Saudi Arabia: Construction

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This country-specific Q&A provides an overview to construction law in Saudi Arabia.

It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    The Saudi Arabian legal system is based on Islamic Law. Legal procedures are more similar to those in civil law jurisdictions than in common law jurisdictions.

  2. What are the key statutory/legislative obligations relevant to construction and engineering projects?

    Government constructions contract are regulated by the Government Tenders and Procurement Regulation of 2006 and mandatory standard form contracts approved by the Ministry of Finance. Private sector contracts are governed by Islamic Law, and, by-and-large, subject to freedom of contract.

  3. Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (c) Planning; (d) Employment; and (e) Anti-corruption and bribery.

    (a) Health and safety;
    Health and safety at work is governed by the Labour Regulation of 2015 and delegated legislation issued by the Ministry of Interior and the Ministry of Labour.

    (b) Environmental;
    Environmental matters are governed by the General Environmental Regulation of 2001, which requires environmental impact assessments and environmental permits for most types of projects.

    (c) Planning;
    Planning is regulated by the concerned municipalities or administrations of industrial zones or industrial cities.

    (d) Employment;
    The main Saudi Arabian statute governing relations between employers and employees is the Labour Regulation, as amended in 2015, which is generally employee-friendly. There are strict quotas limiting the employment of non-Saudis, which depend on the size of the business and the sector in which it operates. For example, a financial institution with more than 50 employees must achieve a Saudization ratio of 65%, while a construction company of the same size need only reach 6%.

    (e) Anti-corruption and bribery.
    The Anti-Bribery Regulation of 1992 makes the payment to or receipt by public officials of money or gifts in connection with their office an offence. The Regulation defines as public officials state employees, and employees of businesses in which the government has a share, as well as employees of businesses that carries out government contracts.

  4. What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    Prior to construction of non-industrial projects, a permit must be obtained from the concerned municipality. Industrial projects may only be built in industrial zones which are administered by the Saudi Industrial Property Authority (Modon), or the Royal Commission for Jubail and Yanbu, or King Abdullah Economic City, each of which licences construction. In addition, for most projects environmental permits must be obtained from the General Authority of Meteorology or Environmental Protection.

  5. Is tort law or a law of extra contractual obligations recognised in your jurisdiction?

    Under Islamic Law, death, accidental injury, or damage to or destruction of property gives rise to non-contractual liability. In case of a male Muslim, the liability for death is capped at US$ 80,000, with damages for personal injuries pro-rated with reference to this ceiling. Damages is respect of damage to or destruction of property are limited to the property’s actual value.

  6. Who are the typical parties to a construction and engineering project?

    Many major projects in Saudi Arabia involve government contracts, with ministries or government agencies as the employer, under the supervision of the Ministry of Finance. State-owned corporations like Saudi Aramco, SABIC and Maaden, are another major source of employment in construction contracts. Contracts typically involve an EPC contractor.

  7. What are the most popular methods of procurement?

    Public tenders are mandatory for government contracts. State-owned corporations either opt for public bidding or tenders by invitation.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    Government contracts must be on standard forms approved by the Ministry of Finance, such as the standard Public Works Contract, Consultancy Engineering Services Contract (Design) and the Consultancy Engineering Services Contract (Supervision), which can only be amended to a limited extent. Saudi Aramco has its own standard form contracts, which ordinarily cannot be amended.

  9. Are there any restrictions or legislative regimes affecting procurement?

    The Government Tenders and Procurement Regulation of 2006 makes public tenders for government contracts mandatory, and state-owned corporations tend to follow this in practice.

  10. Do parties typically engage consultants? What forms are used?

    The Government Tenders and Procurement Regulation of 2006 makes appointment of a supervising engineer mandatory, and state-owned corporations tend to follow this in practice.

  11. Is subcontracting permitted?

    Subcontracting is common but in government contracts requires the express consent of the concerned government agency. Subcontracting without such consent makes the government contract voidable.

