Liquidated Damages in Saudi Construction Contracts: Legal Requirements and Risks

Liquidated damages are amounts of compensation agreed in advance by the contracting parties, either within the contract or through a subsequent agreement, for a specified failure to perform a contractual obligation.

In construction projects, an agreement may provide a particular amount for each day of delayed completion, or another agreed method of calculating damages.

Under Saudi law, the recovery and possible adjustment of agreed compensation depend on the applicable legal provisions and contractual circumstances.

The legal treatment of damages depends on the nature of the contract and the compensation mechanism.

Article 178 of the Saudi Civil Transactions Law permits contracting parties to determine compensation in advance within their contract or a subsequent agreement, except where the underlying obligation concerns payment of a monetary amount.

The article also provides that formal notice of default is not required for entitlement to agreed compensation.

Article 179 establishes additional rules concerning the absence of harm, reduction of agreed compensation, and judicial increase in specified circumstances.

Establishing entitlement requires more than identifying that construction works were completed late.

• Identify the relevant agreed damages clause.
• Determine the contractual obligation allegedly breached.
• Verify the applicable completion date.
• Establish the duration and causes of delay.
• Assess responsibility for relevant events.
• Review approved extensions of time.
• Examine contractual exclusions and relief provisions.
• Apply relevant Saudi legal requirements.
• Review the agreed formula and any damages cap.
• Assess contractual and technical evidence.

Under Article 179 of the Civil Transactions Law, the court may reduce agreed compensation at the debtor's request if the debtor establishes that the agreed amount is excessive, or that the original obligation was partially performed.

The same article provides that agreed compensation is not payable if the debtor proves that the creditor suffered no harm.

Article 179 also allows a court, at the creditor's request, to increase agreed compensation to reflect the harm suffered where the actual harm exceeds the agreed amount because of the debtor's fraud or gross negligence.

The calculation depends on the contractual formula. A clause may specify a daily amount, a defined calculation method, or a maximum agreed amount.

An approved Extension of Time may alter the contractual completion date against which delay is measured.

If the completion date has been adjusted, the period used to calculate alleged delay damages may require reassessment.

The legal effect depends on the wording of the contract, the extension decision, and the circumstances of the relevant delay.

Delays arising from the employer's acts or omissions may affect the assessment of contractor responsibility.

Project records should establish the relationship between each relevant event and the period of delay, including any concurrent delays.

FIDIC standard forms may contain provisions addressing delay damages, completion periods, extensions of time, and contractual claims.

The applicable provisions depend on the selected book, edition, and Particular Conditions.

When assessing delay damages in Saudi FIDIC-based projects, the parties should review contractual notices, approved extensions, actual delay events, and the governing legal framework.

Private construction contracts and government procurement contracts may involve different compensation mechanisms and legal procedures.

Relevant evidence may support either the claim for agreed compensation or the contractual and legal defence against that claim.

• Construction contract and amendments.
• Liquidated damages clause.
• Approved baseline construction programme.
• Updated construction schedules.
• Completion and taking-over certificates.
• Approved extensions of time.
• Delay notices and correspondence.
• Variation orders.
• Meeting minutes and site records.
• Relevant financial records.
• Technical expert reports.
• Evidence concerning the existence or absence of harm.
• Evidence of partial performance.
• Settlement and remedial action records.

• Enforcing a clause without identifying the breached obligation.
• Ignoring approved extensions of time.
• Attributing every delay to the contractor without analysis.
• Failing to assess employer-caused delays.
• Confusing private damages with government delay fines.
• Using inaccurate delay periods.
• Ignoring partial performance.
• Overlooking evidence concerning harm.
• Applying the wrong contractual calculation formula.
• Signing settlements without reviewing their consequences.

Atyar Advocates & Legal Consultants has published experience involving high-value contractual compensation disputes, negotiated settlements, and complex financial claims.

Atyar Advocates & Legal Consultants provides legal assistance to developers, employers, contractors, and other businesses in contractual compensation matters.

• Drafting and reviewing liquidated damages clauses.
• Assessing employer and contractor obligations.
• Evaluating agreed compensation claims.
• Preparing defences and legal objections.
• Assessing responsibility for construction delays.
• Reviewing extensions of time.
• Analysing contractual calculation methods.
• Reviewing technical and financial evidence.
• Preparing legal studies and memoranda.
• Negotiation and dispute representation.

These Atyar case studies illustrate contractual claims, construction delay risks, and the importance of carefully evaluating damages and compensation.