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Article: May 2020: Construction Litigation Update

New Public Procurement Laws in Saudi Arabia

In the second half of 2019, the Kingdom of Saudi Arabia (KSA) introduced new public procurement legislation, the Government Tenders and Procurement Law (the GTPL). It applies to all projects, contracts or appointments issued or made by government authorities, ministries, departments, public institutions and public bodies with corporate personality from 29 November 2019. It operates alongside the Implementing Regulations (the Regulations). The GTPL replaces the 2006 procurement law and is part of a wider reform agenda in the KSA to promote economic development and investment. 

Arbitration

Of particular interest is that the GTPL allows government entities to agree to refer disputes to arbitration. Restrictions in the KSA, dating back to 1963, had prohibited government entities from having recourse to arbitration. In 2012, the KSA introduced the Arbitration Law 2012 (modelled on the widely-used UNICTRAL Model Laws), which permitted private entities to agree to resolve disputes by way of arbitration. However, it maintained the prohibition on government entities being parties to arbitrations. Whilst there were some exceptions, such as under the Mining Investment Law, these were rare.

Article 92(2) of the GTPL now provides that government entities may agree to arbitration, subject to approval of the Minister of Finance and in accordance with the Regulations. However, Article 154(2) of the Regulations provides that the arbitration dispute must be managed by a Saudi arbitration body, and that the parties to such an arbitration must adhere to the rules operated by such a body. Alongside Royal Decree 28004 of 24 January 2019 (which will remain in effect until at least January 2024), all of the established international arbitral institutions, such as the International Chamber of Commerce and the London Court of International Arbitration, are effectively precluded from managing a dispute involving a government entity. The Regulations also provide that arbitration is limited to contracts with a value in excess of SAR 100m (approximately $26m USD). Although recourse to arbitration is still not entirely unrestricted, alongside the Arbitration Law 2012 and the establishment of the Saudi Center for Commercial Arbitration in Riyadh, the changes indicate a greater acceptance of the use of arbitration to resolve disputes in the KSA.

Other Changes

Also of particular interest are the following:

  • The GTPL continues the trend of promoting local businesses and SMEs. Article 9 provides that local contractors and SMEs will be afforded priority throughout the tender and procurement process. Foreign companies looking to obtain a foothold in the market may need to consider establishing a network of Saudi subcontractors and establishing a branch within the KSA.
  • The GTPL also contains special provisions concerning contract termination and cost and time adjustment, which will override any inconsistent contract terms. Whilst the 2006 law contained similar provisions, some of the penalties have been increased, as set out below.
  • Article 68 limits the circumstances in which the contract price may be adjusted. These can occur in circumstances where there is an increase in the price of raw materials or government charges and levies and also where the contractor seeks an increase due to events outside of its control (such as force majeure). Allowance is also made for unexpected material difficulties in the execution of the contract. The Regulations place an upper limit for increases of 20%, however contractors may apply to an administrative court if they wish to seek more. However, increases to reflect instructed changes in the scope of work are still permitted under Article 69, up to a limit of 10% of the contract value. 
  • Consequences of project delay are also prescribed. Article 72 limits the penalties (including liquidated damages) that can be imposed for delay at 6% of the contract value for supply contracts, and 20% for any other contracts (previously set at 10% of the contract value under the 2006 law). Article 73 provides for a similar maximum penalty of 20% for a contractor’s default in executing its contractual obligations (also previously set at 10%). However, Article 74 sets out certain exceptions to these caps, and also provides that contractors may seek extensions of time. Such extensions may be granted in circumstances including scope increases, delays which are the responsibility of the government entity and delays resulting from circumstances beyond the contractor’s control.
  • Termination is dealt with in Articles 76 to 78. Article 76 provides that contracts may only be terminated in certain circumstances. These include a delay in commencement of the works, and the failure to obtain written consent to subcontract the works. The government entity may also terminate a contract if doing so would be in the public interest (although the scope of this is not defined) or if termination is agreed with the contractor (Article 77).

The interplay between these provisions concerning time, cost and termination, and between these provisions and the parties’ contract terms, will need to be carefully examined. Foreign contractors will need be aware of the regulatory position in the KSA before executing contracts with government entities. There have not yet been any published cases dealing with the new GTPL. The interplay between the law and contractual mechanisms may prompt contractors and suppliers to proceed with caution. Nonetheless, the GTPL should come as a welcome shift in the right direction for foreign contractors looking to invest in the massive public infrastructure programs in the KSA over the coming years.

UK Appeal Court Considers the Definition of ‘Practical Completion’

A recent case in the Court of Appeal of England and Wales may be of interest. In Mears Ltd v. Costplan Services (South East) Ltd [2019] EWCA Civ 502, the Court of Appeal considered the definition of “practical completion”, a term which appears in the vast majority of construction contracts but is often left undefined. Mears, the future tenant in a residential development, alleged that the certificate for the achievement of practical completion could not be issued because 56 rooms were over 3% smaller than shown on the drawings. The agreement stipulated that a variance over 3% was a material variation (but, notably, not a material breach of the contract). Rectification would have required demolition of the entire building. 

The tenant’s claim and subsequent appeal were both dismissed. In the Court of Appeal, Coulson LJ held that the relevant test for determining whether defects precluded the issuing of a practical completion certificate was whether the defects were “trifling”. Whether the owner could take possession of the works and use them for their intended purpose is relevant but not a complete answer. Although the irremediable nature of the defects in this case was relevant to the measure of loss, it did not bear upon practical completion. Coulson LJ was also conscious of the practical impact of the tenant’s position, which would be that the whole project would need to be demolished and rebuilt if the Court found that practical completion had not been achieved.

Employers may be wary that this judgment signals a relaxation of the threshold of practical completion. However, the unusual facts of the case are likely to have played a part in the Court’s decision. Employers can also guard against similar outcomes by ensuring that their contracts provide parameters to guide and control the certifier’s discretion in relation to practical completion and where performance or design threshold are express criteria for practical completion - as is common on complex resources, healthcare or infrastructure projects.