Presentation on theme: "Today’s talk Chinese contractors in KSA KSA infrastructure budget 2011"— Presentation transcript:
0 An introduction to Construction laws in the Kingdom of Saudi Arabia (KSA) 15 June 2011Mark BlanksbyPartnerProjects & Construction Group Dubai, UAEClyde & Co LLP
1 Today’s talk Chinese contractors in KSA KSA infrastructure budget 2011 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 ChinaKSA infrastructure budget 2011Population quadrupled over 25yrsSocial infrastructure spend to surpass $155 billion over next few yearsIncluding education and healthcare facilitiesAmongst the lowest public debt levels in the world(reported in Construction Week Online March 2011)
3 Basic 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 MohammedSunnah 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.
4 Key elements of 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.
5 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.
7 Introduction Private contracts – generally free to negotiate terms Government contracts – subject to more stringent requirementsKey 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 projectsPrescribes standard form contract (PWC), (which may be replaced soon by PCC)Project-specific special conditions may amend standard form
8 Structure Specific Special Conditions [NEW] Public Construction ContractGovernment Tenders LawGeneral laws of KSAGeneral
9 Government Tenders Law BackgroundAims promote honesty, transparency, economic efficiency and competitionGTL covers similar ground to “muqawala” provisions in UAE Civil CodeContracts in ArabicRequires the use of approved formsImposes a decennial liability obligationRequirements re: advance payment/ delay damages/ retentionbutLargely a starting point for discussion
10 Government Tenders Law – detail Key provisionsArticle 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 formsArticle 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.
11 Government Tenders Law - detail Key provisionsArticle 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.
12 Government Tenders Law - detail Key provisionsArticle 40:Last claim for payment shall not be less than 10% for public works and 5% for other contractsi.e. effectively retention moniesArticles 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
13 Government Tenders Law - detail Key provisionsArticle 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 onlyNo decennial liability on private projects or for Engineers / Architects but…No concept of limitation periods in KSA
14 Public Works Contract (1988) BackgroundIssued in 1988 under an older version of the Government Tenders LawBased on FIDIC 3rd edition (1977)Still the currently-approved standard form construction contract for public worksConsists of:Section 1 – Contract AgreementSection 2 – General ConditionsSpecial (particular) Conditions may also amend General ConditionsLimits of this unclear (Article 28, Government Tenders Law)Current projects suggest extensive revision possible
15 Public Works Contract (1988) - detail 1. Key features: Parties / rolesEmployerAlso referred to as “Ministry” or “administrative authority” in contractContractorEngineerSupervision role, e.g. inspection of works (Section 2, Article 30)No duty of impartiality(Section 2, Article 2)
16 Public Works Contract (1988) - detail 2. Key features: Site risksContractor 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 compensationContractor 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
17 Public Works Contract (1988) - detail 3. Key features: SubcontractingContractor responsible for the performance of all SubcontractorsContractor may not engage Subcontractors without prior written approval of EmployerApproval does not mean performance at Employer’s riskNo provision for provisional sums / nominated subcontractorsForeign Contractor must:employ Saudi contractors for not less than 30% of the works, unless exempted by MoFpurchase all equipment and tools in KSA unless second-hand, plus various services (transportation, insurance, airlines etc.)(Section 2, Articles 4 and 12)
18 Public Works Contract (1988) - detail 4. Key features: TimeContractor 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), andsupervisor’s costs and fees (Section 2, Article 40).(Section 1, Article 3(2))
19 Public Works Contract (1988) - detail 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 ThereofArticle 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, orsuspension not caused by Contractor
20 Public Works Contract (1988) - detail 5. Key features: Delay penaltiesCalculated 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 1,000Delay penalties levied by period1st period (up to 15 days or 10% of contract term): DPs are ¼ average daily cost per day2nd period (up to 30 days or 15% of contract term): DPs are ½ average daily cost per day3rd period (remainder): DPs are full average daily cost per day
