Contract law and the COVID-19 pandemic
Countries throughout the world are taking extraordinary and unprecedented measures to prevent the spread of the new coronavirus disease (COVID-19), including the suspension of work in both private and public sectors, halting projects and canceling events, and Saudi Arabia is no exception. Many of these measures have legal consequences.
The relationship between the supplier and consumer of goods and services is usually governed by a contract, which in the current COVID-19 pandemic can be difficult or impossible to implement; for example, closing malls and nonfood stores, or suspending import and export operations.
Legally, there are two ways in which a contract can be affected — emergency conditions, or force majeure, of which the latter is the more serious.
For force majeure, or “superior force,” to take effect, three conditions must be met. The event must be unexpected, it must not have been preventable, and it must have an external cause. The circumstances, such as war, crime, riot or plague, must be beyond the control of either party to the contract. When force majeure is applicable, both the supplier and the consumer of goods or services are exempt from their obligations under the contract, which means in practice that the consumer bears most of the consequences, unless the parties agree otherwise.
Force majeure does not apply in cases of negligence and malpractice, or in cases where the circumstances may be unexpected but not unpredictable. For example, if an outdoor event had to be canceled because of heavy rain in a place where seasonal rain was not unusual, that would not be force majeure; if, on the other hand, the event were canceled because of a flash flood, then it probably would be.
Emergency conditions, on the other hand, are a lot less black and white. They do not cause the contract to be terminated, and the supplier is not exempt from carrying out his obligations under the contract. Reasonable compensation to the consumer will be required.
When resorting to litigation, the judge has discretionary power according to the theory of emergency circumstances; for example, he may decide to cancel the contract, thereby reducing the obligation, or he may do the opposite and increase the obligation.
At a sensitive time such as this, many people under commercial pressure may panic and resort to canceling or terminating contracts, which often results in loss and damages to both parties. Undoubtedly, coming out the other side of this difficult period will require the parties to all contracts to cooperate as far as possible, regardless of their different purposes; the aim should be for the obligations in the contract to be modified in a way that achieves the contract goals, satisfies the interests of both parties, mitigates any damage and ensures the preservation of a successful business environment.
Dimah Talal Alsharif is a Saudi legal counsel and a member of the International Association of Lawyers. Twitter: @dimah_alsharif