Construction Law Practice Guide – Saudi Arabia
The construction industry in the Kingdom of Saudi Arabia is a major and thriving industry in the GCC valued at USD 133 billion in 2022, and is projected to grow quite substantially over the next decade given the major projects and plans for development in the Kingdom, in line with the Kingdom’s Vision 2030 to diversify its economy. The developments of the Kingdom also include key changes in its legal system, including enactment of the New Civil Transactions Law (“NCTL”), with direct impact on the construction industry. This article serves as a practice guide to construction law in Saudi Arabia and provides the latest legal information impacting the construction industry in the Kingdom.
The two major legislations that govern the construction law industry are the NCTL and the Saudi Building Code (“SBC”). The NCTL, enacted by Royal Decree No M/191 of 2023, will come into force on 16 December 2023 and brings significant changes to the legal framework for construction projects in Saudi Arabia. An overview of the NCTL can be found here.
The SBC, enacted by Royal Decree No. M/43 of 2017 and amended by Royal Decree M/15 of 2019, and its implementing regulations, play a crucial role in regulating the construction industry and aim to streamline the execution of construction projects in Saudi Arabia. The SBC helps regulate the safety, efficiency, and sustainability of buildings in the Kingdom. The following are the main issues addressed by the SBC:
- Structural Design: The code provides guidelines and requirements for the design and construction of buildings’ structural systems, including load calculations, material specifications, and structural stability, (articles 2 to 5 of the IR of SBC n00004)
- Fire Safety: The code incorporates regulations for fire prevention, protection, and safety measures in buildings. It covers aspects such as fire-resistant construction materials, fire alarm systems, fire exits, emergency lighting, and firefighting equipment.
- Mechanical, Electrical, and Plumbing (MEP) Systems: The code includes provisions for the design, installation, and maintenance of mechanical, electrical, and plumbing systems in buildings. It covers aspects such as electrical wiring, lighting, heating, ventilation, air conditioning, plumbing fixtures, and drainage systems.
- Accessibility: The code addresses accessibility requirements to ensure that buildings are designed and constructed to be accessible and usable by people with disabilities. It covers aspects such as accessible entrances, ramps, doorways, elevators, and parking facilities.
- Energy Efficiency: The code includes provisions to promote energy-efficient building design and construction. It covers aspects such as building insulation, HVAC system efficiency, lighting efficiency, and renewable energy utilization.
- Construction Materials and Methods: The code provides guidelines for selecting, using, and applying construction materials and methods. It includes specifications for concrete, masonry, steel, wood, and other building materials and guidelines for construction techniques and quality control.
- Occupant Safety: The code addresses occupant safety considerations, such as building layout and design to ensure safe circulation, emergency evacuation plans, and safety measures for hazardous areas or activities.
- Environmental Sustainability: The code may also incorporate provisions related to environmental sustainability, such as water conservation, waste management, and green building practices.
In practice, the most common construction contracts used in Saudi Arabia stem from the International Federation of Consulting Engineers (“FIDIC”). The predominant forms are the first editions (published in 1999) of the:
- Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (also known as the Construction Contract or the “Red Book”);
- Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor (also known as the Plant and Design-Build Contract or the “Yellow Book”); and
- Conditions of Contract for EPC/Turnkey Projects (also known as the EPC/Turnkey Contract or the “Silver Book”).
It is common for FIDIC contracts to be modified, often in favor of the employer. Such redistribution of risk can be extensive. The engineer’s role in the FIDIC Red Book form is often limited; so, the employer’s approval for many of the important decisions.
While standard contracts are used, like with any standard form, governing rules are critical in properly negotiating, analyzing and applying contractual rights and obligations. Thus, it is always advised to seek counsel in the jurisdiction of governance, in addition to counsel in the jurisdiction where the parties are domiciled and where the project will be executed.
The employer’s obligations encompass a range of responsibilities and duties that employers must fulfill to ensure compliance with legal requirements and promote a safe and productive work environment. Employers also have obligations related to the administration of contracts and the proper understanding and compliance with contractual obligations. Failure to administer the contract correctly, poorly drafted or incomplete claims, errors or omissions in contract documents, and incomplete design information or employer requirements can, and often do, lead to disputes. Employers must do their best to understand and fulfill their contractual obligations to mitigate or avoid potential legal issues.
