Dispute Resolution Archives - Page 3 of 3 - Hammad & Al-Mehdar Law Firm

Construction Contracts – Assessing Their Pros & Cons

Posted on May 12, 2022 - 3:26 pm by perpetual-admin

The construction and contracting industry in Saudi Arabia is booming, and presents a significant growth opportunity, particularly with notable large-scale projects such as the Riyadh Metro, The Qiddiya Project, Neom and The Red Sea Project to name a few.

With the scale of opportunity present, the need for legal protection becomes greater, therefore we explore the construction contracting landscape, along with the pros and cons.

There is currently no specific construction law in Saudi Arabia, which enables related parties in the private sector to agree on the method to use for pricing, along with terms. The key element to ensure is that agreements should be Sharia law compliant in order to ensure the terms are enforceable.

Construction contracts outline the contractor’s and project owner’s roles and obligations. The agreements come in various forms, and based on the type, one party may gain more than the other, that is, each contract has its benefits and drawbacks.

Lump-Sum Contracts

A lump-sum contract is the same as a lump-sum agreement or fixed price contract. It is one of the most basic and widespread in Saudi Arabia. The contractor undertakes to perform the job for a set fee, and the project owner agrees to pay the entire cost to the contractor.

The cost of the realization, acquisition of materials, and the marking by miscellaneous expenses and benefits are all in the price.

Pros

Since the contracts are set in stone, completing them under budget means better profits.
With anticipated costs, the owner bears minimal risk
Lump-sum contracts are simple. The contractors don’t have to submit multiple bids and calculate the total price instead.

Cons

The fixed price model is a risk to the contractor when the projects are vast. There is no room for errors, and any missteps with suppliers and subcontractors may lead to losses.
Miscalculations can happen when the lump sum contract fails to account for all the variables. Unforeseen changes can reduce margins.

Time and Materials

In a time and materials agreement, the owner agrees to reimburse the contractor per hour in addition to the materials. The contract is most useful where the project’s scope isn’t well defined.

Pros

The contractor benefits because they do not have to estimate the cost of project completion as with a lump sum contract, and the owner benefits as they only pay for the actual time worked.
The contract allows simple negotiations to cover the unforeseen expenses along the way.
The hourly rate is straightforward

Cons

On the other hand, the contractor can be slow because they are paid for their time.
It is no small task to log in the material costs every time and using the wrong amounts may reduce the profit margin for the contractor.

Cost-Plus Contracts

Also known as a cost-reimbursement contract, the cost-plus method involves paying the contractor for all costs incurred during the contract’s duration. The arrangement sets aside a particular amount as profit, usually a percentage of the project’s overall cost.

A cost-based pricing method is often a moving target and can go out of control. To prevent runaway costs, cost-plus pricing often combines with a guaranteed maximum price (GMP) to set the upper limit for fees and expenses. Anything above it goes to the contractor.

In a nutshell, the cost-plus contract covers the direct costs such as labor and materials, indirect costs, including traveling and communication, and the profit.

Pros

Cost-plus contracts are flexible. Owners can make design alterations along the way, and the contractors know in advance what they stand to make after the alterations.
Unlike lump-sum contracts, miscalculations are not detrimental, given the flexible nature of the arrangement.

Cons

Cost-plus contracts require the justification of costs, and this sometimes is difficult. Owners may be unwilling to reimburse some indirect costs such as administrative expenses.

Unit Price

A unit price contract requires the contractor to establish price per unit of work divided into portions. The method is standard in public work. Also known as measurement contracts, the arrangement allows the contractor to forward the cost of every unit of work instead of an estimate for the whole project. Unit price contracts are practical when the task is tedious, and the material costs are not projectable.

Pros

A simplified invoice is the contract’s strength, allowing for more transparency and fewer disputes.
Ideal for well-defined and repetitive projects
The profit margin stays the same even when there are changes to the scope of the work.

Cons

The owner may insist on comparing the prices, which can cause delays.
It may not be handy with private projects unless as part of other methods such as lump sum for particular work components.
Estimating the final value of the contract is not a walk in the park. The amounts of units needed for project completion is not easy to know.

