The Construction Disputes Law Review: Saudi Arabia

Introduction

The years 2020–2021 will forever be synonymous with the covid-19 global pandemic. The conveyor belt of policies, restrictions and updates, and their turnover, has surprised everyone over the past 18 months. Yet handling the unintended, unforeseen and unplanned is precisely where a well-drafted construction contract delivers value by allocating risk appropriately. Further, a sophisticated market should produce a fair and balanced contractual risk profile. Events such as those seen in the past two years test the legal framework and highlight inequalities or imbalances; one stakeholder should not shoulder the entire burden of the pandemic. Resilience and adaptability have also proved to be key components for surviving such events. Many entities involved in the construction market will come out of the pandemic in a strong position and will have used any enforced downtime to refocus and reposition themselves in the marketplace.

With the covid-19 oscillations now settling, we are entering the 'new normal'. Now is the time to reflect on the legal framework of the construction industry, reveal how it coped with the challenges presented and unearth the fundamental principles of construction law in Saudi Arabia.

i The Saudi legal system

The foundation of the legal system in Saudi Arabia is shariah. Shariah is a collection of principles derived from different sources but principally the Quran and the Sunnah (the witnessed sayings and actions of the Prophet Mohammed (pbuh)).

Shariah principles are often expressed in general terms, providing Saudi courts with considerable discretion as to their application. Moreover, there are different schools of Islamic jurisprudence and they construe some of the precepts differently. The Hanbali school of Islamic jurisprudence is generally followed in Saudi Arabia, but the Saudi courts have been known to apply other schools of jurisprudence.

ii The construction industry in Saudi Arabia

Saudi Vision 2030 is the national transformation programme. First announced by Crown Prince Mohammed bin Salman in 2016, the aim is to diversify the economy away from fossil fuel revenue and develop the public sector institutions and infrastructure. Financed via the Public Investment Fund, a sovereign wealth fund, Saudi Vision 2030 has initiated a raft of megaprojects and these are fuelling a construction boom. Projects such as Neom (the half-trillion-dollar city of the future); the Red Sea Project, a 30,000-square kilometre sustainable tourism project; the Jeddah and Riyadh metro projects; Qiddiya, a 334-square kilometre entertainment complex with theme park and Formula One racetrack; and Jabal Omar, a 40-hectare redevelopment of Makkah including a seven-star hotel, have created significant work for the industry and will continue to do so.

iii The key stakeholders

Following the initial public offering of Arabian Centres Company in May 2019, there are currently 11 real estate development or construction publicly listed joint-stock companies on Tadawul, the stock exchange in Saudi Arabia. The largest of these is the Dar Alarkan Real Estate Development Company, with assets of almost 10 billion Saudi riyals as at the end of 2020.

Identifying the true construction giants in Saudi Arabia requires looking beyond the public exchange. Family wealth and the state still dominate the domestic markets. The Saudi Binladin Group, Al-Rashid Trading and Contracting Company (a closed joint-stock company) and Al-Ayuni Investment and Contracting Company (a closed joint-stock company) are just three examples of private companies currently outweighing their publicly listed peers, and dominating the landscape.

Furthermore, there have been marked periods of collapse, recovery and growth in the construction industry in Saudi Arabia between 1 January 2020 (pre-pandemic) and 25 August 2021.

iv Market analysis

The construction industry in Saudi Arabia has undergone three distinct phases since January 2020.2

  1. Phase 1: initial impact – 25 March 2020. The construction industry experienced a 25 per cent loss in value between the start of 2020 and 25 March 2020. This largely mirrored the fall in oil prices with the price of Crude Oil WTI plummeting from 61.19 to 24.3 (US dollar per barrel) over the same period. Despite attempts to diversify, the Saudi economy is still heavily tied to fossil fuels. This was also the beginning of lockdown measures and bans on international travel, which inevitably eroded confidence in the market.
  2. Phase 2: the rebound. The year following 25 March 2020 was one of rapid rebound. Over the year-long period, the growth rate of the construction industry averaged 33 per cent, mirroring the price of oil, which recovered to above pre-pandemic levels.
  3. Phase 3: growth. Since 25 March 2021, the construction industry has continued to grow at an average rate of 13 per cent. With the price of oil increasing further and public investment injecting vast capital into the sector, the construction industry in Saudi Arabia remains on an upward trajectory and is expected to maintain this growth over the medium to long term moving towards 2030.

