Coronavirus: review urged of Saudi construction force majeure clauses

The concept of force majeure is not defined in Saudi law, but the principles of Shariah law, which have overarching effect in the country, do provide a basis for force majeure events to be recognised and triggered in contracts.

While the Saudi courts have applied the concept of force majeure strictly, the Saudi government has taken some steps to clarify the circumstances in which force majeure clauses might be triggered.

The impact of Covid-19 on construction projects in Saudi Arabia

The spread of Covid-19 is impacting the construction markets in the Middle East and globally. The extent of the impact is difficult to assess and differs from project to project and depends on the length and extent of measures implemented by governments in the region in response to Covid-19.

The government of Saudi Arabia has taken a number of measures to curtail the spread of Covid-19 since it was declared as a pandemic by the World Health Organisation on 11 March 2020. These measures include suspending office working; implementing curfews from 7pm to 6am nationwide and 24 hour curfews in Riyadh, Jeddah, Mecca, Madinah and a number of other cities; and suspending international and domestic flights and inter-urban bus, taxi and train services. These measures will have varying levels of impact on a project, depending on the stage of the construction project in question, whether in the development, construction or operation phases.

Claims for force majeure

Regardless of the stage of the project, the delay and disruption and the unexpected nature of the outbreak may entitle contractors and developers to claim for relief under force majeure and 'change in law' provisions of their contract. In the pre-contractual stage, contractors and developers may have to rely on civil law concepts of 'impossibility' or other rights under the law.

The concept of force majeure originally derives from the French civil law system and it is a general legal concept where courts may declare that a particular event such as a pandemic is a force majeure event, thereby relieving parties of their contractual obligations or event resulting termination of the contract if it becomes impossible to perform. Similar concepts exist in the civil law system prevalent in the Middle East. In contrast under English law, force majeure is a creature of contract and not of the general common law. It is therefore important essential that the contract deals with force majeure events.

The purpose of a force majeure clause is to allocate risk for future circumstances and events which are beyond the reasonable control of the parties and which are likely to have an impact on the performance of contractual obligations. Whether a particular clause will relieve a party will depend on the precise wording of the clause. In the case of the Covid-19 pandemic, trigger words such 'epidemic', 'pandemic' or 'plague' would be helpful. Relief is usually in the form of extensions of time, increased costs, suspension of obligations or ultimately termination of a contract.

Saudi law

Saudi law is governed by the principles of Shariah law. Unlike most of the countries in the Middle East, Shariah has been adopted by Saudi Arabia in an uncodified form. This, and the lack of judicial precedent, has resulted in uncertainty in the scope and content of the country’s laws.

While Shariah forms the basis of the legal system, Saudi Arabia has introduced several secular codes, such as the Companies Law and Investment Regulations. In practice, with commercial contracts, it is often enacted, or codified, legislation which will be the principal source of reference in terms of interpretation, but all such laws are ultimately subject to, and may not conflict with, the Shariah.

Shariah forms a background for judicial interpretation of the relevant documents and facts, with an emphasis on being fair and equitable to the parties involved, and applying good faith in commercial dealings. Although there is no codification of the concept of 'force majeure', similar concepts can be understood from the Sharia principles – parties to a contract are legally bound to honour their terms unless otherwise excused. Such a legitimate excuse can include:

• Calamity (Ja’eha (جائحة which are general, external and unavoidable damage-causing circumstances over which contracting parties have no control.
• Valid excuse (Uthur عذر) which is the inability to perform the contract without incurring damages that are not otherwise contemplated under the contract.

The concept of force majeure in Saudi law usually requires that the relevant event is:

• Outside the control of the parties and unforeseeable;
• General in application;
• Unavoidable, or its damages are unavoidable;
• Causing the performance of the contract to be impossible

The law does not provide relief if the relevant party has negligently failed to perform its obligations under the contract prior to the occurrence of the force majeure event, or where the contracting parties are not affected by the force majeure event.

Under Saudi law, force majeure can be claimed irrespective of the parties' contractual position. However, there is no statutory definition of 'force majeure'. The Saudi courts will only recognise force majeure where the circumstances render performance of contractual obligations impossible and no other contractual remedies or relief is available. The courts will consider if force majeure is defined in the contract and that such definition does not contradict with Sharia principles. The burden of proof is on the party seeking the relief and the threshold is generally high. Such cases are examined on a case-by-case basis and the outcome is uncertain, particularly without the benefit of a binding doctrine of precedent to which one might otherwise refer.

Saudi courts are likely to consider factors such as the duration of the event and the terms of the contract when determining whether a force majeure event has occurred or not. Therefore, claims citing force majeure where a contract has merely become too expensive to perform or is no longer profitable would be unlikely to be granted relief by the Saudi courts as such financial losses may well be considered a part of doing business. Accordingly, any claim in connection with the Covid-19 pandemic seeking to be excused from performance under a contract will still need to demonstrate that the performance of such contract has been negatively and directed impacted by Covid-19 in order to be successful.

Helpfully, in response to Covid-19 the Saudi government has issued certain directives and amendments to existing regulations which indicate that Covid-19 is considered as an extraordinary event or force majeure event entitling relief for employees and to ease certain procurement processes under the Procurement Law. The relief includes permitting parties to terminate the contract by agreement in the event of impossibility to carry out the work due to force majeure such as the Covid-19 pandemic.

Further initiatives to ease the burden of the Covid-19 pandemic for the private sector have also been announced by the Saudi government, including the deferral of tax reporting and payment obligations, pay protection for employees, suspension of fines, and delay tof payment of government and municipality fees.  

Review contract terms

The impact of Covid-19 on construction projects is not easy to predict and will vary from project to project. However, during these uncertain and challenging times, it is advisable for contractors and developers to start by reviewing the force majeure provisions in their contracts to better understand their contractual position as a result of Covid-19. From a practical perspective, we would recommend contractors and developers taking the following steps:

• Review your contracts to assess your rights. Consider the relevant law of the contract as this would impact on contractual interpretation and if you have rights under the law;
• Proactively administer the terms of your contract, for example ensure that relevant notices are provided in accordance with the terms of your contract;
• Proactively discussing the situation with your counterpart, and provide regular updates to relevant stakeholders;
• Review your subcontracts and supply chain arrangements to assess your rights and obligations under those contracts as a result of Covid-19. Consider if you are likely to be exposed to any termination of supplier or subcontracts and also diarise any rights of termination you may have;
• Keep contemporaneous records of all communications and notices with your counterparts and records of all mitigation action and any impact on time and costs as a result of the Covid-19 pandemic and government action response; and
• Consider what mitigation strategies can be put in place, such as identifying affected suppliers, consider if alternative materials/suppliers/labour are available – consideration should be given also to lead times– and how any delay or shortages will be managed – for example by acceleration, or commencing early works. Be careful that your actions are not a breach of your existing contractual arrangements.

Written by Gurmeet Kaur of Pinsent Masons, the law firm behind Out-Law, and Ibrahim Alajaji of Al Sabhan & Alajaji Law firm, Pinsent Masons' partner in Saudi Arabia. Contributions from Jas Shoker and Abdullah Al Gowaiz.