21 Public Works Contract (1988) - detail Delay penalties cont…Delay penalties capped at 10% of the value of the contractNo relationship between Employer’s actual costs and delay penalties (unlike LDs)!(Section 2, Article 39)6. Key features: Supervision Costs during delayContractor obliged to bear fees of supervising Engineer for the period of the delay, calulcated on the basis of the supervising Engineer’s contract(Section 2, Article 40)
22 Public Works Contract (1988) - detail 7. Key features: VariationsEngineer must obtain prior agreement from Employer before instructing changeNo 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 EngineerInstruction may not:“change the object of the contract” (not defined)Overstep set limits, i.e.Maximum increase is 10% of contract valueMaximum decrease is 20% of contract value(cf. Article 36 of the Government Tenders Law)(Section 2, Article 43)
23 Public Works Contract (1988) - detail 8. Key features: SuspensionEmployer’s rights (Section 2, Article 32)may suspend indefinitelynot 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, ornecessary for the safety of the works.Contractor’s rightsno right to suspend
24 Public Works Contract (1988) - detail 9. Key features: TerminationEmployer’s rightsmay “withdraw the works” if slow progress, abandonment of the works, breach and no remedy within 15 days, improper gift to government or insolvencyContractor liable for extra costs(Section 2, Articles 53 and 54)Contractor’s rightsno right to terminateContractor has right to sue for breach if claim made within 30 days (Section 2, Article 59)
25 Public Works Contract (1988) - detail 10. Key features: DisputesAll disputes go to the Board of GrievancesNo multi-tiered dispute resolution process (i.e. Engineer’s decision, followed by amicable settlement etc.)No arbitration
26 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 formbut 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
27 Relates to both public and private sector construction projects Saudi Building CodeDeals 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, andfire protectionRelates to both public and private sector construction projects
29 Dispute resolution options in KSA The “Court” SystemLocal arbitration in KSACourt / Arbitration outside KSAADR ?
30 1. The Court System in Saudi Arabia SHARI’AH COURTS1. The Court System in Saudi Arabia3 types of dispute resolution bodyCriminal / Family / Civil disputesBOARD OF GRIEVANCESCommercial / Government disputesQUASI JUDICIAL COMMITTEESDisputes in specified industries (e.g. SAMA – banking disputes)
31 1. The Court System – detail JudgesMale, Muslim, Shari’ah trained but no requirement for any other legal trainingBoard of Grievances and Committees may call on expert advisersProcedure (Commercial Disputes)Commenced by filing a case at Board of GrievancesInquisitorialParties called to a series of hearings and allowed to make:submit written evidencemake oral submissions
32 2. Local Arbitration – Saudi Arabia Arbitration Act 1983Implementing Regulations to the Arbitration Act 1985Provides basic framework for conduct of arbitrationGaps in Arbitration Laws filled in by Supervising Court by reference to Shari’ah LawGovernment 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)
33 2. Local Arbitration – key features Court involvement at each stage of arbitrationMust satisfy Court that there is a valid arbitration agreementChoice of Law Clauses not recognised – must apply Saudi LawArabic 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)
34 3. Court / Arbitration outside KSA Common between parties from outside KSAOnly an issue if requiring enforcement within KSAEnforcement:Pursuant to KSA legislationPursuant to International Treaties
35 3. 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 ArabiaConditions for enforcementForeign judgment may not be contrary to Saudi Shari’ah LawThe enforcing party must show that the country in which the judgment was made would enforce judgments of the Saudi Courts
36 3. Enforcement of Foreign Arbitration Awards Enforcement pursuant to International TreatiesNew York Convention 1958Recognition and enforcement of foreign Arbitral AwardsImplemented in Saudi Arabia in 1994IF not contrary to Shari’ah / Saudi LawReciprocity reservationHistorically 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-reciprocity1983 Riyadh Convention & 1995 GCC Convention
37 Which forum to chose ?Generally not an issue between international parties.Should be a prime focus if contracting with a KSA partyLegal argument can include subjective interpretation of verses of the Qu’ran and SunnahNo binding system of precedent / no official publication of rulingsLack of procedural guidelines on timescales can lead to delays + no recovery of legal costsHistorically KSA judges have been non-specialistLanguage……. can lead to uncertainty of outcome in KSAConversely, the enforcement of an overseas judgment / Award is not without its difficulties………
38 Which forum to chose ? Therefore: Price the Risk Consider submission to the Court of GrievencesConsider arbitration in a GCC State (e.g. UAE, Bahrain)Where established set of arbitration rulesWith KSA qualified lawyer on the TribunalWith KSA law as the substantive law of the ContractEnforcement within KSA governed by local Treaties