There is a clear positive correlation between the price of oil and the value of some of the biggest construction companies in Saudi Arabia,3 and although diversifying rapidly their reliance on oil revenue is still very apparent.

v Construction disputes

Projects are occurring at greater scale, complexity and velocity. This trend has inevitably led the market to witness an increase in construction disputes and the advancement of the legal framework. The Ministry of Justice recently announced that arbitration in particular has seen a dramatic rise in popularity with almost a tenfold rise in arbitration awards between 2016 and 2021.4 As Saudi accelerates towards 2030, this is a wave that is expected to grow in speed and strength.

Saudi Arabia introduced its new Arbitration Law in 2012 and as a result its primary arbitration centre, the Saudi Center for Commercial Arbitration (SCCA), has grown. The Saudi court system is also supporting the growth of arbitration by recognising arbitration agreements and enforcing arbitral awards.

Arbitration is currently the preferred choice for many in the construction industry and it is anticipated that this will be a substantial growth area in Saudi Arabia. The spectre of awards being annulled still hovers in the background; however, time and practice should see the spectre dissipate to some extent, as it has done in neighbouring jurisdictions such as the United Arab Emirates. Recently, a number of court cases have been rejected because of the existence of an arbitration agreement, which sends a positive message concerning support for arbitration generally.

By drawing on the authors' first-hand experience, this chapter seeks to outline the fundamental elements of the dispute resolution system in Saudi Arabia as far as it relates to the construction industry while attempting to reveal the idiosyncrasies, misnomers and market practice of the Middle East's largest construction market.

Year in review

At this moment in history, a year in review is not complete without considering the impact of the pandemic and how the laws of Saudi Arabia deal with covid-19 issues. Force majeure is not a codified concept under shariah, but it is expressly mentioned in a number of laws.5 The lack of codification gives courts a wide discretion to make decisions under shariah but against a backdrop of the sanctity of contract. Court decisions suggest that a force majeure event is one that represents an emergency event, beyond the control of the parties, and that makes performance impossible or unduly burdensome,6 in which case courts are likely to suspend performance rather than terminate a contract.

The Supreme Court issued guidelines identifying a set of principles to deal with contracts affected by the pandemic, determining that the courts have the power to alter the terms of contracts or suspend performance where covid-19 has a direct impact on the contract.

Otherwise, Saudi Arabia is going through a period of progressive change. Modernisation is at the heart of Vision 2030. Technology in the form of apps, virtual systems, artificial intelligence and government portals is spreading through the Saudi social landscape and the legal sector is no exception.

i Anti-Financial Fraud and Deceit Law

In April of this year, Saudi Arabia introduced the Anti-Financial Fraud and Deceit Law7 in line with global efforts to combat financial crime. The Law introduces substantial penalties for a broad definition of fraudulent financial crimes, including prison terms of up to seven years and fines up to 5 million riyals. Combined with some of the other developments discussed elsewhere, this new Law may represent a step towards a more transparent and accountable system in Saudi Arabia.

ii E-title deeds

Saudi has committed to a policy of converting all handwritten land title deeds to an electronic format, held centrally by the Ministry of Justice, allowing reliable enquiries and distribution of information concerning registered land parcels. The e-service removes the historical requirement for notarisation in land transactions.

iii Modern mortgage

Another encouraging sign for global investors is the gradual movement towards contemporary banking systems. The Real Estate Mortgage Law8 is representative of this shift; enacted in 2018, this Law will allow banks to register their mortgage interest on the title deed. This will sit alongside the historic shariah model, whereby the bank is registered on the title deed as owner until the mortgage is paid off in full.

iv Najiz Portal (e-judicial services)

Launched in 2019, the Najiz Portal is the unified judicial portal that now hosts an average of 70,000 users daily. The system is designed to streamline the litigation process by allowing statements of case to be filed online and for judgments to be delivered via the platform. Over 120 services are offered online, including conveyancing, enforcement, notarisation, appeals and litigation.

v Mediation

Mediation has been promoted as a means of easing the burden on the judicial system. Judges are now empowered to refer certain non-construction cases to mediation in accordance with the new procedural rules developed by the Ministry of Justice. Saudi Arabia has set an ambitious goal of successfully mediating 25 per cent of cases. The Taradhi platform has been released by the Ministry of Justice and permits remote filing for mediation whereby virtual mediation can be delivered. In its first year, over 300,000 claims were filed using the Taradhi platform.

vi Case updates

The willingness to undertake, and the frequency of, contractor claims against governmental (or influential) domestic defendants have both been observed to be growing. Al-Shehab Advanced Contracting Establishment's award against the giant Binladin Group is one of many such claims over the past year.

