Welcome to the Saudi Arabia focus edition of Law Update.
One of the key markets in the Middle East and North Africa (MENA) that continues to lead from the front is the Kingdom of Saudi Arabia (KSA). As the largest country in the Middle East and the 18th largest economy in the world, the progress KSA continues to make is underpinned by its Vision 2030 that envisions developing the country as an investment powerhouse and hub that ultimately connects Asia, Europe, and Africa. Given Saudi Arabia’s significance to the regional economy, our team of experts have prepared a range of pertinent articles that provide insights into new laws, regulations, and the legal landscape in the Kingdom.
This edition will provide you with an up-to-date guide on matters such as; the framework issued by the Saudi Central Bank on IT governance, the anti-corruption landscape under Vision 2030; we also provide practical tips for dispute avoidance. This is only a snapshot; there are many more articles within the KSA focus section for you to read, which we hope you will find valuable and enjoyable.Read the edition
Force Majeure, or as it is widely known the “Act of God” clause, is in prominence due to the continued spread of COVID-19 (Coronavirus). This French-law derived doctrine has been repeatedly applied to earthquakes, volcanic eruptions, floods, heat waves and other unforeseeable natural-caused incidents. In recent eras, the scope of the foregoing events extended to include wars, riots, chaos, slowdown and unexpected legislations.
Under UAE law, the concept of Force Majeure may be pursued by a party to a contract as a matter of law. It is a mandatory rule, as opposed to a default rule, of law that de jure applies even without being expressly set out in a contract.
The UAE Civil Code (Federal Law Number 5 of 1985) sets the definition and boundaries of a Force Majeure event, and the consequences it triggers. In principle, Article 273 of the UAE Civil Code stipulates that in order for an event to be qualified as a Force Majeure it should be: (a) claimed in a bilateral agreement; and (b) makes the performance of the obligation impossible – not just in hardship.
The UAE does not provide for an exhaustive list of Force Majeure events. However, Force Majeure may be established on the grounds of either a physical or legal (statutory/legislative) impossibility. An example of physical impossibility is natural disasters. As for the legal impossibility, a change of law and expropriation for public interest in a sale contract are very common examples. However, an event of a mere hardship or uneconomic balance between the parties to a contract would not be qualified as a Force Majeure, especially when the contract becomes impossible, difficult or onerous to perform due to events that fall beyond the affected party’s control. In such event, Article 249 of the UAE Civil Code grants the judge a wide discretionary power to amend the parties’ obligations to reset the contract economic balance, and the contract shall remain still stand.
Other requirements are set by the jurisprudence and the precedents of the Court of Cassation. The most remarkable prerequisite is that a Force Majeure event must be unforeseeable. If either of the parties to a contract, or both, was in a position to anticipate or presume the Force Majeure event, there will be no room to have recourse to Force Majeure principle. The analogy behind this is clear, as each party to a contract is under an obligation to act in good faith and to mitigate damages if foreseeable. If the defaulted party fails to exert its best efforts to mitigate the effects of the underlying event leading to Force Majeure, that party would be consequently precluded from invoking Force Majeure to get excused and released from performance. Further, the underlying event must be unavoidable and beyond the defaulting party’s control in order to be regarded as a Force Majeure event.
Once an event meets the aforesaid requirements, the contract is deemed rescinded by statement of law, and the parties revert to their pre-contractual positions, and if possible, damages are to be awarded to restore the parties’ positions.
The UAE courts have been interpreting the Force Majeure clauses very narrowly, where courts frequently mandated that the underlying events must make performance of the contract literally impossible, unforeseeable and uncontrollable. The reason behind that is the consequences of the application of a Force Majeure, as the defaulting party (usually the one claiming Force Majeure) are excused and released from performance.
It is anticipated that the Force Majeure claim will be on the rise over the coming days due to the COVID-19 Coronavirus. However, as the World Health Organization (“WHO”) declared the threat of the Coronavirus since it was first reported from Wuhan, China, on 31 December 2019, any defaulting party to a contract that is concluded afterwards is unlikely to succeed in invoking a Force Majeure claim. As for contracts preceding the WHO declaration, it will be examined on a case-by-case basis in order to determine whether the underlying events meet the criteria set by law and courts practice.