Saudi Arabia Focus
Euan LloydPartner,Construction & Infrastructure
Muhammad El HagganSenior Associate,Dispute Resolution
“It is only by risking our persons from one hour to another that we live at all. And often enough our faith beforehand in an uncertified result is the only thing that makes the result come true.”– Willam James
In this article, we briefly consifder: (i) risk allocation, (ii) contract administration, and (iii) dispute resolution in the fast moving Saudi construction market.
Agreed risk allocation under a construction contract directly interfaces with liquidity issues (see Pt. 1 of the Saudi Construction Law Saga), particularly as the materialisation of a particular risk can have profound consequences in terms of cost (as well as time).
As in other markets, the dual principles that risk should be: (i) accepted by those who are best placed to manage the risk in question; and (ii) adequately priced, are generally accepted in theory in the KSA. However, the highly competitive tendering environment in the KSA (in respect of which price is often the decisive factor), as well as the general reluctance of employers to meaningfully negotiate can result in contractors being unable to properly price risk, thus leaving them exposed.
Although whether or not to execute a particular contract is ultimately a commercial decision, willingness to accept onerous contractual terms can constitute a de facto condition to entering the KSA construction market, while commercial requirements to fill order books can be compelling.
In terms of examples of onerous risk allocations, we are aware of situations where contractors have accepted the entire risk of ground conditions in respect of major developments even though it was not possible for the site conditions to be properly evaluated during the tender phase. In another similar example, the contractor, without any recourse, relied on inaccurate geotechnical data that was provided to it on the basis that the contractor would independently verify the accuracy of such information, although such independent verification was not possible in the circumstances.
These incidences resulted in contractors – at their own risk – having to blast rock and deal with significant ground-water issues, both of which had significant time and cost consequences.
A further risk that is often encountered (and that is underestimated) concerns the design approval process, which frequently requires direct interface and collaboration with key stakeholders.
It sometimes happens that designers (particularly from an international background) are unfamiliar with the nuances and the particular requirements of the Saudi regulatory and design approval environment.
It sometimes happens that designers (particularly from an international background) are unfamiliar with the nuances and the particular requirements of the Saudi regulatory and design approval environment.Obtaining approvals can be a time-consuming, repetitive and intricate process and its complexities can easily be underestimated and in respect of which ‘on-the-ground’ connections can be key.
Accordingly, design teams that are experienced in the KSA construction market (including engineers of record) should be engaged from the outset & both the employer and the contractor should collaborate with the intention of procuring the required approvals from the necessary stakeholders.
While onerous contracts and one-sided risk allocation can quickly result in contractual rights accruing in favour of the employer, it is often prudent for employers to carefully consider whether it is actually beneficial to the project for it to strictly enforce its contractual entitlements.
For example, a delay may have been caused on account of the occurrence of a contractor risk event. However, the deduction of delay damages may be counter-productive as this step is likely to create an adversarial relationship and also deprive the contractor of much-needed cash flow.This may further inhibit the contractor’s ability to perform the works. Indeed, any deduction of delay damages from the contractor: (i) may mean that the contractor is no longer incentivised to complete the works as expeditiously as possible (particularly if the agreed cap has been exhausted); and (ii) is likely to result in the contractor deducting delay damages from its subcontractors. As above, this may have a detrimental impact on performance (including in terms of quality) of the subcontractors/supply chain and hinder the completion of the project (thus delaying the inception of a revenue-generating asset).
Although each situation needs to be considered on its individual merits, it may be advisable for the employer to collaborate with the contractor and to potentially defer enforcing entitlements until at least the completion of the project or perhaps to waive some or all of that entitlement. Another is for employers to consider offering "positive" incentives to the contractor, including in the form of early completion bonuses. In our experience, approach is becoming more widespread as Vision 2030 takes shape.
After all, it is always important for employers to understand that unduly onerous contracts can be a recipe for disaster. If a contract is brought to a halt because of cashflow problems that were caused by a contractor burdened with risks and unable to properly price them due to fierce competition, it renders a loss to both parties. This, in turn, results in disputes that could have been mitigated had the risks been reasonably allocated or otherwise the contractors were able to properly account for those risks they accepted.
