The Covid-19 pandemic has lead different jurisdictions to take different steps, and the Kingdom of Saudi Arabia is no exception to that general outcome! The Supreme Court’s decision number M/45/M sets out some interesting, and in some areas atypical, principles, granting the courts of Saudi Arabia the power to amend the terms of a contract[1] in the interests of justice and fairness, and acknowledging that the pandemic is an exceptional event, which is potentially at least, an event of force majeure.
But to constitute this, the performance of the contract in question must result in substantial or unusual loss. If as a result of the pandemic, performance is not possible at all, then under this new decision, the event itself constitutes an event of force majeure.
In order for the decision to apply to the particular circumstances in question, five conditions must be satisfied, namely:
- The contract in question must have been executed or agreed prior to the adverse effects of the pandemic, but the contractual requirement for performance of the contract must be continuing during the pandemic
- Performance of the contract must have been unavoidably and adversely affected by the pandemic
- The pandemic must be the only obstacle to performance
- There must have been no waiver or settlement as between the contractual parties, with respect to the parties’ contractual rights
- The adverse effects of the pandemic must not have been dealt with or decided under any other judicial or legislative decision
Having decided that these conditions have been satisfied, a competent tribunal has the power to amend the relevant contract, as I have said, above, ‘in the interests of justice and fairness’.
‘Amendment’ in this context may comprise, an increase to the contract price (for example, if the cost of labour, and/or raw materials increases as a consequence of the pandemic.
Alternatively (or perhaps concurrently), in the context of a contract for supply of goods, the tribunal can amend the contract so as to reduce the quantity of goods to be supplied.
For contracts for the supply of goods, the court or tribunal can also order the temporary suspension, or in certain cases the termination of the obligation to supply.
As regards performance obligations under a contract, if these become onerous or impossible in the circumstances, the court or tribunal may order the temporary suspension of those obligations, albeit that the counterparty would retain the right to request the termination of the contract in the event that that suspension results in substantial damage to that counterparty.
One thing is for sure, this decision is likely also to increase the number of contractual disputes, as a consequence!
This short summary of decision number M/45/M is not meant to constitute legal advice. This post is accordingly for information purposes only.
[1] ‘Contract’ appears to be broadly defined in this case, and could cover a range of types of obligation
Emerging Markets Law and Business 