THOUGHT-PROVOKING COMMENTARY ON THE CONSTRUCTION INDUSTRY IN SAUDI ARABIA.
Mark Fraser, a seasoned expert in advising international design professionals and contractors, shares his insights on navigating opportunities and risks in Saudi Arabia’s construction sector. In his article, he explores the delicate balance between seizing opportunities and managing risks, with a focus on the importance of fair contract terms and the value of expertize in negotiations.
Navigating Opportunities and Risks in Saudi Arabia’s Evolving Market Landscape
Even as NEOM, Saudi Arabia’s megacity project, undergoes strategic review and adjustment, the Kingdom still offers enticing opportunities for international professionals and contractors. That said, opportunity inevitably comes with risk. Against this backdrop, what is the current opportunity window and what does experience tell us in terms of risk and liability? The following commentary is based on my experience advising international design professionals (and their professional indemnity insurers) and contractors dipping their toes into Saudi projects. The lure of the fruits the Kingdom has to offer must be weighed against the hitherto willingness to accept the strict contract terms imposed by employers which appear to be more control than partnering oriented. Is a change in approach overdue?
Construction and engineering can be reduced to three core issues, namely time, quality and money, in other words the right building, at the right price, at the right time. Against this backdrop, the client and professional/contractor relationship can be reduced further to the provision of services in return for money. Put another way, there has to be something in it for both parties for the relationship to work and the project to benefit (the “Reciprocity Factor”).
Expertise is your strongest tool, use it to resist onerous terms
International designers and contractors should not be reticent about placing a value on the expertise they bring to the table. That expertise is why they are being invited to participate. Expertize is the leverage which should be used to resist imposition of unduly onerous terms and conditions and the time to do this is the honeymoon phase of contract negotiation. I have cherry picked some key issues to address at the outset.
He who pays the Piper….
Based on experience advising all players in the construction arena in the UK, Asia and the Middle East, the payment regimes sought to be imposed on professionals and contractors in the KSA are, quite simply, the most onerous I have seen. Do not fall into the trap of restricting your review to the “payment” clause, as the control ethos tends to be woven into a number of clauses which ostensibly address quality, timing and logistics but actually have the overall impact of vesting in the employer complete control over payment.
The result is that the professional/contractor is left having to respond to continuing demands for services whilst being put through the hoops complying with complex invoicing and substantiation mechanics. As a result, there is a strain on resourcing which is not being paid for. In short, the Reciprocity Factor has broken down. I hear you say “but what about the dispute resolution mechanism?”. Any seasoned participant in the construction process will tell you that dispute resolution is not only an avenue of last resort, but often offers little, if anything, in terms of adequate redress.
The answer is to negotiate firmly at the outset and not to lose sight of the value of leverage. If the professional or contractor is to retain any hope of restoring the payment balance, it is imperative that it does not release a prized deliverable if payment is delayed.
Indemnification
Indemnity obligations are onerous and exceed the conventional exposure to damages for breach of contract. Civil code jurisdictions tend to recognize the three factors of fault, proven loss and causation. The beneficiary of an indemnity may be relieved of the requirement to mitigate its loss and establish causation. Either resist indemnities or introduce language to qualify or dilute them.
Absolute Obligations
The most onerous of obligations, absolute obligations are akin to guarantees of performance which leave little scope for a defence. Resist fitness for purpose design obligations and words such as “ensure” which introduce the guarantee ethos. Designers who wish to retain the benefit of their professional indemnity cover should be mindful that professional indemnity insurers recognise and embrace the conventional standard of reasonable skill and care. Absolute obligations go well beyond this standard and will not be covered by conventional professional indemnity cover. Let’s face it, there is no point paying for cover which does not respond.
Dispute Resolution
A dispute resolution clause providing for arbitration or court jurisdiction in KSA against a quasi-governmental entity has little appeal. Professionals and contractors should give themselves some chance by negotiating terms firmly at the outset then trying to negotiate a neutral venue. In terms of institutional arbitration, consider those institutions which are efficiently administered and whose rules embrace expedition and closure. The streamlined and expedited procedures offered by Singapore International Arbitration Centre (“SIAC”) may have appeal in this regard. But the golden rule is that the time and money spent negotiating terms at the outset will be a drop in the ocean compared to the time, money and inconvenience involved in hostile litigation.
The Way Ahead
Drawing the threads together, international professionals and contractors will be well served by embracing and promoting their expertise (always in the best possible taste) and standing their ground at the outset in the negotiation process. If faced with a “take it or leave” attitude during the honeymoon phase, just imagine what the relationship will be like if difficulties arise during the currency of the project when the contract terms are stacked in the employer’s favor. Negotiate fair and balanced terms and do not dance to any tune.
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