Construction Arbitration: Saudi Arabia

1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

Saudi Arabia

The central body of law in the Kingdom of Saudi Arabia is the Sharia, which is a set of principles derived from the Holy Quran and the Sunnah (words and deeds) of Prophet Mohammed, as interpreted by scholars of Islamic jurisprudence. There are different schools of Islamic jurisprudence, each of which may construe Sharia principles differently. The Hanbali school of Islamic jurisprudence is generally followed in Saudi Arabia. Within the Hanbali school there, are majority and minority views on various issues, either of which may be applied by the courts.

In addition to Sharia principles, the laws of Saudi Arabia are also derived from written legislation promulgated by Royal Orders and Royal Decrees, along with ministerial resolutions and circulars. These laws must comply with Sharia principles. The power to enact legislation lies with the King of Saudi Arabia, the Council of Ministers and the Shura Council of Saudi Arabia. New laws come into force upon publication in the Official Gazette. Sharia principles will supplement a law in the event that it is silent.

There is no restriction on laws being passed with retrospective effect in Saudi Arabia. However, as a matter of practice, laws will rarely have retrospective effect, unless it is indicated in the text of the legislation itself.     

2. What are the requirements for a construction contract to be formed? When is a "letter of intent" from an employer to a contractor given contractual effect?

Saudi Arabia

Under the laws of Saudi Arabia, a contract is formed if the following conditions are met:

• an offer is made by one party;
• the counterparty accepts the offer;
• there is certainty as to subject matter and price;
• the parties have the required capacity to contract; and
• the subject matter of the contract des not contravene the principles of Sharia.

Construction contracts are not subject to specific requirements. Rather, in Saudi Arabia, parties are free to agree the terms of a contract, provided those terms comply with the principles of Sharia law. Some key principles require the contract to be free from deception, uncertainty and speculation. Therefore, any obligations under a construction contract must be clearly defined.

A ‘letter of intent’ from an employer to a contractor will only be given contractual effect if it meets these requirements.

Generally, Sharia law does not permit contracts for which the subject matter are assets that are not yet in existence. However, construction contracts come under an exception known as ‘istisna’a’, which permits parties to agree the construction of a future building or asset for a fixed price and a future delivery date. Traditionally, the istisna’a contracts are relied upon for the financing of construction projects.

3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

Saudi Arabia

Arbitral proceedings seated in Saudi Arabia are subject to the Arbitration Law 2012 (Royal Decree No. M/34), which is largely based on the UNCITRAL Model Law. In 2017, the Executive Regulations of the Arbitration Law 2012 were enacted, providing clarifications in respect of certain provisions of the Arbitration Law 2012.

Parties are generally permitted to choose the governing law of contracts (certain limitations or prior approvals would, however, apply to contracts with the Saudi Arabian government bodies). The Arbitration Law 2012 allows the parties to an arbitration seated in Saudi Arabia to select the law of the arbitration agreement, the seat of the arbitration and the applicable rules; again, provided that the parties’ agreement is not contrary to the principles of Sharia law (see, article 5 of Arbitration Law 2012).

The Arbitration Law 2012 prescribes certain requirements and default positions that parties should consider when drafting arbitration agreements. For example:

• Article 14 provides that an arbitrator must possess the necessary legal skills to arbitrate the dispute, be of good conduct, and hold a university degree in either Sharia or law. In the event of a three-person tribunal, this same provision provides that it will be sufficient for only the chairperson to hold a university degree in either Sharia or law.
• Article 29 provides that an arbitration shall be conducted in the Arabic language unless the tribunal or the parties agree otherwise.  

4. How might terms be implied into construction contracts? What terms might be implied?

Saudi Arabia

Terms may be implied in construction contracts so long as these accord with the principles of Sharia law. Under Sharia law, a term of good faith will be implied in all contracts. Further implied terms include force majeure and compensation to a contractor for unforeseen and/or materially different site conditions that arise during the performance of a contract. However, as Sharia principles can be interpreted differently depending on the school and the minority or majority views, it is advisable to clearly spell out all the terms pertaining to such matters (good faith, force majeure, etc) in the contract.   

