Investing in Saudi Arabia: Key areas of Saudi law and dispute resolution

Transformational economic and social infrastructure development is at the forefront of Saudi Arabia's "Vision 2030", the Saudi government's road map for diversifying its economy and addressing the challenges brought by low global energy prices.¹ SAR 54 billion (US$ 14.4 billion) has been allocated for infrastructure and transport in Saudi Arabia's 2018 budget, an increase of SAR25 billion (US$ 6.7 billion) on the previous year. It is estimated that there are US$1.4 trillion worth of major projects planned or under way in Saudi Arabia, with numerous projects expected across key sectors, including housing, healthcare, education, transport and renewables.

This article provides a high level overview of some of the key areas of Saudi law and dispute resolution, which will be very relevant to those considering investing in infrastructure in Saudi Arabia.

The role of Shari'ah in the legal system

In Saudi Arabia the Shari'ah is the supreme source of law. The Shari'ah principles are drawn primarily from the Holy Qu'ran (the divine revelation to the Prophet Mohammed) and the Sunnah (a record of the sayings and actions of the Prophet Mohammed). The application of the Shari'ah to commercial law in Saudi Arabia is also influenced by Islamic schools of Sunni jurisprudence, primarily the Hanbali school and its rules of juristic interpretation.

In addition to the Shari'ah, Saudi Arabian law also consists of promulgated laws. Promulgation occurs in various forms, the most common of which are royal orders, royal decrees, council of ministers resolutions, ministerial resolutions and circulars, department circulars and announcements of official bodies of the Saudi government having the force of law. All promulgated laws are ultimately subject to, and may not conflict with, the provisions of the Shari'ah. Most (but not all) promulgated laws are published in Umm Al-Qura, the official gazette of Saudi Arabia.

In terms of the development of Saudi law, it is important to note that there is no doctrine of binding precedent in Saudi Arabia. In addition, court judgments have traditionally not been published and this allows each judge further discretion in interpreting what is - and what is not - in accordance with Saudi law. This can make the outcome in court proceedings unpredictable. However, in an effort to increase predictability and the transparency of case law, judgments of the courts have recently begun to be made publicly available on a more regular basis. Even so, it should be noted that such published case judgments are merely for guidance and do not bind judges.

Contract Law

General contract law

There are many areas of law that are not regulated by any promulgated law, including contract law. Unlike its Gulf neighbours, which have written civil codes that were heavily influenced by the first Egyptian Code, contract law in Saudi Arabia is regulated by Shari'ah principles. Some of the key Saudi contractual principles are set out below. 

One of the key principles is freedom of contract. Parties are generally free to contract on their own terms, subject to the contract being for a lawful purpose and being compliant with other Shari'ah principles (e.g. contractual clauses providing for the payment of interest will be void as the payment of interest is contrary to Shari'ah).

Under Saudi law a contract is formed by the exchange of offer and acceptance by parties with legal capacity to contract. There are no formal requirements for the execution of a contract. However, to avoid the signing of a contract becoming contentious (e.g. if a party denies signing the contract), it is best practice to have the signatures witnessed by two adult male Muslims, or one adult male Muslim and two adult female Muslims, or four adult female Muslims all being over the age of 18.

Saudi law accords very great respect to the parties' contract. The contract is considered the "law of the parties" and parties must fulfil their contractual obligations ("O you who believe! Fulfil the contracts"; Quran Al-Ma'idah 5:1). However, parties must also perform their obligations in accordance with the principle of good faith, and a Saudi court will take into account the overriding principle of "fairness" when determining a contractual dispute. This could, for example, result in effect not being given to a limitation of liability provision in circumstances where a counterparty's loss is far greater than the contractual limitation.

The principle of Gharar (i.e. speculation or uncertainty) is also very important. It provides that a contract may be invalid, or partly invalid, if a provision gives rise to uncertainty (e.g. where the drafting is inconsistent or ambiguous). The application of Gharar is one of the most debated issues in Islamic law. Generally, for a contract to be valid, all fundamental terms of the contract such as the existence of the subject matter, its availability, the quantities involved, its price and the time of delivery must be absolutely certain at the outset. However, contracts for the construction or manufacture of an object to be delivered at a future date, known as Istisna', are permitted.

