The outbreak of COVID-19 is impacting businesses; this includes effects on commercial and employment contracts. Companies in the Kingdom of Saudi Arabia ("KSA") are left questioning the validity of their contracts and a possible application of the concept of Force Majeure ("FM"). Likewise, companies are assessing various HR topics as a result of the current pandemic. This Legal Briefing will analyze the impact of COVID-19 under KSA law with a special focus on commercial and labor relations.
1. Commercial Relations
COVID-19 can have multiple effects on commercial relations. Its negative impact on the global economy is becoming increasingly apparent: supply chains are being disturbed as the flow of goods is restricted due to logistical challenges. While some services can effectively be provided through work-from-home-setups ("WFH"), services that require a certain local presence can be severely restricted. Hence, as a first step, the question is to assess, how each actual business is affected by COVID-19 before analyzing its legal consequences.
a. What happens, if contract contains a Force Majeure clause?
Where economic interests are affected, regulations on FM might provide a solution. Islamic Legislation (Sharīʿa) as the base of the KSA legal system recognizes the freedom of the parties to contract to the extent this does not contravene any of Sharīʿa's mandatory stipulations.
In general, Sharīʿa knows the principle of contracts and their content to be binding upon the parties (pacta sunt servanda). Accordingly, FM clauses are accepted by
KSA courts and, in fact, many contracts in KSA contain a FM clause. In general, a FM clause in a contract typically contains three elements:
- The establishment of an FM event;
- The suspension of obligations that have become impossible due to FM for a limited time; and
- The possibility to terminate the contract after the limited time.
These elements are common in nearly all FM clauses.
The establishment of a FM event requires to assess if a case is subject to the definition of FM in the contract or not. Individual contracts can differ widely on this point and can include (or exclude) natural disasters, states of war etc.
In many cases obligations may be suspended only to the extent affected by FM. Once an obligation under FM is suspended, it should be assessed what happens to an obligation in consideration to the suspended obligation (e.g. remuneration for the suspended obligation). Frequently such a suspension is only foreseen in the contract for a limited period of time.
Many contracts contain a termination as an option after a lasting period of FM and in some contracts, termination is triggered automatically. Such periods typically range from 30 to 90 days but may extend beyond this timeframe. In many cases, an early announcement of a FM case might lead to an early (and undesired) termination of the contract.
b. Are there any provisions on Force Majeure in KSA laws?
In some fields of law, KSA has enacted laws (nuẓum, Sg. niẓam) to regulate this field of law instead of applying Sharia directly. Several of these legislations contain provisions on FM. The most prominent example is the KSA labor legislation, which is explained in detail below. Several other laws also contain provisions on FM.
c. How does Sharia change factual circumstances in contracts?
Dealing with a divine legal system, Sharia scholars are familiar with acts of God and Islamic law contains a number of concepts addressing change of circumstances beyond the control of the parties.
Islamic legislation holds a wide variety of options depending largely on what kind of contract is at hand (purchase, rent, long term, short term etc.); and whether the circumstances are connected to a contractual party as person or to the object of the contract.
As a general rule, it is the judge who has to take the decision if and how certain obligations are suspended or modified or if the contract as a whole is affected. Individual contracts should thus be checked carefully in order to assess potential outcomes.
Due to the ongoing COVID-19 pandemic, KSA courts are expected to be burdened with additional workload while at the same time having to deal with restrictions due to the pandemic themselves. We therefore strongly recommend, where possible, to amend contracts by including / revising FM clauses. For new contracts this should be a key consideration, as well.
2. Labor relations
One of the most prominent topics in the current situation are matters associated with labor relations. A lot of practical issues in labor relations concern restrictions on the freedom of movement in KSA and abroad. By now, movements over international borders are almost totally suspended. Internal border e.g. between provinces can only be crossed after applying for an exceptional permit. For some of these borders even exceptional permits are difficult to obtain.
a. Have the authorities taken any measures that affect employment relations in KSA?
KSA authorities have taken measures to ease administrative
pressure with regard to labor and residency matters. For instance,
residence permits (iqāmas) of employees can be renewed even
when the concerned person remains abroad.
With particular regard to the work environment, a bundle of measures has been taken regarding the workplace environment, such as the limitation of presence in company headquarters. Companies have also been asked to grant a compulsory leave of 14 days not being deducted from the leave balance for all employees who fall into one of the following categories:
- pregnant and lactating women;
- people with respiratory, chronic or immunodeficiency diseases; users of immunosuppressive drugs; tumor patients; and
- workers over the age of 55.
b. Does Saudi law consider FM in employment relations?
Labor relations are regulated by the Saudi Labor Law ("LL"), enacted by Royal Decree M/51 23/8/1426 H. The LL sets out the main requirements for labor relations and elaborates further on employment contracts. While FM clauses can be included in employment contracts, the LL itself contains several provisions related to FM. The most prominent one is the possibility to terminate a labor relation due to FM in Art. 74 No. 5 LL. The following needs to be considered:
- FM does not allow for extraordinary termination without notice period.
- Moreover, FM is only considered as a valid reason for termination if the employee is not able to exercise his/her obligations under the employment contract due to the FM event.
Art. 87 LL grants full end of service rights to employees leaving work due to FM. c. What other measures can employers in KSA take?
Employers can instruct employees who might not be able to work remotely to take their annual leave. In this regard, Art. 109 Para 2 LL allows employers to determine the start of annual leave of their employees. However, employers must notify their employees of the date specified for the leave within a period not less than thirty days.
However, the aforementioned does not apply to unpaid leave. This means that unpaid leave cannot be unilaterally instructed by employers; instead, it has to be agreed between employers and their employees. This has recently been confirmed by a statement of the Ministry of Human Resources and Social Development. Likewise, salary cuts are only possible with the consent of the employees.
It can be expected that most contracts containing a valid FM clause would be upheld by KSA courts and can be relied upon. It should be checked if FM clauses encompass the current situation as a FM event. New contracts should be carefully drafted, accordingly. Labor relations can be handled by a differentiated set of instruments either through the individual contracts or by relying on the LL. Employers should plan ahead and analyze which measures (leave, salary cuts, terminations) are suitable.