Saudi Arabia has aligned its public procurement guarantee framework with the mechanism most widely used in construction contracting internationally: the on-demand, or "unconditional," guarantee. Article 105 of the Executive Regulations of the Government Tenders and Procurement Law codifies a cluster of principles governing how bank guarantees function once issued.
The defining feature of an on-demand guarantee is that the issuing bank must pay upon first written demand from the beneficiary, without requiring a court judgment, an arbitration award, or proof of actual loss. This is not a Saudi innovation. The same structural logic underpins demand guarantee practice under English law and many jurisdictions, within FIDIC-based international construction contracts, and under the International Chamber of Commerce's Uniform Rules for Demand Guarantees (URDG 758).
In each of these systems, the guarantee is treated as an autonomous instrument, entirely independent from the underlying construction contract. The bank's payment obligation is triggered by the demand itself, not by an adjudicated finding of breach. Any dispute about whether the demand was justified is, by design, relegated to a subsequent and separate process.
This structural independence is precisely what gives the on-demand guarantee its commercial value to employers, and it is precisely why it has become the default security instrument in public procurement across most major jurisdictions, not only in Saudi Arabia.
Article 105 does not merely restate the "pay first, argue later" principle in the abstract. It builds a fairly comprehensive operational scaffold around it, addressing questions that matter greatly to any contractor structuring its banking relationships for a Saudi public project.
The guarantee must be unconditional, irrevocable, and free of any tax, fee, or deduction, guaranteeing the employer access to the full face value of the instrument without the issuing bank raising objections tied to the merits of the underlying works dispute. The Regulations also extend meaningful flexibility to how such guarantees can be sourced and structured. Foreign banks approved by the Saudi Central Bank may issue guarantees where works are executed abroad, and even branches of foreign banks licensed to operate within the Kingdom qualify as acceptable issuers.
A single guarantee may be split across multiple banks, each responsible for an agreed percentage of the total amount, offering contractors a degree of flexibility in managing concentration risk with any one lender. Contractors are also permitted to switch the issuing bank altogether, provided the original guarantee remains valid and in force until the replacement has been properly secured -a sensible continuity safeguard that prevents any coverage gap.
On the employer's side, the government authority is obligated to verify the authenticity of every guarantee directly with the issuing bank upon receipt, and must maintain dedicated internal records tracking each guarantee's status, including pending extensions, confiscations, and releases. This administrative discipline, while primarily a matter of internal governance for the contracting authority, indirectly benefits contractors by reducing the likelihood of guarantees being mishandled, lost track of, or allowed to lapse inadvertently.
Finally, in the narrow circumstances where works are performed abroad and a bank guarantee genuinely cannot be obtained, the Regulations permit cash guarantees or bank checks as an accepted substitute, recognizing that rigid insistence on bank instruments in certain foreign markets would be commercially unworkable.
It would be unfair to contractors, to describe the mechanism of on-demand guarantee without acknowledging the tension and the real risk for the contractors.
The very feature that makes on-demand guarantees efficient and attractive to employers — payment without inquiry into merit — is the same feature that exposes contractors to the risk of a guarantee being called opportunistically, unlawfully, or even as leverage in a wholly unrelated commercial disagreement.
This is not a defect unique to the Saudi framework; it is a well-documented and widely debated feature of demand guarantee practice globally, discussed extensively in several jurisdictions, English case law, ICC commentary, and FIDIC guidance notes alike.
Saudi law does incorporate certain counterweights that operate on the employer's own side of the relationship, most notably the structured confiscation process discussed in a separate article on this blog, which requires committee-level review and reasoned justification before a guarantee is formally called.
However, these safeguards constrain how and when the employer may validly demand payment; they do not grant the contractor a right to block payment to the bank once a compliant demand has been made. There are however several mechanisms that might be helpful for the contractor in case of unlawful call of the guarantee.
However, in practical terms, this means a contractor's most effective protection against misuse of the guarantee mechanism is not found in resisting the instrument itself at the moment of a call, but in the quality of the underlying contractual drafting negotiated well before the guarantee is ever issued: precise definitions of default, clear notice and cure provisions, and, where commercially achievable, negotiated caps or step-down mechanisms tied to project milestones.
Contractors operating in Saudi Arabia's public sector should approach the guarantee regime as a variant of an internationally standard risk allocation tool that they likely already encounter in FIDIC-based private contracts and in public tenders elsewhere in the region and beyond. Understanding its mechanics in detail — and, critically, understanding where genuine protections exist versus where they do not — is essential to pricing risk accurately and to managing banking relationships with the necessary rigor.