Contributed By Simmons & Simmons
The Government of the Kingdom of Saudi Arabia (KSA) have standard forms of contract to be used on public projects. These standard forms are based on the FIDIC Conditions of Contract, with construction contracts adopting the Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract for Construction (the Red Book), and the design and build contracts being based on the FIDIC Conditions of Contract for Plant and Build Design (the Yellow book).
There are no separate specialist courts in KSA and if litigation is the specified dispute resolution mechanism, the parties will be limited to civil-law system of the local KSA courts, which will be conducted entirely in Arabic. Whilst the courts are still commonly used, arbitration is becoming an increasingly preferred option, not just for international parties, but also for domestic.
KSA is an Islamic absolute and the legal system is based on the principles of Shari'a law (being derived from the Holy Qur’an and the Sunnah).
There is no system of judicial precedent and most judges have the discretion to disregard previous judgments and apply their own interpretation of the Shari'a to the particular issues at hand. On this basis, the parties to a contract are generally free to negotiate their own terms (unless expressly prohibited) and the parties must observe and maintain the principles of good faith and fairness.
Under KSA law, for a contractual term to be enforceable, the term must be clearly defined and free from uncertainty. Accordingly, the court may deem the parties’ pre and post-contractual conduct to be relevant to the interpretation of obligations after a contract is formed and may look to letters of intent and notices exchanged before the contract is made (provided they were intended to be binding and are in a binding form).
Parties are generally free to agree the terms that govern their contract and the same will be upheld by the courts. However, as mandatory provisions of the law, public policy and morals will take precedence over contractual terms, if a mandatory provision of the law conflicts with a contractually agreed provision, the provision will be held to be invalid.
Limitation periods have been enacted in a number of areas in the KSA.
Unlike other Middle Eastern Countries, the KSA has not introduced a codified ‘civil code’ and, save for specific legislation applying to particular categories of claim, there is no recognised concept of limitation periods. Pursuant to the principle of freedom of contract, the parties can agree to include provisions within its contracts which act as time-bars to claims, and these will likely be upheld by the courts.
In respect of public construction projects, Article 76 of the Government Tenders and Procurement Law (“GTPL”) provides for the concept of decennial liability, being that a contractor shall provide a 10 year warranty against the partial or full collapse of that constructed from the date of final handover. Unlike in the UAE or Qatar, Article 76 provides that the parties may agree to a shorter time period; however it is unlikely that the parties can contract out altogether.
Pursuant to Shari'a law, the parties owe each other a general duty of good faith. As a result, it could be possible to imply that the duty of good faith has been breached even if a contract has not been entered into as the parties are required to conduct themselves at all times in good faith. Accordingly, good faith would require a contracting party to disclose material facts to its counterpart in circumstances where the counterparty could not or would not be able to discover this material information on its own. How this would operate in practice would be at the discretion of the courts.
The principle of good faith is further codified in respect of public projects, whereby Article 77 of the GTPL provides that both the government and the contractor are to implement the contract in accordance with the principles of good faith.
A construction contract will usually fall within the definition of an istisna’a contract, which is interpreted to be a contract for the build, manufacturer or construction of an asset to be delivered upon a specified completion date. An istisna’a contract requires that certain terms, such as the subject matter of the contract, the work to be carried out and the contract price, to be fixed.
Generally, a contract will only deemed to be formed if the essential elements of a contract exist, namely, offer, acceptance, certainty and the capacity of parties. In addition, the contract (and the purpose of the contract) must be in accordance with Shari'a law.
A letter of intent will be given contractual affect if it is in a binding form, and intended by the parties to be binding.
In theory, a contract which complies with all legal requirements applicable to the making of that contract is capable of becoming legally binding even in the event where there is no signed contract, however, in practice, this will be subject to the discretion of the courts.
For one party to perform work without payment on which it relied, the courts will apply the Shari'a principle of good faith and consider factors such as whether the party benefiting from the performance should have instructed the other party to stop performing, and whether they were enriched by the performance.
Certain terms may be implied into a construction contract in KSA, such the duties good faith and fairness, pursuant to Shari'a law. Further, additional terms may be implied if the courts determine it is in the interests of achieving a fair outcome, such as being excused from performance in the event of force majeure, or in the event of unforeseeable site conditions arising. Further to question 7 , Article 76 of the GTPL, which provides for the concept of decennial liability, will also apply in respect of public construction projects.