5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

Saudi Arabia

The party issuing a certificate under a construction contract must act impartially. Generally, a party would not be entitled to bring a claim against the certifier itself. Rather, a claim can be made against the entity that the certifier represents. However, a claim can be brought against the certifier if, in the course of exercising its responsibilities, the certifier has committed an offence that makes it personally liable, such as fraud or forgery.

The mechanisms that govern the claims procedures are generally set out within the construction contracts. 

6. If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

Saudi Arabia

Saudi law does not specifically address the issue of concurrent and competing delay in construction contracts. Delay issues are generally determined in accordance with the terms of the contract and, to a lesser extent, in accordance with the general principles of Sharia. Saudi courts will typically rely on expert opinions to address delay issues.

Article 74 of the Procurement Law, which applies to contracts for public works, permits extensions of time if the contract is extended because:

• the employer requests additional works;
• the annual budget allocated to the works is insufficient for completion by the original completion date;
• the delay is caused by a government entity;
• if the delay is attributed to government or force majeure;
• if the contractor’s delay is for a reason beyond the contractor’s control; and
• if the contracting government body issued an order to suspend the work due to reasons other than ones caused by the contractor.

7. How does the law view "disruption" to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer’s breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

Saudi Arabia

A disruption claim will only be successful if the contractor demonstrates that it suffered a direct loss. Further, Sharia law generally prohibits unjust enrichment and speculation, therefore a contractor may only recover damages for the amount of loss actually incurred. In addition, the loss suffered must be fair and proportionate, and the contractor will be required

8. How does the law view "constructive acceleration" (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

Saudi Arabia

In accordance with the principles of Sharia law, parties to a construction contract must carry out their respective obligations in good faith. In the event that an employer wrongfully, unreasonably or in bad faith fails to grant an extension of time to a contractor, then the contractor may bring a claim against the employer.

To succeed in a claim for constructive acceleration, a contractor must show that it suffered a direct loss (for example, through the use of additional labour or plant resources, or paying a premium for overtime) and that the acceleration was required due to the employer’s wrongful failure to grant an extension of time. The courts may require written evidence of a contractor putting the employer on notice of the likely costs prior to the acceleration.

9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

Saudi Arabia

Most construction contracts in Saudi Arabia include written force majeure provisions (primarily in the FIDIC form contracts). Such provisions are generally enforceable under Sharia law: ‘Quwa Qahira’.

Court decisions (see, Supreme court decision dated 23 December 2020 clarifying the position with respect to the effects of covid-19) 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.

Under Sharia principles, if an event prevents or delays a party from performing or fulfilling its obligations under a contract, the party may be excused from liability; provided the event is (i) unforeseeable at the time of contracting; (ii) the event impacted a party in a manner that it was unable to control; and (iii) some external force (such as a natural disaster or ‘Act of God’ type event) which has been brought to bear to the detriment of the impacted party seeking relief. The doctrine not only applies where an obligation is physically impossible to achieve but also to circumstances in which performance has become substantially different to what initially was agreed.

A party affected by force majeure events may obtain, with the intervention of the courts, either a suspension of performance for the duration of the force majeure event, or termination of the contract.

In the case of public works contracts, article 74 of the Procurement Law permits a contracting party to a government contract to seek to delay their performance under the contract for a period that is proportionate to the period of delay caused by the force majeure event. The contractor will also need to prove that the delay has been caused by the ‘emergency circumstances’ or ‘reasons beyond his control’, as a matter of fact.

10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

Saudi Arabia

The primary effect of force majeure, if successfully established, is to protect the party invoking it from liability in damages as a result of its failure to perform as a result of such a force majeure event. However, there is no statutory entitlement to compensation for a contract becoming unduly expensive or more onerous than expected. Parties may rely on contractual provisions, such as change of law, for mechanisms of compensation in the event of an increase in the cost of performing the contract.

For public contracts, contractors may claim for increases in contract prices under article 68 of the Procurement Law where (i) the cost of main materials used in the works has increased since the tender; (ii) tariffs, duties or taxes have changed; or (iii) there have been unforeseeable material difficulties. 

To be successful, the contractor must establish:

• that the increase in price was not in effect when it submitted its bid;
• that the price increase did not result from the contractor’s delay in performing the contract;
• that the price increased by over 10 per cent (as indicated in the official price indicators maintained by the Ministry of Finance); and
• that the price increase resulted in the overall cost of the contract increasing by more than three per cent.