Construction Contracts Best Practices

While there are different types of construction projects, the contracts follow the same rules and have pretty much the same elements. Here are the best practices when writing construction contracts:

Incentives are helpful when the scope is not very clear, and the budget or costs of the project are not yet determined.
The parties need to agree on defining costs, especially in the cost-plus contract. Will redoing the rejected work be part of the overall costs included in the total bill? What about the contractor’s equipment? What rate will be applied?
How and when will there be communication between the client and the owner? Both parties should know when and how to contact the other before making decisions.
Parties should agree on how to apportion any savings from the project. Will all the savings in the cost-plus method go to the contractor?
Since every project may have unforeseen circumstances, it is vital to accommodate contingencies. It is much easier for the project when there is a roadmap in place if something unplanned happens or there is an unexpected expense.
State the expectations clearly, such as the method of reporting the expenses.

Knowledge of the different types of contracts, their advantages, and their disadvantages is crucial, and it helps to know which one to choose to align with a particular project.

Resolving Shareholder Disputes In Saudi Arabia

Posted on May 22, 2022 - 10:42 am by perpetual-admin

Shareholder disputes are a common occurrence in many business entities worldwide, and Saudi Arabia is no exception. Disputes can arise because of disagreements over the company’s direction, distribution of profits, or management.

When shareholders are unable to resolve their disputes themselves, they may bring the matter to the attention of the board of directors to seek a resolution. In Saudi Arabia, the board of directors has the authority to resolve shareholder disputes. However, if the board is unable to reach a decision, the shareholders may seek resolution through arbitration or the courts. This can be a time consuming and expensive process, so it’s always preferable to try to find a working solution before the situation gets to the point of arbitration or litigation.

What Is Dispute Resolution?

Dispute resolution is the process of resolving conflicts between two or more parties. It can take many different forms, such as mediation, arbitration, and litigation. Mediation is a process in which a neutral third party helps the parties involved in the dispute come to an agreement. Arbitration also involves a neutral third party who listens to both sides of the dispute, but the difference is that they are granted authority to make a binding decision. Litigation is a process in which the dispute is resolved by a court of law.

Key Elements Of Effective Dispute Resolution

The key elements of effective dispute resolution are:

Communication – The parties involved in the dispute must be willing to communicate with each other to reach a resolution.
Cooperation – The parties must be willing to cooperate with each other and the mediator or arbitrator to reach a resolution.
Flexibility – The parties must be willing to be flexible to reach a resolution that is acceptable to all parties involved.
Respect – The parties must respect each other and the mediator or arbitrator to reach a resolution.
Time – The parties must be willing to invest the time necessary to reach a resolution.

Why Are Shareholder Agreements Important?

Shareholder agreements are a key tool in managing and resolving shareholder disputes. These agreements can provide a mechanism for shareholders to resolve their differences without resorting to arbitration or litigation. They can also help prevent disputes from arising in the first place by setting out clear rules and procedures for the management of the company.

How To Start The Arbitration Process In KSA

In 2012, the Saudi government issued the new Law of Arbitration with the aim to modernize and streamline the arbitration process in the Kingdom. This law made arbitration a more viable option for businesses seeking to resolve disputes, which they have failed to resolve internally.

If you are a shareholder in a Saudi company and you have a dispute with another shareholder, you can commence an arbitration process. The arbitration process will typically take about six months to complete. Once the arbitrator has decided, it will be final and binding for the parties involved.

To discuss arbitration in further detail please contact our Head of Dispute Resolution, Ali Altoukhi.

Arbitration and its Role in Family-Businesses

Posted on May 29, 2022 - 7:34 am by perpetual-admin

Family businesses contribute significantly to the GDP of Saudi Arabia, albeit the dynamics of the family business continue to evolve as the second and third generation enter the corporate world.

While family businesses leverage cooperation, disputes may arise which threaten the health of the enterprise. Alternative dispute resolution offers a mechanism family members can use to resolve differences privately and cost effectively.

Common Disputes in Family Businesses

Disputes over succession following the demise of a founding member are common and can take the business on a downward spiral if no succession planning or dispute mechanisms exist.

Often, family and business values will overlap but not necessarily align. Family values will insist on the unity of the members, which sometimes conflicts with the objective of optimizing the economic return of the family business. There may be a reluctance to disassociate a family member whose actions harm the company.