As in other jurisdictions, concerns have been expressed regarding the adequacy of the administration of some projects in the KSA.
If a FIDIC-based construction contract is being used, it is likely to be administered by the engineer appointed by the employer.
Although the engineer is required to act “fairly” when making determinations, allegations of bias towards the employer have been raised on a number of occasions. Typical examples of such alleged bias include broadly interpreting the scope to deny variation claims and ignoring "acts of prevention" by the employer that have caused or contributed to delays and/or cost overruns.
Perceptions of bias can create an adversarial contracting environment and it is therefore important that employers impress on the engineer the need for the contract to be administered fairly, if the engineer is under the incorrect impression that one-sided administration of the contract is beneficial to the employer.
If the contractor considers that an engineer has erred in making a decision, it is important that the contractor strictly follows the prescribed procedure for challenging the decisions that it disagrees with. This point is made all the more significant as construction contracts frequently state that a determination becomes binding unless it is challenged within a prescribed timeframe.
Aside from the determination of contractor claims, it is imperative that the engineer diligently and proactively supervises the contractor’s performance, particularly by measuring actual performance against the requirements set out in the programme and/or the method statement.
As in many other jurisdictions, participants in construction projects in the KSA typically want disputes to be resolved as quickly and as cost-effectively as possible.
While construction contracts contain a range of dispute resolution mechanisms, commercial settlement discussions are invariably a first step.
Although such discussions need to be conducted on a frank and candid basis in order to be meaningful, parties should be aware that the principle of "without prejudice" is not officially recognised under KSA law and, as such, appropriate protections need to be put in place (such as in the form NDAs).
Further, it has become a mandatory requirement by the Commercial Courts in Saudi Arabia that parties to a dispute must attempt to resolve disputes amicably before proceeding to Court. This could take the form of amicable settlement negotiations, mediation, conciliation or similar non-binding processes. Similarly, we have witnessed disputing parties precluded from access to arbitration upon failure to prove amicable settlement attempts, especially where the contract mandates such a requirement.
Dispute adjudication boards (DABs) remain relatively unusual in the KSA market, but there has been an increase in the use of expert determination procedures, particularly in respect of disputes of a "technical" nature.
While such mechanisms can certainly be effective in resolving disputes, care is required to carefully define the disputes that fall under the jurisdiction of the expert, as what is meant by "technical" can be highly subjective.
This could result in disputes that have a significant legal (as well as technical) component being determined by an expert who may have insufficient legal knowledge. Furthermore, this position can be exacerbated if, as is frequently the case, it is stated that the expert’s determination is "final and binding, save in respect of fraud or manifest error".
Mediation is also gaining popularity, in respect of which the Saudi Centre for Commercial Arbitration has produced comprehensive rules that will apply in default if the parties have failed to agree on any alternative mediation rules. On 5 May 2020, the KSA ratified the United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention), which provides for the reciprocal enforcement of valid settlement agreements in signatory states.
Arbitration is frequently used to finally determine disputes under construction contracts, particularly on the basis that arbitrators with expert knowledge of the construction industry can be selected and the Government Tendering Procurement Law permits disputes concerning government entities to be determined by arbitration.
Furthermore, the popularity of arbitration has increased following the enactment of the Arbitration Law (which is inspired by the UNCITRAL Model law and applies to all arbitral proceedings seated in the KSA), while the KSA is also a signatory to the New York Convention and the Saudi Centre for Commercial Operation is being increasingly prominent.
However, court litigation also remains a frequent mode of final dispute resolution in respect of which the Commercial Court is the competent court to hear disputes between private parties, while the Administrative Court has jurisdiction over disputes that involve government entities. The Riyadh Convention generally allows for the reciprocal enforcement of court judgments in various Arab nations.
For further information,please contact Euan Lloyd and Muhammad El Haggan.
Published in March 2023
