Force Majeure Does Not Cancel Debt – War, Regional Escalation, and Borrower Obligations Under the Saudi Civil Transactions Law

10 min 21 sec

Written by

Rafiq Jaffer

Partner

r.jaffer@tamimi.com View LinkedIn Profile

Mohammed Negm

Partner

m.negm@tamimi.com View LinkedIn Profile

The Middle East has undergone an unprecedented geopolitical shift since the widening of regional military operations in late February 2026. The consequences have reached well beyond security: macroeconomic structures have been disrupted, energy markets destabilised, maritime navigation impaired, and supply chains fractured. Shipping costs have surged, marine insurance premiums have multiplied, oil prices have oscillated sharply, and execution risk across commercial sectors has intensified. Many corporate and mid-market borrowers now face acute financial and operational pressure that threatens their capacity to service existing financing obligations on time.

In this climate, borrowers increasingly invoke exceptional legal doctrines — principally force majeure and hardship — seeking to shift geopolitical risk onto lenders. The underlying argument is that the failure to pay is not the product of mismanagement or commercial misjudgement, but of sovereign and military events beyond the borrower’s control.

These arguments, however legitimate in principle, do not in themselves abrogate the obligations of the obligor under applicable Saudi laws. The Saudi Civil Transactions Law (Royal Decree M/191, 29/11/1444H) (the Civil Code) enshrines rules protecting contractual stability and the sanctity of creditor claims. The relationship between war and borrower obligations is not automatic: it is subject to judicial scrutiny that balances the foundational principle of pacta sunt servanda against the demands of contractual fairness.

This article examines whether a borrower can invoke force majeure to suspend or extinguish monetary obligations under a Saudi-law-governed financing agreement, in the context of the regional military escalation since February 2026. The analysis covers Articles 97, 110, 125, 171, 174, and 294 of the Civil Code and their application to Islamic financing structures.

As at the date of this article, we are not aware of any published Saudi judicial decisions applying force majeure specifically to banking or financing contracts. The analysis relies on the codified statutory provisions only.

The statutory framework: Three doctrines, not one

Practitioners frequently conflate the three distinct mechanisms that the Civil Code provides for exceptional circumstances. The differences in their conditions and consequences are fundamental.

Force majeure: Absolute impossibility (Articles 110, 125, 294)

Force majeure under Saudi law is defined as an external, general event that was unforeseeable at the time of contracting, that the debtor cannot avert or mitigate, and that renders performance absolutely impossible.

• Article 294 provides that the obligation is extinguished where the debtor proves impossibility due to an extraneous cause;
• Article 110 provides for automatic termination of the reciprocal obligation; and
• Article 125 relieves the debtor from liability for damages.

Three cumulative conditions must be satisfied.

1. Externality: The event must be wholly independent of the debtor’s will. War, military operations, closure of straits, and sovereign measures qualify by nature.
2. Unforeseeability: Assessed objectively by the standard of a prudent merchant at the time of contracting, not at the time of performance.
3. Absolute impossibility: The event must make performance categorically impossible, not merely costly or burdensome. The debtor must demonstrate that all reasonable measures to mitigate and find alternative means of performance have been exhausted.

Article 97: Mandatory contractual rebalancing (hardship)

Article 97 addresses a different situation: performance remains possible but has become excessively onerous, threatening the debtor with severe loss due to exceptional general circumstances that were unforeseeable at the time of contracting. The contract does not terminate; instead, the court intervenes to redistribute the burden equitably, without extinguishing the principal debt.

Critically, Article 97(4) voids any prior agreement that deprives the debtor of the right to seek renegotiation. This is a mandatory rule of public policy. It follows that standard “no set-off, no deduction” and “gross-up” clauses in LMA-form facility agreements cannot strip the borrower of this statutory right to judicial relief. This is one of the most commercially significant protections available to Saudi-law borrowers and one that lenders must factor into their documentation risk analysis.

This provision should be read alongside comparable developments in other jurisdictions: France’s 2016 reform introduced a parallel mechanism (imprévision), and the UNIDROIT Principles provide for hardship under Article 6.2.3. However, Article 97(4) of the Saudi Civil Code is more mandatory in effect, as it expressly voids contrary agreements, whereas French law permits contractual exclusion.

Article 174: Contractual assumption of force majeure risk

Article 174 permits the parties to agree that the debtor shall bear the consequences of force majeure. This means that many structured financing agreements will have contractually excluded force majeure protection.

However, such a clause does not affect the borrower’s mandatory right to renegotiation under Article 97. Courts are likely to construe assumption-of-risk clauses narrowly, given the severity of their effect in depriving the debtor of fundamental statutory protection.

Comparative summary

Why force majeure does not excuse debt repayment

This principle is rooted in both classical Islamic jurisprudence and modern civil law: money is fungible and debts are discharged by their equivalent. The distinction is between an obligation to deliver a specific, identified thing (a bridge, a named vessel) and an obligation to pay a sum of money.

If a construction site is destroyed by military action, the contractor’s obligation becomes physically impossible. But in a financing contract, the borrower’s obligation is to pay money — a fungible, inexhaustible obligation. If the borrower’s cash reserves are destroyed or its project fails, its legal obligation to repay is unaffected: it must source funds from any available means.

That said, in an asset finance context, the lenders would typically insist on adequate insurance covering usual risks and assign the proceeds to the lenders. The questions that then apply are whether the insurance coverage includes armed conflict related damage.

Practical consequence

Absolute impossibility within the meaning of Article 294 of Saudi Civil Code is effectively inconceivable for pure monetary obligations. The scope for force majeure in financing contracts is therefore narrower than in construction, supply, or operational contracts.

