COVID-19 Saudi Arabia: Recent Supreme Court decision impacting on construction contracts

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.

What does the Supreme Court decision say?

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:

•  increasing the contract price if the pandemic increases "the price of materials, labour, operating costs etc." for contractors but only to the extent of a "normal increase" and any increase above that shall be determined reasonably.  Employers may also seek suspension of performance or seek termination of the contract by reason of the price increase.
• reducing the quantity of supply if a commodity has become scarce in the market due to the pandemic and the contractor will suffer unusual damage by having to supply the full amount.
• suspending an obligation if materials have become temporarily unavailable in the market due to the pandemic (or termination of the obligation where the unavailability is absolute or where suspension would cause the vendor "unusual severe damage").
• granting extensions to the due dates for obligations if the pandemic has made it impossible for the contractor to perform the work on time (or termination of the obligation where an extension of time would cause the contractor "unusual severe damage").
• declining to permit employers to apply remedies for delay by contractors (such as delay penalties or termination) if the delay in the performance of the relevant obligation was attributable to the pandemic.

In order for the above remedies to be granted, the decision requires various prerequisites to have been met.

What construction contracts does the decision apply to?

The decision is stated to only apply to the following:

• contracts where the pandemic has had a "direct and unavoidable impact".  For example, the relevant contract must have been concluded before the precautionary measures said to have impacted the contract were put in place and continue thereafter.
• the contract must also have been affected mainly by the pandemic without the contribution of any other reason.  Similarly, the decision states that the evaluation of damage shall not exceed the period of the pandemic's actual impact.

What if the relevant contract contains inconsistent terms?

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. 

Is the decision binding as a matter of Saudi law?

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.

What does all of this mean for contractors and employers?

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.