Legal abroad: Doing business in Saudi Arabia

Saudi Arabia is one of the UK’s major trading partners in the Middle East, and its Vision 2030 plan to help it diversify away from dependence on oil includes major building projects. So is the kingdom a good place for UK construction firms to do business? In general terms and subject to regional stability, the picture is positive.

Saudi Arabia may have over 20% of the world’s oil, with the oil industry contributing a substantial part of its GDP, but it now has other ambitions. The scale of its construction programme is eye-watering, involving not just megaprojects, but gigaprojects. In the worth-west of the country, Neom is a $500bn project to build a futuristic city, reportedly 33 times the size of New York. Qiddiya entertainment city is said to be more than twice the size of Disney World in Orlando and the Red Sea Project and Amaala are also massive and ambitious projects, targeting tourism. The Jeddah Tower, at an estimated height of 1km, showcases the kingdom’s architectural ambition while the Sakani housing programme has a target of building 500,000 homes. There are a variety of other impressive projects in the pipeline, including the Riyadh Metro, medical facilities, and solar and wind projects. 

Doing business

The World Bank’s 2020 Doing Business analysis ranks Saudi Arabia at 62 overall (of 190 countries) for ease of doing business, but at 28 for dealing with construction permits and 38 for starting a business, and it comes third for protecting minority investors. On the World Economic Forum’s Global Competitiveness Index 2019 Saudi Arabia comes in at 36 (of 141 countries) and on the Transparency International Corruption Perceptions Index it is ranked 58 out of 180 countries. 

Governance in the kingdom is based on justice, shura (consultation) and equality according to Islamic Sharia

There are, inevitably, regulatory hurdles to be overcome, for instance, obtaining a foreign investment licence from the Saudi Arabian General Investment Authority and complying with the Nitaqat or Saudization rules on the prioritisation of the employment of Saudi workers.

And the law?

The Saudi Arabia Basic Law of Governance says that governance in the kingdom is based on justice, shura (consultation) and equality according to Islamic Sharia and, in article 48, that the courts shall apply rules of the Islamic Sharia in cases brought before them, according to the Holy Qur’an and the Sunna. Sharia law aims for justice and equity in contracts, for example through a requirement of good faith in commercial transactions, and even government regulations must comply with the overriding principles of Sharia. 

Despite its importance, Sharia in the kingdom is not codified as are the laws in other Arab countries, and the legal system and the Sharia courts have no system of binding precedent. Justice and equity therefore come at a price, that of the vital business ingredients of predictability and certainty. But generally Sharia does call for the enforcement of contracts, as is expressly stated in the Qur’an.

If commercial contracts do not go as planned, and legal proceedings are necessary, where does the kingdom’s legal system leave litigants? Although arbitration is the likely forum for dispute resolution for an international construction contract, because it avoids any issues as to lack of expertise or speed in the local courts, a key question for any business on the legal implications of contracting is enforcement.

The new law brought the kingdom into line with other countries in the region

Since 1994 the kingdom has been a party to the New York Convention, which provides for reciprocal recognition and enforcement of international arbitration awards. It is also a signatory to the ICSID, Riyadh and GCC Conventions and in 2012 it enacted a new Arbitration Law. Broadly in line with the UNCITRAL (UN Commission on International Trade Law ) Model Law, the new law brought the kingdom into line with other countries in the region. 

This was followed by an Enforcement Law, transferring jurisdiction over the enforcement of foreign judgments to a specialist enforcement judge. A subsequent 2016 decision, by a Riyadh enforcement court, enforcing an $18.5m International Chamber of Commerce award, was seen as a welcome indication of a significantly improved landscape for resolving disputes through arbitration and enforcing them against Saudi-domiciled parties. 

There remains, however, the fact that a court may not enforce an award, or part of it, which conflicts with Sharia law, for example, payment of interest, a common feature of arbitration awards. 

Nevertheless, Saudi Arabia has embraced arbitration in recent years, with the enactment of its Arbitration Law and the establishment in 2014 of the Saudi Center for Commercial Arbitration (SCCA). The SCCA began accepting disputes in October 2016 and has issued its own Arbitration Rules and Mediation Rules (the “SCCA Rules”), which provide for the procedural basis for the arbitration proceedings

The new developments in international arbitration are therefore a welcome development that should improve the legal framework for investment. 

Raid Abu-Manneh is a partner and global co-head of international arbitration and head of international arbitration (London), Alain Farhad a partner and head of international arbitration and disputes (Dubai), and Jad Taha a partner (Dubai) at Mayer Brown