Saudi Supreme Court Resolution No. (45/ M) applies force majeure to commercial transactions

The Saudi Supreme Court has ruled, as of December 23, 2020 (08.05.1442 AH) to apply force majeure to commercial transactions that meet certain conditions, brought on by the COVID-19 pandemic, based on resolution No. (45/ M).

After an extensive review of the judicial principles related to the COVID-19 pandemic, the impact of force majeure and emergency circumstances and their bearing on obligations and contracts which have been affected, in addition to the assessment of these impacts and a clarification of the limits of the Court’s authority in amending such obligations and contracts, the summary of the decisions taken by the Saudi Supreme Court include:

• The COVID-19 pandemic has been deemed an emergency situation. As such, the court has ruled that if certain obligations and contractual agreements cannot be fulfilled due to the pandemic, then they can be considered as force majeure.
• However, each case and contract is subject to various conditions that will be assessed on an individual basis, and the party who has breached the obligation shall be responsible to prove that the pandemic caused the arising issue.
• The Supreme Court has ruled tenants who were unable to full or partially utilize leased properties, covered under the contracts pertaining to real estate and movable property, may be exempt from paying rent dues in full.
• Regarding supply chain agreements impacted by the pandemic, should an increase in value of materials, wages or operations have been reported, or due to a lack of goods in the market, then the governing contracts are subject to conditions.

The Supreme Court decisions in detail, are outlined hereunder:

First: The COVID-19 pandemic has been considered an emergency situation. As such, if the obligation or contract cannot be executed except with an unusual loss, and it can be considered a force majeure situation if the execution becomes impossible, then certain conditions apply. Accordingly, in order to apply this principle to the affected contracts and obligations, the following conditions should be met:

1. They are required to be concluded before the implementation of the pandemic precautionary measures, and their implementation shall continue after its occurrence.
2. The impact of the pandemic is directly on the contract and cannot be avoided.
3. The impact of the pandemic imposed on the contract is independent without having another cause.
4. The aggrieved party must not have waived his rights or reached a settlement related to the case.
5. The impacts and damages of the pandemic must not be addressed by a special law, or by a decision of the competent authority.

Second: Based on the request by the party alleging damages and after achieving balance between both parties and considering the related circumstances, the Supreme Court can amend the contractual obligation which has been affected by the pandemic, in order to achieve justice, as follows:

a) For lease contracts pertaining to real estate and movable property affected by the pandemic, the following provisions shall apply:

1. If, due to the pandemic, the tenant is unable to fully or partially utilize the leased premises, then the Court shall reduce the rent to the extent by which the usual intended utilization has decreased.
2. The landlord shall not have the right to annul the contract if the tenant was late in paying the rent for the period during which it was impossible to fully or partially utilize the premises because of the pandemic.

b) For supply agreements and other related agreements, affected by the pandemic, the following provisions shall apply:

1. If the impact of the pandemic consists in the increase of the value of materials, labor wages or operation and the likes; then the Court shall increase the value of the contract, provided that the obligor bears the usual increase level of such an increase, then returns what exceeds that to a reasonable extent. The obligee has the right to request termination of the contract, when the obligation has been increased. However, in the event that the material prices have increased temporarily and will return to normal soon, then the Court suspends the implementation of the obligation for a temporary period.
2. If the impact of the pandemic is based on the lack of goods in the market, the Court shall reduce the quantity to the extent it deems sufficient to undo the unusual damages which the obligor has been subjected to.
3. If the impact of the pandemic is related to the temporary lack of materials in the market, then the Court shall suspend the obligation for a temporary period in the event that the obligee is not severely affected by this suspension. Should the beneficiary be affected, then he may request a termination. However, if there is an absolute lack of materials and this leads to the impossibility of implementing all or some contractual obligations, the Court shall terminate, upon the request of a contracting party, the obligations of impossible implementation.
4. If the subject of the contract agreement is an obligation to perform work functions and the pandemic makes it impossible to fulfill on time, then the Court shall suspend the implementation of the obligation for a temporary period. If the obligee is severely affected by this suspension, he may request the termination of the contract.

Third: When assessing the impacts of the pandemic, the following points must be taken into consideration:

1. Determine the extent of the impact of the contract according to the activity and the percentage and time of vulnerability, if any, and verify that it is an unusually large percentage, provided that consideration is limited to the contract in dispute. The assessment of the damage must not exceed the period in which the pandemic affected the contract. The assessment shall be done by one or more specialized experts.
2. In lease contracts, the value of the benefit is estimated as if it is equal in duration. So, the rent is reduced by the duration that could not be satisfied. If the benefit is different according to the seasons, then the nominal wage shall be paid in installments according to the value of the benefit. The duration that could not be satisfied shall be deducted from the rent, according to what the expert determines.

Fourth: Taking into account the previous provisions, the Court shall, when reviewing the cases arising from contracts and obligations affected by the pandemic, be bound by the following:

1. The penalty clause or fines, as the case may be, or withdrawal of the project and implementation at expense, as stated in contracts and obligations, shall not apply, either in whole or in part, whenever the COVID-19 pandemic is the reason for delaying the performance of the obligation.
2. If the contract includes a clause of exemption from liability for a party to the contract when the emergency situation or force majeure occurs, then this clause shall have no effect.
3. The party who breached the obligation shall be responsible to prove that the pandemic caused the issue.
4. The impacted obligations and contracts that are not covered by the provisions of this principle shall be governed by Shariah Law and legal principles of litigation.

This ruling is based on the powers granted to the General Assembly of the Supreme Court under the Law of Judiciary issued by the Royal Decree No. (M/ 78) dated 19.09.1428 AH, and comes after a review of the Royal Decree No. 15700 dated 20.03.1442 AH addressed to the President of this Court.

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