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Managing Construction Disputes in Saudi Arabia

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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

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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.

Navigating M&A in KSA: A legal roadmap

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Mergers and acquisitions (M&A) have become a standard business strategy for companies seeking to expand, diversify or enter new markets. In Saudi Arabia, M&A activity has grown significantly, with the government encouraging foreign investment to promote economic growth and diversification.

M&A transactions in Saudi Arabia are subject to a complex legal framework, and navigating the process can be challenging. A combination of laws and regulations governs the legal framework for M&A. The most significant is the Companies Law, which sets out the requirements for the incorporation, management, and dissolution of companies in Saudi Arabia. Other relevant laws and regulations include the Capital Market Law, the Anti-Monopoly Law, and the Foreign Investment Law.

In addition to these laws, M&A transactions in Saudi Arabia are subject to the rules and regulations of the Capital Market Authority (CMA) and the Saudi Arabian General Investment Authority (SAGIA). The CMA is responsible for regulating the securities industry in Saudi Arabia, while SAGIA is responsible for promoting foreign investment in the country.

The process of an M&A in Saudi Arabia generally involves the following steps:

Due diligence: The acquirer thoroughly analyses the target company to determine its financial, legal, and operational position. This is done to identify potential risks or liabilities associated with the target company.

Negotiation of terms: Once due diligence is complete, the acquirer and target company negotiate the terms of the merger or acquisition, including the purchase price and the transaction structure.

Memorandum of Understanding (MOU): The parties sign a non-binding MOU outlining the key terms of the transaction.

Approval from regulatory authorities: The transaction is subject to approval from regulatory authorities, including SAGIA and the CMA. The parties must submit the required documents to the authorities, including a share purchase agreement, audited financial statements, and other relevant documents.

Shareholders’ approval: The transaction is subject to approval by the shareholders of both companies. A meeting is held to obtain the necessary approvals.

Closing: Once all approvals have been obtained, the transaction is completed. The acquirer pays the agreed-upon purchase price, and the target company’s shares are transferred to the acquirer.

Post-merger integration: After the transaction, the acquirer and target company must integrate their operations. This includes IT systems, combining departments, and restructuring the organisation.

The exact process may vary depending on the nature of the transaction and the companies involved.

M&A in Saudi Arabia is subject to a range of legal requirements that must be carefully considered by the parties involved. Some of the essential legal requirements to consider include the following:

Regulatory approvals: M&A transactions in Saudi Arabia require approval from regulatory authorities, including the Saudi Arabian General Investment Authority (SAGIA) and the Capital Market Authority (CMA). The parties must submit the required documents to the authorities, including a share purchase agreement, audited financial statements, and other relevant documents.

Foreign investment restrictions: Certain industries in Saudi Arabia are restricted or closed to foreign investment. The parties must ensure compliance with these restrictions and obtain any necessary approvals or licenses.

Anti-trust regulations: transactions may be subject to anti-trust regulations, which prohibit anti-competitive behavior. The parties must ensure that the transaction does not result in a dominant market position or otherwise violate anti-trust laws.

Employment laws: M&A transactions may have implications for the employment of staff of the target company. The parties must comply with Saudi Arabia’s employment laws and ensure that staff is treated fairly and appropriately during the transaction and integration process.

Tax laws: The parties must ensure compliance with Saudi Arabia’s tax laws and seek appropriate advice to manage any tax implications of the transaction.

Intellectual property rights: The parties must ensure that any intellectual property rights associated with the target company, such as patents, trademarks, and copyrights, are transferred adequately as part of the transaction.

Contractual obligations: The parties must carefully review any existing contracts or agreements of the target company to ensure that the transaction does not violate any contractual obligations.

It is important to note that the above list is not exhaustive, and the exact legal requirements will depend on the specific circumstances of the M&A transaction. Therefore, it is recommended that the parties seek legal and financial advice to ensure compliance with all applicable laws and regulations.

