacts and damages due to the pandemic must not have been addressed by a special regulation or by a decision from the relevant competent authority.

Second: If the court is satisfied in relation to the first issue, it will then undertake – on the request of the affected party and after balancing the interests of both parties and studying the wider circumstances – to alter the affected party’s contractual commitments which have been affected by the pandemic (or the other party’s contractual entitlements) in a manner that achieves justice:

  1. In the context of real estate contracts and lease agreements relating to moveable items, the following rules shall apply:
    • If it is impossible for the lessee to benefit from the leased real estate partially or completely due to the pandemic, the court will deduct from the rent an amount equivalent to the reduced use compared to the contractually intended use.
    • The lessor will not have the right to terminate the contract for non-payment or late payment of the lease amount for the period during which the lessee was unable to make use of the leased property completely or partially due to the pandemic.
  2. Regarding construction and supply contracts affected by the pandemic, the following rules shall apply:
    • If the pandemic has led to increases in the price of materials, labour wages or operation costs, the court will increase the contract price, though the affected party must bear that part of any price increase which would be seen as a normal or foreseeable price increase in the relevant context. In these circumstances, the increase in the contract price shall only reflect the excessive or unforeseeable increase. Once the court has held what the increased obligation should be, the other party then has the right to request the termination of the contract (as the cost of the contract may have become unaffordable to that party). When the increase in the price of the relevant materials is only temporary, the court also has the right to suspend the implementation of the obligation temporarily.
    • If the pandemic has resulted in a shortage of commodities in the market, then the court has the ability to reduce the quantity required to be delivered by the amount that it deems sufficient to prevent unusual losses being incurred by the affected party.
    • If the pandemic has resulted in a temporary shortage of materials in the market, the court has the ability to suspend performance of the relevant commitment if the affected party has not yet incurred the loss. If the shortage is permanent and has made performance of part or all of the affected party’s obligations impossible, then, on the application of a party, the court has the ability to cancel that part of the affected party’s obligations which has been impossible to execute.
    • If the contract is a commitment to execute certain work and the pandemic has made the execution impossible within the specified time period, the court has the ability to suspend performance of the obligation. If the party which required the work to be undertaken has suffered, or will suffer, significant and unforeseen losses as a result of any suspension, they shall have the right to terminate the contract.

Third: When evaluating the impact of the pandemic, the following shall be taken into account:

  1. An evaluation must be made (by one or more experts) of the extent of the impact of the pandemic on the relevant obligations or sector, and to determine the percentage of the impact and its duration, and to assess whether this impact is significant and unusual, and affected the contract to which the dispute relates. The evaluation of losses must not go beyond the period during which the effect of the pandemic on the contract occurred.
  2. Regarding leases, the benefit value shall be estimated if it is equal in duration. The lease value is decreased according to the period during which it has been impossible to fulfill the commitment. If it varies according to the seasons, the agreed lease value shall be made in installments based on the benefit value, and the lease value shall be reduced according to the period during which it has been impossible to fulfill the commitment.

Fourth: Subject to the earlier requirements being satisfied, when considering cases arising from contracts and commitments impacted by the pandemic, the court shall abide by the following:

  1. If the pandemic is the cause of the delay in the execution of a project, then fines or penalty provisions shall not be applied – partially or entirely as the case may be – and the project shall not be withdrawn from the affected contractor or executed at the expense of the contractor as may be provided for in the relevant contract.
  2. If the contract includes an exemption from liability for one of the parties to the contract then, if an emergency or force majeure occurs, that provision shall have no effect.
  3. The party whose performance of the contract is affected shall bear the burden of proving that the pandemic was the cause of its inability to perform in accordance with its obligations.
  4. The normal principles set down in the law or in judicial precedent shall be applicable to any affected commitments and contracts which do not fall within the provisions of this principle.

Although the Saudi judicial system had settled cases resulting out of Emergency Circumstances and Force Majeure in a fair way previously, the Saudi Supreme Court’s decision was issued at an opportune time, with the decision combining previous precedents and principles of fairness under Sharia in one overarching guideline. This has proven to be extremely useful for both the courts and parties affected by contract termination or suspension in Saudi Arabia.     

Please contact the author Mohammed Al Shahrani for more information.