Parties are generally not able to terminate a contract for a reason not mentioned in the contract. However, if a court or tribunal deems that there was a valid cause for termination, then the termination may be valid in certain circumstances even if the cause was not expressly mentioned in the contract. There is generally no "specific performance" remedy or injunctive relief under Saudi law. Therefore, a party's remedy for wrongful termination is normally limited to damages, although in the case of fraud the innocent party can apply to have the contract cancelled.

A party in breach of its obligations under a contract must make good the loss suffered by the other party as a result of the breach. However, the damages that a party may recover are actual sustained damages since loss of profit or indirect losses are generally not recognised.

Government contracts

Contracts with government entities are currently regulated by the Government Tenders and Procurement Law (the GTPL). The GTPL was issued in 2006 and applies to tenders and procurements carried out by government authorities. A draft new Government Tenders and Procurement Law was released for consultation at the end of 2017 but is not yet in force. The draft law will have wider application than the current law as it will apply to entities in which the state has a 51 per cent (or greater) stake. The current GTPL states that its terms will prevail in any case where there are provisions in a contract with a government authority that are inconsistent with the GTPL. It is therefore critical that contractors involved in government projects are familiar with the requirements of the GTPL.

A draft Private Sector Participation Law, which will regulate public private partnerships (PPPs) in Saudi Arabia, was released for consultation in July 2018. Under the proposed PPP regime, the GTPL will not automatically apply to projects covered by the Private Sector Participation Law, unless there is agreement between the government entity and private partner. A Royal Decree has also been issued and has come into force (M/101 dated 4 July 2018), which provides that contracts necessary for the execution of privatisations are excluded from the GTPL.

In addition to regulating the procurement process, the GTPL also contains provisions which may affect parties' rights and obligations during the lifespan of a project. Significantly, the GTPL places limits on changes to the value of a contract once it has been awarded and restrictions on extensions of time. Article 36 of the GTPL provides that a government authority can only increase the obligations under the contract by a maximum of 10 per cent of the contract's value and decrease the obligations by a maximum of 20 per cent. Article 52 of the GTPL provides that extensions of time can only be granted if: (i) the contractor has been required to perform additional works; (ii) works are suspended for reasons not attributable to the contractor; or (iii) annual budgeted funds are not sufficient to complete the project. It is important for contractors to be aware of these restrictions when negotiating variations to the scope of works or claims for extensions of time for such contracts.

Claims for compensation arising under a contract which is subject to the GTPL must be referred to a government committee established under the GTPL. However, the GTPL provides that the committee cannot review a claim until the final handover of works. Decisions of the committee can be appealed to the Board of Grievances (an independent administrative judicial commission responsible directly to the King). Under the new draft GTPL, government authorities and contractors will be able to agree on arbitration as the dispute resolution mechanism and to bring claims while the works are still ongoing. Currently, permission from the King is required for government entities to agree to arbitration.

Resolution of disputes

Arbitration

There is a growing understanding of, as well as a culture of, commercial arbitration in Saudi Arabia and it is increasingly being used for the resolution of construction disputes between non-government entities.

In 2012, Saudi Arabia enacted a new arbitration law (Royal Decree No. M/34, the "Arbitration Law"), replacing the previous law that had been enacted in 1983. The new law was a major change to the arbitration landscape in Saudi Arabia and brought Saudi Arabia's arbitration law into much closer alignment with the UNCITRAL Model Law.

Under the Arbitration Law, arbitration proceedings are commenced by sending a request for arbitration to the opposing party. If court proceedings are brought in respect of a dispute which is the subject of an arbitration agreement, the court is required to dismiss the case, provided that the defendant has raised the arbitration agreement as a defence before any other claim or defence has been made.

