Update: How to succeed with KSA construction claims in the current climate

In June 2020, we posted a blog regarding construction claims in the Kingdom of Saudi Arabia (KSA) during COVID-19 (available here).

Under KSA law, contractual parties may have rights to extensions of time, suspension / termination, and costs when an unforeseeable event occurs, under three doctrines:

• Quwa Qahira, or force majeure;
• Al Dhorouf Al Tari’a, which is similar to hardship or imprévision; and
• Istihala, or impossibility.

Recently, the KSA Royal Court asked the KSA Supreme Court for guidance on how to apply the first two principles to disputes arising as a result of the impact of COVID-19 on construction projects.

KSA Supreme Court Guidance on force majeure

The KSA Supreme Court has confirmed that COVID-19 will be considered a force majeure event (i.e. Quwa Qahira) and that contracting parties can invoke force majeure if the event renders contractual performance impossible.[1]

As a result of the high threshold for proving that performance is impossible, force majeure is unlikely to apply in all but the rarest of circumstances. One example the KSA Supreme Court gave is where the unavailability of materials renders (full or partial) performance impossible. In such cases, the parties are excused from performance.

KSA Supreme Court Guidance on hardship

Alternatively, if COVID-19 renders a contractual obligation more onerous, parties may rely on the doctrine of hardship (i.e. Al Dhorouf Al Tari’a). Given that COVID-19 generally makes contractual performance more onerous but not impossible (for example, because of supply chain issues, social distancing measures, reduced access to site and/or workforce illness), the KSA Supreme Court focused on Al Dhorouf Al Tari’a and issued wide-ranging guidance on how the doctrine applies to muqawala contracts (which includes construction contracts) governed by KSA law impacted by COVID-19.   

Significantly, the KSA Supreme Court has reconfirmed that contractual provisions excluding a party’s liability in the event of hardship and force majeure will have no effect. This is different to other jurisdictions in the region in which the hardship provisions of the Civil Codes are mandatory, but the risk of force majeure can validly be allocated. 

The KSA Supreme Court clarified that for the hardship doctrine to apply to contracts impacted by COVID-19:

1. The contract or obligation must have been entered into prior to the adoption of safety measures in response to COVID-19 and performance must continue thereafter;
2. COVID-19 must have a direct and unavoidable impact on the contract or obligation;
3. The impact causing hardship is solely attributable to COVID-19;
4. The aggrieved party has not waived or settled the right in question; and
5. The impact of COVID-19 is not addressed by a specific law or an applicable decision by a competent authority. 

If these criteria are satisfied, parties can obtain the following relief:

• Additional payment

If the cost of materials, labour or operating costs have increased because of COVID-19, the contractor can claim additional payment. Based on the KSA Supreme Court’s guidance, the contractor will be responsible for any “normal” or foreseeable increase in the contract price, with any further increase arising because of COVID-19 to be apportioned “reasonably” between the parties. An increase in the contract price may entitle the employer to suspend the works (if the price increase is temporary) or to terminate the contract. Whereas the Egyptian Court of Cassation has held that the unforeseeable increase is split 50:50 between the parties [2], the KSA Supreme Court guidance suggests that there is no similar ‘rule of thumb’ regarding apportionment of losses in KSA.

• Reduction of quantities

The KSA courts will consider amending contracts to reduce quantities where materials are scarce. In addition, if materials have become temporarily unavailable due to COVID-19, the KSA courts may suspend the contract or, where such suspension would cause “unusual exorbitant loss”, terminate it.  

• Suspension of performance

A party may request the KSA courts temporarily to suspend performance if COVID-19 has made it impossible for the contractor to perform the work on time for a limited period. Where such suspension would cause “unusual exorbitant loss”, the KSA courts may terminate the contract.  Significantly, employers will not be entitled to levy liquidated damages or penalties for delays caused by COVID-19.

Also, the KSA Supreme Court explained that, if COVID-19 has resulted in delay, a contract may not be terminated, and that the contractor should not be required to perform an obligation at its own expense.

Conclusion

The impact of the KSA Supreme Court guidance is wide-ranging. However, it does not entirely overhaul the law in this area. Rather, the guidance is best understood as an explanation of how the Al Dhorouf Al Tari’a doctrine applies to construction contracts in KSA impacted by COVID-19, rather than as the creation or expansion of existing law. 

Further, some arbitration agreements may be subject to the laws of KSA. Whilst the KSA Supreme Court’s guidance relates to how the KSA Judiciary will approach COVID-19 disputes, we expect it to be highly persuasive to arbitral tribunals applying KSA law.  

[1] KSA Supreme Court’s General Assembly, Decision no. 45/m of 08/05/1442 A.H.

[2] Egypt Court of Cassation – Case no. 580 of 43JY issued on 1 March 1977, See also Egypt Supreme Administrative Court Case 21626 of 62JY issued on 23 January 2018