This is the fourth article in our ongoing series on the Civil Transactions Law of the Kingdom of Saudi Arabia, which came into force in 2023. The series explores the law’s key implications for the construction sector.
Our first article examined the overarching impact of codification and general contract formation principles. The second focused on variations and quantum meruit, while the third addressed suspension and termination. This article considers the provisions dealing with liquidated damages and delay; a recurring feature in construction disputes across the region.
Timely delivery is a critical component of construction projects, particularly in Saudi Arabia where national infrastructure programmes continue to expand at pace. Against this backdrop, the Civil Transactions Law provides much-needed clarity on the enforceability and adjustment of delay damages. For contractors and employers alike, it introduces a more predictable framework, closely aligned with civil code principles, but refined through the lens of Shari’ah compliance.
Under Article 178 of the Civil Transactions Law, parties may agree in advance on the amount of compensation payable in the event of delay. This reflects well-established industry practice, particularly in construction contracts. It also offers reassurance to developers and public entities seeking a mechanism to address late completion without resorting to complex loss quantification exercises.
However, the right to enforce liquidated damages is not absolute. Article 179 provides that a Saudi Court (or arbitral tribunal) may reduce the agreed amount if the contractor demonstrates that the actual harm suffered was less than what was predetermined. Conversely, the court may increase the compensation if the employer proves that the actual loss exceeded the agreed amount, and that this was due to fraud or gross negligence. This protective measure is akin to neighbouring jurisdictions and reinforces the principle that liquidated damages must reflect a genuine pre-estimate of loss and not operate as a penalty.
Of particular importance in the construction context is the requirement for a causal link between the delay and the harm suffered. Article 171 makes clear that compensation is only payable where delay is attributable to the contractor, and where actual loss can be shown. Delay caused by force majeure, employer risk events, or other justifiable grounds will not give rise to liability. The burden of proof remains crucial, especially where critical path analysis is required to assess the cause and effect of overlapping events.
It is also notable that the law recognises that compensation cannot be enforced unless the contractor has failed to perform a contractual obligation. Delay, standing alone, does not give rise to damages unless it amounts to a breach. This is a helpful clarification that aligns with international standards of contractual liability but must be carefully navigated through proper contract administration. Employers should ensure that extensions of time are fairly assessed in accordance with the contract, whereas contractors must ensure that that notices are properly and timely issued.
From a practical standpoint, contractors should continue to maintain detailed records of progress, instructions, delays, and site events. Proper notice procedures must be followed if they are to preserve their rights to relief. Likewise, employers should ensure that delay damages are clearly set out in the contract and correspond to a fair approximation of anticipated losses. Where these steps are taken, parties can rely on a more robust and predictable legal framework in the event of delay.
As the Kingdom continues to invest in transformative development under Vision 2030, the ability to manage delay risk effectively is essential. The Civil Transactions Law represents a significant step forward in aligning Saudi Arabia’s legal infrastructure with international contracting norms while maintaining the principles of equity and good faith that underpin its legal tradition.
Practical insights
Early identification of delay events: Contractors should actively monitor progress against the programme and identify delay events as they arise. Prompt identification allows for timely notification and mitigation measures and reduces the risk of delay becoming critical. Delay should not be treated as a retrospective issue, especially when entitlement to an extension of time or relief from delay damages may depend on compliance with notice requirements.
Strict adherence to notice provisions: Most construction contracts in the Kingdom contain strict timeframes for issuing notices of delay or claims for additional time or cost. Contractors must ensure that these provisions are followed precisely. Failure to comply can result in claims being time-barred, regardless of merit.
Concurrent delay analysis: Where employer-caused delay overlaps with contractor-caused delay, careful analysis is required to assess entitlement. Under the Civil Transactions Law, compensation is only payable where the delay and resulting harm can be attributed to the contractor. In cases of concurrent delay, courts may reject the application of liquidated damages altogether or apportion responsibility. Contractors should consider obtaining expert programming analysis early to support their position.
Valid certification of delay damages: Unsupported claims or unsubstantiated assessments of delay damages may be challenged, particularly where the employer has failed to issue extensions of time or where delays arise from employer instructions or variations.
Linking delay to actual harm: Employers should ensure that the delay damages stated in the contract reflect a genuine estimate of likely loss, not a punitive figure. Similarly, contractors should be prepared to demonstrate when delay has not resulted in material harm.
Early third-party input: Where delay events arise, contractors should consider seeking third party input (whether it is legal advice, or having external quantum and/or delay experts review claims) early, particularly where claims for extensions of time, suspension, or acceleration costs may arise.
If you would like to discuss this article further, please contact Danielle O’Brien
