Under Saudi law, the three elements to establish contractual liability are fault, harm and causal link. In general, the claimant bears the burden of proof of each element.
Sharia obliges the parties to comply with their contractual obligations. The Quran states: 'O believers, fulfil your contractual obligations.' 2 The Prophet also said: 'And Muslims will be held to their conditions, except the conditions that make the lawful unlawful, or the unlawful lawful.' 3 Muslims ought to comply with their obligations. Because damages under Islamic law must be actual and direct, whether the breach is wilful or not does not impact the quantum of damages. However, the wilfulness of the breach may have criminal repercussions if it causes physical harm, for example. The same comments apply to reckless misconduct. There is no contractual concept equivalent to 'reckless misconduct'. The concept would devolve to 'breach' and, if it causes harm to people or property (for example), there might be criminal sanctions.
There are several Hadiths that require Muslims to be honest in their transactions and not commit fraud or misrepresentation. For example, there is a Hadith attributed to the Prophet: a man who was cheated during a sale transaction reported it to the Prophet, where he then said: 'When you buy and sell, say, “there must not be any deceit”.' 4
Under Saudi law, a defaulting party that causes direct damages to the other party is liable to compensate the other party for such damages. Failure to fulfil the contractual obligations should be attributed to actions or omissions of the party responsible for the failure.
Defences to enforcement
The following are some of the defences that a party may raise in response to a claim arising from contractual obligations.
i Violation of Sharia
As mentioned above, if a clause under a contract contravenes Sharia, a court would sua sponte sever such clause from the contract or invalidate the entire agreement.
ii Statute of limitations
Historically, Islamic law (Sharia) did not recognise that legal rights terminated as a result of the passage of time. This implied that, under many circumstances, a legal claim did not expire after the lapse of a certain period and a party to a contract could file a claim against the counterparty at any time in the future. The filing of a claim years after the end of the contractual relationship obviously posed evidentiary issues (the quality of the evidence might have degraded, potential witnesses might not remember certain details, and so forth); however, in principle, the claim was not expunged as a result of the passage of time.
There were exceptions to the general policy, however.
The Saudi Labor Law requires that claims based on employment contracts be filed within one year from the date of the termination of the contractual relationship.
The Committee for Banking Disputes will not hear claims that are filed more than five years after the due date of the claimed amount (or from the date of the claimant becoming aware of the event which is the subject of the claim) unless there is reasonable justification for failing to file within the limitation period.
Enforcement on order notes (promissory notes) is also subject to a statute of limitations. If the order note does not have a maturity date, the statute of limitations is four years commencing from the issuance date. Order notes with a maturity date have a statute of limitations of three years commencing from the maturity date.
Similarly, commercial claims were historically not subject to a statute of limitations. However, a new Law of Commercial Courts was approved by Royal Decree No. M93, dated 15/8/1441H, corresponding to 7 April 2020G, which imposed a five-year statute of limitations on commercial claims. The Law went into effect 60 days after its publication in the Official Gazette on 17 April 2020 (i.e., it became effective as of June 2020).
Article 24 of the new law states that a claim which falls under the jurisdiction of the Commercial Courts is considered time-barred after five Hijri years (approximately four years and 10 months of the Gregorian calendar) from the date on which the right arises, unless the defendant has acknowledged the right or the plaintiff has an acceptable justification for the delay in bringing a claim. The statute of limitations also applies retroactively: claims that arose before the new law went into effect must be filed within five Hijri years after June 2020.
The Commercial Court has jurisdiction over any claim that arises from, inter alia, commercial contracts, the implementation of the Companies Law, and disputes over intellectual property.
The two exceptions to the application of the deadline on commercial claims are stated in the law as: 'unless the defendant has acknowledged the right or the plaintiff has an acceptable justification for the delay in bringing a claim'. We do not have any learning yet as to how the commercial courts will interpret these exceptions.
iii Force majeure
Under Saudi law, the concept of force majeure is recognised.
A force majeure event relieves parties to a contract from their contractual obligations under certain extreme circumstances. 'Force majeure' is not defined in Saudi laws and regulations but is derived from Sharia principles (such as 'Istihalah al-tanfidh') and is applied by Saudi courts. Even if an agreement contained no force majeure provision or a force majeure clause of limited scope, a Saudi court would still consider whether the general principle relating to force majeure applies in a particular case. However, the threshold for its applicability is high and the burden of proof rests on the claimant.