The courts now apply the new Arbitration Law and respect arbitration clauses more consistently than in the past. For example, in 2020, the Court of Appeal enforced the terms of an arbitration clause between Qimma Al-Musheedoon Contracting Company and Huboud Contracting Establishment, appointed an arbitrator and referred the dispute to arbitration.

The top-down policy to reduce the burden on the litigation system and promote alternative forms of mediation has also been a clear trend. The Commercial Court routinely rejects claims for failure to comply with clauses containing a precondition to litigation.9

Courts and procedure

There are three tiers of court in Saudi Arabia: first degree courts, appellate courts and the Supreme Court. The courts are subject matter courts with no dedicated construction court.

When undertaking construction for a government entity, the first dispute forum will be a committee of at least five specialists, as provided in Articles 86–88 of the Government Tenders and Procurement Law 2019 (GTPL).10

Court actions are commenced with the filing of a claim, normally via the Ministry of Justice website. Once the court receives the claim, it will set a date for the hearing and issue a subpoena to the defendant in the case. Under the new digital system, a subpoena can be delivered to a defendant via a registered mobile number or email address.

There is no pretrial disclosure. However, a judge, at his or her own request or upon a party's motion, can order either party to present evidence or specific documents to the court. The options for refusing to supply evidence when requested are restricted. Notably, the concept of privilege is not recognised. If a party does not disclose a document following the court's direction, it will not be compelled to disclose it; however, the court is entitled to draw adverse inferences from this conduct.

Either side can produce oral witnesses, who may be cross-examined, and the court can appoint an expert if it deems it necessary. The appointment of experts is a common feature of construction cases.

One strict feature of Saudi law is the assessment of damages. Claims for damages must be shown to correspond to actually incurred costs and evidenced or the court will disregard them. Loss of future profits or expected gains are not considered by the court.

Alternative dispute resolution

While informal means of alternative dispute resolution (ADR) have long been practised in Saudi Arabia, more formal means of ADR have been far less popular. Majlis discussions and amicable settlement are commonplace, but formal means of ADR are still relatively uncommon when compared to the situation in many other states involved in international trade. ADR has, however, become more popular in the past decade, especially in the past year. While none of the formal means of ADR are prohibited by law, and thus all ADR methods are available in theory, the only methods witnessed commonly in practice are arbitration, mediation and expert determination.

A number of legislative instruments and other efforts have been introduced in recent years with a view to promoting ADR and encouraging its use by government bodies and private parties. For example, Royal Decree No. 280004 of 19 January 2019 has been circulated among all state-owned companies, government agencies and affiliated bodies, encouraging them to resort to arbitration for resolution of disputes with foreign investors, and specifically references the SCCA, which was established in 2014.

Although not directly relevant to construction, the Franchising Law 201911 supports ADR by expressly stating that arbitration, mediation and conciliation may be used to resolve disputes concerning franchise agreements.

The GTPL encourages government authorities to avail of ADR methods in their tenders and procurement activities. In particular, Article 92(2) provides that disputes arising from government procurement contracts can be resolved by arbitration if the Minister of Finance grants permission.

The Commercial Courts Law 202012 permits the commercial courts to use private sector services in relation to ADR. The related implementing regulations make conciliation or mediation mandatory in certain disputes before they can proceed to litigation. Construction disputes are not caught by this and adjudication is not a precondition to litigation or arbitration. Making ADR a precondition to litigation in certain disputes, however, is likely to raise awareness of ADR in general and indicates a move towards support for formal ADR.

In addition to legislative efforts, in February 2021, the Ministry of Justice, the Ministry of Finance and the Ministry of Commerce announced that, in conjunction with certain other organisations, they would be leading a major awareness campaign to draw attention to the importance and value of ADR.

The SCCA has announced that it is conducting a comprehensive analysis of cases relevant to arbitration and that it will publish the Saudi Arbitration Index in 2021, providing insight into arbitration cases under the Arbitration Law 2012.13

As a part of the general drive of the Saudi government to achieve a wider use of ADR, the Minister of Finance has approved 14 unified governmental contracts incorporating the SCCA's model clause as the default dispute resolution mechanism. Similarly, the Ministry of Commerce has issued a number of model contracts containing the SCCA's model clause. As of 6 October 2021, the Public Works Contract form of the Ministry of Finance contained a clause providing that disputes not resolved amicably shall be settled in litigation unless the parties agree to refer their dispute to arbitration.

