Navigating Saudi Supreme Courtroom Pointers for Drive Majeure and COVID-19

The concept of violence is recognized in a number of Saudi laws, including the Labor Law, the Government Tendering and Procurement Law, the Mining Investment Law, and the Civil Aviation Law. In addition, there is a separate but similar concept that is recognized in Saudi law and by the Saudi courts that companies must consider during the COVID-19 pandemic. This is the concept of emergencies applied in situations where it is not possible for a party to perform its contractual obligations without suffering an unusual or unforeseen loss. In these circumstances, the courts have the power to amend the terms of the contract to ensure that the affected party does not suffer such loss for the duration of the effects of the pandemic or to mitigate its worst effects.

The pandemic has created many situations in which companies have been compromised in their ability to meet their obligations under existing contracts and have either suffered loss or damage or were in prospect. In these circumstances, many interested parties have taken legal action through the courts, asking the courts to decide whether it is a force majeure or an emergency.

As of December 2020, there was no clear definition of these two concepts, and no guidelines or instructions for the courts. However, this position changed with the Supreme Court Decision No. (45 / M) of the Supreme Court of Saudi Arabia dated 08/05/1442 (corresponding to December 23, 2020), which differentiated between force majeure and emergencies and established guidelines for the courts follow affected parties in crisis situations due to COVID-19.

In its ruling, the Supreme Court ruled that the COVID-19 pandemic will be considered an emergency if, under the particular circumstances of the contract they are dealing with, it is impossible for a party to perform their obligations under the contract without one to suffer unusual loss. The Court also concluded that the related concept of force majeure would only apply if the performance of the contract in question had become impossible. In doing so, the Court of Justice has made a clear distinction between the two concepts, creating a useful precedent for courts to draw upon when dealing with cases related to the COVID-19 pandemic.

The decision of the Supreme Court of Saudi Arabia established four guidelines for emergencies and force majeure:

First: In order to apply the legal principle to the contracts and obligations concerned, the following conditions must be met:

1. The contract must have been concluded before the precautionary measures resulting from the pandemic were put in place and the performance of the contract must have continued throughout the pandemic.
2. The impact of the pandemic on the contract must be immediate and cannot be avoided.
3. The impact of the pandemic on the contract must be independent of any other reason (by which the Court apparently meant that the problems under the contract should be caused by the pandemic and not by any other reason).
4. The injured party should not have waived its rights in relation to the matters complained of or reached an agreement with its other party on these matters. and
5. The effects and damage caused by the pandemic must not have been regulated by a special ordinance or a decision by the competent authority.

Second: If the court is satisfied with the first question, at the request of the affected party and after weighing the interests of both parties and investigating the further circumstances, the court will undertake to amend the contractual obligations of the affected party affected by the pandemic (or the contractual claims of the other party) in a way that achieves fairness:

1. In connection with real estate contracts and leasing contracts for movable objects, the following rules apply:
   1. If, due to the pandemic, the tenant is unable to benefit partially or fully from the rented property, the court will deduct an amount from the rent that corresponds to the reduced use compared to the contractually intended use.
   2. The landlord does not have the right to terminate the contract due to non-payment or late payment of the lease amount for the period in which the lessee was unable to use the leased property in whole or in part due to the pandemic.
2. The following rules apply to construction and supply contracts affected by the pandemic:
   1. If the pandemic has resulted in price increases in materials, wages or operating costs, the court will increase the contract price, although the affected party will have to bear that part of a price increase that is considered to be a normal or foreseeable price increase in the relevant context. In these circumstances, the increase in the contract price will only reflect the excessive or unpredictable increase. Once the court has decided how much the increased obligation should be, the other party has the right to request termination of the contract (as the cost of the contract may have become prohibitive for that party). If the price increase for the material in question is only temporary, the court also has the right to temporarily suspend the fulfillment of the obligation.
   2. If the pandemic has resulted in a shortage of goods in the market, the court may reduce the quantity to be delivered by what it deems sufficient to prevent the affected party from incurring unusual losses.
   3. If the pandemic has resulted in a temporary shortage of materials in the market, the court may suspend compliance with the relevant obligation if the affected party has not yet suffered the loss. If the deficiency is permanent and has made it impossible for the party concerned to fulfill part or all of its obligations, the court may, at the request of either party, cancel that part of the party’s obligations that could not be fulfilled.
   4. If the contract constitutes an obligation to carry out certain work and the pandemic has made it impossible to carry out the work within the specified period, the court has the option to suspend the fulfillment of the obligation. If the party who requested the work to be carried out has suffered or will suffer significant and unforeseen losses as a result of a suspension, it has the right to terminate the contract.

third: When assessing the impact of the pandemic, the following should be taken into account:

1. The extent of the impact of the pandemic on the relevant commitments or the sector needs to be assessed (by one or more experts) to determine the percentage of the impact and its duration and to assess whether this impact is significant and unusual and concerned the contract to which the dispute relates. The assessment of the losses must not go beyond the period during which the impact of the pandemic on the contract occurred.
2. In the case of leases, the service value is estimated if it has the same term. The lease value is reduced according to the period in which the obligation could not be fulfilled. If it varies depending on the time of year, the agreed lease value will be calculated in installments based on the performance value, and the lease value will be reduced according to the period during which it was impossible to meet the obligation.

Fourth: Subject to previous requirements being met, when considering cases arising from contracts and obligations affected by the pandemic, the court must consider the following:

1. If the pandemic is the cause of the delay in the execution of a project, any fines or penalties – in whole or in part – will not be applied and the project will not be withdrawn by the affected contractor or at the contractor’s running costs as provided for in the relevant contract.
2. If the contract contains an exemption from liability for either party, this provision has no effect in the event of an emergency or force majeure.
3. The party whose performance of the contract is affected bears the burden of proving that the pandemic caused its inability to meet its obligations.
4. The normal principles set out in law or in a precedent apply to all obligations and contracts concerned that are not covered by the provisions of this principle.

Although the Saudi judicial system had previously fairly resolved cases arising from emergencies and acts of God, the decision of the Supreme Court of Saudi Arabia came at an opportune time, using previous precedents and principles of fairness under the Sharia summarized in a superordinate guideline. This has proven extremely useful for both courts and parties affected by a contract termination or suspension in Saudi Arabia.