Major project adjustments in Saudi Arabia: termination, suspension and descoping

Undoubtedly the oil price is a major contributing factor to the size of the Middle East’s infrastructure market. In early May the Organization of the Petroleum Exporting Countries (OPEC) shocked the market when it announced it would increase supply by 411,000 barrels a day in June, marking the group’s second consecutive monthly oil hike. This increase in production of the group’s oil quota to significantly higher levels than analysts expected signals a shift towards prioritisation of market share and national interests over global pricing, likely influenced by global oil market changes, including the US’ increased output.

In parallel, a more focussed approach to managing projects is emerging in the Middle East, including to change priorities and implement lessons learned along the way. These changes may see a recalibration of timelines to allow the economy to keep pace with growth. The re-prioritisation of infrastructure projects can often, in turn, lead to downsizing or significant changes, temporary suspension and even plans being abolished completely.

Typically, KSA contracts already contain provisions governing these events. Where they are silent or ambiguous, the country’s Civil Transaction Law (CTL) steps in. In addition, where the contract is administrative in nature – where one party is a government entity and the project is for the public benefit – the Government Tenders and Procurement Law 2019 (the Procurement Law) applies. 

Descoping

Construction contracts typically contain provisions governing changes or variations to the works and they tend to include scenarios where an omission is instructed. As such, the contract provisions will govern circumstances where a portion of the work is descoped from a contractor and whether the contractor is entitled to recover loss of profit. Helpfully, the CTL also contains a requirement at article 471.3 to restore the balance of the contract, where an exceptional circumstances has severely prejudiced the contractual balance between the obligations of the contractor and employer and undermined the basis of the financial estimate of the contract. A party seeking relief under this article may need to consider the rates built into its tender or contract pricing and demonstrate how the underlying assumptions have been undermined by the exceptional circumstances.

Article 69 of the Procurement Law governs the extent of changes a public authority is permitted to make. It states: “A government agency may, in accordance with its actual needs, issue change orders to increase the contract value by no more than 10%, or decrease such value by no more than 20%, in accordance with the Regulations.” In addition to this limitation on the amount of work that can be omitted, the contract would need to be reviewed to identify whether it is permissible to omit work and redistribute it to another contractor, on the basis that the contractor is not in default. On one view, the contractor is being deprived of the right to complete the work, and this option is therefore only available to the employer if expressly stated in the contract. If the employer does not have clear rights under the contract to make this type of change, it is exposed to a claim for loss of profit and overhead contributions which would otherwise have been earned.

Suspension

Similarly, most construction contracts in the KSA contain terms governing suspension and typically give the contractor time and cost in those circumstances. The CTL does not contain a general provision governing ‘suspension’. General principles such as good faith (article 95), breach of contract (article 107) and compensation for breach (articles 136 and 137) will be relevant to deciding whether a contractor is entitled to compensation for a period of suspension and, if so, how much.

Article 74 (5) of the Procurement Law provides that the contractor is entitled to an extension to the time for completion if the public authority suspends the works or a part of the works if the reasons are not attributable to the contractor. It states: “Contracts may be extended and fines may be waived in the following cases…5. If the government agency orders suspension of the work, or part thereof, for reasons not attributable to the contractor.” Helpfully, Article 74.2 provides that the term of the contract shall be extended – and the contractor exempted from delay damages – if “the annual funds allocated to the project are not sufficient to complete the work within the specified time”.

Termination

The CTL identifies various ways in which a contract can be terminated. Consistent with the rest of the Middle East, it provides that termination can take place by mutual consent (article 105), for the convenience of one party through withdrawal (article 106), as a result of a default or breach of an obligation (article 107) or because it is impossible to perform (article 110). 

Where the contract is for construction works, a further set of circumstances are described as giving rise to termination, set out at articles 475 to 478. These include completion of the works, an emergency excuse related to performance of the contract and where the contractor becomes incapable of completing due to reasons beyond its control.

The right to compensation varies depending on the circumstances. If the contractor encounters an emergency related to the performance of the contract, the party requesting termination has to compensate the other party for damages. 

If the works cannot be completed due to reasons beyond the contractor's control, the contractor is entitled to payment for completed work, and expenses incurred for uncompleted work, to the extent of the benefit gained by the employer. This might include, for example, the cost of long lead items or materials procured for the project, but that have not yet been used.

Unlike Qatari law, helpfully, the CTL expressly states a court order is not required for termination for default.

Where the contract is administrative in nature, article 76 of the Procurement Law provides that the government entity has the right to terminate if the contractor becomes bankrupt; the contractor assigns or subcontracts the works without permission or the contractor fails to rectify a delay or breach of contract within 15 days of being requested to do so effective from the date of receiving a written notification; or if the contractor commits bribery.