Saudi Arabia: Construction force majeure and alternative relief

Force majeure and alternative relief under standard form construction contracts and local law

Middle East Publication May 2020

What is the most commonly used standard form construction contract used in the country?

In Saudi Arabia, the most common standard form construction contracts are the International Federation of Consulting Engineers (“FIDIC”) forms of contract. The predominant forms are the first editions (published in 1999) of the:

  • Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (also known as the Construction Contract or the “Red Book”);
  • Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor (also known as the Plant and Design-Build Contract or the “Yellow Book”); and
  • Conditions of Contract for EPC/Turnkey Projects (also known as the EPC/Turnkey Contract or the “Silver Book”).

The FIDIC Red, Yellow and Silver Books are collectively referred to as the “Rainbow Suite”. Clause references and capitalised terms in this section refer to those used in the Rainbow Suite (1999 editions), unless specifically stated otherwise.

Does the contract include provisions on force majeure?

The FIDIC Red, Yellow and Silver Books all include provisions on Force Majeure at Clause 19.

Sub-Clause 19.1 defines “Force Majeure” as “an exceptional event or circumstance:

(a) which is beyond a Party's control;
(b) which such Party could not reasonably have provided against before entering into the Contract;
(c) which, having arisen, such Party could not reasonably have avoided or overcome, and
(d) which is not substantially attributable to the other Party.”

The definition of Force Majeure does not require that the event or circumstance be unforeseeable. Accordingly, contracts entered into post the Covid-19 pandemic would not be precluded from citing Covid-19 as being an event of Force Majeure, even though it was existing and known to the parties at the time of entering into the contract.

Sub-Clause 19.1 includes a non-exhaustive list of events (including, among others: (i) war; (ii) rebellion; (iii) riot; (iv) munitions of war; and (v) natural catastrophes) that may constitute Force Majeure, subject to conditions (a)-(d) above being satisfied. Epidemic, pandemic and/or plague are not included in the non-exhaustive list of Force Majeure events in Sub-Clause 19.1. Notwithstanding, the Covid-19 outbreak could arguably be construed as a “natural catastrophe” and would likely satisfy conditions (a)-(d).

Sub-Clause 19.2 states that if “a Party is or will be prevented from performing any of its obligations” by Force Majeure then it shall give notice “within 14 days after the Party became aware, or should have become aware, of the…Force Majeure”. The Party shall then be excused performance of such obligation, although payment obligations shall not be excused. A party seeking to rely on Force Majeure relief must be able to show that it is actually “prevented” from performing its obligations under the Contract – it is not sufficient for such obligations simply to be disrupted or made more expensive to perform. In the context of the Covid-19 outbreak, prevention could arguably include government measures imposed to limit the spread of Covid-19, including lockdown and quarantine measures and the suspension of issuing certain permits and visas.

Under Sub-Clause 19.3 both Parties have a duty to “use all reasonable endeavours to minimise any delay”. In the context of the Covid-19 outbreak, mitigation could include adjustments to the programme and resource management to minimise delay to the works. Also, the sourcing of alternative suppliers for goods, equipment and materials to mitigate against disruption to the supply chain.

Sub-Clause 19.4 provides that, if Sub-Clauses 19.1-19.3 (above) are satisfied and subject to the Contractor’s claims procedure and notice requirements set out in Sub-Clause 20.1, a Contractor will be entitled to an extension of time and, in certain circumstances, Cost. Cost would only be available in case of events “of the kind” described in sub-paragraphs (i) to (iv) above, where events (ii) to (iv) must occur in the country where the Works are being executed. Natural catastrophe is thus excluded as an event of Force Majeure that entitles a claim for Cost. As mentioned above, even though epidemic, pandemic and/or plague are not included in the non-exhaustive list of Force Majeure events in Sub-Clause 19.1, Covid-19 could arguably be construed as a “natural catastrophe”. In such case, a contractor would be entitled to claim for time but not Cost.

Sub-Clause 19.6 provides that either Party may terminate the Contract if “the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Force Majeure… or for multiple periods which total more than 140 days due to the same notified Force Majeure”. This entitlement to terminate only arises if the Contractor is prevented from executing substantially all of the Works in progress, which is a high threshold to satisfy.

