The Supreme Court of Saudi Arabia has published a set of principles to be applied to contracts impacted by the COVID-19 pandemic. This decision may affect all construction contracts governed by Saudi law. Employers and Contractors alike should be aware that the terms and conditions they agreed originally may be modified.
In this article, we examine the decision issued by the Supreme Court of Saudi Arabia and consider the implications this may have on employers and contractors.
Following a request from the Royal Court, the Supreme Court issued a statement of the relevant legal principles under Islamic Law (Sharia) relating to the COVID-19 pandemic. In particular, the decision focused on the performance of contracts impacted by the pandemic, which includes construction contracts.
The decision states that the Saudi courts may modify contract obligations that have been affected by the pandemic by:
In order for the above remedies to be granted, the decision requires various prerequisites to have been met.
The decision is stated to only apply to the following:
The decision says that it is a restatement of Sharia. As such, rather than creating new law in Saudi Arabia, it is intended to clarify the existing law, which is of course Islamic Law based on the Qur'an and the Sunnah.
Under Saudi law, contracts are enforceable in accordance with their terms, unless they are inconsistent with Sharia. In the latter case, Sharia will override the offending contract terms.
For example, under the decision, contract clauses will not be effective if they exonerate the parties from liability in case of contingency or force majeure arising under Sharia.
The Supreme Court is the highest appeals court in the Saudi judiciary. Importantly however, the decision was not made in relation to a particular case that was appealed to the Supreme Court. As noted above, the decision arose from a request from the Royal Court to publish a set of principles to assist with the determination of claims before the Saudi courts relating to COVID-19.
In our view, the decision is best characterised as a legislative instrument made under the Saudi Judiciary Law. In particular, under that Law, the General Panel of the Supreme Court may determine general principles in issues relating to the judiciary. In this context, we expect that the Saudi courts will regard the principles set out in the decision as binding upon them and will apply them to the cases before them strictly.
That said, the decision states that it is based on Sharia, being the primary source of law under the Saudi Constitution. In this context, we expect that, in fora outside of the Saudi courts (e.g. arbitration), it will be open to parties to argue that they can present additional material to assist Arbitral Tribunals with the proper application of Sharia. In this regard, we expect that Arbitral Tribunals will refer to the decision as a persuasive (but not binding) interpretation of Sharia as it applies to the pandemic.
Since the pandemic arose, many contractors have given many notices of delays and/or additional costs arising from either COVID-19 itself or government measures introduced in response to the pandemic. Usually, such claims have been framed as "force majeure", "change in law" and/or "variation" claims by reference to the terms of the relevant contract.
The Supreme Court decision is clearly relevant to the determination of those claims under Saudi law and we expect that it will feature in discussions between employers and contractors on this subject going forward.