In addition to obligations stipulated in the contract, the employer has statutory rights and obligations, such as obligations to issue acceptance certificates, fulfill payment obligations, agree to additional work and changes, and remunerate the contractor reasonably, as well as the right to cancel the construction contract.
The contractor’s basic obligations include the obligation to perform the work in accordance with its agreement with the employer, including doing so within the agreed timeframe and in a manner consistent with the contract specifications.
Like with the employer, the contractor is subject to statutory rights and obligations that may not be covered in the contract. For example, the contractor has a duty of care to perform the work agreed and to warrant the work completed by him. The NCTL stipules that, during the progress of the work, if it appears that the contractor is performing the work in a defective manner or in breach of the contract, the employer may notify the contractor to correct the method of performance within such reasonable time as determined by the employer. Where such period expires without remedy of such breach, the employer may demand termination of the contract or ask another contractor to perform the work at the cost of the first contractor by the provisions of Article 167 of the NCTL. If the contractor delays in commencing or accomplishing the work to such an extent that he cannot possibly deliver the work within the agreed period, or if his actions indicate his intention not to perform his obligation or make the performance of his obligation impossible, the employer may demand the immediate termination of the contract.
Subcontracting is allowed if mentioned in the main contract. Given the size of the projects and the specialized work required, outsourcing is very common, especially in specialized areas such as design/engineering, enabling and foundation work, mechanical, electrical, and plumbing, facade work, and any special systems required project.
The contractor may assign the implementation of all or part of the work to a subcontractor; unless the legal texts, the agreement, or the nature of the work require otherwise. The responsibility of the contractor remains against the employer. In this case, the subcontractor may not claim for himself any rights or obligations entitled to the main contractor. (Articles 473 – 474 of the NCTL).
Historically, Saudi Arabia’s government projects have been self-funded, and recent budget announcements confirm continued investment in infrastructure and construction projects. The Public Investment Fund (PIF) has a world-class investment portfolio that focuses on sustainable investments both domestically and internationally. With effective and long-term investments, PIF wants to be a leading investor and have an impact beyond the borders of KSA. This investment strategy is consistent with Vision 2030 which will lead the transformation of KSA’s economy through active long-term investments and high standards of governance and transparency.
The Construction Industry in Saudi Arabia
The construction industry in Saudi Arabia has been a significant driver of economic growth and development in the country. Saudi Arabia has invested heavily in infrastructure projects, residential and commercial buildings, and industrial facilities to support its economic diversification and urbanization efforts.
Here are some key points about the construction industry in Saudi Arabia:
- Vision 2030: The construction sector plays a crucial role in achieving the goals outlined in Saudi Arabia’s Vision 2030, a comprehensive plan to reduce the country’s dependence on oil, diversify the economy, and promote social development. The plan includes the development of new cities, tourism projects, and infrastructure improvements.
- Mega-Projects: Saudi Arabia has initiated several mega-projects that have attracted global attention and investment. One of the most significant is the NEOM project, a futuristic city being built from scratch in the northwest of the country. Other notable projects include the Red Sea Development, Qiddiya Entertainment City, and Amaala, all aimed at enhancing tourism and leisure offerings.
- Infrastructure Development: The government has invested heavily in infrastructure development, including transportation, energy, and water projects. This includes the expansion of airports, the construction of new seaports, the development of the Riyadh Metro, and the building of new highways and railways.
- Housing Sector: The Saudi government has prioritized the provision of affordable housing for its citizens. It has launched various initiatives, such as the Sakani program, to facilitate home ownership and increase the availability of housing units. This has led to a surge in residential construction projects across the country.
- Public-Private Partnerships (PPPs): To attract private investment and expertise, Saudi Arabia has actively promoted public-private partnerships in the construction sector. These partnerships have been encouraged through various mechanisms, such as the establishment of the National Center for Privatization and Public-Private Partnership.
- Local Content and Job Creation: The government has placed a strong emphasis on increasing local content and creating job opportunities for Saudi nationals. The construction industry has been a major contributor in this regard, with efforts to enhance local skills and promote the employment of Saudi citizens.
- Sustainability and Green Building: There is a growing focus on sustainability and green building practices in Saudi Arabia’s construction industry. The government has set targets for energy efficiency and environmental sustainability, leading to the adoption of green building standards and the incorporation of renewable energy technologies in construction projects.