All the above seems to have already had an effect on the number of cases handled by the SCCA. The SCCA has reported that from its establishment in 2014 until the end of 2020, 116 cases were registered, including arbitration, mediation and limited services cases. Of these, 41 cases were registered from 2014 to 2019, while 75 cases were registered in 2020 alone. These 116 cases are distributed between 16 industries, with 55 per cent of cases being in the construction sector.14

i Arbitration

In construction arbitration, the key laws are the Arbitration Law 2012, the Executive Regulations,15 the Enforcement Law,16 and the GTPL and its Implementing Regulations,17 all subject to the overarching shariah law.

The original Saudi arbitration law was introduced in 1983 and was replaced by the Arbitration Law 2012, which applies to arbitration seated in Saudi Arabia. The Executive Regulations have clarified certain provisions of the Arbitration Law.

The Arbitration Law has modernised and streamlined regulation of arbitration in Saudi Arabia and has led to more expeditious proceedings and an increased use of arbitration. Under the new Law, court recognition of arbitration agreements and enforcement of awards is increasing rapidly, thereby engendering trust in the system.

The Arbitration Law is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. It allows the conduct of proceedings in any language and parties can agree to adopt procedural rules of their choice (whether institutional or ad hoc) and to use services of the SCCA or foreign arbitration centres. The SCCA Arbitration Rules 2018 are based on the UNCITRAL Arbitration Rules and include provisions regarding the appointment of an emergency arbitrator, expedited procedure and joinder of third parties. Notably, the first-ever emergency award in Saudi Arabia in institutional arbitration was rendered in 2020 in a dispute governed by the SCCA Arbitration Rules.

Under the 1983 law, parties had an automatic right to challenge the award at court on substantive and procedural grounds. This often amounted to full or partial rehearing of cases and the setting aside of arbitral awards in favour of the court judgment. The new Arbitration Law has reduced the interventionist powers of the court. Challenging an award is now possible on limited grounds only, and the court's involvement in arbitration is otherwise limited to assistance in respect of appointments and emergency remedies and suchlike. A party can also bring a parallel claim in court to resolve points of shariah law.

Article 11 of the Enforcement Law 2012 provides that foreign arbitral awards (and judgments) may be enforced only if the following conditions are satisfied:

  1. the award was rendered in a state with reciprocal enforcement rights;
  2. the courts of Saudi Arabia had no jurisdiction over the dispute;
  3. the respondent was duly notified of the claim, was properly represented and was able to defend itself;
  4. the award is final and unappealable;
  5. the award is not inconsistent with any decision of the courts of Saudi Arabia; and
  6. the award does not violate shariah law, public order or ethics in Saudi Arabia.

Grounds for nullifying an award rendered under the Arbitration Law 2012 are set out in Article 50 of the Arbitration Law 2012 as follows:

  1. the arbitration agreement does not exist or has been terminated or is invalid or voidable;
  2. a party lacked legal capacity at the time of concluding the arbitration agreement;
  3. a party was unable to present its defence because of lack of proper notification of the proceedings or for any other reason beyond the party's control;
  4. the award was not rendered in accordance with the laws applicable to the dispute;
  5. the composition of the tribunal or the appointment was not in accordance with the Arbitration Law 2012 or the agreement of the parties;
  6. the award deals with matters outside the scope of the arbitration agreement;
  7. the tribunal failed to observe certain mandatory requirements for an arbitral award that affect the substance of the award;
  8. the award violates an agreement of the parties or the subject matter of the dispute is not arbitrable under the Arbitration Law 2012; or
  9. the award violates shariah law or public policy of Saudi Arabia.

According to the SCCA, 107 nullification proceedings were initiated in the Saudi courts between 2017 and 2021, only six of which were successful. Notably, violation of shariah law or public policy was relied on in only 7 per cent of the applications. The most common grounds relied upon were an alleged failure to observe conditions required for the award affecting its substance, or the award being based on void arbitration proceedings (24 per cent of applications). The other two most common grounds were an alleged lack of proper notice of arbitration proceedings or appointment of arbitrators, or inability to present the case (18 per cent) and an allegation that the procedure violated an arbitration agreement or law (18 per cent).

Further, according to Article 10(2) of the Arbitration Law 2012, government bodies18 may enter into arbitration agreements only with the approval of the Prime Minister or in the case of special provision of law. As mentioned above, the GTPL provides that procurement contracts may be referred to arbitration with the approval of the Minister of Finance. Most significant construction contracts in Saudi Arabia are offered by the government and, considering the government's efforts to promote ADR, it is expected that government construction contracts containing arbitration clauses will become increasingly popular.

