Liquidated Damages in Saudi Arabia: A Guide for EPC Owners
Liquidated Damages in Saudi Arabia: A Guide for EPC Owners
For decades, whether a liquidated damages clause would actually hold up in a Saudi court was a real question, not a formality. Saudi Arabia’s Civil Transactions Law, in force since December 16, 2023, settled it. If your factory’s EPC contract runs late, what happens next now follows a codified set of rules instead of case-by-case uncertainty.
What liquidated damages actually are
A liquidated damages clause sets a pre-agreed compensation amount for a specific breach, most often a missed completion date, before that breach ever happens. Article 178 of the Civil Transactions Law confirms parties can fix this figure in the original contract or in a later agreement. One default worth knowing before you negotiate: Saudi law doesn’t require you to notify the contractor before the right to compensation kicks in, unless your specific contract says otherwise. The UAE and Egypt both require notice by default; Saudi Arabia doesn’t.
The burden of proof now favors the owner
This is the part that changed the most. Under Article 179, a liquidated damages clause creates a presumption that harm occurred. As the project owner, you don’t have to prove the delay actually cost you money or prove a causal link between the delay and your loss. The contractor carries that burden instead, and the only way out is proving you suffered no harm at all.
That’s a meaningfully lighter lift than a standard damages claim, where the party seeking compensation typically has to prove the loss itself.
How a contractor can still escape or reduce the amount
The clause isn’t unconditional. A contractor avoids liability entirely by proving your project suffered no harm. They can also point to the delay coming from your own acts, omissions, or a force majeure event, rather than their own failure. Courts can also reduce the agreed amount, but only on narrow grounds. The contractor has to prove the figure was grossly exaggerated, or that they partially performed their obligations before the breach.
Saudi courts read “grossly exaggerated” narrowly too. A liquidated damages figure that runs somewhat higher than your actual loss isn’t enough on its own to get reduced. The excess has to be gross, not just present. On the other side, you can ask a court to increase the amount too. You need to show the contractor’s fraud or gross negligence caused your losses to exceed what the clause covers.
What market practice actually looks like
The law sets the rules; the market sets the numbers. Liquidated damages in Saudi Arabia typically get capped around 10% of contract value. Caps sometimes run from 5% up to 25% depending on project risk, with most falling in the 10% to 15% range. One hard limit applies regardless of what you negotiate: liquidated damages can’t attach to payment obligations. That restriction follows directly from Saudi Arabia’s prohibition on interest. Courts have upheld it as a matter of public policy that contracting parties can’t override.
Why this connects to how you structure your EPC contract
A liquidated damages clause is only as useful as your ability to prove the delay was actually the contractor’s fault. That’s exactly where the rest of your project documentation matters. An owner’s engineer reviewing progress independently gives you a real record of what caused a schedule slip, instead of relying on the contractor’s own account once a dispute starts. The same logic runs back through a properly completed FEED package. A contractor who accepted a fixed price against mature engineering has less room to argue the delay was really a scope or design problem you created.
None of this replaces a well-drafted clause. It just means the clause works better when the rest of the project supports it too.
How Temujin approaches this
We build liquidated damages provisions around what a Saudi court will actually enforce: market-standard caps, clear triggers, and documentation practices that hold up if a delay dispute ever gets that far. That’s a different starting point than a generic contract template, and it’s worth getting right before signature rather than after a schedule slips.
Frequently asked questions about liquidated damages in Saudi Arabia
Are liquidated damages clauses enforceable in Saudi Arabia?
Yes. Saudi courts recognized them even before the Civil Transactions Law, based on Sharia principles, and the law that took effect in December 2023 codified the rules governing how they work.
Does the project owner have to prove financial loss to enforce a liquidated damages clause?
No. The clause creates a presumption of harm. The contractor bears the burden of proving no harm occurred if they want to avoid paying.
Can a Saudi court reduce an agreed liquidated damages amount?
Yes, but only if the contractor proves the amount was grossly exaggerated or that they partially performed their obligations. A court can’t reduce the amount just because it’s somewhat higher than the actual loss.
What is the typical liquidated damages cap in Saudi Arabia?
Market practice generally caps liquidated damages around 10% of contract value, though caps can range from about 5% to 25% depending on project risk.
Can liquidated damages apply to late payments?
No. Saudi law prohibits liquidated damages on payment obligations, since that would function as interest, and courts treat that prohibition as public policy.
Structuring an EPC contract that protects your schedule?
A liquidated damages clause only works if it’s built around what Saudi courts actually enforce. It works best alongside a contract structure that can prove where a delay actually came from. Get in touch and we will help you think through both.