Pursuant to Shari'a principles, the contract is the law of the parties and accordingly, if the parties have clearly agreed for the contract to amount to the entire agreement, this will generally be found to be enforceable. As stated in paragraph 5, the courts may look to pre and post-contractual conduct provided the same was intended to be binding and is in a binding form.
Under the principles of Shari'a law, the contract is the law of the parties.
Unjust enrichment is contrary to Shari'a law and accordingly, the court may deem that there is an implied right due to the work undertaken, or arguably, that a contract was formed between the parties because work was undertaken.
If a contract has agreed the price, then the courts will generally enforce that price. In the event of a dispute which affects the agreed price, the court will determine a reasonable price for the works.
In general, payment terms are freely determined and are covered by the contractual terms agreed upon between the parties. The date of payment may be fixed freely provided that the payment would be the consideration of an obligation executed or to be executed by the other party. However, it is common practice in the Saudi market that parties agree to execute payments within 30 days from the date of invoice.
Further to Paragraph 20, there are no compulsory payment terms under the KSA law.
Courts will generally try to uphold the agreement of the parties, provided the same is not contrary to Shari'a principles. Accordingly, provisions such as pay-when-paid are generally upheld if clearly agreed between the parties, unless the court determine a breach of good faith or similar.
In respect of private contracts, a contractor’s right to suspend works for non-payment will be subject to the terms of the contract and any terms to this effect will have to be set out clearly and agreed to by the parties. In respect of public contracts however, the GTPL specifically prohibits a contractor from suspending works for non-payment of a government entity.
Pursuant to the principles of Shari'a law, the certifier will always be obliged to act impartially, fairly and honestly.
The certifier will be empowered to carry out the functions defined in the contract and must perform those functions in accordance with the principles of Shari'a law. Where a party who has an interest in the result of any assessment or decision, and uses that to its own benefit, is unlikely to be acting in good faith.
In the event that a certifier fails to act impartially, fairly or honestly and the certification causes substantial unfairness to the contractor, it may be possible, in accordance with the principles of Shari'a law, for the contractor to bring a claim against the employer if a direct loss was suffered. In respect of bringing a claim directly against the certifier, it is likely that the courts will only allow this in circumstances such as an allegation of fraud.
As stated, the courts will generally try to uphold the agreement of the parties, provided the same is not contrary to Shari'a principles. However in reality, these certified sums are usually applicable to global claims and if dispute resolution clause is drafted broadly enough, any claim, even a certified one, can be ruled into an overall global dispute.
Yes, the courts will generally try to uphold the agreement of the parties, provided the same is not contrary to Shari'a law principles.
Further to paragraph 11, a construction contract requires that certain terms, such as the subject matter of the contract, the work to be carried out and the contract price, to be fixed. Where a contract is entered into without the time for performance being specified, the courts may determine that the contract is to be completed within a reasonable time, taking into account factors such as the time necessary for completion and business efficiency.
Under public contracts, in the event the contract is delayed due to the government employer assigning additional works, suspending the works for reasons not attributable to the contractor or for reasons of non-payment, it is possible that the courts may grant an extension of time to the contractor pursuant to the GTPL. Aside from this, there is no specific KSA law addressing concurrent delay and such a circumstance will be decided by the courts on a case-by-case basis.
Liquidated damages are applied in KSA, however their application is limited due to the fact that damages for breach are limited to the direct damages suffered. As such, liquidated damages provisions will not apply in circumstances where the damages awarded grossly exceeds the damage caused, or the scope of the breach is too broad. In addition, the GTPL provides regulation in respect of public contracts in certain circumstances, where the liquidated damages may not exceed 10 times of the contract value. Penalty clauses however, are unenforceable in KSA.
There is no specific KSA law addressing concurrent delay and such a circumstance will be decided by the courts on a case-by-case basis, likely taking into account factors such as whether the employer caused a delay deliberately or in bad faith, or if the delay event is of the type that was not reasonably foreseeable at the time the contract was made.
Further to paragraph 32, under public contracts, in the event the contract is delayed due to the government employer assigning additional works, suspending the works for reasons not attributable to the contractor or for reasons of non-payment, it is possible that the courts may grant an extension of time to the contractor pursuant to the GTPL.
Similar to the concept of concurrent delay, there is no specifically recognised principle of acceleration under KSA law so a claim will be based on Shairah'a principles of fairness. The contractor will need to show that its losses were unavoidable as a result of not being granted an extension of time that was properly due.
There are no express provisions under KSA law that provide for global claims or total cost claims, but generally these claims will be approached carefully and in some cases, damages awarded.
