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Law enforcement

by Stian Overdahl on Feb 26, 2013

Contractors in Saudi Arabia may face a range of challenges, but they have the opportunity to work on projects of real significance.
Contractors in Saudi Arabia may face a range of challenges, but they have the opportunity to work on projects of real significance.

 Will new laws aimed at simplfying contract disputes in Saudi Arabia make life easier for foreign constructors? Stian Overdahl finds out more.

Saudi Arabia performs well in the World Bank’s Ease of Doing Business 2012 report, ranked 22nd globally, but one category where it performs abysmally is enforcing contracts.

In the most recent report it ranked in the bottom third of countries, 124 out of a 185 countries globally, an increase on its previous year’s position of 138th.

Enforcing contracts in Saudi Arabia is notoriously difficult, and even more so for foreign companies operating within the Kingdom, with aggrieved parties often having to wait several years just for a court appearance.

Local construction companies, who have a strong grasp of Saudi Arabia’s business culture can navigate the difficulties. Final payments are notorious for not arriving, and companies will look to write in costs up front.

However, for foreign companies, operating in the Kingdom can be a daunting prospect. According to Andrew Greaves, head of the Dubai office of Addleshaw Goddard, there have been concerns among the international construction community.

In many instances, he said, contracts are, “let on standard form (government) terms which can be onerous, one sided and in need of modernisation to reflect modern ways of working; or, bespoke terms which are, in parts, lacking in clarity, detail and applicability.”

Speaking with PMV, Greaves said enforcing contracts and payment obligations in Saudi Arabia “has been problematic and fraught with procedural uncertainty. Stories abound of ‘fingers being burnt’ on many fronts.”

Yet for Saudi Arabia, with a young, growing population that is putting heavy demand on services, especially water and power, it requires outside investment and outside expertise to help fund and build the needed infrastructure.

Recently, in an effort to make the Kingdom more attractive to foreign investors, a major law reform was passed, that came into force in July.

This included anew arbitration law, based on a model international commercial arbitration law, that has been used as the basis for the arbitration law of nearly 70 countries.

One change to the model law for the Kingdom was to require the arbitration process to not “violate Shari’ah” as practised in the Kingdom. In the context of a contract dispute, this could include preventing collecting interest on disputed payments.

Lawyers in Saudi Arabia spoken to by PMV said that it too early yet to say what results will stem from the new laws, while saying the laws appear to be a step in the right direction.

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