Overview of Construction Disputes in the Kingdom of Saudi Arabia
The Kingdom of Saudi Arabia (“Kingdom” or “Saudi Arabia”) has initiated an extraordinary national infrastructure and development program as part of the Vision 2030 initiative. The main goal of the program is to diversify the Kingdom’s economy away from oil by utilizing structural changes, liberalization, and foreign investment. The Kingdom is putting into effect a number of new laws that deal with difficulties which are anticipated to arise when the program is put into action, to enable the ambitious goals of the development program.
The Kingdom’s audacious ambition, especially the intricate “giga” projects upon which the Vision 2030 development program is predicated, depends critically on these legislative modifications.
Contractors, consultants, and investors involved in, or looking to get involved in, construction projects in the Kingdom should be aware of the several legal changes that do not appear to have drawn much attention despite the likely significant impact on construction projects. The changes are wide-ranging. With respect to construction, the most fundamental change is perhaps the introduction of laws and regulations creating a “no-fault” liability regime for construction projects, which transfers certain construction risks to a new mandatory insurance scheme.
This update introduces laws and regulations that put in place both a decennial no-fault liability regime and a mandatory inherent defects insurance scheme. These changes are likely to have a significant positive impact on project owners. For example, the insurance scheme will ensure that it will no longer be necessary to pursue litigation that may last many years before project owners are able to finance remedial works. For contractors, designers, and supervision consultants, the changes will clarify the circumstances in which they may be held liable as a matter of law and will, with certain qualifying projects, require the involvement of a new party (an inspection service) during the construction phase. This will no doubt have an impact on project administration.
For 10 years after construction is complete, contractors, designers, and supervising consultants are held jointly liable in the event a building collapses completely or partially, or if there is a flaw in the structure that jeopardizes its stability and safety. It’s commonly known as “decennial liability.”
Previously, Saudi Arabia did not impose decennial liability. As a result, consultants and contractors worked in the Kingdom without worrying about no-fault liability (besides for government projects). Hence, the parties’ contract served as the only basis for resolving construction and design issues that arose from the discovery of flaws after completion. This is no longer the situation. Article 29 (1) of the Saudi Building Code Application Law and its implementing regulation (“SBCAL”), calls for decennial 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.
In the case of design-only consultants, Article 29 (3) specifies:
An accredited designer shall be responsible for design defects if its work is limited to drawing up the design only, without supervising the implementation.
Therefore, the decennial liability scheme applies, and when the liability is triggered, Article 29 would apply to:
- supervising designers (consultants);
- designers in respect of defects in their design (if their work was limited to design); and
It should be further noted that Article 2 of SBCAL designates the scope of the law and states that:
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.
The foundation of the legal system in the Kingdom is shariah law. Shariah is a collection of principles derived from different Islamic sources but principally the Quran and the Sunnah (the witnessed sayings and actions of the Prophet Muhammad PBUH).
Shariah principles are often expressed in general terms, providing Saudi Arabia courts with considerable discretion as to their application. According to the Kingdom’s Basic System several statutory laws in the domains of criminal, administrative, and commercial law have been passed that are in line with the growth of the Kingdom in addition to the shariah. To support shariah law, the Monarch plays an important legislative role. The King of Saudi Arabia, who upholds divine law, is given extensive latitude in topics of public concern, which is known as the area of Islamic public policy (al-Siyasah al-Shar’iyyah). One of the key legal areas in Saudi Arabia deals with the overall development is with the public interest. There is no doubt that the public interest serves as the foundation for rules in the Saudi Basic System. Only when there is a lack of a clear provision in Islamic law that could govern a particular matter is this power exercised. According to the Basic System, the regulatory authority lays down regulations and motions to suit the interests of the state or eradicate what is harmful in its affairs, in line with the Islamic shariah. Consequently, this authority performs its duties with an aim to achieve this goal.
Courts and procedure
There are three tiers of court in Saudi Arabia: first degree courts, appellate courts and the Supreme Court. The courts are general subject matter courts with no dedicated construction court.
When undertaking a construction project for a government entity, the first dispute forum will be a committee of at least five specialists, as provided in Articles 86 to 88 of the Government Tenders and Procurement Law. If the decision of the committee is not in the favor of the vendor, then the vendor can file a case before the specialist court within 60 days.
Alternative dispute resolution
Arbitration on Government projects – Subject to contract value over SAR 100M (USD 26M) – Minister approval is required prior to signing the relevant contract – the trial should be before the Saudi Centre for Commercial Arbitration.
The most commonly used forms of alternative dispute resolution in Saudi Arabia consist of negotiation and arbitration. Mediation and conciliation are usually only used when they are mandatory under statutory requirements. Mediation has been promoted as a means of easing the burden on the judicial system. Judges are now empowered to refer certain non-construction cases to mediation under the new procedural rules developed by the Ministry of Justice. Saudi Arabia has set an ambitious goal of successfully mediating 25 per cent of cases. The Taradhi platform has been released by the Ministry of Justice and permits remote filing for mediation whereby virtual mediation can be delivered.
Amicable negotiation between two parties to settle a dispute frequently occurs in Saudi Arabia. Arbitration involves a third party whose decision is binding on the dispute and the parties involved.
The principal causes of construction claims and disputes when executing contracts related to infrastructure are as follows:
- changes in project scope; and
- design information that is either issued late or incomplete.
These two causes result from projects being tendered and launched when designs are still immature in addition to cashflow problems due to late approvals from the relevant competent authorities.
The report of HKA’s CRUX Insight 2022 “Battling the Headwinds” (“Report”) indicates that projects in the Middle East faced high overruns in cost in comparison to other regions. Moreover, extensions of time claimed by contractors would add more than (83%) to the programme durations – compared with a global (68.6%) average.
The Report further showes that it is becoming increasingly more important to ensure that the “terms within a contract are clear” and address all the necessary points and provisions. Any areas of uncertainty, no matter how minor, could trigger a potential dispute between the parties. Poorly drafted contracts often tend to include additional bespoke clauses that may have been designed to address problems that arose on previous projects, but conflict with other provisions of a current contract. Claims and disputes over contract interpretation ensue. Foreign contractors’ reliance on translated versions of Arabic contracts is another complicating factor since the adopted translation of contracts versions in Arabic may not necessarily reflect the exact meaning rendered in English, a matter often neglected by parties when projects are launched.
Finally, the Report clarifies that risk assessment in the early stages of the project contributes to a more fair and realistic determination of the contracts’ costs, and mitigates the risk of disputes stemming from late or interrupted projects. Risk is invariably imbedded in all construction projects, with only the degree of risk varying from one project to another. However, the degree of risk exposure can be minimized by understanding how risks can be properly managed.
With the adoption of preventative measures and an effective supervision over the execution of designs at the early stages of projects, the contracting parties may avoid overruns and further distress on complex capital projects.
This article provides the reader with an overview of the construction disputes under the KSA jurisdiction. For brevity purposes, certain legislative provisions and definitions have been paraphrased. Therefore, this article does not, and is not intended to, constitute legal advice.
Author: Fawaz A. AlDubaikhi, Partner & Head of Litigation.