Despite the COVID-19 pandemic’s impact on the global economy, Saudi Arabia has continued its commitment to infrastructure development and construction projects. The construction industry remains a key sector for economic growth, job creation, and achieving the country’s long-term development goals.
Projects are growing in number, complexity, and speed. Like with any dispute, construction disputes in Saudi Arabia are a significant issue that often lead to delays to completion, interruption in workflows, cost overruns, and conflicts among project stakeholders. Construction disputes are influenced by various factors, including delays in progress payments, unrealistic project durations, change orders, poor quality of work, and labor inefficiencies. Effective communication, proper project planning, and risk management are crucial in mitigating and resolving construction disputes. Understanding the causes and effects of construction disputes can help stakeholders in the construction industry in Saudi Arabia develop strategies to minimize disputes and improve project outcomes.
Construction disputes in Saudi law are governed by a combination of statutory provisions and Islamic principles. The relevant laws and regulations, especially when the contract is governed by the laws of, or is executed in, Saudi Arabia, include the Saudi Arabian Arbitration Law and the New Civil Transactions Law.
Jurisdiction: Construction disputes in Saudi Arabia are typically resolved through local courts or arbitration. The jurisdiction depends on the parties’ agreement or the provisions of the contract.
Mediation and Arbitration: Mediation and arbitration are commonly used methods for resolving construction disputes in Saudi Arabia. Parties often include arbitration clauses in their contracts, specifying the arbitration rules and procedures to be followed.
Saudi Arabian Arbitration Law: The Saudi Arabian Arbitration Law, enacted in 2012, provides a comprehensive legal framework for arbitration proceedings in the country. It incorporates internationally recognized principles of arbitration, such as the recognition and enforcement of arbitral awards.
Islamic Principles: Islamic law emphasizes fairness, equity, and the principle of “no harm” (not harming others). This principle may be considered by courts and arbitrators in reaching a decision.
Evidence Law: The parties may agree on their regulations that deviate from the law of evidence, which must be accepted by the court. For example, the parties may agree to accept the result of an expert’s report in the preparation of a legal dispute or, at the request of one party, to exclude certain documents from being produced in court to preserve confidentiality.
One of the key features of the evidence law is limiting witness testimony to dispositions below the sum of One Hundred Thousand Saudi Riyals. If the amount is unspecified, the courts shall require documentary evidence in case there is no agreement in this respect between the parties. This provision will drastically reduce the incidences of false claims and claims which do not have strong evidence.
In cases where the amount of disposition does not exceed One Hundred Thousand Saudi Riyals, witness testimony shall not be accepted if the evidence law requires the evidence to be in writing, in conflict, or exceeds what is contained in the documentary evidence thereby reducing the weightage of witness testimonies. As an exception, the evidence law allows witness testimony in cases where the plaintiff had lost the documentary evidence due to a reason not related to him or where the main ground of the claim was proven through documentary evidence.
The evidence law restricts persons having interest or benefits from the lawsuit nor parents or grandparents for children or grand-children and vice versa as well as the wife for the husband and vice versa.
New Civil Transactions Law: The NCTL contains general principles of contract law and provides a framework for resolving disputes related to contractual obligations. It may apply to construction disputes if the parties have not specifically addressed certain issues in their contract.
Local Customs and Practices: Saudi law considers local customs and practices when resolving construction disputes. This consideration ensures that the resolution aligns with the cultural and social context of Saudi Arabia.
Major Challenges and Opportunities Facing the Construction Industry in Saudi Arabia
Economic Diversification: Saudi Arabia aims to reduce its dependence on oil and diversify its economy. This transition poses challenges as the construction sector needs to adapt to new industries and sectors, such as tourism, entertainment, and renewable energy.
Financing and Cash Flow: The availability of financing and managing cash flow are significant challenges for construction projects. The sector relies heavily on government funding and private investments, which can be affected by economic fluctuations or changes in policies.
Skilled Labor Shortages: The construction industry requires a skilled workforce, and there is a shortage of qualified professionals in certain areas. While efforts are being made to enhance local skills and job opportunities for Saudi nationals, there is still a need for foreign workers with specialized expertise.