  12. How are projects typically financed?

    In the past, government projects were not financed and bid out on an EPC basis with the government paying the winning bidder. Private sector projects were financed either on a project finance basis or on the balance sheet of the owner. Recently, the Saudi government has implemented Vision 2030, which is a plan to reduce Saudi Arabia’s dependence on oil and diversify its economy. An important part of Vision 2030 is the use of Private Public Partnership programme to finance government projects on BOO, BTO, BOT and BOOT (and other variations) basis. The PPP programme has kicked off with the Sakaka IPP – the first solar independent power project which will be closely followed by the first wind IPP. Private sector projects had reduced to a minimal due to the downturn in the economy but is expected to pick up after Vision 2030 gets into full swing.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    Performance bonds, advance payment bonds, bank guarantees, and (in rare instances) parent company guarantees, are available for employers on EPC projects. These types of security are held for the construction period plus a retention period. For project finance, the lenders can take security over performance bonds, advance payment bonds, bank guarantees, equipment, receivables, banks accounts, IP rights and shares in joint stock companies. These types of security are held for the duration of the loan.

  14. Is there any specific legislation relating to payment in the industry?

    The Government Tenders and Procurement Regulation of 2006 requires government contracts with a value above US$ 1.335 million and more than one year's duration to be approved by the Ministry of Finance, whose officials monitor all payments by government agencies closely.

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    There is no prohibition of pay-when-paid clauses in private sector contracts but we cannot comment whether they are widely use.

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Government construction contracts require retention of not less than 10% of the contract value until preliminary handover and confirmation of payment of taxes.

  17. Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?

    All government contracts contain penalty clauses of up to 10% of the contract value in construction contracts, and private sector contracts tend to contain similar provisions. Penalty clauses and liquidated damages agreements in private sector contracts are upheld by the courts if they are not excessive or are disguised interest provisions.

  18. Are the parties able to exclude or limit liability?

    Exclusion of liability is treated as a condition contrary to the essence of the contract and thus not valid. Limitation of liability provisions are valid.

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    Government contracts can be terminated for convenience. If a private sector contract is terminated in breach of contract, compensation is limited to work performed up until termination, but not for lost opportunity. Force majeure is recognized as a defence under Saudi Arabian law where unforeseen the circumstances have made contractual performance considerably more onerous that could be envisaged at the time of making the contract.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    Generally, no rights are granted to third parties. As an exception, however, contractors with government contracts assign their receivables to banks/lenders in order to obtain financing. The government, represented by the Ministry of Finance, usually consents to such assignments of receivables. Another exception is found in project financings where the lenders insist on direct agreements amongst the lenders, borrower and the offtaker/client relating to the project agreements allowing the lenders to step-in in the event the borrower is in default.

  21. Do contracts typically contain strict provisions governing notices of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    Government contracts contain strict notice provisions for additional time and money which will be upheld by the courts. Such conditions are also valid in private sector contracts.

  22. What insurances are the parties required to hold? And how long for?

    Contractors all risk insurance is required in government construction contracts, and professional negligence insurance in government consulting contracts, in both instances for the duration of the contract.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    Government contract disputes must be submitted to a three-member tribunal appointed by the Minister of Finance. The tribunal’s decisions can be appealed to the Administrative Court, which is also known as the Board of Grievances. Private sector disputes can be submitted to the Commercial Court or to arbitration.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    In private sector cases, the courts must decline jurisdiction if there is an agreement to arbitrate and the defendant pleads the agreement before filing a substantive defence. If a substantive defence is filed, the defendant has agreed to the court’s jurisdiction. Enforcement of an arbitration award rendered outside Saudi Arabia can take two years.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    Saudi Arabian law does not recognize substantive time bars. Appeals to the Board of Grievances must be initiated within sixty days of the government contract claims tribunal’s decision.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Multi-party disputes are rare. Subcontractors cannot be impleaded to government contract disputes.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    The Public Investment Fund is planning the construction of US$ 500 billion Neom City on 26,500 sq km of land on the Red Sea and Gulf of Aqaba coast. Another major project is the Al-Qiddiya entertainment and sports project on 334 sq km in the Riyadh region.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    The Public Investment Fund is planning the construction of US$ 500 billion Neom City on 26,500 sq km of land on the Red Sea and Gulf of Aqaba coast. Another major project is the Al-Qiddiya entertainment and sports project on 334 sq km in the Riyadh region.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    N/A