One example of where this could be applicable is where there is a disruption in payment systems and the impossibility relates to the ability to make the payment or a new foreign-exchange restriction.

Application to Islamic financing structures

Murabaha: A dual-leg analysis

Murabaha constitutes the largest share of Saudi financing. Its dual nature — the purchase leg (the bank acquires the asset) and the deferred-payment leg (the customer pays the price over time) — is critical. Once the customer takes delivery of the commodity (whether actual or constructive), ownership and risk of loss transfer to the customer, and the purchase price crystallises as a fixed monetary debt in the customer’s name.

Worked example

A manufacturer obtains Murabaha financing to purchase equipment for SAR 50 million. After delivery, the factory is destroyed by military operations. The monetary debt (SAR 50 million plus profit) survives in full, because the debt has already crystallised independently of the asset. The borrower may, however, invoke Article 97 to seek judicial rebalancing if hardship conditions are met.

This dual-leg analysis is structurally specific to Islamic finance. In a conventional loan — even one advanced for the purpose of acquiring an asset — the bank never takes title to the asset: the debt crystallises at drawdown, independent of the asset’s fate. In Murabaha, by contrast, the bank acquires ownership before resale, creating a window of risk (between purchase and delivery) during which destruction of the asset falls on the bank as owner, and no debt has yet crystallised in the customer’s name. This structural feature — the bank’s transitory ownership — has no counterpart in conventional lending and generates scenarios that do not arise in a conventional loan.

One variation of the issue that can arise is where the asset has been destroyed prior to the title passing from the bank to the customer. In this case, the bank would not be in a position to claim the purchase price from the customer as a result of non-performance. The mitigant would be taking Takaful insurance (with the appropriate conflict coverage) during this period.

Ijara (finance lease): Asset destruction vs. continuing payment

The position under Ijara is fundamentally different. The bank (as lessor) retains ownership of the leased asset throughout the financing term. Under the Fiqhi principle al-kharaj bil-daman (“return corresponds to risk”), read with Article 110(1) of the Civil Code and Article 22(1) of the Finance Lease Law, if the leased asset is totally destroyed by force majeure, the contract terminates automatically and future rental instalments fall away. Instalments accrued before the destruction remain payable.

Worked example

A bank leases a commercial vessel to a shipping company under Ijara-wa-Iqtina. The vessel sinks as a result of hostilities in the Arab Gulf. The contract terminates and future rentals are extinguished. This is precisely why banks require comprehensive cooperative insurance (Takaful) with assignment of proceeds in their favour.

The structural distinction is stark: Under Ijara, war may constitute force majeure that terminates the contract; under Murabaha, the debt survives regardless. This differentiation is unique to Islamic finance.

Project finance: Cascading default

Project finance introduces a structural complexity: repayment depends on the project’s own cashflows. In non-recourse structures, if the project is destroyed by military action, this may approximate impossibility. However, this is typically addressed through total-loss provisions in the facility agreement, not through force majeure doctrine.

More critically, project finance triggers a cross-default cascade: if the EPC contractor declares force majeure on the construction contract, this may cascade through the supply agreement, the offtake agreement, and ultimately breach the representations, warranties, and default provisions in the facility agreement, triggering full acceleration. Force majeure in an operational contract thus transforms into an event of default in the financing agreement without having force majeure within it.

Due to the (typical) non-recourse nature of project finance, the bank would not have recourse to the sponsors of the project and rely on the insurance proceeds to satisfy the debt. In the event of inadequate insurance or lack of appropriate coverage, the lenders would have an unpaid loan on their books.

The MAC clause and the deliberate absence of force majeure

A structural reality of LMA-form facility agreements is that they contain no force majeure clause. This is not an oversight; it is a deliberate contractual choice reflecting the foundational philosophy that the obligation to repay is absolute.

MAC as drawstop and acceleration trigger

In place of force majeure, facility agreements rely on the material adverse change (MAC/MAE) clause, which operates in two distinct tracks.

1. As a repeating representation: The borrower confirms at each utilisation request that no MAC has occurred, giving the lender the right to refuse further drawdowns.
2. As an event of default: If MAC is classified as a default trigger, the lender may accelerate the entire outstanding debt, though this carries the risk of wrongful acceleration.

The foreseeability problem

Contracts entered into or renewed after June 2025 (the 12-day war) face a significant hurdle: was the broader February 2026 escalation foreseeable to a prudent merchant? If so, the geopolitical risk will have been priced into the facility, and the borrower cannot invoke either force majeure or hardship.

Equally, the lender may struggle to trigger MAC for circumstances that were known at the date of signing. Contracts concluded before 2021-2022 occupy a stronger position on foreseeability.

The intersection of Article 97 and MAC acceleration

A critical question arises when a lender activates MAC to accelerate debt while the borrower simultaneously invokes Article 97 for judicial rebalancing. The likely judicial approach is that a Saudi court will weigh the lender’s contractual right against the borrower’s mandatory statutory right, and may treat acceleration during proven hardship as an abuse of right.

It is worth noting that reliance on MAC clauses or a breach of financial covenants alone without a payment default has not been tested (to the best of our knowledge) in the KSA courts.

Guarantees and security

Because the principal monetary obligation is not extinguished by operational force majeure, the obligations of guarantors and security remain fully enforceable. If the value of real security erodes due to the conflict (for example, a pledge over a vessel whose value has fallen sharply), the lender is typically entitled under the facility agreement to demand substitute collateral or margin top-up. Failure to comply constitutes an event of default.

Where the guarantor itself is affected by force majeure (for instance, inability to effect a transfer), temporary suspension of enforcement may apply under the same payment-mechanism logic, but the guarantor’s obligation is not discharged.