Regulatory Framework: The construction sector in Saudi Arabia operates within a complex regulatory environment. Streamlining regulations, improving transparency, and ensuring consistency in the application of rules can be challenging, particularly for international investors and contractors.
Project Delays and Cost Overruns: Construction projects are prone to delays and cost overruns due to various factors, including changes in project scope, inadequate planning, and logistical challenges. Addressing these issues and improving project management practices is crucial for the sector’s growth and efficiency.
Mega-Projects and Infrastructure Development: Saudi Arabia’s commitment to large-scale infrastructure projects presents significant opportunities for construction companies. Mega-projects such as NEOM, the Red Sea Development, and Qiddiya offer substantial contracts and partnerships for local and international firms.
Housing and Real Estate: The demand for affordable housing and real estate developments in Saudi Arabia remains high. The government’s initiatives to provide housing for its citizens through programs like Sakani create opportunities for construction companies to participate in residential and commercial projects.
Public-Private Partnerships (PPPs): The government’s focus on public-private partnerships opens doors for collaboration between the public and private sectors. This allows construction companies to participate in projects, benefit from government support, and tap into the expertise of private investors.
Sustainability and Green Building: With a growing emphasis on sustainability and environmental responsibility, there are opportunities for construction companies to specialize in green building practices, renewable energy installations, and energy-efficient infrastructure projects.
Technology and Innovation: The construction industry is evolving rapidly with advancements in technology, including Building Information Modeling (BIM), prefabrication, and automation. Embracing these technologies and innovative construction methods can improve productivity, reduce costs, and enhance project outcomes.
Export Potential: Saudi construction companies have the opportunity to expand their operations and extend their expertise to international markets. With the government’s support and the country’s experience in large-scale projects, Saudi contractors can explore opportunities beyond the domestic market.
Force majeure refers to unforeseeable circumstances or events that are beyond the control of the parties involved in a contract and prevent them from fulfilling their contractual obligations. These events are typically considered outside the parties’ reasonable control. Force majeure clauses are commonly included in contracts to allocate the risk and responsibility for such events.
The application of force majeure in construction contracts is particularly relevant due to the inherent risks and uncertainties associated with construction projects. Construction projects are susceptible to various external factors that can disrupt or delay the progress of the project, such as natural disasters, political instability, labor strikes, and material shortages. Force majeure clauses provide a mechanism for addressing these risks and allocating the associated costs and liabilities.
The concept of force majeure and its application in construction contracts may vary depending on the jurisdiction and the specific terms of the contract. In Saudi Arabia, the application of force majeure in construction contracts is influenced by both the general principles of contract law and specific provisions of Saudi Arabian law. The Saudi Arabian legal system is based on Islamic law (Sharia), and contracts are generally governed by the principles of freedom of contract and good faith.
In the case of construction public procurement contracts, Article No. 144 of the Government Tender and Procurement Law (GTPL) allows a party to a public procurement contract to seek to delay performance under the contract for some time proportional to the delay caused by force majeure. The contractor must also prove that the delay was due to “critical circumstances” or “causes beyond his control”.
To invoke force majeure in a construction contract in Saudi Arabia, the party seeking relief must demonstrate that the event in question meets the criteria specified in the force majeure clause. These criteria typically include the occurrence of an event beyond the control of the parties, the event’s impact on the party’s ability to perform its contractual obligations, and the absence of any reasonable measures that could have been taken to mitigate or avoid the event.
Damage refers to harm, loss, or injury caused to a person, property, or entity. In the context of construction law, damages can occur in various forms, including physical damage to structures, financial loss, reputational damage, and personal injury. In the event of damage in a construction project, parties may seek legal remedies to address the harm suffered. This may involve filing insurance claims, pursuing litigation or arbitration, or engaging in alternative dispute resolution methods. The specific legal framework and contractual provisions governing the construction project will determine the available options for seeking compensation or resolving disputes related to the damage. The NCTL stipulates that “the building guard shall be responsible for compensating the damage caused by the demolition of the building in whole or in part; unless it is proven that the damage was not caused by negligence in maintenance, age in construction, or a defect in it.”
Previously, Saudi Arabia did not impose a ten-year commitment. As a result, consultants and contractors worked in the kingdom without worrying about liability (except for government projects), and the parties’ agreement was the only basis for resolving construction and design issues arising from deficiencies identified after completion. This is no longer the case. The SBC requires a ten-year liability and states the following:
The Supervising designer who supervises the implementation of the construction along with 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.
