An introduction to Construction laws in the

Kingdom of Saudi Arabia (KSA)

15 June 2011

Mark Blanksby
Partner
Projects & Construction Group
Dubai, UAE
Clyde & Co LLP
Todays
Todaystalk
talk Chinese contractors in KSA
Won over 50% of $5.2billion rail spend 2009
- (Forbes 2009)

China Rail Construction Corporation $1.8 billion Mecca Metro

China Guangdong Overseas Construction Group Company Limited
$612 million King Khalid University
China Harbour Engineering Company Limited, China National
Petroleum Corp, Aluminium Corporation of China

KSA infrastructure budget 2011

Population quadrupled over 25yrs
Social infrastructure spend to surpass $155 billion over next few
years
Including education and healthcare facilities
Amongst the lowest public debt levels in the world
- (reported in Construction Week Online March 2011)
Basic Principles

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Basic
Basicprinciples
principles

KSA is a sovereign Arab Islamic state.

KSA law is based on Shari'ah law from two main sources:

- Holy Qur'an - divine revelations to the Prophet Mohammed

- Sunnah - the record of sayings and actions of the Prophet
Mohammed.

There is no Civil Code in KSA.

The KSA Government will issue specific laws and regulations

when necessary to supplement Shari'ah Law.
Key
Keyelements
elementsof
ofShariah
Shariahlaw
law

Freedom of Contract: parties are generally free to negotiate their own

terms except where the activities are expressly prohibited.

Fairness and Good Faith: parties must observe fairness and equity in
their dealings.

Uncertainty: no elements of deception or excessive uncertainty

(gharar).

Speculation: no gambling or speculation on a future outcome (maisir).

Agreements to Agree: will not be acceptable if excessively uncertain as

to key elements of a future obligation.

UnjustEnrichment: no party is to gain unjustly in a contract at the

expense of another.
 Interest: clauses in contracts which provide for payment or receipt of
interest will generally not be enforceable. An exception to this
general principle allows interest provisions in banking transactions to
be enforced by the Saudi Arabian Monetary Authority Banking
Disputes Settlement Committee.

Sovereign immunity: KSA Government entities are capable of being

sued in KSA in respect of their commercial and private acts.

Language: Contracts need to be in Arabic or they will not be

admissible In KSA Courts or Judicial Committees. Translations into
Arabic must be certified by a KSA certified translator.
Construction laws

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Introduction
Introduction

Private contracts generally free to negotiate terms

Government contracts subject to more stringent requirements

Key KSA Government Laws:

Government Tenders and Procurement Law (2006)

Public Works Contract (1988)
Draft Public Construction Contract (2010)
Saudi Building Code (SBC)

Government Tenders and Procurement Law:

General statute applying to all government construction projects
Prescribes standard form contract (PWC), (which may be replaced soon by
PCC)
Project-specific special conditions may amend standard form
Structure
Structure

Specific
Special
Conditions

[NEW] Public
Construction Contract

Government Tenders Law

General laws of KSA

General
Government
GovernmentTenders
TendersLaw
Law

Background
Aims promote honesty, transparency, economic
efficiency and competition
GTL covers similar ground to muqawala provisions in
UAE Civil Code
- Contracts in Arabic
- Requires the use of approved forms
- Imposes a decennial liability obligation
- Requirements re: advance payment/ delay damages/
retention
but
Largely a starting point for discussion
Government
GovernmentTenders
TendersLaw
Law detail
detail
Key provisions
Article 27:
- Contracts shall be interpreted and executed in Arabic,
even if drafted in another language.
Article 28:
- When drafting contracts, government authorities shall use
approved contract forms
Article 31:
- Where contract value is less than SAR 300,000
(US$80,000) an exchange of letters may be used in lieu
of the government contract.
Government
GovernmentTenders
TendersLaw
Law --detail
detail