Saudi Arabia ratified the New York Convention19 in 1993 with effect from 1994. It has adopted the reciprocity reservation, which restricts recognition and enforcement of foreign arbitral awards to those that are rendered in territories with reciprocal rights for enforcement of Saudi awards. Recognition and enforcement of awards rendered in non-contracting states are also subject to the reciprocity condition, as set out in Article 11 of the Enforcement Law 2012.

Saudi Arabia is also a party to the Arab League Convention,20 the Riyadh Convention,21 the GCC Convention,22 the ICSID Convention23 and the Singapore Mediation Convention.24 Saudi Arabia has ratified 21 bilateral investment treaties out of 24 that it has signed.

According to a report of the Ministry of Justice released in February 2021, the number of enforced arbitral awards (domestic and foreign) has increased from 930 in 2015 to 8,946 in 2020. The ministry has also reported that the enforcement courts have handled a total of 25,000 arbitral awards (domestic and foreign) with an aggregate value of 4.7 billion riyals in the past five years.

Advantages of arbitration over litigation in Saudi Arabia include a quicker process that many foreign parties are already familiar with. The freedom to appoint an arbitrator and counsel with necessary experience and expertise is another major benefit. Notably, there is no requirement for arbitrators or counsel to be familiar with shariah law nor to be based in Saudi Arabia, but, of course, any award must be compatible with shariah law. In practice, therefore, arbitrators (or at least one arbitrator in the case of a multi-member tribunal) should be familiar with shariah law. Further, the Enforcement Law and the Arbitration Law have narrowed the grounds for nullifying an award. Some of the conditions, however, remain wide enough for substantive re-examination of an award by the courts to be a possibility. The support generally being shown to ADR, and arbitration in particular, would suggest that the threat of this is reducing with every passing enforcement of an award by the Saudi courts.

ii Mediation

Mediation is another method of ADR that is increasing in popularity. According to the report of the Ministry of Justice published in February 2021, 50,000 conciliation deeds (i.e., mediation agreements) worth 2.9 billion riyals have been handled by the enforcement courts in the past five years.

Article 9(3) of the Enforcement Law 2012 recognises conciliation deeds as enforcement instruments that cannot be challenged or appealed. In 2018, the SCCA published its mediation rules, which are largely based on the UNCITRAL Mediation Rules and are applicable by default unless parties have agreed otherwise.

Negotiation is, of course, also used for resolution of disputes. In relation to both mediation and negotiation, parties should bear in mind that there is no concept of 'without prejudice' in Saudi Arabia. Accordingly, any information and documents disclosed during settlement discussions can be used by the other party during proceedings. Any agreement reached must comply with shariah law and, accordingly, the same disadvantages mentioned above in relation to arbitration apply in the case of mediation and negotiation. It is advisable to appoint mediators familiar with shariah law.

iii Other ADR methods

There has been an increase in the use of expert determination in disputes of a technical nature. The contractual appointment of an expert can be a sensible measure, similar to the appointment of a dispute board, and both these practices are accepted but not yet commonplace in Saudi Arabia. It is anticipated that the growth of the construction market in Saudi Arabia will encourage further use of both expert determinations and dispute boards, especially on the megaprojects currently under construction.

Construction contracts

i Public procurement

Public procurement and government contracts are regulated by the GTPL and the Procurement Regulations, which entered into force on 24 April 2020.

Under the GTPL, the Ministry of Finance has a key role in establishing policies and issuing instructions and circulars, maintaining a list of boycotts and approving tender and pre-qualification forms, contract forms, performance assessment forms and other papers and documentation.

The Ministry of Finance launched a centralised e-portal called Etimad portal25 for government procurement. Unless there are technological or national security concerns, all government tenders and procurements must be announced on the Etimad portal.26

Entities subject to procurement regulations

The GTPL applies to procurement processes conducted by all governmental entities, including ministries, government agencies, authorities, departments, public institutions and agencies with independent legal personality.27 It also applies to enterprises that provide work and procurement on behalf of governmental entities.28

Fundamental principles

The GTPL aims at regulating procedures relating to works and procurements, and preventing abuses of power and conflicts of interest, thus ensuring the protection of public funds. The GTPL promotes integrity and competitiveness and maintains equality and transparency in all procedures relating to works and procurements.29

The GTPL further stipulates that governmental entities must fulfil their contractual responsibilities to the contractor after the procurement contract has been awarded and executed. Crucially, this includes obligations to make payment to all contractors and suppliers in accordance with the contract.