Courts will give consideration as to whether it is possible to segregate obligations that have become impossible to perform from other obligations which remain possible. A judge is likely to try to reinstate an economic balance between the parties, and, in doing so, may alter provisions in the contract.

11. When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

Saudi Arabia

The concept of Istihala (or impossibility) is similar to the common law concept of impossibility. It allows a party to be released from a contract on the grounds that an event (not resulting from the fault of either party) that has occurred after the contract has been entered into has rendered performance physically or legally impossible. Istihala may be partial or absolute.

In the event of an absolute Istihala, the contract shall be cancelled.

12. How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example, making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer's requirements in design and build forms?

Saudi Arabia

While Sharia law respects sanctity of contracts, it requires contracting parties to act in good faith and that contract terms should be certain, fair and equitable.

Therefore, the enforceability of contractual provisions that seek to pass risks is uncertain given its speculative nature.

13. When must the contractor warn the employer of an error in a design provided by the employer?

Saudi Arabia

If a contractor proceeded with its works knowing that there are errors in the designs without informing the employer, the contractor may be considered to have acted in breach of its duty to perform in good faith.

14. Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party’s discretion whether to terminate or suspend the contract; or (c) the employer’s discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

Saudi Arabia

Sharia law provides for a general duty to perform contracts in good faith. Saudi courts rely on the presumption that parties have acted in good faith. Therefore, the party alleging a breach of that duty bears the burden of proof. However, there is no precise definition of good faith. Saudi courts have therefore interpreted good faith on a case-by-case basis in view of the parties’ conduct and the factual circumstances, with particular regard to the knowledge of each party. This approach applies to the scenarios described in (a) to (c).

15. How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 ("otherwise in connection with the contract")? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

Saudi Arabia

Saudi law will uphold the terms of contracts as the law of the parties, including provisions that permit parties to bring claims that are in connection with the contract or that bar claims if they are not validly notified within a certain period.

The Commercial Courts Law, which came into effect on 16 June 2020, provides, amongst other provisions, the introduction of a five-year time limit on the ability of parties in commercial proceedings to bring their claims to court. It is unlikely that parties will be permitted to contract out of this statute of limitations. In the event, as this law is relatively recent, it remains unclear how it might apply to construction contracts (if at all). Further, the Commercial Courts Law may not apply to government contracts.

16. What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?

Saudi Arabia

Construction contracts will generally address the issue of employer and contractor rights and remedies in the event of breach of contract (including non-performance). Such provisions will generally be enforceable, subject to being compliant with Sharia principles. 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 the law (including the Procurement Law) or the principles of Sharia law.

17. May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

Saudi Arabia

Yes, an employer may rely on express provisions of a contract to unilaterally terminate a contract for convenience or to omit work so as to give the works to another contractor or to perform the works itself. Such termination is likely to entitle the contractor to its actual costs only, given the general limitations on the recovery of damages under Saudi law. Contracts that are subject to the Procurement Law can be terminated by the government entity for the public interest.  

However, termination rights may not be exercised in a manner that is contrary to Sharia principles, including the implied covenant of good faith.

18. What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

Saudi Arabia

Termination of construction contracts can be exercised for cause, for convenience or when performance becomes impossible (without exposing the terminating party to an award of damages).

The conditions relative to termination for cause are generally set out in the construction contracts. The terminating party may be entitled to recover damages resulting from breaches of contract.

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

• the contractor was awarded a contract through bribery, fraud, deceit, forgery or manipulation while executing the contract;
• the contractor entered into bankruptcy, insolvency, dissolution, liquidation, or was placed under receivership; and
• the contractor assigned a contract without the written approval of the government agency and did not cancel the assignment within 15 days of receiving written notice.

Articles 76.2 and 77 of the Procurement Law set out grounds on which a government agency may terminate a contract. This includes breach of any contract term, which the contractor fails to rectify within 15 days of receiving written notice. Termination can also be effected if it is in the public interest. It is further specifically provided that a contract may be terminated if the contractor delays commencement of works or subcontracts a portion of the works without written approval of the government agency concerned.

19. If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

Saudi Arabia

Parties may terminate for reasons that are not set out in the contract if the court or tribunal considers the termination to be on lawful grounds, including, for example, in case of fraud, deceit or forgery.  