Furthermore, in the event a formal succession plan is not in place, the voting in of a temporary leader may cause unharmony between family members, which brings into question their position and future within the business.

Such rapid changes may lead family members to cash in on their stake, which may give rise to potential liquidation or divestment of stakes, again compromising the family business, brand reputation and future growth plans.

Avoiding Disputes

Families that decide to go into business should plan on ways to resolve conflicts in advance, usually at the outset of drafting company laws.

There are various pre-emptive measures at the disposal of family businesses to prevent disputes. These measures include legal governance structures providing for dispute resolution.

Families must establish a dispute resolution mechanism in their constitution, appointing an arbitrator or mediator.

The constitutional documents should have provisions for family members that want to cash in on their share, allocation of voting rights, processes of operating charities, and a dispute resolution mechanism.

Family businesses should prioritize succession planning in the event the founder expires.

In a nutshell, precautions that family members can take before they decide to go into business together include:

Preparation for conflicts: conflicts are always possible when business and family inter-twin. A careful analysis of the potential pitfalls and interests can preempt conflicts to establish sound mechanisms for resolution.
Focus on transparency: conversations about issues and challenges should come before negotiations on business matters. In addition, discussions on the norms and procedures in conflict resolution should also occur.
Appoint an arbitrator: parties should agree on a competent arbitrator in case of a dispute.

Alternative Dispute Resolution (ADR)

The Saudi government has taken steps to modernize the countries legal system to align with global standards. This includes provisions for mediation and arbitration. Unlike in the past, the parties can choose the foreign law they wish to apply in the ADR process. The provision is practical where one or more parties to the dispute are non-Saudis.

Usually, mediation and arbitration are the two major forms of ADR available to family businesses in KSA. Other variations such as expert determination, conciliation, neutral evaluation, and adjudication may exist, but they are still sub-branches of mediation and arbitration.

Mediation should typically come before arbitration and only move to arbitration when mediation fails. When the government established the Taradhi platform for virtual mediation, the primary objective was to accelerate dispute resolution, which is the overall goal of ADR.

The 2020 Commercial Courts Law introduced various changes to encourage arbitration and mediation in conflict resolution.

The benefit of ADR is control of the process. It is more flexible and inexpensive and provides a faster way to resolve differences between parties.

Arbitration as a Legal Resolution Channel for Family Businesses

With arbitration, dispute resolution between the family members usually involves one or more hearings. The arbitrator is a neutral third party, mutually or contractually engaged by the parties, or the arbitral tribunal based on the arbitration law.

Before the arbitration process, parties to the dispute agree to be bound by the arbitrator’s final decision.

Considering that the arbitration process is private, the public does not access information on disputes or resolutions. However, the parties must sign a non-disclosure agreement to keep all the dispute details confidential.

The process is also preferable when subject matter expertise is necessary. Some arbitrators specialize in particular areas such as construction and real estate law, and the process can leverage this expertise for quick and fair resolutions.

Drawbacks of the arbitration process can include the relaxed evidentiary and discovery rules. The arbitrator may use materials that an actual court may not have to make final decisions, and the result may be an unfavorable outcome that does little to resolve the dispute in the long run.

Normally, the arbitration law in KSA requires the supervision of the process by a court that typically has jurisdiction. Parties can appeal the arbitration decisions through that court, which can lengthen the process. The absence of finality can water down the benefits of the arbitration process, such as swiftness and cost-effectiveness.

The Saudi legal regime is undergoing significant changes, and challenges such as compliance will be apparent. However, the new modifications benefit the overall dispute resolution mechanism and provide greater certainty and clarity.

The decision to include a binding arbitration clause in the governance structure of a family business is up to the members. Nevertheless, the family business should consider drafting a process for arbitration for effectiveness and to avoid wasted time through appeals. Attention to the KSA arbitration law provisions is vital to making informed decisions.

Hammad & Al-Mehdar Law Firm has experience in all legal matters involving businesses and can help with arbitration agreements. Contact us to discuss your requirements further.