Compensation for Damages
Compensation of damage refers to the legal process of providing financial or non-financial restitution to a party who has suffered harm or loss as a result of the actions or negligence of another party. In the context of the NCTL, the compensation of damage is governed by legal principles and provisions that aim to restore the injured party to the position they would have been in had the harm not occurred. The NCTL provides guidelines and principles for determining liability and awarding compensation, it also establishes the general principles of tort law, which governs civil wrongs and the resulting liability for damages.
To claim compensation for damage in Saudi Arabia, the injured party must establish the following elements:
- Fault or negligence: The injured party must demonstrate that the responsible party acted negligently or committed a wrongful act that caused the harm. This may involve proving that the responsible party breached a duty of care owed to the injured party.
- Causation: The injured party must establish a causal link between the wrongful act or negligence of the responsible party and the harm suffered. It must be shown that the harm would not have occurred but for the actions or omissions of the responsible party.
- Damage: The injured party must demonstrate that they have suffered actual harm or loss as a result of the wrongful act or negligence. This can include physical injuries, property damage, financial losses, emotional distress, or other forms of harm.
Once these elements are established, the injured party has met his burden to establish his right to recovery. The amount of compensation awarded is determined based on the evidence presented and the specific circumstances of the case. Courts in Saudi Arabia typically consider factors such as the extent of harm, the financial losses incurred, and any applicable legal principles or guidelines for calculating damages.
The Hidden Defect
The concept of a hidden defect is an important aspect of construction law and new civil transaction law. A hidden defect refers to a flaw or issue in a construction project that is not readily apparent or visible upon reasonable inspection. It is a defect that is not easily detectable and may only become apparent after the completion of the project or after a certain period. In construction contracts, there is an implied warranty that the work performed will be free from hidden defects. This means that the contractor is responsible for ensuring that the construction work is of good quality and free from defects that are not immediately visible. If a hidden defect is discovered, the contractor may be held liable for the costs associated with rectifying the defect.
The liability for hidden defects is typically governed by the construction contract terms and the applicable laws and regulations in the jurisdiction. In some cases, the contractor may be required to provide a warranty period during which they are responsible for addressing any hidden defects that arise.
When a hidden defect is discovered, the party affected by the defect, typically the project owner, may need to notify the contractor promptly. The contractor is then allowed to inspect and rectify the defect. If the contractor fails to address the hidden defect within a reasonable timeframe, the affected party may have the right to pursue legal remedies, such as filing a claim for damages or seeking specific performance to rectify the defect.
A design defect in the context of product liability refers to flaws or deficiencies in the design of a product that make it unreasonably dangerous or unfit for its intended use. When a product is defectively designed, it poses a risk of harm to users and consumers, even when used as intended. Design defects can occur in various industries, including manufacturing automotive, electronics, and construction.
In the field of construction, design defects can have serious consequences, leading to safety hazards, structural failures, and financial losses. These defects can arise from errors or omissions in the design process, inadequate consideration of relevant factors, or failure to meet industry standards and codes. Design defects in construction can affect various elements, such as structural integrity, electrical systems, plumbing, and fire safety.
The enactment of the NCTL in Saudi Arabia has ushered in significant changes and implications for the construction industry. With its comprehensive provisions addressing various aspects of construction contracts, rights, and obligations, the law aims to promote fairness, transparency, and legal certainty in construction projects. From the protection of the rights of contractors and owners to the establishment of dispute resolution mechanisms, the NCTL seeks to enhance the efficiency and effectiveness of construction operations in the Kingdom.
It is crucial for all stakeholders, including contractors, owners, and legal professionals, to familiarize themselves with the intricacies and nuances of the new law. Understanding the termination provisions, contractual requirements, and dispute resolution mechanisms will be essential to mitigate risks, avoid conflicts, and ensure compliance with the legal framework.
Ultimately, by embracing the NCTL and its construction-related provisions, Saudi Arabia aims to foster a robust and prosperous construction industry that attracts both domestic and international investments. With a focus on legal certainty, fairness, and efficient dispute resolution, the NCTL sets the stage for sustainable growth and development in the Kingdom’s construction sector.