If, however, the court or tribunal determines that a contract was wrongfully terminated, then the terminated party will be entitled to recover its direct losses.

20. What limits apply to exercising termination rights?

Saudi Arabia

The primary limitation to termination rights is the Sharia. Whilst the Saudi courts will abide by the wording of the contract, judges will examine the factual circumstances of any termination to determine whether it was compliant with Sharia principles.

21. Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

Saudi Arabia

Taking beneficial possession of the works does not necessarily imply that the works are deemed completed (even in part).

22. Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

Saudi Arabia

Saudi courts will abide by the express terms of a contract, which includes ones related to completion, takeover, warranties or liability periods.

However, the Saudi Building Code Application law (the SBCAL) – approved by Royal Decree on 24 January 2017 and amended on 18 September 2019 – sets out the legal principles that give rise to decennial liabilities in Saudi Arabia. Under the SBCAL:

‘The Supervising designer who supervising the implementation of the construction and the contractor shall be jointly responsible for compensating the owner for ten years - from the date of issuance of the occupancy certificate – for the total or partial demolition of the buildings they constructed or the facilities they built and for every hidden defect that threatens the durability and safety of the building.’ (Article 29(1) of the Implementing Regulations)

‘The code shall apply to all construction works in the public and private sectors, including the design, implementation, operation, maintenance and amendment of the building, and also applies to existing buildings in the event of their restoration, change in use, expansion or modification.’ (Article 2 of the SBCAL)

Parties may not contract out of the liability periods provided in the SBCAL.

23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

Saudi Arabia

Liquidated damages provisions are generally permitted but are subject to the principles of Sharia. Therefore, these will only be enforceable to the extent that the quantum of the damages claimed accurately reflects the actual damages incurred.

Saudi courts will generally uphold provisions that permit the recovery of damages beyond an agreed cap, so long as those damages are actual damages.

Delay penalties in government contracts are generally subject to a cap of 6 per cent of the contract value for supply contracts and 20 per cent of the contract value for all other contracts (article 72 of the Procurement Law). Government contracts may stipulate higher caps on delay penalties provided (i) the higher cap was communicated to tenderers before submitting their tenders, and (ii) the Minister of Finance’s prior approval was obtained (article 72 of the Procurement Law).

24. If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no "sweep up" provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

Saudi Arabia

Sharia law does not permit a party to benefit from its own wrongdoing. Therefore, it is unlikely that an employer would be entitled to liquidated damages in circumstances where it has caused the critical delay. In this scenario, Saudi courts are unlikely to uphold a ‘sweep up’ provision as it would contravene one of the fundamental principles of Sharia, which is that contracts must be free from uncertainty.

25. When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

Saudi Arabia

Saudi courts will generally uphold liquidated damages provisions in a contract. However, to be successful, a party bringing a claim for liquidated damages must show that the damages claimed are ones that is it has actually suffered. Otherwise, if the amount claimed exceeds the losses actually suffered, Saudi courts may not award liquidated damages.

26. When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

Saudi Arabia

Subject to the conditions set out in response to questions 23 and 25, Saudi courts will generally uphold the liquidated damages provisions in a contract

27. How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

Saudi Arabia

Sharia law prohibits riba (unjust enrichment) and gharar (speculation). In practical terms, therefore, contractual remedies are limited to direct and actual damages suffered. Damages cannot be claimed for indirect or consequential losses, loss of business or loss of profit. 

28. If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

Saudi Arabia

Contractors will be liable for rectification costs if those costs are reasonable. The limitation being that Sharia law does not permit terms that are manifestly unfair.

29. If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?

Saudi Arabia

Saudi courts will generally uphold the express terms of the contract, including ones relative to defects notification periods. However, such provisions will not impact the employer’s ability to claim under the SBCAL for the total or partial demolition of what the contractor has built.

30. What is the effect of a construction contract excluding liability for “indirect or consequential loss”?

Saudi Arabia

Saudi law does not generally recognise indirect or consequential losses. Contractual remedies are limited to direct and actual damages suffered.

31. Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

Saudi Arabia

While provisions in a contract that limit or exclude liability will generally be recognised in Saudi Arabia, the enforceability of such provisions remains uncertain. However, Saudi courts will not uphold an exclusion of liability in cases of fraud, wilful misconduct, recklessness or gross negligence.