In terms of contracting requirements, the GTPL requires that contracts be written in Arabic or in a bilingual format, with the Arabic version taking priority in contract interpretation.30 The Law also introduces a broader range of template contracts.31

Procurement methods

The GTPL provides eight contracting procedures that may be used for the award of a contract, as follows:

  1. general tender: serves as the default procedure of all tenders with tenders being published on the Etimad portal;
  2. limited tenders: addressed to a limited number of par­ticipants by invitation;
  3. two-round tender: competition over two rounds for complex or specialised works;
  4. direct purchase: subject to specific criteria;
  5. framework agreements: where it is not pos­sible to determine certain elements of the works;
  6. reverse electronic bidding: where successive reduced offers culminate in the low­est price offers;
  7. knowledge transfer contracts: for industrial localisation and transfer of knowledge; and
  8. competition: to determine the best idea, design or other intellectual property rights through a competition procedure.

Evaluation criteria

Pre- or post-qualification criteria should be objective, meas­urable and related to the technical, financial and administrative capabilities of the bid32 and tenders will be evaluated by a bid evaluation committee in accordance with the criteria set out in the tender documents. Offers not meeting the set criteria shall be excluded and bid bonds returned.

Tender results will be announced on the Etimad portal, identifying the successful bid and notifying the unsuccessful bidders of the reasons for their exclusion, which should include the technical scores of their bids.

Contracts shall be concluded when the winning bidder submits the final letter of guarantee. With public construction contracts, a contractor shall be allowed to commence execution of the contract within 60 days of the date of being notified of the award, unless otherwise stipulated in the tender documents.33

The GTPL provides that governmental entities should not conclude contracts before the expiry of a standstill period. During this period, to enable unsuccessful competitors to raise objections or grievances to the tender process, the award decision may not be enforced. The stand­still period should be no fewer than five and no more than 10 working days from the date of the announcement of the award on the Etimad portal.34

Challenging awards

One or more specialised committees shall be formed by the Ministry of Finance and empowered to consider and render binding decisions concerning the following:

  1. grievances against the award decision or any decision or action taken by governmental entities prior to the award decision;
  2. grievances against the performance evaluation decision by governmental entities; and
  3. requests for adjusting contract prices, where permissible.

Any grievance should be accompanied by a guarantee equal to half the value of the bid bond and be valid for at least 30 days.35

When public procurement and government contracts are awarded, arbitration can be used as a means of dispute reso­lution and this is covered in more detail in Section IV. Otherwise, administrative courts will have jurisdiction to hear cases relating to such contracts.

A further committee shall be formed by the Ministry of Finance to ensure the proper application of the GTPL and to monitor the terms of awarded contracts. The committee may issue a deci­sion against violators to exclude them from future bids for a period not exceeding five years, or reduce their classification, if any. Alternatively, the committee may impose a fine on violators not exceeding 10 per cent of the value of their offer. The decision of the committee shall be effective from the date of its issuance unless an administrative court order is issued to suspend its implementation. Furthermore, the committee's deci­sions may be appealed before the administrative court, within 60 days of the date on which the decision is communicated.36

The GTPL together with the Procurement Regulations are further evidence of the progression within Saudia Arabia towards a transparent and collaborative future.

ii Contract interpretation

In the absence of codified construction law in Saudi Arabia the courts interpret contracts under the general principles of shariah law.

One of the fundamental principles of shariah law is the sanctity of contract, under which parties are free to contract upon their agreed terms and each party must fulfil their contractual obligations provided that they are lawful. The courts will not disregard a clause or a contract on the basis that it was a bad deal for one party, subject to the duty to act in good faith. Provided that the parties entered into the contract with knowledge of the subject matter and neither party acted in bad faith, it would be exceptional for the courts to rescind a contract or a specific term.

In general, oral modifications are permitted on the basis that the parties are free to agree and contract, but terms must be clearly defined and it is recommended that modifications are agreed in writing. If the contract includes a clause stating that oral modifications are not acceptable, this will generally be upheld and neither party can rely on an oral modification until it is agreed in writing.

Contract interpretation must always be subject to the caveat that, as an inviolable principle, Saudi law will not uphold any term contrary to shariah law.

Common substantive issues and remedies

i Time bars as condition precedent to entitlement

'A just claim never dies' is a legal maxim often associated with shariah law and civil law systems, and has been applied in Saudi Arabia with few exceptions. However, from June 2020, the new Commercial Courts Law has imposed a time bar. Claims must now be filed within five years of the incident unless the respondent acknowledges the claim. This is a new path for the Saudi legal system and we must wait to determine how the Law is interpreted. In the meantime, a claimant should assume that a claim must be filed within five years of the alleged incident.

ii Right to payment for variations and varied scope of work

Typically, construction contracts will have a built-in mechanism for agreeing substantive amendments to the scope of work and how fees will be calculated, and courts are likely to apply this mechanism in accordance with the principle of sanctity of contract. The main reason for inserting a clause of this kind is to avoid lengthy negotiations causing delay to the project and to give the parties an understanding of how costs might vary. The parties should comply with the terms of such a mechanism unless they mutually agree otherwise.

