Saudi Arabia confirms Covid construction disputes approach

On 23 December 2020, the Supreme Court of Saudi Arabia issued order no. M/45 of 8/5/1442 H ('the SC order'), setting out the rules to be applied to contracts impacted by the Covid-19 pandemic. Although some final judgments had been produced and certified by the Court of Appeal before this date, others were postponed pending the issue of the order. The President of the Supreme Council of Magistracy issued a decision on 6 February 2021 directing judges and courts to resume looking at pandemic-related disputes.

Two specific court circuits – General Circuit 50 and General Circuit 51 – have been designated to look at contracts affected by the pandemic, and new and resumed cases will be forwarded and distributed equally between the two circuits.

The SC order applies to disputes arising out of construction, supply and lease contracts signed before the pandemic. It does not apply to contracts signed after the pandemic began. Contracts where a government body or entity is a party are also excluded from the scope of the SC order. Instead, High Order no. 61 of 02/03/1442 H directs government entities to consult with the Ministry of Finance in relation to any contract or obligation impacted by the pandemic which has a direct financial impact on the General Treasury.

The SC order gives the competent court the power to change some of the contractually agreed terms on request of the injured party, taking into account what is fair. The court will consider Covid-19 to be an 'emergency event' justifying court intervention where implementation of the contract is not technically impossible, but results in an unusual loss by the performing party. Where implementing the disputed contract or clauses becomes impossible, Covid-19 will be considered a force majeure event.

Courts can now rely on the order to rule on pending and upcoming disputes that meet the criteria, resolving months of pause on ruling in disputes raised and sparked by the pandemic. Future transactions and contracts should consider the content of the SC order when drafting their agreements.

Conditions precedent

Before the rules set out in the SC order can be applied, the following conditions must be met:

• the contract was entered into before pandemic precautionary measures took effect, and the contract continues during the pandemic;
• the contract was directly impacted by the pandemic, and such impact could not have been avoided;
• the impact on the contract was solely as a result of the pandemic, and not because of any other factors;
• the injured party has not waived its rights under the contract or entered into any settlement; and
• the impact or damage caused by the pandemic has not been addressed by a separate law or decision of the competent authority.

The construction contract principles

The SC order sets out a number of principles designed to regulate the courts' significant discretion in handling disputes arising out of Covid-19, for both lease contracts and construction contracts. Contracts not covered by the principles set out in the SC order are to be regulated by reference to the recognised principles of litigation.

The construction contract principles are:

• increase in materials value – where the cost of materials has increased beyond a 'normal' amount, the court can increase the value of the contract. The party subject to the increase can request the termination of the contract. If the cost increase is temporary, the court can order the temporary suspension of the contract
• shortage or temporary lack of goods – if there is a shortage of goods in the market, the court can decrease the quantity to an extent that protects the supplier from unusual damage. If the shortage is temporary, the court can suspend performance for a temporary period, provided that the creditor does not incur damage. Otherwise, the creditor may request to terminate the contract
• permanent lack of goods in the market – if certain goods cannot be located in the market and this is permanent, resulting in impossible full or partial performance of the contract, the court can terminate the impossible-to-perform part on request of either party
• delayed performance – if the contract was for the performance of certain works and the pandemic made it impossible to deliver such work on the agreed delivery date, the court can temporarily suspend performance. If unusual damage is incurred by the creditor, it may request to terminate the contract
• delay penalties – if the performance of a contract is delayed due to the pandemic, the court can prevent the application of a penalty clause or any fines
• ·non-exemption - if the contract includes exempting a party from its liabilities in case of a force majeure or emergency event, this exemption will be ineffective
• burden of proof – when a defaulting party claims that the pandemic caused the breach, the burden of proof lies on this party.

Measuring the impact of the pandemic

The SC order instructs competent courts to take into account the extent to which the contract is affected based on the type of activity, as different activities will be affected to different extents. The court will also determine the impact percentage - if any - and duration per activity, and verify whether this impact was to an unusually large extent.

The impact of the pandemic should be considered separately from the impact of any other reason for delay, increase in material value, shortage or lack of goods, and it must be proven that the pandemic was the sole reason for such impact.

Written by Ibrahim Alajaji, Sharifah Alshuhail and Nasser Bari of Al Sabhan & Alajaji Law Firm, Pinsent Masons' partner in Saudi Arabia.