In 2016, Saudi Arabia opened its first commercial arbitration centre, the Saudi Center for Commercial Arbitration (SCCA). The SCCA arbitration rules are based on the UNCITRAL Arbitration Rules and the International Arbitration Rules of the International Centre for Dispute Resolution. It has already had a number of cases filed in its first few years of operation, including cases with foreign parties from Germany, USA, England and France. It has over 150 arbitrators on its roster, including a mix of Saudi and non-Saudi nationals.

Saudi Arabia acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1994, but it is only in recent years that there has been a growing acceptance and recognition of international commercial arbitration by the Saudi courts. This appears, in part, to be attributable to a new Enforcement Law issued in 2012 (Royal Decree No. M/53 of 3 July 2012). Prior to the introduction of the new Enforcement Law, applications for the enforcement of foreign awards and foreign court judgments were heard by the Board of Grievances. The process for enforcement was complex and would often result in a full review being undertaken of the merits of the award.

Another turning point in the enforcement of international arbitration awards in Saudi Arabia was the announcement in May 2016 that the Enforcement Court in Riyadh had held that an arbitration award rendered in London was enforceable in Saudi Arabia against a Saudi debtor. This was a US$18.5 million award obtained by a UAE subsidiary of a Greek telecommunications company in an ICC arbitration seated in London and was the first known enforcement of a foreign arbitration award since the enactment of the new Arbitration Law and the new Enforcement Law. Since then, there have been a number of other successful enforcements of foreign arbitration awards, including two involving Japanese counterparties.

It is important to note, however, that an award of interest is unlikely to be enforced given that the concept of interest is contrary to Shari'ah and Saudi public policy. Under the Arbitration Law, an award is not enforceable if it violates the provisions of Shari'ah and public policy. However, if an award can be broken down, execution of the parts not contrary to Shari'ah or public policy can be ordered. Therefore, if enforcement of an award in Saudi Arabia may be required, it is important to ensure that any interest component of a monetary award is separately identified (or a separate award is issued for the interest).

Court system

Where parties have not agreed on arbitration and where jurisdiction for a particular type of dispute does not fall under another court or judicial committee, disputes are heard before the general courts of Saudi Arabia (i.e. the first instance courts, courts of appeal and the supreme court — the highest judicial authority). Examples of specialist committees include the Committee for the Resolution of Banking Disputes, and the Committee for Adjudication of Insurance-Related Disputes and Violations of the Saudi Arabian Monetary Agency. 

As part of Vision 2030, Saudi Arabia has undertaken a number of reforms to its judicial system to increase efficiency and investor confidence. This has included the establishment of specialist commercial courts in Jeddah, Damman and Riyadh, as independent institutions. Prior to this, the commercial courts were a branch of the Board of Grievances, which was originally established to hear cases involving the government. Historically, there have been concerns over delays in progressing cases through the courts, with disputes potentially taking a number of years to resolve. Under a new court procedure law, however, the commercial courts are required to deal with claims more expeditiously, and first instance decisions are expected to be handed down within approximately six months of a claim having been filed.

Looking to the future

As Saudi Arabia moves towards achieving Vision 2030, there will be many opportunities for both local and international investors in the infrastructure sphere. There also appears to be a real commitment by Saudi Arabia to modernise its legal system so as to make it more attractive to investors.

The creation of independent commercial courts to deal with commercial disputes and specialist courts to deal with the enforcement of judgments and awards is a welcome development in the field of dispute resolution. There is also landmark law reform on the horizon in respect of PPPs in Saudi Arabia. All of these are significant and positive developments for investors in the infrastructure space. However, with such rapid change under way, it is important that investors obtain specialist legal advice when considering investing in Saudi Arabia and whenever contentious issues arise.

Co-Author: James MacDonald, Associate.

1. For further details on Saudi Arabia's Vision 2030, see the article "Public Private Partnerships and the New Economy: the changing face of the Saudi infrastructure market" in issue 11 (April 2018) of InfraRead.