My Musings On Construction Law Week No:9A
Construction Law under the Islamic/Sharia Law Legal System in Saudi Arabia.
This musing is in two Parts. To continue to Part 2, click on the link below:-
Construction Law in Saudi Arabia | Medium
Without further ado, let us go to Part 1.
HOW MANY OF YOU KNOW OR ARE AWARE OF THIS ?
Kindly explain what Non-Lawyer Claims Professionals should know about Construction Law under the Islamic/Sharia Law Legal System in Saudi Arabia.
As the Construction Industry winds down in UAE and pick up in Saudi Arabia, quite a number of Claims Professionals will be uprooting themselves from UAE to work in KSA. So the question to be asked is “Are the people ready to continue their services there as they did in UAE”. ? First and foremost although both countries practises the Islamic/Sharia Law ecosystem, they are not the same and there are marked differences between the two. The differences is UAE have codified certain aspects of the Construction Law for use whereas this is not done in KSA for private sector contracts. KSA have codified only the construction law for use in Government contracts.
The other salient point between the two is for UAE, Sharia Law is supreme but this is not so in KSA where the codified law for government contract reign supreme in the event of conflict/s.
In a nutshell, the Saudi Arabia’s legal ecosystem is based on the principles of Sharia Law in particular the Hanbali school of Islamic interpretation and thoughts adopting a fundamentalist and literal interpretation of the Qur’an. Currently there are 4 schools of interpretation and thoughts in the Islamic Law ecosystem. Saudi Arabia practices the Hanbali school.
The Islamic/Sharia Law ecosystem as practised in Saudi Arabia is also strikingly different from the common and civil law ecosystems. Parties are of course free to contract with each other; however, the degree of freedom with which they can do so is governed by certain prohibitions in the Qur’an. A general rule is when contractual provisions violate the fundamental principles of Sharia law, that provision will not be enforced by the Saudi courts (the legal basis of which has been explained under “My Musings on Construction law Week No: 1A”, exception being for government contracts, the codified law is supreme.
Accordingly, Construction Contracts in Saudi Arabia are categorised into two areas and they are :
(i) Government Contracts. There are specific rules that apply to public sector contracts and they are governed by law pursuant to the Government Tenders and Procurement Law 2006 (“the Procurement Law”) issued by Saudi Arabia Royal Decree No. M58/1427, which was introduced to promote transparency, honesty, economic efficiency and competition in the Kingdom.
The hierarchy and Sources of Law for Government Contracts in KSA :-
The Procurement Law
Sharia Law
(ii) Private Sector Contracts . All construction agreements in the private sector are subject strictly to the Private Law as contained in the agreement entered into by the Parties, to the parties’ consent, provided that the agreement does not contradict Sharia Law.
The hierarchy and Sources of Law for Private Sector Contracts in KSA :-
Sharia Law
Private Law (The Terms and Conditions of Contract )
*P/s : To have a better understanding of the Hierarchy and Sources of Law. please refer to my previous posting “My Musings on Construction Law Week No:6A on Medium.com
Government Contracts
Salient Points of the Government Tenders and Procurement Law 2006 (hereinafter referred to as “Procurement Law”)
For organizations servicing contracts for the Saudi Arabia government, the Government Tenders and Procurement Law is supreme and will override Sharia Law in the event of conflict unlike UAE. In particular, the rules of liquidated damages will be applied as per the contract and the law. Readers are advised to take note if the salient points outlined below :
Article 36 — In relation to public works contracts, variations are permitted under an increase in the scope of work is permitted up to 10% of the contract value whereas omissions are capped at 20%.
Article 40 — Provides that the last payment (not less than 10% for public sector contracts and 5% for private sector contracts) should be paid after the initial handover of the works.
Articles 48 and 49 — Stipulate that delay penalties should be subject to 10% liability cap for all tenders and procurements undertaken by government entities and a 6% cap for supply contracts.