Further, limitation of liability provisions will not impact the employer’s ability to claim under the mandatory provisions of the SBCAL for the total or partial demolition of what the contractor has built.

32. What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

Saudi Arabia

The laws of Saudi Arabia relating to the rights of contractors to claim a lien in respect of works that it has carried out are unclear. A contractor will typically secure payment for works performed if the relevant construction contract provides for such payment.

33. How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

Saudi Arabia

Conditional payment terms, such as ‘pay-when-paid’, are enforceable in Saudi Arabia.

34. May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

Saudi Arabia

In the absence of privity of contract between the subcontractor and the employer, a subcontractor is unlikely to be permitted to bring a claim against the employer for payments that should be made to it by the contractor. Further, regardless of the governing law of the contract, it is unusual for employers to concern themselves with supply chain issues, unless it is in their interest to do so.

35. May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

Saudi Arabia

The employer’s ability to hold the contractor to an arbitration agreement will depend on the terms of the arbitration agreement itself. For example, if the arbitration agreement provides that any dispute ‘arising out of or in connection with the contract’ will be subject to the arbitration agreement, then, depending on the circumstances, a dispute concerning a subcontractor (a pass through claim, for example) could be within the ambit of that arbitration agreement. However, in the absence of consent between the subcontractor, the employer and the contractor, the subcontractor is unlikely to be permitted to participate in an arbitration between the employer and the contractor. The position would not change if the arbitration were to have its seat outside Saudi Arabia.

36. May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

Saudi Arabia

Third parties may bring claims under a construction contract, so long as the contract specifically provides for third-party rights.

37. How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

Saudi Arabia

Under the Companies Law, those individuals who hold management positions may face liability for breaches of duties and errors of management, as well as decisions taken in bad faith. In theory, therefore, if those management decisions have led to third party claims in relation to delays, defects and payment, the relevant individuals may face liability to the company and/or its shareholders for those management decisions. 

It is less clear, however, If the contractor’s directors, managers and employees and other affiliated companies might be liable for the contractor’s breaches. This is because the Companies Law recognises the concept of separate legal identity. Thus, shareholders of a company are usually only liable for the company’s debts only to the extent of their respective interests in the capital of the company, save for certain limited exceptions. In addition, although clauses purporting to exclude or limit liability are common in Saudi contracts, their enforceability is uncertain; while limitations of liability or exclusions are likely to be enforced where they are reasonable or have commercial justification, the courts are less likely to uphold them if they offend Sharia law.

38. What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

Saudi Arabia

The Saudi courts would uphold contractual limitation periods so long as these accord with Sharia principles.

Traditionally, there have been no statutory limitation periods in Saudi law. In June 2020, however, Saudi Arabia introduced a five-year time limit on the ability of parties in commercial proceedings to bring their claims, unless the defendant acknowledges the claim or there are other good reasons for the delay. The law only relates to those proceedings within the jurisdiction of the Commercial Courts, and therefore the application to construction claims with an arbitration clause is unclear. See the comments above in relation to decennial liability.

39. What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

Saudi Arabia

The parties to a construction contract governed by the laws of Saudi Arabia cannot seek to exclude or modify the imperative principles of Sharia law or other rules in other Saudi Arabian legislations pursuant to that agreement. In addition, in contracts with government bodies, the parties cannot agree to exclude the application of the Procurement Law or other laws that the government entities are obligated to observe when contracting with private parties.    

40. What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

Saudi Arabia

The courts of Saudi Arabia will apply the imperative principles (equivalent to the concept of ‘public policy’ in other jurisdictions) of Sharia law to a construction contract performed in Saudi Arabia, irrespective of whether the agreement is governed by the laws of Saudi Arabia or otherwise. For example, charging interests (usuary) is against Sharia law and would not be enforceable in Saudi Arabia regardless of the agreed governing law of the contact. 

41. For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

Saudi Arabia

Pursuant to article 22(1) of the Arbitration Law 2012, the Saudi courts may make orders for interim measures (such as the payment of any sum awarded by a DAB) to be taken. Such orders may be made prior to the commencement of arbitral proceedings at the request of a party, or over the course of the proceedings at the request of the arbitral tribunal.