 

Suhaib Hammad and Rakesh Bassi have presented a comprehensive analysis and insightful perspectives on strategic mergers and acquisitions in the Saudi Arabian market. Their expertise and acumen in this field are evident in the thought-provoking insights and valuable contributions that this article offers. Should you wish to engage in further discussions or seek clarifications, please reach out to the authors on info@hmco.com.sa

 

An Insight into Kuwait’s Economic Market

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Situated at the tip of the Persian Gulf, Kuwait is a small but fascinating oil-rich nation, with a population of just over 4 million people. Before its reinvention as a global oil supplier, it was a busy trade port, connecting merchants and traders between ancient Mesopotamia, Persia, and India. Today, Kuwait is considered one of the most prosperous countries in the Middle East – it has one of the highest GDPs per capita and is a major player in the global oil industry.

It currently holds around 7 percent of the world’s oil reserves and is one of the wealthiest nations in the region. But there is more to modern-day Kuwait than just oil. In this article, we will explore some of the exciting investment opportunities that Kuwait has to offer.

Exploring Kuwait’s Economic Opportunities

There are plenty of reasons why Kuwait should be on the radar of investors. Thanks to its long history of oil production, Kuwait has benefited from a stable economic foundation on which to build further prosperity. Here are some of the economic opportunities Kuwait has to offer:

Infrastructure Development. Kuwait’s government is making enormous investments in infrastructure projects, aiming to build a new subway system and modernize its airport in the coming years.

Oil-backed economy. While Kuwait makes gains in developing other economic sectors, its significant oil reserves provide investors with a stable economic foundation for investment.

Politically stable. Kuwait ranks well in terms of political stability, providing a beacon of security among the turbulent political climates of other countries in the region.

Business-friendly. Kuwait has created a business-friendly atmosphere, with its open economy characteristics, favorable taxes, and an active venture capital market.

Kuwait’s Most Well-Developed Sectors

Kuwait boasts a diversified economy and is home to some of the most innovative start-ups and modern business ventures in the Middle East. The government has made considerable strides towards liberalizing the economy, making it easier to invest and start businesses. Let’s take a look at some of the most profitable opportunities (outside of the oil sector) in Kuwait.

Renewable Energy

With the increasing demand for electricity and the growing threat of global warming, Kuwait has invested heavily in renewable energy sources. With a goal of 15% of its energy needs being supplied by renewable sources by 2030, solar and wind projects are featuring prominently in Kuwait’s energy sector.

Finance

Kuwait boasts a flourishing banking sector, making it an attractive option for investors looking to take advantage of its highly competitive financial services industry. Regional and international banking institutions are well-established here, so businesses in the finance domain will find all that they need to explore the market.

Technology

As the government seeks to digitize the nation’s healthcare system and bring its other industries up to international standards, technology and ICT companies are finding excellent opportunities for growth in Kuwait. Cybersecurity, mobile application development, and software development are some of the most in-demand industries in the country.

Real Estate

Although Kuwait is a small nation, demand for housing is beginning to pick up pace. The government has recently started to devote its resources to the development of this sector, creating even more attractive opportunities for investors.

Kuwait’s Trade Relationship with Saudi Arabia

Kuwait and Saudi Arabia have a long history of trade ties, with Kuwait often serving as the gateway to regional markets. The two countries share many cultural and economic similarities, making Kuwait an ideal partner for Saudi businesses and investors.

The United Nations COMTRADE database on international trade has revealed that Saudi Arabia’s imports from Kuwait totaled US$566.55 million in 2021, and in the same year, Kuwait imported US$149.89 Million in goods from Saudi Arabia. KSA primarily imports petroleum-related products, paper, iron, and steel from Kuwait, whereas Kuwait largely imports Saudi dairy products, plastics, and soaps.

Kuwait: A Strategic Investment Hub

For investors with an eye for the Middle East, Kuwait is an obvious choice. With its strong economic fundamentals and strategic location, Kuwait provides investors with a stable opportunity to diversify their portfolios. Non-GCC, foreign-owned companies can own 100% of their subsidiary in Kuwait with approval from the Kuwait Direct Investment Promotion Authority (KDIPA). Alternatively, non-GCC foreign investors may join forces with a local Kuwaiti partner and own up to 49% of the company. There is no double taxation treaty between Kuwait and KSA, however, Gulf nationals are not required to pay corporate or personal income tax in Kuwait. Except for the requirement to retain 5% of the contract or transaction value by entities in Kuwait on payment to any incorporated body (which will be released at the presentation of a tax clearance certificate), Kuwait does not have any other form of withholding tax regime on payments made by residents to a non-resident.

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