There is no definite list of force majeure events under Saudi law; the nature of the specific event at issue (rather than the general category it belongs to) tends to determine whether it will be considered a force majeure event or not.
A force majeure event is understood in practice to contain the following elements:
Lack of anticipation tends to be interpreted in absolute terms, and not in terms of likelihood, and judged by the standard of a hypothetical 'hyper perceptive' person. In other words, a court would likely ask whether a very perceptive person would have anticipated the occurrence of the force majeure event.
The principle is often applied very narrowly to acts that may make a party's performance absolutely impossible. Thus, a difficulty of (or non-commerciality in) performance will not discharge the contractual obligation. It is unlikely, for example, that a Saudi court would find that diminished revenues would amount to a force majeure as financial losses are deemed part and parcel of ordinary business dealings. If a party's main obligation under a contract is to make payment, force majeure can still, in principle, be invoked. However, the 'impossibility' standard might be difficult to satisfy if the party is technically able to pay.
The court would likely consider several factors in determining whether a force majeure event has occurred. The court would examine the purported force majeure event to determine whether it was unanticipated, beyond the control of the party who is positing it as a defence, and whether it led to an impossibility of performance. A Saudi court would likely also consider the duration or likely duration of the event and the term of the agreement (whether the lease is for one year or 10 years, for example). An event that lasts or is likely to last for a few months may not be deemed sufficient by the court to excuse a party of its contractual obligations. The court may also consider other factors, such as the possibility that the claimant could have tried to negotiate different contractual terms (in the case of a lease agreement, perhaps lower rent).
iv Burden of proof
The philosophy underlying the process of litigation in Saudi Arabia is that the plaintiff bears the burden of proving the case. The defendant has the burden of rebuttal. In commercial litigation, the plaintiff is required to prove its case by a preponderance of the evidence. That is, the plaintiff generally prevails if it can demonstrate to the satisfaction of the court that its claims are more likely than not to be true. However, standards of proof are not robustly formulated, and because judicial precedent, where it exists, is not binding, interpretation and application of the standard of proof devolve to the discretion of the particular judge (or panel of judges) who is hearing the case.
Historically, there has not been a system of compulsory discovery in Saudi courts. The discovery rules that have been in place until recently stipulated that a party may request documents from the opposing party, but the latter is not obligated to produce them. So, in general, the practice has been that each party proceeds with the documents that it has in its possession. The exception is if a party submitted documents to the court, then it must provide a copy to the other party.
The court has discretion to demand, sua sponte or upon the request of a litigant, the production of a document from a third party, but this is not a discretion that the court has exercised often.
A few years back, a new Law of Commercial Courts was approved by Royal Decree No. M93, dated 15/8/1441H (corresponding to 7 April 2020G), which went into effect in June 2020. The Implementing Regulations of the Law, which interpret and clarify the Law, were also issued in June 2020.
The Law appears to modify the documentary discovery system that has been in practice for decades in Saudi Arabia.
Article 46 of the Law states that:
If a party maintains that the requested documents are confidential, then it bears the burden of demonstrating that. The court shall decide whether the documents are confidential and hence should not be disclosed.
Since the Law of Commercial Courts was enacted, this provision remains largely untested.
The consensus among Saudi litigators is that the Saudi Commercial Courts are unlikely to interpret Article 46 broadly. We anticipate that any document that bears directly on the rights and obligations of the parties in the relationship would be discoverable, particularly if such documents were signed by both parties.
Given the historical practice in Saudi courts against documentary discovery, it is very unlikely that the courts would allow the parties to engage in 'fishing expeditions' for documents.
Another facet of Saudi litigation is that the court has no obligation to assist in the fact-finding process, and generally refrains from doing so. The plaintiff must prove its case on the basis of the documents that are in its possession, and the defendant must defend the case on the basis of the documents that are in its possession. The court may intervene, either sua sponte or upon the request of a litigant, to compel the disclosure of a document, but this is the exception, not the rule.
Moreover, Saudi Arabia has enacted earlier in 2022 the Law of Evidence, by Royal Decree No. M/43, dated 26/05/1443 H (31 December 2021). This regulation organises the rules of evidence in civil and commercial transactions (and applicable partially in administrative and criminal matters). Pursuant to this regulation, electronic and digital instruments carry the same evidential weight as written documents.
