COVID-19 And Its Impression On Contractual And Labor Relations In The Kingdom Of Saudi Arabia – Coronavirus (COVID-19)

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The COVID-19 outbreak is affecting businesses. This includes effects on trade and employment contracts. Company in the Kingdom of Saudi Arabia (“KSA“) question the validity of their contracts and the possible application of the concept of force majeure (“FMCompanies are also evaluating various HR issues due to the current pandemic. In this legal briefing, the effects of COVID-19 are analyzed under KSA law, with a special focus on trade and labor relations.

1. Trade Relations

COVID-19 can have several effects on business relationships. The negative effects on the global economy are becoming more and more evident: The supply chains are disrupted as the flow of goods is restricted due to logistical challenges. While some services can be effectively provided through work-from-home setups (“WFH“) services that require a certain on-site presence can be severely restricted. Therefore, the first question is to assess how each actual company is affected by COVID-19 before analyzing the legal consequences.

a. What happens if the contract contains a force majeure clause?

When economic interests are concerned, FM regulations could provide a solution. Islamic law (Sharīʿa) as the basis of the KSA legal system recognizes the parties’ freedom of contract, provided that this does not violate one of the binding provisions of Sharīʿa.

In general, Sharīʿa knows the principle of contracts and their content in order to be binding on the parties (pacta sunt servanda). Accordingly, FM clauses are accepted by

KSA courts, and indeed many contracts in KSA, contain an FM clause. In general, an FM clause in a contract usually contains three elements:

  • Setting up an FM event;
  • The suspension of obligations that have become impossible for a limited time as a result of FM; and
  • The possibility of terminating the contract after the limited time has expired.

These elements are the same in almost all FM clauses.

Establishing an FM event requires assessing whether or not a case is subject to the definition of FM in the contract. Individual contracts can be very different on this point and include (or exclude) natural disasters, states of war, etc.

In many cases, obligations can only be suspended to the extent affected by FM. Once an FM obligation is suspended, an assessment should be made of what happens to an obligation taking into account the suspended obligation (e.g., compensation for the suspended obligation). Often such a suspension is only provided for for a limited period of time in the contract.

Many contracts include termination as an option after a longer FM period and in some contracts the termination is triggered automatically. Such periods are usually between 30 and 90 days, but can be longer than this. In many cases, an early announcement of an FM case can lead to an early (and undesirable) termination of the contract.

b. Are there provisions on force majeure in the KSA laws?

In some areas of law, the KSA has enacted laws (nuẓum, Sg. Niẓam) to regulate this area of ​​law instead of directly applying Sharia law. Some of these laws contain provisions about FM. The best-known example is the KSA labor legislation, which is explained in detail below. Some other laws also contain provisions on FM.

c. How does Sharia law change the actual circumstances in contracts?

Sharia scholars dealing with a divine legal system are familiar with acts of God, and Islamic law contains a number of concepts that deal with changes in circumstances that are beyond the control of the parties.

Islamic legislation offers a wide variety of options, largely depending on what type of contract it is (purchase, rental, long-term, short-term, etc.). and whether the circumstances are related to a party as a person or to the subject matter of the contract.

As a rule, the judge must decide whether and how certain obligations are suspended or changed, or whether the entire contract is affected. Individual contracts should therefore be carefully examined to evaluate possible outcomes.

Due to the ongoing COVID-19 pandemic, it is expected that the KSA courts will be burdened with additional workload and at the same time have to deal with restrictions due to the pandemic itself. We therefore strongly recommend changing contracts, if possible, by including / revising FM clauses. This should also play an important role in new contracts.

2. Labor Relations

One of the most important issues in the current situation is industrial relations issues. Many practical questions in industrial relations concern restrictions on freedom of movement in KSA and abroad. Movements across international borders are now almost completely suspended. The internal border, e.g. between provinces, can only be crossed after applying for a special permit. For some of these borders, even exceptional permits are difficult to obtain.

a. Have the authorities taken any measures that affect the employment relationships in KSA?

The KSA authorities have taken steps to ease administrative pressures on work and residence issues. For example, residence permits (iqāmas) of employees can be renewed even if the person concerned remains abroad.

With regard to the work environment, a number of measures have been taken in relation to the work environment, for example restricting the presence in the company headquarters. Companies have also been asked to allow mandatory 14 days of vacation leave, which is not deducted from vacation balance for all employees falling into any of the following categories:

  • pregnant and breastfeeding women;
  • People with respiratory diseases, chronic diseases or immunodeficiencies; Immunosuppressant users; Tumor patients; and
  • Employees over 55 years of age.

b. Does Saudi law take FM into account in employment relationships?

The labor relations are regulated by the Saudi labor law (“LL“), issued by Royal Decree M / 51 of 23.8.1426 H. The LL lays down the main requirements for industrial relations and goes further into employment contracts. While FM clauses can be included in employment contracts, the LL itself contains several provisions in the Connection with FM. The most important is the possibility of terminating an employment relationship based on FM in Art. 74 No. 5 LL. The following must be taken into account:

  • FM does not allow extraordinary termination without notice.
  • In addition, FM is only valid as a reason for termination if the employee is unable to meet his obligations under the employment contract due to the FM event.

Art. 87 LL grants employees who leave work due to FM the full end of service. c. What other actions can employers take in KSA?

Employers can instruct workers who may not be able to work remotely to take their annual leave. In this regard, Art. 109 Para. 2 LL enables employers to determine the start of the annual leave of their employees. However, employers must notify their employees of the date set for the vacation within a period of at least thirty days.

However, this does not apply to unpaid leave. This means that unpaid leave cannot be unilaterally ordered by employers; Instead, an agreement must be made between employers and their employees. This was recently confirmed by a statement from the Ministry of Human Resources and Social Development. Likewise, salary cuts are only possible with the consent of the employees.

3. Conclusion

Expect most contracts that contain a valid FM clause to be upheld and relied on by KSA courts. It should be checked whether FM clauses include the current situation as an FM event. New contracts should be carefully drafted accordingly. The working relationships can be regulated by differentiated instruments either through the individual contracts or with reference to the LL. Employers should plan and analyze in advance which measures (vacation, salary cuts, dismissals) are suitable.

The content of this article is intended to provide general guidance on the subject. You should seek advice from a professional about your particular circumstances.

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