Article 23(1) of the Arbitration Law 2012 provides that, upon the request of a party, an arbitral tribunal may make orders for interim measures (such as the payment of any sum awarded by a DAB in the form of an interim award). Article 23(2) in turn provides that, if a party fails to comply with any such orders made against it, a tribunal may permit the other party to seek equivalent orders from the Saudi courts.       

42. Does your jurisdiction have courts or judges specialising in construction and arbitration?

Saudi Arabia

Saudi Arabia does not have a specific court or judges specialising in construction and arbitration. However, the judges of the Board of Grievances (the competent court for hearing disputes between government bodies and contractors) have significant experience in respect of construction contracts in Saudi Arabia as the majority of disputes in this court are related to construction disputes.  

43. What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

Saudi Arabia

Pursuant to the Commercial Courts Law 2020, a first instance construction dispute would likely be heard by the Commercial Courts of Saudi Arabia (provided that the value of the claim exceeds 1,000 Saudi riyals). Judgments and decisions of Saudi courts can generally be appealed within 30 days (for commercial disputes, this is also possible except small claims which do not exceed 50,000 riyals in value).

Pursuant to article 8 of the Arbitration Law 2012 and article 2 of the Executive Regulations, disputes relating to arbitration proceedings (including the validity of an award) will be heard by the court of Appeal.

Article 49 of the Arbitration Law 2012 provides that an award rendered in accordance with the legislation can only be appealed by filing a claim for annulment in the Saudi courts. Article 50 specifies that any such claim can only succeed in limited circumstances, including, for example, where a valid arbitration agreement does not exist, or the tribunal failed to adhere to any mandatory requirements for rendering an award that impacted on the substance of the award. Article 50(2) specifies that the Saudi courts shall annul an award of their own volition if the award does not comply with principles of Sharia law or the public policy of Saudi Arabia, is in contravention of what was agreed upon between the parties, or if any provision of the Arbitration Law 2012 provides that the subject matter of the dispute is not arbitrable.  

The doctrine of binding precedent does not exist in Saudi Arabia. Rather, judges have discretion to decide matters in accordance with the law, the circumstances of a case and their understanding of Sharia law. However, courts will generally consider higher courts’ judgments (including the Supreme Court) as guidance and to a certain extent follow the decisions of the Supreme Court.   

44. In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

Saudi Arabia

A judge or an arbitrator in Saudi Arabia is at liberty to raise any preliminary issues (whether or not put to them by the parties), provided that doing so accords with the law and the Sharia principles. Further, a judge or an arbitrator is entitled to give preliminary indications to the parties as to how they view the merits of the dispute.

45. If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

Saudi Arabia

Pursuant to article 11(1) of the Arbitration Law 2012, the Saudi courts will decline jurisdiction in respect of a claim which arises under an arbitration agreement, provided the respondent requests that the claim be referred to arbitration prior to filing a defence or counterclaim. However, an employer may bring claims for interim or conservatory measures before the courts (for example, a precautionary attachment of assets). Article 11(2) of the Arbitration Law 2012 provides that the filing of any claim in the Saudi courts despite the existence of an agreement to arbitrate cannot be relied upon to bar the commencement or continuation of arbitral proceedings.

46. If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

Saudi Arabia

There is a risk that a party may be deemed to have forgone its right to arbitrate by seeking interim relief from a foreign court. It is therefore recommended that the arbitration includes clear language to the effect that any action before a court seeking interim relief will not be construed as a waiver of a party’s right to arbitrate.

47. In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party-appointed experts owe their duties?

Saudi Arabia

Yes, experts are often relied upon in construction dispute, whether appointed by the tribunal or by the parties. The Arbitration Law 2012 does not, however, specify to whom such experts owe their duties.

48. Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).

Saudi Arabia

See questions 6, 9, 10, 16, 18, 23 and 29 discussing specific provisions of the Procurement Law.

