Contractual Disputes in Construction Projects

When reviewing contracts and resolving contractual disputes in construction projects, it is often surprising to discover how poorly many contracts are drafted. Weak wording, inconsistencies, and omissions frequently undermine the contract's primary purpose as the most important tool for preventing and resolving disputes. In many cases, the contract itself becomes the source of disagreement rather than the solution.

This article outlines the essential elements of engineering contracts, together with practical recommendations and important considerations.

Ideally, contracts should be prepared by an experienced engineer or legal professional with expertise in construction contracts. However, this may not always be feasible, particularly for individuals and small businesses. In such cases, it is advisable to use standard contract templates issued by official authorities or those published by recognized experts as a public service.

Every contract should clearly state the place and date of execution, together with the complete details of both contracting parties. The First Party is the purchaser or client requesting the service, while the Second Party is the seller or service provider.

An individual must execute the contract personally or through a duly authorized representative holding a valid legal power of attorney. Sole proprietorships are represented by their owner or an authorized representative with a delegation certified by the Chamber of Commerce. Companies are represented by the general manager whose name appears in the Commercial Register, or by an authorized representative holding a Chamber-certified authorization.

The parties' details should include the legal name (as stated in the national ID or Commercial Register), ID or Commercial Registration number and date of issuance, address, mobile number, and email address. These details constitute the official contact information for all contractual correspondence, and each party must promptly notify the other of any changes.

Preamble

The preamble represents the offer and acceptance forming the basis of the agreement. It should state that the First Party desires to purchase the specified goods or services, that the Second Party is willing and legally qualified to provide them, and that both parties have full legal capacity and mutual intention to enter into the contract.

Scope of the Contract

This section should describe the goods or services in as much detail as possible, including quantities, specifications, and any relevant technical requirements. Reference may be made to contract appendices such as drawings, technical specifications, bills of quantities, schedules, and other supporting documents to eliminate ambiguity or misunderstanding.

Obligations of the Parties

The primary obligation of the Owner (First Party) is to pay the Second Party's entitlements on the agreed payment dates. Additional obligations may include issuing authorizations, granting site access, obtaining permits, and providing utilities or other agreed support.

The principal obligation of the Second Party is to supply the goods or perform the services described in the contract within the agreed period. Additional obligations may include providing warranties, complying with applicable standards, and assuming responsibility for the consequences of its work.

Contract Duration

The contract period should preferably be expressed in days, specifying whether they are calendar days or working days. The contract should also provide that any delay caused by the Owner automatically entitles the Contractor to an extension of time. Likewise, approval periods should be clearly defined, and any delay beyond those periods should result in a corresponding extension of the contract duration.

Delay Damages

Delay damages are not a penalty. Neither party has the right to impose punishment on the other. Instead, they represent a pre-agreed estimate of the Owner's losses resulting from delay. Consequently, the Owner should not be entitled to claim both delay damages and additional compensation for the same delay. By common industry practice, delay damages are typically capped at 10% of the contract value.

Contract Price

The contract price is one of the most critical provisions. It should be stated both numerically and in words, specifying the applicable currency. The contract should also identify whether it is a lump-sum contract or a remeasurement contract in which quantities are adjusted upon completion.

Even in lump-sum contracts, it is recommended to allocate the total contract value among the individual work items to facilitate the pricing of variation orders.

Governing Law and Dispute Resolution

The governing law should be expressly stated. The contract should also specify the agreed dispute resolution mechanism, whether through litigation—identifying the competent city or court—or arbitration.

Where arbitration is selected, the contract should state that proceedings shall be conducted in accordance with the Saudi Arbitration Law.

Arbitration generally provides a faster resolution process but involves higher costs, making it more suitable for larger contracts. Litigation is generally less expensive but often requires significantly more time.

General Recommendations

• Use clear and descriptive titles for the contract and each of its articles.
• Number all articles and pages of the contract.
• Use Modern Standard Arabic as the primary language. Where necessary, commonly used terms—whether colloquial or in another language—may be included in parentheses.
• Conclude the contract by stating the number of original copies executed and identifying the party receiving each original copy.