Does the contract include provisions for alternative relief that may be relevant to projects impacted by COVID-19?

Sub-Clauses 8.4 provides the Contractor is entitled to claim an extension of time, subject to the claims procedure at Clause 20, if completion of the Works is or will be delayed by, among other things, “Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions”. In the context of the Covid-19 outbreak, Contractors, whose supply chains are impacted by the pandemic, could seek to claim time relief under this clause. However, such relief may not be applicable for contracts entered into post-the Covid-19 outbreak, as the shortages must be “Unforeseeable” (i.e. “not reasonably foreseeable by an experienced contractor by the date of submission of the Tender”).

Sub-Clause 8.5 provides that, if the Contractor has “diligently followed” procedures laid down by public authorities and such public authorities cause “Unforeseeable” delay or disruption, the Contractor may claim an extension of time under Sub-Clause 8.4. In the context of the Covid-19 outbreak, the lockdown and quarantine measures and the suspension of issuing certain permits and visas could arguably constitute delay or disruption caused by public authorities. Again, relief is only available if such delay or disruption is “Unforeseeable” (see above).

Sub-Clause 13.7 provides the Contractor is entitled to claim an extension of time and Cost, subject to the claims procedure at Clause 20, in relation to any “change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws)…made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.” “Laws” means “all national (or state) legislation, statutes, ordinances and other laws, and regulations and by-laws of any legally constituted public authority”. Given the relatively wide definition of Laws, the introduction of quarantine and lockdown measures relating to Covid-19 could arguably entitle the Contractor to claim time and Cost. Such change in Laws must occur after the “Base Date”, being “28 days prior to the latest date for submission of the Tender”.

Sub-Clause 17.4 provides the Contractor is entitled to claim an extension of time and Cost, subject to the claims procedure at Clause 20, in relation to Employer’s risks set out in Sub-Clause 17.3. Such risks include, at sub-paragraph (h), “any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions”. If the Covid-19 pandemic is deemed a force of nature, then relief may be available to a contractor that suffers related loss or damage that is “Unforeseeable” (see above) or that could not reasonably have been prevented against. This second limb could allow contractors to claim for foreseeable loss related to Covid-19 (i.e. under contracts entered into after the pandemic outbreak).

Do the laws of the country provide for force majeure relief?

Saudi Arabia will generally support the right of the parties to agree their relationship, although the courts would consider to what extent the contract was consistent with Shari’ah Law.

Kingdom of Saudi Arabia (“KSA”) law is based on the application of Shari’ah law. The Shari'ah is a collection of principles derived from different sources, but principally the Holy Qur’an and the Sunnah (the witnessed sayings and actions of the Prophet Muhammad). The general principles of contract under Shari’ah law apply to all contracts.

The principle of adherence to contracts is very well established under Shari’ah law. The Holy Qur’an imposes upon Muslims the duty to faithfully observe their obligations. Prophet Mohammed (“PBUH”) is reported to have said “Muslims are bound by their stipulations, except a stipulation which makes lawful that which is unlawful”. The binding force of contracts is asserted by jurists of all schools of Islamic jurisprudence. The principle of freedom of contract, which applies to both the substance as well as the form of contract, is well established under Shari’ah law.

Accordingly, Shari’ah law recognizes the maxim “the contract is the law of the parties”. In effect, so long as something is not forbidden by Shari’ah (or otherwise regulated by statute), it is permitted.

Under Shari’ah principles, if an event prevents or delays a party from performing or fulfilling its obligations under a contract, the party may be excused from liability for such failure or delay; provided the event is (i) unforeseeable; (ii) unavoidable; and (iii) make the timely performance of the agreement impossible. In such circumstances, it is also possible that the affected party may obtain a judicial order to terminate the contract.

For contracts with the government, the contract which is drafted based on the principles set out in the Government Tenders and Procurement Law (the Law) and its Implementing Regulations will primarily govern the form and content of contractual arrangements. Many government contracts will allow for time delays caused by force majeure type events, but such events will not usually lead to contractual damages.