The Procurement Law applies to all construction contracts with Saudi public authorities. Works and procurements executed outside of Saudi Arabia are also included within the scope of the Procurement Law. A few important points arising from the Procurement Law are summarised below:

• A two-stage tender procedure, which provides some flexibility for complex matters where it is not possible to determine technical specifications or final contractual terms early on.
• An electronic reverse tender, which allows bidders to submit successively lower bids during a specified bid period.
• Tenderers are required to submit a bid bond of between 1 and 2 per cent of the value of the bid. Bids submitted without a bid bond shall be rejected.
• A standstill period of between five and 10 days following a tender decision to allow unsuccessful bidders to raise an objection. During this period the government entity is prohibited from entering a contract with the successful bidder.
• All contract documents are required to be in Arabic. Where an additional language is used, the Arabic original shall prevail.
• Government entities shall use the types of contracts set out in the regulations.
• Government entities awarding a contract relating to an allocation under the General Budget must submit the contract to the Ministry of Finance for approval prior to conclusion.
• A contractor may not assign a contract or enter a subcontract without the prior written consent of the government entity.
• A government entity may issue a change order increasing the contract value by up to 10 per cent or decreasing it by up to 20 per cent.
• The Procurement Law provides for three forms of dispute resolution:
  • Specialist Committee and Administrative court: A specialist committee, comprising of at least five members and formed by the Minister of Finance, will hear and pass decisions on claims, violations and grievances in relation to tender awards, performance evaluations of contractors and changes in contract prices.
  • Dispute Settlement Board: comprising representatives of both government entities and contractors, with a chairperson appointed by the Ministry of Finance for resolution of technical disputes.
  • Arbitration: parties to agree on arbitration as the preferred method of dispute resolution, albeit only with the prior approval of the Minister of Finance. Otherwise, the disputes will be referred to the Board of Grievances.

49. If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

Saudi Arabia

In Saudi Arabia, the concept of ‘without prejudice’ privilege does not exist. On this basis, admissions made in settlement offers or discussions can potentially be brought into evidence in the course of proceedings and used against a party. However, non-disclosure agreements can be entered into to facilitate frank dialogue and open discussion with the objective of settling disputes and mitigating against the risk of disclosures being used against a party.

50. Does the law of your jurisdiction recognise "without prejudice" privilege (such that "without privilege" communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

Saudi Arabia

In Saudi Arabia, the concept of ‘without prejudice’ privilege does not exist. As such, any communications which may be withheld from disclosure in other jurisdictions on the basis of ‘without prejudice’ privilege can be disclosed in Saudi Arabia.

On this basis, it may be agreed (in a non-disclosure agreement) that a sum may be payable by a disclosing party to the other party if settlement communications are disclosed to a court or arbitral tribunal.   

51. Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?

Saudi Arabia

The concept of ‘legal professional’ privilege is recognised in Saudi Arabia under the Professional Code of Conduct for Legal Professionals in Saudi Arabia (announced on 4 September 2021). The Code of Conduct provides for the protection of communications between lawyers and their clients. However, it is unclear whether these protections will extend to the advice of in-house counsel.

52. What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

Saudi Arabia

Guarantees are generally recognised by KSA law and the Sharia principles. Guarantees must be writing and have specific reference to the amount guaranteed. Oral guarantees are not effective.

53. Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?

Saudi Arabia

Yes, the obligations of a guarantor under a guarantee are secondary to those of the primary obligor who is party to the construction contract. As such, the liability of the guarantor will be limited to that of the party to the construction contract. The wording of the guarantee will need to be specific and clear about the obligations that it is guaranteeing.

54. Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?

Saudi Arabia

The guarantor will remain bound by the guarantee until released from liability by the beneficiary in writing unless agreed otherwise. In addition, if the beneficiary releases the principal obligor from any guaranteed obligation, the guarantor will also be released from such obligation. However, if the primary obligations are found to be void, the guarantee will also be void as a result.

55. If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

Saudi Arabia

Unconditional on-demand bonds are a common feature of construction contracts in Saudi Arabia. If an on-demand bond is governed by the laws of Saudi Arabia, once the bond is called, a challenge is unlikely to succeed in the Saudi courts without valid reason (such as fraud) and the issuing bank will be obliged to act upon the call of the bond.

56. If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

Saudi Arabia

An on-demand bond governed by the laws of Saudi Arabia will be enforceable in accordance with the terms of the underlying construction contract. A Saudi court or arbitral tribunal would only restrain a call on any such bond in accordance with those terms if doing so would constitute a violation of the principles of Sharia law.

In practice, conditional bonds are not popular among employers in Saudi Arabia.

57. Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

Saudi Arabia

We are unaware of any other material aspects of the law that has not been covered above.