Where the performance of an administrative contract results in an increase in the financial burdens borne by the contracting party, without any fault attributable to the administrative authority, the contracting party is entitled to seek restoration of the financial balance of the contract. Administrative case law has settled on three theories governing this right:
First Theory: The “Act of the Prince” Theory (Theoria du fait du prince)
This theory holds that any measure or act issued by the State, without fault on its part, which increases the contracting party’s financial burdens after the contract has been concluded, obliges the contracting administrative authority to compensate the contracting party for that increase.
The principal effect that administrative case law attaches to the application of the “act of the prince” theory is that the court awards the contracting party full compensation for the financial burdens it has incurred as a result of the measure issued by the State.
The application of this theory is conditioned upon the measure having been issued by the State, the administrative authority not being at fault in respect of that measure, and the resulting harm being specific to the contracting party.
Second Theory: The Theory of Unforeseen Circumstances (Theoria de improvision)
This theory applies where, during the performance of the administrative contract, circumstances or events arise that were not foreseeable at the time the contract was concluded, and that cause the contracting party severe financial hardship. The application of this theory obliges the administrative authority, by judicial order, to bear with the contracting party a share of the loss it has sustained.
The application of this theory is conditioned upon the unforeseen circumstance having caused the contracting party substantial losses that could not have been foreseen at the time the contract was concluded.
Third Theory: The Theory of Unforeseen Material Difficulties (Subjections improves)
The application of this theory requires that the difficulties be material in nature and incapable of being foreseen prior to the conclusion of the contract — for example, where, in a public works contract, the ground proves to be of a rocky nature although the contract assumed it to be of an easily workable nature.
The most significant effect of applying this theory is the contracting party’s entitlement to claim full compensation for the financial burdens resulting from such difficulties.
The Saudi Higher Administrative Court, in Appeal (Objection) No. 2581 of 1442H, established two principles concerning the scope of application of the “act of the prince” theory and the theory of unforeseen circumstances in respect of damages arising from price increases:
First Principle
For the ‘act of the prince’ theory to apply, the harm arising from the price increase must be presumed to be harm specific to the contracting party, or to a defined category of persons, not shared by all others affected by the same decision, and the increase must result from a general decision issued by the regulatory authority. However, the price increase is of a general nature and affects all persons and contracts — whether administrative contracts or civil contracts within the scope of dealings between private individuals — this theory does not apply to contracts with the State, unless the regulation or the contract provides otherwise.
Second Principle
Where no harm specific to the party contracting with the State arises from the price increase, that party is not entitled to compensation under the ‘act of the prince’ theory, but rather to compensation under the theory of unforeseen circumstances, where its conditions are met — a theory whose origin lies in the doctrine of ‘calamities’ (al-jawāʾḥ) in Islamic jurisprudence.
Mr. Ahmed Mohammed Al-Dawwas
Attorney at Dhamanah Law Firm and Legal Consultations
Former Judge at the Courts of the Board of Grievances
