Government contracts in Saudi Arabia

On 1 December 2019, the Saudi Minister of Finance (MOF) issued the executive regulations (Executive Regulations) of the new Government Tenders and Procurement (GTP) Law, the much-anticipated law that came into force concurrently with the issuance of the Executive Regulations. These will apply to all government projects. The new GTP regime introduces many reforms, including changes to the applicable dispute resolution (DR) mechanism.

Many private businesses are interested in doing business with the government of Saudi Arabia, one of the oil-richest countries in the world that has a long-term plan for developing its infrastructure. This blog provides some insights that one should be aware of when considering doing business in the KSA. It also discusses some major changes in the DR methods introduced by the new GTP regime.

Legal system in Saudi

Saudi Arabia is a unique jurisdiction. It has adopted Islamic Sharia as the main sources of legislation, but in an uncodified form. It is also influenced by the civil law system prevailing in the neighbouring countries of the Middle East. Legislation in the KSA is based on laws enacted from time to time by HH the King and other specific regulations issued by the relevant department of the government. Where there is no specific legal provision regulating a particular matter, Saudi courts apply the relevant principles of Sharia with respect to the matter and the judges enjoy wide discretion in deciding cases. The common-law concept of stare decisis (binding precedent) does not exist under Saudi law. Accordingly, decisions by Saudi courts do not constitute binding precedents but carry persuasive value.

Administrative contracts

The GTP regime is specific to contracts concluded with government agencies for procurement of public utilities and services. These types of contracts are categorised as administrative contracts and are subject to distinctive legal rules that are not applicable to normal commercial contracts. Administrative contracts are quite common in civil law countries and refer to that body of contracts entered into with the administrative authorities of a state for public procurement purposes. In Case No. 281 of 1433 (Hijri), it was held that the main features of administrative contracts are three, namely, (a) one of the parties is a public authority (e.g. the government), (b) the contract is concluded for the performance of work that is in the public interest or for the public benefit, and (c) the public authority enters into the contract as a sovereign and powerful entity¹.

Administrative contracts typically provide the public authority with greater powers vis-à-vis the other contracting party. For example, the GTP Law allows the government body the right to terminate or withdraw the contract from the other contracting party in case of the latter’s default, but no corresponding provisions exist for the benefit of the other party contracting with the state. Further, and unlike its predecessor, the new GTP Law allows the government to terminate the contract if it is considered in the public interest to do so. In that case, the government is required to pay the contractor for the value of the work executed and to release any bonds furnished by the contractor after settlement of the final accounts.

Dispute Resolution mechanisms

Under the old GTP regime, disputes arising from the execution of administrative contracts were referred to the Board of Grievances (BOG), which is the administrative judicial body within the Saudi court system. The BOG consists of administrative courts that are competent to hear and decide cases filed by or against the Saudi government.

Under the new GTP regime, the parties to administrative contracts may agree to refer disputes to arbitration provided that the MOF’s approval is obtained. However, the Executive Regulations add the following conditions for the validity of the arbitration agreement contained in these types of contracts:

• Arbitration is possible only for high-value contracts whose value exceeds hundred million Saudi Riyals, but the MOF may reduce the threshold amount;
• The local laws of the KSA must apply to the substance of the dispute. Also, it is not possible to refer the dispute to an international arbitration institution located outside the KSA or apply their rules, except where the contracting party is a foreign entity; and
• The arbitration agreement must be contained in the original contract documents.

This is a remarkable reform that aims at attracting foreign investment to the KSA. Saudi Arabia has an independent arbitration act that is based on the UNCITRAL Model Law on International Commercial Arbitration, but with some modifications to ensure compliance with Islamic Sharia. Saudi Arabia has also acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In addition to arbitration, the Executive Regulations provide for other unprecedented alternative dispute resolution (ADR) mechanisms for resolving disputes arising from administrative contracts. Article 155 of the Executive Regulations requires the government entity to attempt to resolve amicably any dispute of a technical nature that may lead to the disruption of the works or cause damage to the employer, the contractor or any of the state’s utilities. If the efforts to achieve amicable settlement fail, then the next step will be a process akin to adjudication by a dispute resolution board (DRB) made up of the following persons:

• A representative from the government entity;
• A representative from the contracting entity; and
• A chairperson appointed by the MOF from the public or private sector.

The process before the DRB will involve an exchange of written submissions by each party on the disputed issue and, if applicable, the consultant of the project will submit a report of his views on the issue. The DRB may engage an expert to look into the disputed issues and the cost of the expert is to be shared equally by the parties. The DRP will then have to decide on the issues in dispute within 30 days from receipt of all reports and submissions made to it.

The DRB’s decision will be binding on both parties in the first instance. However, if one of the parties objects to the DRB’s decision, the objection will be referred back to the DRB for consideration and decision within 15 days. If the final decision of the DRB is unsatisfactory to either party, the concerned party will be entitled to take the matter to the DR forum agreed upon in the contract, whether it is the BOG or arbitration.

It is important to note that the issues that are eligible for submission to the DRB must be of technical nature, such as alleged defects in the work produced, and do not extend to other claims, which must be submitted to the proper DR forum pursuant to the contract.

The above ADR methods introduced by the new GTP Law and the Executive Regulations represent a major development in the contracts concluded with government entities in the KSA. This is likely to reshape the future of DR in the KSA and make it more attractive to foreign investors.

^{1 Board of Grievances, Case No. 281 of 1433(H), Proceeding Dated 3-6-1433(H) (corresponding to 24 April 2012).}