Key provisions
Article 33:
- Successful bidder shall submit a 5% bank guarantee (subject to
certain exceptions for majority government owned entities and
charities)
Article 36:
- Positive variations exceeding 10% and negative variations
exceeding 20% are not permitted.
Article 38:
- Advance payments may not exceed 5% or SAR 50 million.
Government
GovernmentTenders
TendersLaw
Law --detail
detail
Key provisions
Article 40:
- Last claim for payment shall not be less than 10% for public
works and 5% for other contracts
- i.e. effectively retention monies
Articles 48 52:
- Penalties imposed for delay in certain circumstances (up to 6%
in supply contracts and 10% in other contracts).
- i.e. set cap imposed on Employers
Government
GovernmentTenders
TendersLaw
Law --detail
detail
Key provisions
Article 76
- A contractor shall provide a ten-year 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
No general decennial provision under KSA law (cf. Article 880 of
UAE Civil Code)
- Strict liability for Contractors on government projects only
- No decennial liability on private projects or for Engineers /
Architects but
- No concept of limitation periods in KSA
Public
PublicWorks
WorksContract
Contract(1988)
(1988)
Background
Issued in 1988 under an older version of the Government Tenders
Law
Based on FIDIC 3rd edition (1977)
Still the currently-approved standard form construction contract for
public works
Consists of:
- Section 1 Contract Agreement
- Section 2 General Conditions
Special (particular) Conditions may also amend General Conditions
- Limits of this unclear (Article 28, Government Tenders Law)
- Current projects suggest extensive revision possible
Public
PublicWorks
WorksContract
Contract(1988)
(1988)-- detail
detail

1. Key features: Parties / roles

Employer
- Also referred to as Ministry or administrative authority in
contract
Contractor
Engineer
- Supervision role, e.g. inspection of works (Section 2, Article
30)
- No duty of impartiality
(Section 2, Article 2)
Public
PublicWorks
WorksContract
Contract (1988)
(1988)--detail
detail

2. Key features: Site risks

Contractor has obligation to inspect site and notify the Employer
of any latent adverse physical conditions within 10 days after
they are discovered (Section 2, Article 11)
- Failing to do so waives right to compensation
Contractor has obligation to review Engineers design and notify
Employer of any defects in design (Section 2, Article 10)
- May require engagement of external design consultant
Public
Public Works
WorksContract
Contract(1988)
(1988) --detail
detail

3. Key features: Subcontracting

Contractor responsible for the performance of all Subcontractors
Contractor may not engage Subcontractors without prior written
approval of Employer
- Approval does not mean performance at Employers risk
- No provision for provisional sums / nominated subcontractors
Foreign Contractor must:
- employ Saudi contractors for not less than 30% of the works,
unless exempted by MoF
- purchase all equipment and tools in KSA unless second-hand,
plus various services (transportation, insurance, airlines etc.)
(Section 2, Articles 4 and 12)
Public
PublicWorks
WorksContract
Contract (1988)
(1988)--detail
detail

4. Key features: Time

Contractor must submit work programme and work method
statements
(Section 2, Article 13)
Contractor commits to set contract duration which commences
upon the handing over of the site (Section 1, Article 3(1))
Failure to complete on time gives rise to liability for:
- delay penalties (Section 2, Article 39), and
- supervisors costs and fees (Section 2, Article 40).
(Section 1, Article 3(2))
Public
PublicWorks
WorksContract
Contract (1988)
(1988)--detail
detail

Key features 4: Time cont

EOTs granted by reference to separate law (Section 2, Article 36)
- i.e. Article 9, Law of Securing Government Procurement and
Executing Projects and Works Thereof
Article 9(1) delay penalties not payable if delay caused by:
- force majeure or emergency event
- cause beyond the will of the contractor (not defined)
Article 9(2) EOT may be granted if delay due to:
- instructions for extra works meaning time for completion cannot
be achieved, or
- suspension not caused by Contractor
Public
PublicWorks
WorksContract
Contract(1988)
(1988)-- detail
detail

