An introduction to Construction laws in the Mark Blanksby Partner

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
Today’s 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 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 elements of Shari’ah 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.
 Unjust
Enrichment: 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

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
Specific
Special
Conditions
[NEW] Public
Construction Contract
Government Tenders Law
General laws of KSA
General
Government Tenders 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 Tenders Law – 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 Tenders Law - 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 Tenders Law - 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 Tenders Law - 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 Works Contract (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 Works Contract (1988) - 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 Works Contract (1988) - 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 Engineer’s design and notify
Employer of any defects in design (Section 2, Article 10)
-
May require engagement of external design consultant
Public Works Contract (1988) - 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 Employer’s 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 Works Contract (1988) - 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
- supervisor’s costs and fees (Section 2, Article 40).
(Section 1, Article 3(2))
Public Works Contract (1988) - 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 Works Contract (1988) - 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 ¼
average daily cost per day
- 2nd period (up to 30 days or 15% of contract term): DPs are ½
average daily cost per day
- 3rd period (remainder): DPs are full average daily cost per day
Public Works Contract (1988) - detail
Delay penalties cont…
 Delay penalties capped at 10% of the value of the contract
 No relationship between Employer’s 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
Engineer’s contract
(Section 2, Article 40)
Public Works Contract (1988) - 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 Works Contract (1988) - detail
8. Key features: Suspension
 Employer’s 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.
 Contractor’s rights
- no right to suspend
Public Works Contract (1988) - detail
9. Key features: Termination
 Employer’s 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)
 Contractor’s rights
- no right to terminate
- Contractor has right to sue for breach if claim made within 30
days (Section 2, Article 59)
Public Works Contract (1988) - detail
10. Key features: Disputes
 All disputes go to the Board of Grievances
- No multi-tiered dispute resolution process (i.e. Engineer’s
decision, followed by amicable settlement etc.)
- No arbitration
Draft Public Construction Contract (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:
- Engineer’s 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 Building Code

Deals with:
 architectural requirements,
 loads and forces,
 testing and inspection,
 soil and foundations,
 concrete structures,
 masonry structures,
Relates
 steel structures,
 electrical requirements,
 mechanical requirements,
 energy conservation,
 sanitary requirements, and
 fire protection
to both public and private sector construction projects
Dispute resolution
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Dispute resolution options in KSA
 The “Court” System
 Local arbitration in KSA
 Court / Arbitration outside KSA
 ADR ?
1. The Court System in Saudi Arabia
3 types of dispute resolution body
SHARI’AH COURTS
Court of First
Instance
Court of Appeal
Supreme Court
• Criminal / Family / Civil disputes
BOARD OF GRIEVANCES
Court of First
Instance
Board of
Grievances Appeal
1
Board of
Grievances Appeal
2
• Commercial / Government disputes
QUASI JUDICIAL COMMITTEES
Court of First
Instance
Committee Level 2
Board of
Grievances
• Disputes in specified industries (e.g. SAMA – banking disputes)
1. The Court System – detail
Judges

Male, Muslim, Shari’ah 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. Local Arbitration – Saudi 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 Shari’ah 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. Local Arbitration – key 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. Court / Arbitration outside 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. Enforcement of Foreign Court 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 Shari’ah Law
- The enforcing party must show that the country in which the judgment
was made would enforce judgments of the Saudi Courts
3. Enforcement of Foreign Arbitration 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 Shari’ah / 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 nonreciprocity
 1983 Riyadh Convention & 1995 GCC Convention
Which forum to 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
Qu’ran 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 forum to 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 you
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