Article 74 of the Law states that the government shall be entitled to extend the contract and exempt the contractor from paying fines and penalties related to delay if “…the delay is attributed to the Government Authority or Emergencies...” or “If an order is issued by the Government Authority to stop the works or some of them for reasons not attributed to the contracted party”. Article 74 (nor the related Implementing Regulations) allows for additional payments to be made for such delays.

In relation to the current COVID-19 pandemic, there have been a number of government directives aimed at curbing the spread of the virus, and depending on the particular contractual terms, such directives may be considered either a “Political Force Majeure Event” or a “Change of Law”. It is possible that a contract would provide that a Political Force Majeure Event or a Change in Law allows not only for an extension of the time period to carry out the works, but for additional costs to be payable by the government customer. The Law limits upward adjustment of contract prices. 

Those seeking guidance on how Saudi courts will interpret contractual provisions must consider that prior judicial decisions do not bind a Saudi court considering a contract or factual situation, even one that seems similar to a contract or factual situation addressed by a prior decision. Moreover, Saudi judges have discretion to interpret and to reform contractual provisions if, in their determination, doing so is necessary to achieve a fair outcome. It is, therefore, not always possible to predict how a particular Saudi court will rule on a particular contractual provision or factual situation.

There has been a Circular that was issued by the Ministry of Finance which confirms the COVID-19 pandemic is an event which depending on the circumstances could allow for time extension and avoiding time delay penalties for contractors.

It is possible that the Saudi Arabian government will issue more circulars in order to direct how contracts that have been delayed due to the COVID-19 pandemic should be dealt with, but until they have issued further directives the law is a guide of what contractors might expect.

Do the laws of the country provide for alternative relief that may be relevant to projects impacted by Covid-19? 

There are a range of programs, schemes and law changes that have been implemented to offset the economic impact of the COVID-19 pandemic or the government directives focused on containing the pandemic, as follows:

  1. There is a potential wage subsidy for Saudi employees. Companies who wish to benefit from this initiative must apply through the Taqat website.
  2. Termination of employee’s had been made possible subject to various conditions under the newly implemented Article 74(5) of the Labor Law, which would require agreement between the employer and the employee’s as follows: (i) agreeing to align the employee’s wage with the number of actual hours worked; (ii) agreeing to grant the employee paid leave that is deducted from their annual leave; or (iii) agreeing to use the leave without pay for no more than twenty (20) days per month.
  3. Exemption from the visa renewal fees for non-Saudi nationals who have completed their stay in KSA from the date of June 30, 2020, by extending their stay period for three months free of charge.
  4. Enable employers to recover unused work visa fees during the period of the ban on entry and exit from the Kingdom even if stamped on a passport, or extended for three months free of charge.
  5. Enabling employers to extend unused exit and return visas during the three-month ban on entry and exit from the Kingdom free of charge.
  6. Postponing the collection of customs duties on imports for 30 days in exchange for a bank guarantee, for the next three months, and setting the necessary criteria to extend the deferral period for the most affected activities as needed.
  7. Postponing the payment of some government service fees and municipal fees due to private sector enterprises for three months, and setting the criteria for extending the deferral period for the most affected activities as needed.
  8. The Minister of Finance is authorized to approve lending and other forms of financing and to waive the payment of fees and returns of loans granted until the end of 2020, for the Corporate Sustainability Program initiative.
  9. The formation of a committee chaired by the Minister of Finance and the membership of the Minister of Economy and Planning, the Minister of Commerce, the Minister of Industry and Mineral Resources, the Deputy Chairman of the National Development Fund and the Governor of the National Development Fund in order to consider further support that could be offered to investors, companies and individuals. 

Many companies are initially focused on employment costs, especially where employees are unable to work, and contracts have been put on hold and may be cancelled. This is likely the reason for many of the initial responses to be focused on visas employment and how to arrange and support companies through the process of dealing with employment issues.

It is difficult to say what further directives may look like.



Contacts

Partner-in-Charge, Riyadh
International Partner

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