The Ministry of Finance in Saudi Arabia has recently released a draft new Government Tenders & Procurement Law (Draft Law) for public consultation.

Whilst much of the detail as to how the Draft Law will be implemented will be contained in the Implementing Regulations (which have not yet been released for consultation), the introduction of the Draft Law is a welcome development in Saudi Arabia. It supports the aims of Saudi Vision 2030 to diversify the economy and encourage more foreign investment and signals a significant development for contractors doing business in the Kingdom, particularly when it comes to resolving project issues and disputes which may arise during the execution period of public contract works.

The Draft Law is intended to replace the existing Government Tenders & Procurement Law, which was enacted by Royal Decree in 2006 (2006 Law).

Significant developments of the Draft Law include:

Expanded application

The Draft Law has a wider application than the previous law: it applies to any entity in which "the state owns 51 per cent or more of the capital thereof". The 2006 Law applied to "government authorities" only.

Unless exceptions are to be granted, many infrastructural developments which would previously have fallen out of scope will now be caught. The Draft Law also demonstrates a move towards a single government entity (referred to as the "Unit") exercising fiscal control and managing liabilities for government procurement on a national level.

That said, the Draft Law does stop short of creating a much anticipated public private partnership (PPP) unit in the Kingdom. However, we believe that it is still the legislative intention to bring a PPP law into being in the near future.

Government entities / employers can agree to arbitration

The Draft Law appears to provide for the first time that government entities / employers can agree to arbitration as a viable method of resolving disputes with contractors. Whilst the detail and extent of this change remains to be seen in the (not yet released) Implementing Regulations; if the change was made, it would be a significant and positive step forward for the Kingdom.

Under the 2006 Law, government entities are prohibited from entering into arbitration agreements unless permitted by the President of the Council of Ministers. This prohibition means that in public works disputes, contractors are often left with no option but to refer their differences with employers to a compensation committee set up by the Ministry of Finance, or to the local Saudi Courts (the Board of Grievances).

The option for contractors to be able to resolve their disputes with employers by way of arbitration would allow both contractors and employers to have more control over the dispute resolution process. The parties, for example, would be able to choose experienced arbitrators who have a high degree of technical expertise, which is especially important when it comes to deciding upon complex construction issues.

The change complements the recent opening in Riyadh of the Saudi Center for Commercial Arbitration, an institution which has adopted international arbitration rules modelled on the UNCITRAL and AAA-ICDR rules.

Contractors can file claims as the works progress

A significant difficulty for contractors under the 2006 Law is that they are restricted to filing claims with a compensation committee set up by the Ministry of Finance which in turn is prohibited from reviewing any such claims until the contractor has achieved final handover of the works.

The Draft Law appears to remove this difficulty by allowing contractors to file claims as the works are progressing with the 'competent court' (which is likely to be the Board of Grievances). In this way, claims for compensation during the execution period of a contract could be decided upon by the local courts, and there is no sign yet of the contractor having to wait until final handover had been achieved. This is a significant departure from the 2006 Law and of clear benefit to contractors.

Contract termination in the 'public interest'

Under the 2006 Law, there is no explicit ability for government entities / employers to terminate public works contracts if it was considered to be in the 'public interest' to do so. The Draft Law introduces this and appears to oblige the employer to return any bonds/guarantees to the contractor and to settle any outstanding entitlements the contractor may have at the date of termination.

This change would aid in bringing the relationship between contractor and employer to a mutually acceptable conclusion in a situation where public expediencies did require a contract to be terminated.

Other developments

In addition to the above developments, we further note that the Draft Law:

  • Appears to prioritise local companies over foreign companies when government entities invite bids and award contracts; however the extent of such prioritisation is presently unknown since it may largely depend upon recommendations from a public committee comprising representatives from various government ministries and authorities
  • Maintains a restriction from the 2006 Law against works being subcontracted without the prior written permission of the government entity / employer; and
  • Increases the cap on the amount of delay penalties which could be potentially levied against a contractor from 10% of the contract value to 20%

Whilst the Draft Law certainly addresses a number of perceived deficiencies in the 2006 Law, the finalisation of the Draft Law and the release of the Implementing Regulations are eagerly awaited to find out to what extent.