5. Key features: Delay penalties

Calculated for each day based on average daily cost of the
project
- e.g. If Contract Price SAR 100,000 and contract duration is 100
days, the average daily cost is SAR 1,000
Delay penalties levied by period
- 1st period (up to 15 days or 10% of contract term): DPs are
average daily cost per day
- 2nd period (up to 30 days or 15% of contract term): DPs are
average daily cost per day
- 3rd period (remainder): DPs are full average daily cost per day
Public
PublicWorks
WorksContract
Contract(1988)
(1988)-- detail
detail

Delay penalties cont

Delay penalties capped at 10% of the value of the contract
No relationship between Employers actual costs and delay penalties
(unlike LDs)!
(Section 2, Article 39)

6. Key features: Supervision Costs during delay

Contractor obliged to bear fees of supervising Engineer for the
period of the delay, calulcated on the basis of the supervising
Engineers contract
(Section 2, Article 40)
Public
PublicWorks
WorksContract
Contract(1988)
(1988)-- detail
detail

7. Key features: Variations

Engineer must obtain prior agreement from Employer before
instructing change
- No statement that Contractor may assume this has been done
(cf. FIDIC)
Change may be to shape, type or quality of the works or any part
but must be in written order of Engineer
Instruction may not:
- change the object of the contract (not defined)
- Overstep set limits, i.e.
- Maximum increase is 10% of contract value
- Maximum decrease is 20% of contract value
- (cf. Article 36 of the Government Tenders Law)
(Section 2, Article 43)
Public
PublicWorks
WorksContract
Contract(1988)
(1988) --detail
detail

8. Key features: Suspension

Employers rights (Section 2, Article 32)
- may suspend indefinitely
- not responsible for the extra cost of suspension if the suspension is:
- provided for in the Contract,
- necessary for the proper execution of the works,
- necessary by reason of climatic conditions,
- necessary by reason of some default on the part of the Contractor,
or
- necessary for the safety of the works.
Contractors rights
- no right to suspend
Public
PublicWorks
WorksContract
Contract(1988)
(1988) --detail
detail

9. Key features: Termination

Employers rights
- may withdraw the works if slow progress, abandonment of the
works, breach and no remedy within 15 days, improper gift to
government or insolvency
- Contractor liable for extra costs
(Section 2, Articles 53 and 54)
Contractors rights
- no right to terminate
- Contractor has right to sue for breach if claim made within 30
days (Section 2, Article 59)
Public
PublicWorks
WorksContract
Contract (1988)
(1988)--detail
detail

10. Key features: Disputes

All disputes go to the Board of Grievances
- No multi-tiered dispute resolution process (i.e. Engineers
decision, followed by amicable settlement etc.)
- No arbitration
Draft
DraftPublic
PublicConstruction
ConstructionContract
Contract (2010)
(2010)

Released in April 2010 by Ministry of Finance to replace Public

Works Contract (1988)
Influenced by FIDIC Red Book 1987 standard form
but some significant departures, such as:
- Engineers role constrained to technical matters (e.g. variation
orders to be given by Employer direct)
- Contract price varies with changes in underlying costs (!)

No indication as yet as to when this will be enacted

Saudi
SaudiBuilding
BuildingCode
Code

Deals with:

architectural requirements, steel structures,

loads and forces,
testing and inspection,
soil and foundations,
concrete structures,
masonry structures,
electrical requirements,
mechanical requirements,
energy conservation,
sanitary requirements, and
fire protection

Relates to both public and private sector construction projects

Dispute resolution

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Dispute
Disputeresolution
resolutionoptions
optionsin
inKSA
KSA

The Court System

Local arbitration in KSA
Court / Arbitration outside KSA
ADR ?
1.
1. The
TheCourt
CourtSystem
System in
inSaudi
SaudiArabia
Arabia
3 types of dispute resolution body
SHARIAH COURTS

Court of First
Court of Appeal Supreme Court
Instance

Criminal / Family / Civil disputes

BOARD OF GRIEVANCES
Board of Board of
Court of First
Grievances Appeal Grievances Appeal
Instance
1 2