· Kindly take note that in KSA, penalties are allowed under the Procurement Law and this is a marked difference from the Common Law and Civil law ecosystem where penalties are considered unenforceable.
Article 51 — Provides that a contract will be extended (and the penalty waived) if the delay is due to unforeseen circumstances or reasons beyond the contractor’s control.
Article 52 — Permits extensions of time if the contract is extended because:
· the employer requests additional works;
· the annual budget allocated to the works is insufficient for completion by the original completion date, and
· the relevant public authority suspends the works through no fault of the contractor.
Article 53 — The government has the right to terminate the contract in certain circumstances, as set out in. The circumstances include :
· bankruptcy of the contractor;
· assignment or subcontracting the contract without permission of the government;
· the contractor’s failure to rectify delay or breach of contract within 15 days of the government’s notice to do so, and
· if the contractor commits bribery.
Article 54 — Entitles a contractor to damages if the government authority terminates the contract with no valid grounds.
Article 84 is somewhat a buildup of article 48. And states where services that are not completed on time will be subjected to a penalty, which will be based on the average daily cost of the project. However, in line with article 48, the maximum penalty is set at 10% of the contract value.
Private Sector Contracts
Unlike those for government contracts, there are no codified laws to govern the construction contracts in the private sector. The rules for private sector contracts will depend solely on the terms and conditions as agreed by the parties and will be enforced based on the written contractual obligations as agreed, the only exception is only when such obligations does not comply with or in conflict with Sharia Law.
The legal basis for the above pertains to the cornerstone of Sharia Law whereby the rule of law requires that each party should honour their contract obligations as laid out under the the Qu’ran at
Surrat Al Maida , verse number 1 — ( O ye who believe fulfil your contracts “ obligations”)
For Government Contracts which are under the Procurement Law, an ad hoc committee will be formed to hear disputes concerning
(i) an alleged breach of contract by the government body;
(ii) an alleged breach of contract by the contractor;
(iii) defective performance by the contractor, and
(iv) fraud, deceit or manipulation, but only on the part of the contractor.
Either party can appeal the committee’s ruling to the Board of Grievances within 60 days of the decision.
Private Sector Contracts
As pointed out earlier, All government contracts are governed by the Procurement Law while for private sector projects, there are no codified construction law perse and as such dependent entirely on the terms and conditions of the contract. There is no protection even if the said clause is onerous and the only exception is when the said clauses is in conflict with Sharia rules.
Salient points of such exceptions are as follows:
1. The normal instruments of law that are commonly used under the common law and civil law ecosystem such as :-
(i) specific performance
(ii) injunctive relief
are generally unavailable for use in KSA and
(iii) Mediation is typically only used where it is made mandatory under statutory requirements.
(iv) Allegations of fraud and bad faith are ageless and not subject to any limitation periods.
2. Good Faith
· One of the 5 cornerstone of Sharia Law is duty of good faith. Whether a party has acted in good or bad faith will depend on the particular facts and circumstances of each case.
· One such example is a breach of the duty to warn. If the contractor was aware of an error or defect but continued work without informing the employer or the engineer they are likely to have acted contrary to the duty of good faith.
3. Remedies for breach of contract
Sharia law prohibits
(i) riba (unjust enrichment) and
(ii) gharar (speculation).
As set out above, Sharia Law prohibits unjust enrichment and speculation, therefore a contractor may only recover damages for the amount of loss actually incurred.
Therefore contractual remedies are limited to direct and actual damages suffered and damages cannot be claimed for:
a. indirect or consequential losses,
b. loss of business,
c. loss of profit,
d. economic loss of a chance or
e. any other type of speculative or uncertain losses.
3, The Issue of “Riba”and “Gharar” and Contractual Certainty
· Under Sharia rules, penalties are enforceable as it is stated as an agreed contractual obligations that must be honoured in the event of default. The only exception is when based on the facts and circumstances it falls into the category of exorbitant compensation, which incidentally would fall under the Sharia “riba” rules of unjust enrichment.