Any change in scope clause should be drafted clearly to define the intentions of the parties. Otherwise, either party can claim that the proposed amendment is outside the pre-agreed terms and open the gate to negotiations, delay and uncertainty.

Article 69 of the Public Procurement Law restricts the ability of a government agency to agree price variations with a cap of 10 per cent increase and 20 per cent decrease. The ability of a contractor to demand increases is also severely limited following the submission of the tender documents.

In the event that there is no built-in mechanism, the parties will be required to mutually agree any variations as and when they occur.

iii Concurrent delay

There is no codified law on concurrent delay and therefore delay issues generally are determined in accordance with the contract and in accordance with shariah law. The contractor would have to establish employer delay and could, in those circumstances, request an extension of time to cover the delay. Any disruption or costs of delay will be determined in accordance with the contract, but the contractor will, in all cases, only be entitled to losses actually incurred.

iv Suspension and termination

In public works contracts, termination is governed by the GTPL.

Article 76.1 sets out circumstances in which a government agency must terminate a contract, including the following:

  1. the contractor obtained the contract through bribery, fraud, deceit, forgery or manipulation, or engaged in activities of this kind while executing the contract;
  2. the contractor entered into bankruptcy, insolvency, dissolution, liquidation, filing for bankruptcy or being placed under receivership; and
  3. the contractor assigned a contract without a written approval of the government agency and did not cancel the assignment within 15 days of receiving a written notice.

Articles 76.2 and 77 of the GTPL set out grounds on which a government agency has an option to terminate a contract. These grounds are very broad and include violation of any contract terms if a contractor fails to rectify the breach within 15 days of receiving a written notice, and termination if public interest so requires. It is further specifically provided that a contract may be terminated if the contractor delays commencement of works or enters into a subcontract without written approval of the government agency concerned.

In addition, in both public and private contracts, any contract provision dealing with suspension and termination is enforceable. A provision, whether bespoke or incorporated from a standard form, such as the International Federation of Consulting Engineers (or FIDIC) contracts, will, however, be unenforceable if the court considers that it is inconsistent with the principles of shariah law, such as good faith, fairness or unforeseen circumstances. These principles may of course be used not only to resist enforcement of a contract provision but also to justify suspension or termination of a contract that does not contain an express clause to this effect. It should be borne in mind, however, that for most public works, the government uses its own standard form contracts and accordingly a contractor wishing to challenge the validity of a clause in such a contract would need to persuade the court or a tribunal that the government standard contract violates principles of shariah law.

vii Penalties and liquidated damages

Liquidated damages are a common feature of contract in Saudi Arabia, but generally a court will look to the actual damage or loss suffered rather than strictly applying the liquidated damages clause. Therefore, a liquidated damages clause may be enforceable but only to the extent of the actual damage suffered.

Public works contracts will contain a liquidated damages clause subject to a cap of 10 per cent of the contract value.37 If the cost of the damage caused by the contractor exceeds 10 per cent of the contract price then a court order is required, unless the parties agree otherwise.

viii Defects correction and liabilities

Under Article 76 of the GTPL, 'a contractor shall provide a warranty against partial or full collapse of what he constructs starting from the date of final handover to the government authority, if such collapse is due to a construction defect, unless the two contracting parties agree on a shorter period'. The term 'partial or full collapse' will require any defect to be substantial, although the term is not defined.

Within the private sector, the parties are free to agree any defect liability period between themselves. There are no statutory protections outside the GTPL that will not apply to the private sector, but it is unclear whether the limitation periods referred to above will apply to construction defects resulting in a partial or complete collapse.

ix Bonds and guarantees

Performance bonds and advance payment bonds are a common feature of construction contracts and will generally be unconditional on-demand bonds. With these bonds, an employer can demand payment on written demand without the requirement to show a breach of contract on the part of the contractor. Conditional bonds, under which an employer would have to establish breach before taking action against the bond, are not popular with employers. Saudi courts will consider an urgent application or injunction to freeze a bond and prevent its encashment.

x Overall caps on liability

The standard position in Saudi Arabia is for the contractor to provide a 10 per cent bank guarantee to the government agency (under the GTPL) and to limit liability to the same extent.