Commercial / Government disputes

QUASI JUDICIAL COMMITTEES

Court of First Board of

Committee Level 2
Instance Grievances

Disputes in specified industries (e.g. SAMA banking disputes)

1.
1. The
TheCourt
Court System
System detail
detail

Judges
Male, Muslim, Shariah trained but no requirement for
any other legal training
Board of Grievances and Committees may call on
expert advisers

Procedure (Commercial Disputes)

Commenced by filing a case at Board of Grievances
Inquisitorial
Parties called to a series of hearings and allowed to
make:
submit written evidence
make oral submissions
2.
2. Local
LocalArbitration
Arbitration Saudi
SaudiArabia
Arabia

Arbitration Act 1983

Implementing Regulations to the Arbitration Act 1985
- Provides basic framework for conduct of arbitration
- Gaps in Arbitration Laws filled in by Supervising Court by reference
to Shariah Law
Government entities cannot arbitrate (Act art 3)
Special dispensation must be given by Chairman of the Council of
Ministers (Regs art 8)
Advance approval: Draft Ministry of Finance Construction Contract
(Clause 91.3)
2.
2. Local
LocalArbitration
Arbitration key
key features
features
Court involvement at each stage of arbitration
Must satisfy Court that there is a valid arbitration agreement
Choice of Law Clauses not recognised must apply Saudi Law
Arabic language is compulsory (Regs art 25)
Tribunal must be male and muslim (Act arts 4 & 12, Regs art 3)
Not private (Regs art 20)

Award within 90 days unless parties agree otherwise (Act art 9)

Award not final reviewed by Supervising Court (Act arts 18 &
19)
Enforcement via order of the Supervising Court (Act art 20)
3.
3. Court
Court//Arbitration
Arbitrationoutside
outsideKSA
KSA

Common between parties from outside KSA

Only an issue if requiring enforcement within KSA

Enforcement:

Pursuant to KSA legislation

Pursuant to International Treaties
3.
3. Enforcement
Enforcementof
ofForeign
Foreign Court
Court Judgments
Judgments

Enforcement pursuant to KSA Legislation:

Royal Decree No M/51 dated 11 May 1982 (arts 8 & 6)
Board of Grievances Regulations 2007 (art 13)

Grants Board of Grievances authority to hear applications for

enforcement of foreign Court judgments in Saudi Arabia

Conditions for enforcement

- Foreign judgment may not be contrary to Saudi Shariah Law
- The enforcing party must show that the country in which the judgment
was made would enforce judgments of the Saudi Courts
3.
3. Enforcement
Enforcementof
ofForeign
Foreign Arbitration
ArbitrationAwards
Awards

Enforcement pursuant to International Treaties

New York Convention 1958

- Recognition and enforcement of foreign Arbitral Awards
- Implemented in Saudi Arabia in 1994
- IF not contrary to Shariah / Saudi Law
- Reciprocity reservation
- Historically some difficulty in satisfying reciprocity reservation.
- Judgment 4/D/F/20 of 1992: Saudi Courts refused to recognise
a judgment of the English High Court on the grounds of non-
reciprocity

1983 Riyadh Convention & 1995 GCC Convention

Which
Whichforum
forum to
tochose
chose??
Generally not an issue between international parties.

Should be a prime focus if contracting with a KSA party

Legal argument can include subjective interpretation of verses of the

Quran and Sunnah
No binding system of precedent / no official publication of rulings
Lack of procedural guidelines on timescales can lead to delays + no
recovery of legal costs
Historically KSA judges have been non-specialist
Language
. can lead to uncertainty of outcome in KSA

Conversely, the enforcement of an overseas judgment / Award is not

without its difficulties
Which
Whichforum
forum to
tochose
chose??
Therefore:

Price the Risk

Consider submission to the Court of Grievences

Consider arbitration in a GCC State (e.g. UAE, Bahrain)

- Where established set of arbitration rules
- With KSA qualified lawyer on the Tribunal
- With KSA law as the substantive law of the Contract
- Enforcement within KSA governed by local Treaties
Thank
Thankyou
you