Dispute Resolution in a Modern Economy

Posted on September 5, 2022 - 8:41 am by perpetual-admin

Saudi Arabia, the world’s largest oil producer, has been undergoing a major transformation in recent years as it looks to diversify its economy and reduce its reliance on petroleum revenues. As part of this process, the government has laid out a plan to transform Saudi Arabia into a more business-friendly environment. Part of this transformation includes reforming the legal system with respect to commercial law.

Dispute resolution is a key area of commercial law, and Saudi Arabia’s legal system is currently undergoing a process of reform in this area. As the nation begins to attract significant Foreign Direct Investment (FDI), international businesses are set to benefit from greater transparency and confidence in the legal system with respect to disputes.

KSA’s Economic Changes & the Legal System

Saudi Arabia’s legal system is based on Islamic law (sharia) and is therefore distinct from the common law systems of many Western nations. The government has been working to standardise the legal system in recent years, and this process has accelerated in light of the Kingdom’s plans to diversify its economy. These changes are designed to make Saudi Arabia a more attractive destination for Foreign Direct Investment (FDI) and to create a more business-friendly environment.

Some of the key changes that have been made in recent years include:

E-Commerce Licencing

As part of a move to provide greater protection to consumers, the government has informed e-commerce enterprises that they must now apply for a licence in order to operate in Saudi Arabia. Online retailers can either make this application via the Ministry of Commerce or the Freelance Platform. This registration can be performed entirely electronically, removing barriers to entry for businesses.

New Companies Law

In 2022, the Saudi government signed off on a new companies law, which is designed to make it easier for businesses to set up and operate in the Kingdom. The law includes a number of key reforms, such as the introduction of a new type of company called a Simplified Joint Stock Company with an aim to meet the needs of entrepreneurs.

This new law also addresses ownership, governance and employment to help simplify the process of setting up a business while also regulating the business landscape. Speaking to Asharq Al-Awsat, Osama al-Obaidi, Professor of Commercial Law at the Institute of Public Administration (IPA), said that these legal changes will “boost corporate governance principles, facilitate regular procedures, and reduce disputes.”

Commercial Arbitration

The Saudi government has also been working to promote arbitration as a means of dispute resolution and this is an area where businesses can expect to see further reform in the future. The Saudi Center for Commercial Arbitration (SCCA) was established in 2014 and is working to promote the use of arbitration among businesses operating in the Kingdom. It provides training and education on the benefits of arbitration and assists businesses amid disputes.

The Impact on Dispute Resolution

The reforms to Saudi Arabia’s legal system will have a significant impact on commercial disputes. Businesses operating in the Kingdom will benefit from greater clarity and certainty with respect to their legal rights and obligations. While Saudi’s business leaders are still slightly hesitant to engage with arbitrators, there is a growing recognition of the benefits of arbitration as a means of dispute resolution.

This will position Saudi Arabia as a more attractive destination for investment since foreign enterprises will be afforded greater protection thanks to the recognition of transnational arbitration awards and the availability of impartial dispute resolution. It removes an element of risk for international businesses and will encourage more companies to invest in Saudi Arabia.

As Saudi Arabia continues to evolve as an economy, businesses can expect to see further reform in the legal system. Overall, these reforms are proving to be a positive development for businesses operating in the Kingdom and will help transform the nation into a safe and profitable destination for FDI.

Changes to Saudi Arabia’s Dispute Resolution Regulations

Posted on November 9, 2022 - 10:41 am by perpetual-admin

Dispute resolution is a growing industry in Saudi Arabia, and over the past 18 months, there have been some changes to its regulations. These changes aim to maintain high levels of efficiency and bring the system in line with international best practices.

Another significant change concerns the power of KSA’s enforcement courts. In this article, we will outline what these courts are, and what they can do to help ensure the efficient resolution of disputes.

Updates to the Dispute Resolution Framework

Dispute resolution was not a particularly well-developed area of law in Saudi Arabia until recently. In 2012, the government passed the Saudi Arbitration Law, which introduced a new framework for resolving disputes in the Kingdom. The introduction of this law was in response to growing levels of international arbitration, and it is part of a wider plan by the government to improve its legal infrastructure. Since then, a number of changes have been made to this framework to keep pace with international best practices, including the ones outlined below.

