Applying Delay Penalties in Saudi Contracts: When Is Agreed Compensation Due and How Do You Build the Deduction File?

Why is the stated figure not collected automatically?

Under Saudi Arabia’s Civil Transactions Law, issued by Royal Decree No. M/191, ^[2] a delay penalty clause in a private contract is a form of agreed compensation. Article 178 allows the parties to fix the amount of compensation in advance, in the contract or a later agreement, unless the obligation is a sum of money, and states that entitlement to compensation does not require notice to the debtor. ^[1]

Article 179, however, sets important limits: ^[1]

• Agreed compensation is not due if the debtor proves that the creditor suffered no harm.
• The court may reduce it if the debtor proves it is excessive or that the obligation was partly performed.
• The court may increase it if the creditor proves the harm exceeded the agreed amount because of the debtor’s fraud or gross negligence.
• Any agreement to the contrary is void.

So the clause shifts the burden of proof and makes the claim easier, but it does not settle it.

The exception for monetary obligations

Because Article 178 excludes obligations whose subject is a sum of money, ^[1] a delay penalty on a supplier’s delivery is different from a fixed sum imposed on a buyer that pays late. The first concerns supply or performance; the second concerns a sum of money. Do not treat the two clauses alike, and put any late-payment clause to your adviser.

Step one: what triggers the clause?

The weakest deduction files start from the wrong date. The date in the original contract rarely stays the same, so establish:

• The updated contractual date: after change orders and written extensions.
• What was delivered and what was late: using delivery records showing quantities and dates.
• The creditor’s own delay: such as late approvals, site access or specifications. Article 171 does not make a late debtor liable for harm if the delay was due to a reason beyond its control. ^[1]
• Notices exchanged: what the supplier notified about the delay and its causes, and how the creditor responded.

How do you calculate the amount?

Read the clause with three questions: is the rate applied to the whole contract value or to the value of the delayed portion? Is the unit of time a day or a week? What is the cap? Then apply it to the chargeable period after excluding anything caused by the creditor. Check how the clause counts time: calendar days or working days, and whether a part week counts as a full week or pro rata. These details change the final figure. Keep the calculation sheet with the source of every number in it, so that any reviewer can redo the sum and reach the same result.

If the clause applies the rate to the whole contract value even though most of the supply was delivered on time, expect the debtor to rely on partial performance to seek a reduction under Article 179. ^[1] Preparing an alternative calculation on the delayed portion helps you assess your position before a dispute.

Anticipate the debtor’s defences under Article 179

Prepare the file as if the debtor will challenge it, because Article 179 gives it three lines of attack: ^[1]

1. No harm: gather evidence of the impact, such as operational disruption, substitute costs or penalties the organisation itself paid to its customers.
2. Excessive amount: compare the sum with the actual expected impact, and keep anything showing how the rate was estimated at contracting, if it exists.
3. Partial performance: record the value of what was delivered on time and whether it was put to use.

Conversely, if the delay resulted from the debtor’s fraud or gross negligence and the harm exceeded the agreed amount, the creditor may seek an increase. ^[1] So do not rely on the stated figure alone; keep a record of the actual impact.

Deduct from payments or make a claim?

If the contract gives the creditor a right to deduct the penalty from amounts due, follow its procedure precisely: the required notice, the time limit and how objections are raised. Although Article 178 does not require notice for entitlement to agreed compensation, ^[1] a written notice setting out the trigger, the period and the calculation reduces disputes and documents your position.

If the contract gives no right to deduct, or the amount is substantially disputed, the safer course is to put the file to your adviser to assess a claim rather than deduct unilaterally. Ultimately, a disagreement over the amount is decided by the competent court or arbitral tribunal under the contract.

Common mistakes in applying the clause

• Deducting before extensions are settled: pending extension requests make the chargeable date itself disputed.
• Exceeding the cap: continuing to accrue after the agreed maximum is reached, instead of moving to what the contract allows at that point, such as termination or completion at the supplier’s expense.
• Accepting without reservation: signing a receipt for the late delivery without reserving the right to the penalty may be used against you later, so record the reservation in writing.
• Mixing the penalty with other claims: a delay penalty is one thing; claims to repair or be compensated for defects are another, with their own clauses and evidence.
• One figure for several deliveries: each delivery has its own date, value and period of delay, so do not combine them into a single unexplained figure.

Government contracts: fines set by law

If the counterparty is a government entity, the fine is also governed by the Government Tenders and Procurement Law. Under the law issued by Royal Decree No. M/128, a contractor that is late faces a fine not exceeding 6% of the value of a supply contract or 20% of other contracts, ^[3] and in continuing service contracts a fine not exceeding 20% of the contract value plus deduction of the value of unperformed work. ^[3] The law allows the contract to be extended and the fine waived in cases including delay attributable to the government entity, to exigent circumstances or to reasons beyond the contractor’s control. ^[3]

A new law was issued by Royal Decree No. M/76 dated 27/2/1448H, ^[5] which, according to a published analysis, lowers the general cap to 15% while keeping 6% for supply contracts, and takes effect on 2 January 2027. ^[4] The previous law continues to govern tenders issued while it was in force. ^[5] How these statutory fines relate to the agreed compensation rules of the Civil Transactions Law is a question for your adviser in each contract.

Hypothetical example: equipment delivered in two batches

Hypothetical example: A private contract to supply equipment to a site in Dammam is worth SAR 2,000,000, and the clause provides for 0.5% per week of the value of the delayed portion, capped at 10% of the contract value. A first batch worth SAR 1,200,000 was delivered on time; the second, worth SAR 800,000, was six weeks late, two of those weeks being caused, according to the correspondence, by the buyer’s late approval of drawings.

The chargeable period is therefore four weeks. The amount: 800,000 × 0.5% = SAR 4,000 per week, × 4 weeks = SAR 16,000, well below the SAR 200,000 cap. Had the clause been wrongly applied to the whole contract value for six weeks, the figure would have been SAR 60,000, which is easy to challenge. The team prepared a statement separating established facts from disputed points, recorded the operational impact of the delay, sent a written notice and took the file to its adviser before deducting.

Conclusion

A delay penalty clause makes a claim easier but not automatic. Start from the updated contractual date, exclude delay caused by the creditor, calculate on the correct basis, prepare for the Article 179 defences and, in government contracts, confirm which procurement law and caps apply.