Subcontract Agreements in Saudi Arabia: Clauses That Prevent Payment Disputes

The legal background

The Civil Transactions Law's contracting (muqawala) provisions apply to subcontracts:

• the law addresses unit-rate and lump-sum pricing;
• The Civil Transactions Law addresses the right to subcontract and the employer's limited liability to subcontractors;
• The law deals with correcting defective work and with termination where a breach cannot be rectified.

What the subcontract says still decides most disputes.

1. Scope and documents

Define the scope precisely, with drawings, specifications and a bill of quantities attached. If parts of the main contract are "incorporated", list exactly which clauses, and make sure the subcontractor has actually received them.

2. Price and measurement

• Unit rates: set the measurement method and who signs the measurement sheets, and how often.
• Lump sum: define what is included and what counts as a change. Under the contracting rules, general exceptional circumstances that destroy the contract's balance may allow the court to extend time, adjust the price or terminate.

3. Payment terms

• Set the payment cycle, the certification steps and the due date after each step.
• If you use a "pay when paid" or "pay if paid" link to the owner, define it carefully: what happens if the owner certifies but does not pay, and what happens if the delay is caused by the main contractor.
• Retention: state the percentage, when it is released, and what triggers release.
• Avoid fixed late-payment penalties on unpaid sums. The Civil Transactions Law allows agreed compensation, except where the obligation is to pay a sum of money.

4. Variations

Require written instructions for variations, set a short period for pricing them, and state how disputed variations are paid in the meantime. Most variation disputes are lost for lack of a written instruction.

5. Delay and liquidated damages

Back-to-back delay damages are common, but they must be realistic:

• agreed compensation is not payable if the debtor proves no harm;
• it can be reduced if exaggerated, or if the obligation was partly performed.

Set a rate and a cap, and link extensions of time in the main contract to the subcontract.

6. Defects

Set an inspection and snagging process. Under the contracting rules, the employer may require correction within a reasonable time, failing which a third party may do the work at the contractor's expense. A clear notice-and-cure clause applies this to the subcontract chain.

7. Termination

• If you want a right to terminate without a court order, say so expressly.
• Otherwise, a party notifies the other and asks the court to rescind for non-performance.
• If a breach cannot be rectified, or cannot be rectified within the agreed period, the employer may demand immediate termination.
• Dispute-resolution and confidentiality obligations survive rescission unless agreed otherwise.

8. Security and disputes

• Payment security that can be enforced directly includes cheques and registered promissory notes.
• If you choose arbitration, use a clear clause. A valid arbitration clause stops the court from hearing the dispute if the defendant relies on it.

Example: A mechanical subcontractor in Jubail Industrial City is offered a subcontract with delay damages of 1% per day and no cap, and payment only "after receipt of payment from the client". On review, it negotiates a cap, a defined period after owner certification within which payment is due regardless, and written variation instructions with a seven-day pricing period.