· As per Sharia rules each party in a contract must have perfect knowledge of the terms indicated therein regarding the transaction and obligations for the same. The terms should be clearly stipulated within the contract. Therefore, for a contract to be enforceable, it must have clear agreements and clauses that do not leave anything to doubt. Anything that leaves room for speculation under Sharia (gharar) brings contradiction, or uncertainty will make the contract unenforceable in a Saudi Arabian court.
· When drafting such clause, one must pay attention to a major rule under Sharia, which is “riba”, and translates to interest because it is highly condemned. So, Saudi courts will not enforce any liquidated damages clause that contains any indications of payments or receipt of interest such as late payment commission or service charge.
· included in the contract, provided such clause is fair and for direct and actual damages.
5. Disruption and LAD
· A disruption claim will only be successful if the loss suffered was direct, fair and proportionate, and that the contractor took reasonable steps to mitigate the losses.
· Liquidated damages clauses are generally permitted but are subject to the principles of Sharia Law set out above. Therefore they will only be enforceable to the extent that the amount of delay damages are not overtly or exorbitant.
6. Force majeure
Force majeure provisions are recognised in Saudi law; however, the courts will only recognise exceptional events beyond a party’s control that make performance absolutely impossible rather than overly burdensome.
7. Variations
In relation to private contracts, the courts will generally uphold the provisions of the contract provided that they do not violate the principles of Sharia Law.
8. Contract Completion
There are no specific rules governing completion of the works.
9. Resolution of Disputes
· Construction disputes can be heard by the Sharia Court, the Board for the Settlement of Commercial Disputes, the Board of Grievances and the Labour Courts.
· In the private sector, parties are free to litigate or arbitrate (pursuant to an arbitration agreement) in accordance with the terms of the contract.
Article 11 of the New Arbitration Law 2012, parties are bound by their agreement to arbitrate but can also bring parallel proceedings in the Saudi courts if there are issues of Sharia Law that must be resolved.
It is worth noting that domestic arbitration is governed by the Board of Grievances and can therefore be just as costly and time consuming as litigation.
10. Limitation/time bars
· In common and civil law jurisdictions, if a claim is time-barred this will provide the defendant with a very strong defence. However, there is no statutory limitation period in Saudi Arabia. Saudi courts will uphold contractual limitation periods if they accord with Sharia Law principles.
· For example, Saudi courts may refuse to dismiss a claim on the basis of a limitation argument in circumstances where
(i) it would be unfair to the claimant, and
(ii) rights should not be lost with the passage of time, both of which would contravene the principles of Sharia Law.
11. Bankruptcy/insolvency
In relation to the private sector, the parties are free to include termination provisions in the contract in the event of bankruptcy or insolvency. There is no provision in Saudi law that automatically treats a contract as void or voidable in those circumstances.
12. Liquidated Damages in Saudi Arabia
With exception to government contracts which are under the Government Tenders and Procurement Law, contract disputes are resolved using Sharia Law as Saudi Arabia does not have any other form of contract law. Nonetheless, Saudi courts recognize the right for compensation and delay penalty clauses concerning liquidation damages as per Sharia Law.
However, Saudi courts when reviewing the compensation claim, will apply the tripartite theory, of the :-
(i) fault,
(ii) harm, and
(iii) casual relation
when determining such matters. If the claimant could not prove the fault or wrong from the respondent or the actual harm, then the court will not automatically grant him the compensation under the liquidated damages clause.
A WORD OF CAUTION
For those who are involved in drafting the contract terms under FIDIC, it is important to be very mindful of the above pointers as any minor infringement of Sharia contract rules or lack of clarity of terms can render a clause unenforceable in Saudi Arabian courts.
In order to avoid such risks, it is crucial to work with a lawyer well versed in the Sharia to ensure that contract terms are in line with Sharia guidelines. A case in point would be ensuring the Liquidation Damages clause is enforceable
For those of you who found my weekly musings informative and helpful, I have posted 45+ posts at www.medium.com. You can access them there. You can use this link to find me at :-
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