Although limitation of liability clauses are common in Saudi Arabia, their enforceability is surprisingly limited. The law will primarily calculate the cost of the direct damage that the actions or inactions of the defendant caused to the claimant. If the damage is far greater than the cap on liability, it is likely that the cap will be disregarded.

Caps on liability that are reasonable or have commercial justification are more likely to be enforced. The predominant method of protection in Saudi Arabia is liability insurance and contractual indemnities insurance.

Outlook

The kingdom of Saudi Arabia has taken huge strides in recent years in terms of modernisation and transparency. It is anticipated that this trend will continue apace under the banner of Vision 2030.

In terms of construction disputes, we anticipate that arbitration will continue to grow in popularity and we may see dispute boards introduced on some of the megaprojects.

Courts have shown a willingness to support arbitration through recognition of arbitration agreements and enforcement of awards. We anticipate that this will continue and, with each passing year, support of the arbitral procedure is likely to strengthen through recognition and enforcement of awards, as has happened in the neighbouring United Arab Emirates.

It seems inevitable that there will be a substantial number of disputes arising from the megaprojects referred to above. These projects are of huge commercial and national value and the successful management of disputes arising therefrom could be the guiding light for construction disputes in Saudi Arabia. This presents an opportunity to set the tone for managing disputes and to embrace forms of ADR to support Saudi's position as the Middle East's construction powerhouse.

Footnotes

1 Scott Hutton and Hadi Melki are partners, Arthur Dedels is an associate and Harry Taylor and Ibrahim Al-Atiki are junior associates at EKP. The authors wish to thank their colleagues Nanette Barroga, paralegal, and Tracy Aad, intern, at EKP, for their contributions to this chapter.

2 As reported on the Saudi Exchange on 6 October 2021 (www.saudiexchange.sa).

3 According to stock prices reported on Tadawul. The price of oil is from Trading Economics (https://tradingeconomics.com/commodity/crude-oil).

4 Arbitration awards rose from 930 awards in 2016 to 8,946 awards in February 2021.

5 Including article 74 of the Government Tenders and Procurement Law 2019; article 14 of the E-Commerce Law (1440H or 2019); article 24 of the Commercial Court Law (1350H or 1931).

6 Appeal Commission Decision No. 1/T/199, 1417H; Appeal Judgment No. 34208836 dated 7 May 2013.

7 Cabinet Decision 534/1442.

8 At the time of writing this Law has yet to be implemented in practice.

9 For example, Commercial Court, City: Mecca, Case No. – Resolution: 213, Date: 24/4/1442; Court of Appeal: Commercial Court, City: Makkah Province, Resolution number: 355.

10 Resolution No. 649 of the Council of Ministers dated 13/11/1440 H (16 July 2019) adopted by Royal Decree No. R/128 dated 13/11/1440 H (16 July 2019).

11 Enacted by Royal Decree No. M/22.

12 Enacted under Royal Decree No. M/93 dated 15/8/1441H (8 April 2020).

13 H Merah and J MacPherson of the SCCA, Global arbitrations around the world: Saudi Arabia, Global Arbitration Review, 26 May 2021.

14 H Merah and J MacPherson of the SCCA, Global arbitrations around the world: Saudi Arabia, Global Arbitration Review, 26 May 2021.

15 Cabinet Resolution No. 541 of 1438 issuing the Executive Regulations.

16 Royal Decree No. 53 dated 13/10/1433 AH (30 August 2012).

17 Ministerial Decision No. 1242 dated 21/3/1441 H (19 November 2019); amended by Ministerial Decision No. 3479 dated 11/4/1441 H (5 April 2020).

18 This does not include state-owned companies.

19 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.

20 Convention of the Arab League on the Enforcement of Judgments and Arbitral Awards 1952.

21 Convention on Judicial Cooperation between States of the Arab League 1983.

22 Gulf Cooperation Council Convention for the Execution of Judgments, Delegations and Judicial Notifications 1996.

23 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1966.

24 United Nations Convention on International Settlement Agreements Resulting from Mediation 2018.

26 Article 13 of the GTPL.

27 Articles 1 and 10 of the GTPL.

28 Article 93 of the GTPL.

29 Article 2 of the GTPL.

30 Article 55 of the GTPL.

31 Article 57 of the GTPL.

32 Article 20 of the GTPL.

33 Article 59 of the GTPL.

34 Article 53 of the GTPL.

35 Article 86 of the GTPL.

36 Article 88 of the GTPL.

37 This is reduced to 6 per cent for supply contracts.

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