Saudi Arabia Business: Performance Requirements & Settling Disputes
Saudi Arabia Business: Performance Requirements & Settling Disputes Last updated on Sunday 25th April 2010
The Kingdom of Saudi Arabia requires bid and performance bonds from most foreign companies in the amount of 1% and 5% respectively of the total value of a given contract.
Bonds may be in the form of a bank guarantee payable on demand, a certified check on a local bank, or cash. Each guarantee must be approved by a bank in Saudi Arabia acting as an agent for the foreign bank.
The government of Saudi Arabia issues a list of acceptable insurance companies. The limits which these companies may underwrite are also specified.
The performance bond is not required for consulting work, service contracts, supply of spare parts not for contracts which the government awards for direct-purchase whose value is less than one million riyals and which do not have to be tendered.
In some joint-ventures, the Saudi company may put up the whole guarantee.
The bid bond is always required except in the case of a purely negotiated contract where there are no competitors. The performance bond is generally due from the winning bidder within ten days of notification of the award of the contract. It is returned to the contractor on final completion of the project even though the contractor remains liable for defects of collapse of the structure for ten years -- unless the structure was not meant to last ten years.
An advance payment of 10% of the cost of a project must be paid by the Saudi client upon the signing of the construction contract. This advance must be supported by the contractor with a bank guarantee also of 10% of the project's cost. As work progresses, payments of up to 90% will be made on the completed work. The remaining 10% will be held pending the final delivery of the project or it may be paid against bank guarantees as the work advances.
Saudi companies and joint-ventures where a Saudi partner holds at least 60% of the capital may be paid in full for the completed work without requiring a bank guarantee.
Provisions for settling disputes are included in contracts as a matter of course. Commercial disputes are normally settled through personal contact and negotiation or through the Saudi arbitration system. There are arbitration and grievance boards set up for the settlement of disputes. Their decisions may be accepted by both litigants or they may be appealed to the Sharia court. In major disputes, the Council of Ministers may become involved.