15 June 2011 An introduction to Construction laws in the Kingdom of Saudi Arabia (KSA) Mark Blanksby Partner Projects & Construction Group Dubai, UAE Clyde

15 June 2011

An introduction to Construction laws in theKingdom of Saudi Arabia (KSA)

Mark BlanksbyPartnerProjects & Construction GroupDubai, UAEClyde & Co LLP

Today’s talkToday’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)

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Basic Principles

Basic principlesBasic 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 regulationswhen necessary to supplement 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.

Key elements of Shari’ah lawKey elements of Shari’ah law

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

IntroductionIntroduction

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

StructureStructure

Government Tenders Law

[NEW] Public Construction Contract

Special Conditions

General laws of KSAGeneral

Specific

Government Tenders LawGovernment 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 – detailGovernment 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 - detailGovernment 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.


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


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)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) - detailPublic 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)


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


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)


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))


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


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


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)!


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



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)



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


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)


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)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 CodeSaudi Building Code

Deals with:

architectural requirements,

loads and forces,

testing and inspection,

soil and foundations,

concrete structures,

masonry structures,

steel structures,

electrical requirements,

mechanical requirements,

energy conservation,

sanitary requirements, and

fire protection

Relates to both public and private sector construction projects


Dispute resolution

Dispute resolution options in KSADispute resolution options in KSA

The “Court” System

Local arbitration in KSA

Court / Arbitration outside KSA

ADR ?

1. The Court System in Saudi Arabia1. The Court System in Saudi Arabia

SHARI’AH COURTS

Supreme CourtCourt of First

InstanceCourt of Appeal

• Criminal / Family / Civil disputes

BOARD OF GRIEVANCES

Board of Grievances Appeal

2

Court of First Instance

Board of Grievances Appeal

1

• Commercial / Government disputes

QUASI JUDICIAL COMMITTEES

Board of Grievances

Court of First Instance

Committee Level 2

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

3 types of dispute resolution body

1. The Court System – detail1. 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 Arabia2. 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 features2. 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 KSA3. 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 Judgments3. 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 Awards3. 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 non-reciprocity

1983 Riyadh Convention & 1995 GCC Convention

Which forum to chose ?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 ?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 youThank you

Documents

15 June 2011 An introduction to Construction laws in the Kingdom of Saudi Arabia (KSA) Mark Blanksby Partner Projects & Construction Group Dubai, UAE Clyde