Electronic submissions

The introduction of an online dispute resolution system allows businesses to submit and manage disputes electronically. Since the COVID-19 global pandemic, this has become increasingly popular as it allows disputes to be dealt with remotely at a much faster pace than traditional face-to-face proceedings.

New Fee Structure

A new fee structure is one of the most recent changes to Saudi Arabia’s dispute resolution framework. Under this structure, parties who lose in court will be required to pay a fee of 2-5% of the claim value. This is intended to discourage frivolous claims and ensure that disputes are not being pursued to simply pressure the other party.

Saudi Arabia’s Enforcement Court

Saudi Arabia’s enforcement court has considerable power and is responsible for dealing with a wide range of disputes. These include:

Enforcement of court judgments from other countries that apply to people or entities resident in Saudi Arabia.
Enforcement of arbitration awards issued in accordance with the new arbitration law.
Enforcing family law judgments concerning the division of assets and child custody.
Ensuring that financial obligations (such as debts or alimony) are met following a divorce.
Enforcing intellectual property rights, such as trademarks, patents, and designs.

The role of the enforcement court is to ensure that these disputes are resolved in a fair and timely manner, which benefits businesses and individuals alike. With its extensive power, it is an important facet of the Saudi legal system.

In the case of arbitration and dispute resolution, the enforcement court has the power to enforce arbitration awards issued under the new arbitration law. This means that, should one party fail to comply with the award, the other party can seek enforcement of it in court. This gives businesses a level of security and ensures that any awards are respected.

Overall, the changes to Saudi Arabia’s dispute resolution framework have introduced higher levels of efficiency and international best practice to the legal system. This has benefited businesses and individuals alike, making Saudi Arabia a more attractive region for investment and entrepreneurship.

Managing Construction Disputes in Saudi Arabia

Posted on February 28, 2023 - 1:51 pm by perpetual-admin

The construction industry in Saudi Arabia has experienced significant growth in recent years, with numerous infrastructure projects and real estate developments underway across the Kingdom. From tourist attractions to transport projects, the Kingdom is undergoing a transformation fuelled by rapid infrastructure development.

While this trend presents significant opportunities for investors and developers, it has also given rise to its fair share of challenges, including construction disputes. These disputes can occur due to a variety of reasons and can often lead to costly and time-consuming legal proceedings.

Effective management of construction disputes is therefore crucial for the success of any construction project in Saudi Arabia. This article will provide an overview of common types of construction disputes in the Kingdom and examine the available dispute resolution methods.

Common Types of Construction Disputes in Saudi Arabia

It’s an unfortunate reality of the construction industry that disputes are a frequent occurrence. However, the root cause of many of these disputes can be narrowed down to several common issues. Here are the main types of construction disputes, which commonly arise in Saudi Arabia.

Design Faults and Errors. These types of disputes may arise when the construction design does not meet local regulations or when the design fails to match the specifications agreed upon in the contract.
Delay Claims and Disputes. Delays can be triggered by a range of issues, such as adverse weather conditions, modifications to the scope of work, or the late delivery of equipment or materials. This can impact the timeline of a project and lead to claims for compensation or other remedies.
Scope of Work Disagreements. Disagreements about the scope of work can lead to disputes during the completion of construction projects. These disputes can occur when relevant parties disagree over the interpretation of the contract, or when there is unclear contract language, or an unexpected change in the scope of work.
Payment and Billing Disputes. Disagreements over payment are common in Saudi Arabia’s construction industry, with contractors and subcontractors sometimes coming into conflict over compensation for unpaid work or additional work that was not included in the original contract.
Contractual Obligation Disputes. Finally, contractors and developers may disagree about the terms of a contract, such as payment schedules or other contractual obligations, leading to costly and time-consuming disputes.

