The Kingdom of Saudi Arabia (the Kingdom) is a land of opportunity for Canadians and Canadian businesses. Each year, the government of the Kingdom spends billions of dollars on infrastructure in multiple categories. In 2012 alone, the Kingdom is slated to spend US$45-billion on education in training as well as building and renovating schools and universities; US$23-billion on building and renovating hospitals, community centres and sports centres; US$9.4-billion on roads and airports; and US$15.3-billion on the enhancement of water resources, agricultural programs and desalination plants. The spending in 2012 is in addition to the billions of dollars spent in previous years in the same areas that offer opportunities for Canadian businesses to win contracts from government agencies in the Kingdom.
The Kingdom's Government Tenders and Procurement Law (the Law) and its Implementing Regulations provide the requirements for contracts and dealings with Saudi government authorities (the Government Authorities). In our representation of clients with respect to these public contracts, a series of issues has come up repeatedly, which are addressed below.
This bulletin does not focus on general procurement rules in the Kingdom or the bidding and tendering process but rather looks at the terms and conditions of contracts with the Governmental Authorities that are common concerns for contractors.
Business Qualification Requirements. Generally speaking, only entities that have qualified to do business in the Kingdom will be invited to participate in a bidding process or tender for a direct procurement contract. However, entities that are not qualified are routinely solicited for direct tenders. Regardless of this type of scenario, contractors must have the required commercial registration and licence to perform the activities described in the contract and should be prepared to provide copies of the registration and Saudi tax certificate.
Companies looking to qualify to do business in the Kingdom should be aware that the registration process can take from three months to a year, depending on the form of qualification chosen.
Language of the Contract. Many contracts between Government Authorities and foreign contractors in the Kingdom are both written and negotiated in English. It is, therefore, understandable that contractors would prefer English as the law of the contract to be enforced. However, contracts and related documents with Government Authorities must be drafted in or translated into the Arabic language, the official language of the Kingdom. A supplementary language other than Arabic may be used, provided that Arabic is the prevailing language for interpretation and execution of the contract. However, regardless of the original language of negotiation and contract, the translation into Arabic will be the version that takes precedence in a legal dispute. Therefore, it is important that contractors be comfortable with and execute an Arabic version of the contract.
Choice of Law, Arbitration and Dispute Resolution. Although it is understandable that contractors entering the Kingdom would want to use the laws of their home jurisdiction or a jurisdiction other than the Kingdom, contracts with Government Authorities in the Kingdom must be governed by the laws of the Kingdom. It is also understandable that contractors would want to avoid the courts of a foreign jurisdiction by going to arbitration. However, Government Authorities are barred from resolving their disputes through arbitration unless approval is obtained by the Council of Ministers. Instead, the Law provides a special procedure to resolve disputes through the Ministry of Finance. This procedure is appealable through the Board of Grievances, which is the commercial court for the Kingdom.
While this may seem alarming, contractors have been generally satisfied with the dispute resolution process in the Kingdom, and the Kingdom is rapidly improving its court system. In addition, the laws of the Kingdom are generally favourable with respect to contract enforcement.
Contract Term. Contracts with terms exceeding one year, or a value exceeding 5-million Saudi Riyals (US$1.33-million), must be approved by the Ministry of Finance. The execution period of continuing service contracts (such as maintenance, cleaning, operation and catering) cannot exceed five years but may be extended after the approval of the Ministry of Finance. Contractors should be mindful that open-ended master service contracts can fall afoul of the contract term rules, which will delay payments. Since payments are authorized through the Ministry of Finance, not the contracting Government Authority, additional procedures will need to be satisfied to cause payment to be made.
Contract Scope. A Government Authority may increase the obligations of the contractor within the scope of the contract to an extent not exceeding 10% of the total contract value or decrease such obligations to an extent not exceeding 20%. As noted above, since payments are made through the Ministry of Finance, not the contracting Government Authority, increasing the scope without obtaining approval may lead to delays in payment.
Payment Currency. Disbursements for contracts with a Government Authority must be paid in Saudi Riyals. However, payment may be paid in other currencies after approval from the Ministry of Finance. There are no restrictions with respect to making payments outside of the Kingdom.
Withholding Tax. To the extent that a contractor is being paid outside of the Kingdom or to a non-Saudi entity, the contractor should expect the application of the Saudi withholding tax. The withholding tax will range from 5% to 20% depending on the type of services rendered. Contractors often negotiate “grossing up” payments to cover the withholding tax obligation.