Notice provisions are commonly used in KSA and generally adhered to. When an instance arises where a contractor has not complied with the notice provisions, the courts will generally apply the Shari'a law principle that the contract is the law of the parties and may bar the claim from being brought. The courts will however balance this against circumstances such as whether the notice requirement was waived previously, whether the employer has given the impression that they will not insist or rely on the notices, or whether they were aware of the issue because of their own action/prevention.
See Paragraph 38.
Specific performance is not available as a remedy under KSA law and the primary remedy for breach of contract is monetary damages. In addition, the court may apply certain interim remedies (such as freezing orders), where it deems appropriate.
The assessment of damages would typically run from the date of breach. For a non-contractual claim, damages are assessed from the date of injury and potentially date of discovery of the damage, if later in time.
In general, parties of a contract are free to agree the terms that govern their contractual relationship and thereby limit the extent to which one is entitled to claim, for example, limitation of liability provisions, however under KSA law, indirect and consequential losses cannot be claimed so this will unlikely be addressed. In addition, fraud and gross negligence cannot be excluded.
Agreements for the payment of interest or of amounts in the nature of interest (howsoever described and whether or not involving a penal element), as well as indemnities with respect thereto and amounts in the nature of interest, are not compliant with the principle of prohibition of interest (riba) under the Shari'a rules. The invalidity of any such obligation would not, however, cause other obligations not constituting or in the nature of interest to become likewise invalid and unenforceable.
Termination provisions are freely agreed between the parties. In the absence of an express provision permitting the employer to terminate a contract, the courts may grant termination for reasons that they deem appropriate, such as fraud or unjustified delay.
See Paragraph 38.
In principle, set-off is permitted under KSA law. However, under the Shari'a rules, a right cannot be waived until that right has accrued. Therefore a waiver of future rights, such as a right to set off amounts owed at a future date, will not be effective until those rights have accrued. Therefore where the contractor has the right to terminate in the event of non-payment, the courts will look to the terms of the set-off and the right to determine to ensure that the contractor has not wrongly terminated.
The concept of material breach (unless defined in a contract) is a creature of common law, not civil law and therefore is not immediately understood in KSA jurisprudence. Breaches of all terms will be deemed to be as equally serious as another under civil law.
In practice, parties commonly agree to a period of amicable settlement in their contracts. If such amicable settlement fails, the parties proceed to resolve their dispute either before courts or by arbitration. Since arbitration may be very costly in Saudi Arabia and court filing is free of charge, commercial agreements are generally referred to the courts. As it may take up to 24 months to get a final decision on a claim, and a final arbitration award is enforced by an Enforcement Judge relatively quickly, it often comes down to a “quick and costly vs. slow and cheap” decision.
The arbitration law, which is based on the UNCITRAL Model Law, includes several ‘arbitration-friendly’ provisions that were absent from the previous arbitration law and limits the oversight and intervention of the Saudi courts.
The subsequent introduction of the Enforcement Law in 2013 strengthened this relationship further, providing, amongst other things, for compulsory enforcement upon the presentation of a final arbitration award. It is also worth noting that the enforcement judge may only enforce foreign arbitral awards where reciprocity exists i.e. awards from countries that would enforce judgments/awards issued in KSA. Note also that KSA is a signatory to the New York Convention.
While there is no mandatory or statutory scheme, the introduction and general acceptance of the FIDIC 1999 suite of contracts began to raise awareness of the use of the dispute adjudication board (DAB) in the region, and generally, a DAB decision will be enforceable in KSA, although this will have to be enforced through the Board of Grievances and the decision will have to be compliant with Shari'a principles.
There are various international bodies that are called upon in KSA, such as the Institute of Chartered Civil Engineers (ICES).
Expert determination is sometimes used as the preferred means of dispute resolution before resorting to arbitration or litigation due to its speed, simplicity, and the lack of involvement of other participants and depending upon the terms of reference of the expert and the submission agreement, the decision may be binding upon the parties as a matter of contractual agreement. However, the report may be totally or partially rejected by the courts.
The SCCA introduced its own set of mediation rules in July 2016 (along with the arbitration rules) and are based upon the AAA-ICDR Mediation Rules and parties are freely permitted to incorporate this process into their dispute resolution provisions. Where there is no contractual provision for mediation, the parties are able to enter into an agreement for ‘mediation by voluntary submission’, following which, the SCCA will be granted jurisdiction to mediate.