Dispute Resolution Methods in Saudi Arabia

When construction disputes arise in Saudi Arabia, there are a variety of dispute resolution methods available for the parties involved to resolve their disagreements. These methods can include litigation in the courts or alternative dispute resolution (ADR) methods, such as mediation, arbitration, and expert determination. Here’s a brief overview of each of these dispute resolution methods:

Litigation in the Courts. The most traditional method of resolving disputes is through litigation in the courts. The dispute is presented before a judge, who decides on the outcome of the case. Litigation can be a time-consuming and expensive process and may not always result in a favourable outcome for all parties.
Mediation is an ADR method in which a neutral third party, the mediator, assists the parties in reaching a mutually acceptable solution. Mediation is voluntary and confidential and can often result in a faster and more cost-effective resolution to the dispute.
Arbitration is another ADR method in which a neutral third party – the arbitrator – listens to both sides of the dispute and renders a binding decision. Arbitration can be faster and less expensive than litigation, but it can also result in a limited ability to appeal.
Expert Determination. Expert determination is an ADR method in which an independent expert is appointed to determine the outcome of a dispute. The expert’s decision is binding, and the process is often faster and less formal than other ADR methods.

Resolve and Prevent Disputes for a Stronger Construction Industry

Construction disputes in Saudi Arabia can be costly and disruptive for all parties involved, delaying the completion of projects, and causing financial losses. However, construction disputes in the Kingdom are an unfortunate but common reality for stakeholders within the industry. By understanding the common types of construction disputes, stakeholders can take proactive steps to mitigate the risk of disputes occurring in the first place.

Additionally, by utilising the appropriate dispute resolution methods available, such as mediation or arbitration, stakeholders can resolve disputes more efficiently and effectively than through traditional litigation. If you need help with a construction dispute in Saudi Arabia, it is best to seek legal advice from a qualified expert who can guide you through the process and help you reach a resolution.

A Summary of Saudi Arabia’s Mediation Draft Law

Posted on March 14, 2023 - 12:50 pm by perpetual-admin

Saudi Arabia recently introduced a draft law introducing mediation as an alternative way to resolve disputes. This law is currently in the 30-day public consultation phase, and once implemented, it will apply to all legal entities registered with the Ministry of Commerce who are engaged in commercial disputes.

The law defines mediation as a process in which two or more parties come together to resolve their disputes with the assistance of a neutral third party (the mediator). It is intended to provide a more efficient and cost-effective method for resolving disputes between parties outside of the court system while ensuring that their rights are protected.

What Does the Law Mean for Parties Involved in Disputes?

The law lays out a framework for mediation and outlines the requirements that parties must meet in order to participate in this process. Here are some key takeaways from the new draft law below.

Confidentiality and Privacy

Mediation must be conducted in a confidential setting, which includes both in-person and virtual sessions. The mediator is bound by a duty of strict confidentiality and all parties involved in the mediation session must agree to maintain a similar standard of confidentiality. This means that the mediator and all participants must agree not to disclose any confidential information obtained during the mediation process and nothing that is discovered during mediation may be used as evidence in court.

Selecting a Mediator

The mediator must be approved by the Saudi Centre for Commercial Arbitration, with the appropriate qualifications and accreditation. The mediator will act as an impartial arbiter and facilitate communications between the parties in order to reach a resolution that is acceptable to everyone involved. The parties involved in the mediation session are responsible for paying the mediator, and the mediator’s fees should be agreed upon before the mediation session begins.

Terminating Mediation

If one of the parties decides to terminate the mediation, the law states that all information discussed during the session must remain confidential and may not be used in any subsequent legal proceedings. Failure to appear for a mediation session will also result in a termination of the mediation, and any expenses incurred in relation to the session will be borne by the party that failed to appear.

Mediation Agreements

The agreement reached through the mediation session must be recorded in writing and signed by both parties. This agreement will be enforceable by law and the parties are expected to abide by the terms of the agreement. There are a few exceptions to this, such as cases in which one or both parties are discovered to have been fully competent at the time of the agreement or if the mediator seriously violated their duties during proceedings.

How Does This Law Benefit Businesses in Saudi Arabia?

The introduction of this draft law is a positive development for those seeking to resolve disputes through mediation. Not only does it bring the Kingdom in line with international best practices for commercial mediation, but it also facilitates a more business-friendly environment. It creates a framework that ensures fairness, transparency, and privacy for all parties involved.

The law provides legal certainty and clarity, which should encourage more individuals and entities to explore mediation as an alternative dispute resolution method. As a result, businesses will benefit from a faster and more cost-effective way to settle disputes and will benefit from greater peace of mind while operating in Saudi Arabia.