The Egyptian Civil Code is the source of vast majority of the laws in the Middle East including the UAE, Qatar, Kuwait, Jordan, Libya and Syria.

However, in Saudi Arabia, there is no civil code, but Shari’ah law, in essence, prevails. Although many laws have been enacted in areas such as employment, investment and the judiciary, the courts will only apply these laws to the extent that they do not contravene Shari’ah law.

As Saudi Arabia has this key difference, it is important to understand the essential principles guiding construction contracts in the kingdom.

The kingdom has a comprehensive government tenders and procurement law (GTPL) that lays down the procedure, risks and liabilities for appointing contractors on government projects.

Decennial liability in Saudi Arabia is governed by the GTPL and applies to government contracts only. This means that projects being undertaken by government bodies alone will be governed by this law.

GTPL liability under Article 76 is for the partial or total collapse of a built structure. As per this, liability remains with the contractor who is responsible for the construction, no matter how any collapse may occur.

The liability arises where the defect occurs within ten years of completion. In the event the parties agree to build a structure having a life span shorter than ten years then the liability attaches for the agreed life cycle of the building (but the GTPL implementing regulations stipulate a minimum period of one year).

Similar to most Middle East jurisdictions which recognise the principle of decennial liability, the liability of the contractor and/or the architect is strict (i.e. fault is not a necessary factor for liability to arise).

The position in Saudi Arabia is similar for liability under the GTPL, which arises whether the collapse is due to a construction defect or otherwise and therefore would not require consideration of evidence of breach of contract or negligence.

It is unclear if the GTPL is meant to apply only for contractors or to consultants and architects as well. Perusal of other provisions in the law throws more light on the proposed meaning of the word “contractor” under Article 76.

In our view, it is intended to mean the party engaged to build the works (i.e. the constructing contractor) and not a designer or supervisor.

However, some uncertainty may remain as to the meaning of "contractor" as the term is not defined in the GTPL, it is most likely the constructing contractor who is intended to fall within the scope of this term.

Article 107 of the GTPL Implementing Regulations prescribes a minimum warranty period of no less than one year for the contractor on any “project in public work contracts”.

In this context any type of project and indeed any type of contractor (including designers for example) are subject to the minimum warranty period, though a longer period may be stipulated in a contract.

There is no concept of limitation periods in the kingdom compared to the requirement in many jurisdictions to bring a claim within three years of a defect or damage being known.

Hence, even 10 years after the project handover, a contractor, designer or supervisor can still be liable for the defective works if such liability arises under the general law of the kingdom

It is a fundamental principle of Shari’ah law that contracting parties should abide and comply with their contractual obligations. The law recognises construction contracts and barring anything which goes against the Shari’ah custom or law, are generally enforceable.

Therefore the contract, if clearly and unambiguously drafted, will apply to set out the rights of the parties. It should be noted that for government contracts, a duty of good faith is mandated by law under the GTPL.

However, in order to achieve a fair outcome, such rights are subject to certain qualifications and caveats. One such qualification is the duty of good faith under Shari’ah law which requires parties to have fair and honest dealings and avoid misrepresentation.

Courts may exercise their discretion in taking into account a party’s lack of good faith if a dispute arises. The local courts will look to the intention of the parties with the objective of enforcing an arrangement as it was intended.

Therefore, it is important to clearly define one's rights and obligations in the contract and prevent any possible allegation of bad faith.

Incidents of suspected fraud, bribery, deceit or bad faith can be reported to the Ministry of Finance in the case of government contracts.

Liquidated damages

For a contractual obligation to be enforceable in the kingdom, it must be clearly defined in the contract and permitted by the Shari’ah law.

Damages for loss of anticipated future profits, loss of business reputation and loss of goodwill are not ordinarily recognised through the Saudi courts as normally judges view it as a form of speculative, consequential or otherwise unquantifiable damages.

On the other hand, because liquidated damages provisions can give certainty by defining the contracting parties’ rights and obligations, if drafted correctly to represent a genuine pre-estimate to calculate damages but not an unreasonably or uncustomarily high amount, liquidated damages deals are likely to be held as valid and enforceable under the Saudi law and this may extend to penalty clauses.

However, it should be noted that the kingdom's courts usually only award damages that arise as a direct consequence of a breach of contract and award compensation for actual damages, not probable or loss-of-profit damages.

Despite that flexibility in assessing the extent of damages and the amount of compensation, the Saudi courts tend to only award actual, direct damages that are quantifiable and that can be established with certainty.

Shari’ah is the overarching law in Saudi Arabia and all regulations, contracts, laws and agreements are subject to it. The Saudi government will from time to time issue specific laws and regulations when necessary to supplement Shari’ah law.

In the event of any conflict between Shari’ah and any other government law, the Islamic law will usually prevail. At places where the Saudi government laws or regulations are silent, reference should be made to the relevant principles under Shari’ah law.

The legal regime spanning Shari’ah law and Saudi government laws can be tricky to understand and hence careful advice and drafting is required to ensure the agreement will be enforced as intended.

Daniel Goodwin and Kanishka Singh are construction lawyers working at Al Tamimi & Co