The Supreme Court of Saudi Arabia has provided guidelines on
Legal Standards to be Extended to COVID-19-affected Contracts
The Supreme Court of Saudi Arabia released Decision No. 45/M (08/05/1442 A.H.) ("Decision No. 45/M") on December 23, 2020, setting down a series of legal standards that relate to contracts regulated by Saudi law that are influenced by the COVID-19 pandemic. The ruling is important for those affected by COVID-19 because it establishes that Saudi courts have the right to change contract provisions, including force majeure, liability limits, revocation, and termination.
1. Contracts to which the decision will apply
For this to extend to a specific contract, the Supreme Court defined five conditions:
The relevant contractual obligations must: (i) have been entered into prior to the start of the precautionary measures taken in response to COVID-19; and (ii) still be in effect after the precautionary measures were imposed; the COVID-19 pandemic must have had a direct and unavoidable impact on the contract; and the parties were unable to perform their respective obligations solely due to COVID-19.
The involved party did not forfeit its statutory rights or conclude any compromise with respect to the matters at hand; and
A special legislation or a ruling of a competent body may not resolve the consequences and losses of the COVID-19 pandemic.
Many commercial contracts signed before March 2020 would most likely be caught by the test outlined in the ruling. Saudi courts reserve the power to determine whether a contract satisfies all five conditions on a case-by-case basis in all cases.
2. Saudi courts' right to adjust the terms of contractual contracts:
The Supreme Court confirmed that once the five conditions are met, a court has the power to amend a contract that has been affected by the pandemic in order to seek justice. The following changes that a court may enforce was expressly specified in Decision No. 45/M:
Increasing the contract price: If the pandemic has raised the price of supplies, manpower, or operational costs, the contract price may be increased by a fair amount (above what would be a normal increase). If there is a major price rise, the paying party will seek contract termination. The court will order a provisional termination of the deal if the cost changes are only temporary.
Reducing the quantity of supply: A court will minimize the quantity that a party is expected to supply where there has been a lack of specific products in the market due to the pandemic and the provider would incur extraordinary harm from needing to provide the entire volume.
Temporarily suspending or terminating an obligation: Where materials have been temporarily inaccessible in the market due to the pandemic, a court may temporarily suspend or terminate obligations. A party can even seek termination if the supplies are unavailable for an extended period of time, making it difficult to carry out any or all of the contract's obligations; and
Granting extensions of time: If the pandemic has made it difficult for a group to complete work on time, a court can award an extension of time. If an extension of time will cause serious and unusual harm, the other party may warrant termination.
While beneficial, the instruction produces an atmosphere that is ripe for more future conflicts. What, for example, would be a major rise in costs that would warrant ending the contract? What rights would an innocent person have if the right to terminate arises? Will a party move to cancel a contract if those supplies have been unused for several months and the other party has taken no economically fair action to procure materials elsewhere? Furthermore, while the courts have the authority to extend time extensions, the guidance does not clarify how delays that happened due to the pandemic can be handled.
Though Decision No. 45/M does not directly mention arbitration, the guidelines could potentially extend to arbitral tribunals applying Saudi law (whether the contract itself is being performed in Saudi Arabia or elsewhere).
3. Saudi courts' right to change lease conditions:
The Supreme Court confirmed that if a resident is unable to use a rented property entirely or partly, the court should lower the rent to reflect the real reduction in use.
The Supreme Court has confirmed that a landlord would not have the power to cancel a lease if a homeowner failed to pay the rent for the time during which the whole or part of a property was unavailable due to the pandemic.
4. Liability exemptions are unenforceable:
Where contracts disagree with Sharia law rules, the contradictory provisions will be overridden by Sharia law, according to Saudi law.
Clauses exempting a party from responsibility in the case of an emergency or force majeure are unenforceable, according to Decision No. 45/M, and the party that violated an agreement carries the burden of demonstrating that COVID-19 caused the violation.
5. Practical impact:
The judicial standards outlined in Decision No. 45/M offer valuable advice to parties seeking to decide how the COVID-19 pandemic can affect their contracts and what relief might be possible.
The Saudi courts have been called upon to address complicated and unprecedented problems resulting from the COVID-19 pandemic over the last year, and Decision No. 45/M offers much-needed clarity on these challenging issues. Saudi courts now have specific rules for how to amend contracts and, most specifically, how to void them.
The courts' right to interfere and change contractual terms is reaffirmed in Decision No. 45/M, and they should not be reluctant to use it.