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Law firm King & Spalding’s projects partner in Riyadh, Michael Dunphy, and James Bremen, a construction partner with the London office, discuss demand versus recession.
The Kingdom of Saudi Arabia (KSA) has not been left behind in the construction boom, which has swept the Middle East in the past decade.
Strong growth supported by high oil prices has meant KSA has had increased demand for petro chemical projects, IWPP’s, power, infrastructure and new housing and retail developments.
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But as the world moves into global recession and major projects reach completion, construction disputes will inevitably arise.
So what are the dispute resolution options for local and international developers, contractors and lenders to construction projects?
This article considers:
Dispute Resolution Options
Within KSA there are a number of choices for dispute resolution processes. The two most common are arbitration and litigation before the Board of Grievances (BoG).
Arbitration is popular with non-KSA parties and ensures confidentiality is maintained. There are various venues available for arbitration in Riyadh, such as the Riyadh Chamber of Commerce, which also provides a secretariat service.
Generally, international law firms who have Saudi qualified lawyers on their teams, are entitled to represent clients in arbitrations in the KSA. Where the firm has no KSA counsel, local co-counsel are often appointed to act in conjunction with the international firm.
Arbitrators may be selected by the parties but must be KSA nationals or Muslim males. Arbitration clauses are prohibited in government contracts without the consent of the Saudi Council of Ministers.
Like many Gulf states, KSA does not have specific laws relating to without prejudice privilege. It is therefore vital that legal advice be sought prior to entering into any form of negotiation related to claims where there is a possibility that the dispute will proceed to arbitration or litigation.
Board of Grievances
While the predictability of judgments by the BoG has improved recently, international companies often still seek to include an arbitration procedure in their contracts where possible.
The BoG has exclusive jurisdiction over disputes concerning KSA government contracts and may also decide commercial disputes. Only KSA counsel may appear before the BoG and all submissions and documents must be in Arabic.
For large, highly complex construction disputes this can be disadvantageous as both KSA counsel and the tribunal may have limited experience, owing to the lack of specialist judicial construction tribunal or bar in the KSA (as there is in some other jurisdictions).
Enforcement of foreign arbitral awards in KSA
KSA is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.
However, in practice the BoG will only enforce foreign judgements and arbitral awards to the extent they are compliant with Shariah and KSA public policy principles and where the state of origin affords reciprocal recognition to awards of the KSA courts.
In addition, KSA is a signatory to the rules and procedures of, and recognises awards of, the Gulf Cooperation Council Commercial Arbitration Centre, which has a seat in Bahrain.
The overriding application of Shariah principles means interest may not be enforceable and uncertain contract terms, including liquidated and ascertained damages, may be declared void for uncertainty.
Such considerations ought to be taken into account when structuring any contractual relationship with a KSA entity.
Therefore a party seeking recognition of a foreign arbitral award in the KSA may, as part of its recognition application, expressly disclaim any right to recover any uncertain component of the award.
Choice of Law
Often contracting parties in KSA have little option regarding the law governing their relationship. In particular, KSA government entities may not consent to the laws of another jurisdiction.
Where this is not the case, (for example with Saudi Aramco, which has government dispensation to contract using foreign laws), the election of a more developed system, such as English law, may provide more certainty in complex commercial contracts.
However, the overriding principles of Shariah law are likely to be taken into account in a KSA court’s judgment, regardless of the governing law.
King & Spalding has significant experience dealing with construction disputes governed by KSA law and parties using firms without this resource are best advised to seek Saudi co-counsel to supplement specialist disputes advice.
Language
When contracting with a KSA government entity it is generally compulsory for Arabic to be the governing language for contracts. But, in our experience it is common to negotiate the contract in English and have an Arabic translation prepared for execution.
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