Investment, dispute resolution, and international principles in Saudi Arabia: Legal prospects for Neom
Dr. Mohammad Bashayreh, PMU College of Law.
Saudi Arabia has started the development of a special zone, Neom, whose name denotes a new future. Located in the north west of the country by the coast of the Red Sea and the Gulf of Aqaba, Neom promises to be a place like no other on earth in terms of economic opportunities but also in lifestyle, integrating technology and artificial intelligence. It is envisaged that its residents “will embody an international ethos and embrace a culture of exploration, risk-taking and diversity - all supported by a progressive law compatible with international norms and conducive to economic growth.” With the potential of cosmopolitan population, comprising Saudis and expatriates, the legal regime for Neom is crucial for its goals.
Indeed, international elements have already made inroads to the general legal system of Saudi Arabia and may constitute a basis for the development of Neom’s legal framework. The following sections will describe the relevance of international law for the Saudi commercial and investment laws. In particular, international commercial arbitration as a means for the settlement of disputes will be considered. Concluding remarks will suggest possible means for the development of regulation and legislation in Neom that can be the subject matter of special legal studies to explore their feasibility.
Saudi Arabia has its domestic law of foreign investment, which is to be found in the Regulation relating to Foreign Investment. Another Regulation has established a special commission for investment (the General Investment Authority) that implements regulatory aspects of investment. The investment regulation echoes common international principles of freedom of movement of capital, remittance of funds, protection from confiscation, and access to justice.
In addition, Saudi Arabia is contracting party to a number of international conventions concerning foreign investment. To begin with, the Saudi legal system recognizes the binding effect of international treaties vis. domestic law. Indeed, Article 81 of the Basic Regulation, , promulgated in 1992 and which provides for constitutional rules and principles, states that the Basic Law does not derogate from international treaties to which the Kingdom is contracting party. Specific reference to binding international law is contained in Article 2 of the Regulation relating to Arbitration, promulgated in 2012, which stipulates that the provisions of the said Regulation apply subject to relevant international conventions. Another example of explicit recognition of the binding effect of international treaties within the domestic legal system, albeit in another context, can be found in the Regulation of the Saudi Red Crescent Organization, which provides that the organization shall observe the rules of the Geneva Conventions.
As such, it can be said that principles of international investment law are generally part of Saudi law as far as the scope of relevant treaties and conventions is concerned. Saudi Arabia has signed numerous bilateral investment treaties that contain international principles including, among other things, national treatment, most favorable nation clause, double taxation treatment, and general guarantees for capital and dispute resolution.
Further, the Kingdom of Saudi Arabia is party to two multilateral investment conventions; namely, the Arab Convention for the Promotion of Investment (the Amman Convention of 1980), and the Convention for the Promotion and Protection of Investment of the Organization of Islamic Cooperation. Both conventions provide for internationally recognized principles. Also, at the regional level, Saudi Arabia is party to the economic and trade agreements within the Cooperation Council for the Arab States of the Gulf.
Substantive commercial law is also influenced by international principles and practices. For instance, the recent Regulation for Security Interests in Movable Property, promulgated in 2020, has introduced new forms of common law forms of security interests and enforcement, including forms of floating charge and foreclosure. Likewise, the new Commercial Maritime Regulation of 2018 contains rules and principles compatible with the Hamburg Rules and international custom concerning marine insurance.
It is true that Shariah is the supreme law of the land, and judges are expected to verify that the provisions of a Regulation are Shariah complaint. However, it should be realized that Saudi courts have shown tendency to accept the legality of rules and contractual provisions so long as they are valid according to sound juristic views without requiring compliance with a particular school of Islamic law. The multiplicity of Islamic law (Fiqh) largely reduces the legal risk of challenging enacted Regulations. For example, the Court of Appeal[1] upheld a judgment validating a financing transaction that has been ruled as Shariah-compliant by ‘many contemporary jurists and the Fiqh Academy of the Organization of Islamic Cooperation.’ It is noteworthy that the relevant form of contract that was at issue in the aforementioned case is considered invalid under the Hanbali school of Islamic law which is otherwise the general source of legal rules.
Further, the Regulation relating to the Judiciary, promulgated in 2007, provides that the disregard by a court decision for the applicable Regulation is a ground for challenging the judgment before the Supreme Court. It follows that, a trial judge’s or an appellate judge’s juristic view on the preferred Shariah ruling should not override the ruling adopted by the Regulation so long as the latter is accepted under Shariah rules or by contemporary juristic views. Further, the same Regulation relating to the Judiciary states that the legal principles laid down by the Supreme Court constitute binding precedent. As such, through determining appeals from lower courts’ decisions, the Supreme Court sets binding precedents that will reduce the likelihood of differing judgments based on each judge’s juristic view. This is capable of affirming the application of enacted Regulations, ensuring ascertainability of legal rules and predictability of court decisions.
To sum up, the Saudi laws relating to investment and commercial law tend to accommodate the needs of commerce in an international context through the flexibility and multiplicity of Islamic law. General principles and a bulk of legal rules are reconciled with international principles and practices. Disparities that exist in some aspects are found among different legal systems and they do not constitute obstacle to international trade and foreign investment. Certainty and harmony of legal principles can be augmented by the role that commercial arbitration can play in dispute resolution.
Saudi Arabia enacted the Regulation relating to Arbitration in 2012. The said Regulation largely draws on the Model Law for international commercial law produced by the United Nations Commission on International Trade Law (UNCITRAL). The autonomy of the parties in determining how the arbitration process is to be conducted is the corner stone of the arbitration regulation. The policy of ensuring speedy finality of the determination of disputes underline many aspects of the Regulation.
One cardinal aspect of the Saudi Regulation of Arbitration is that it explicitly recognizes the power of the parties to choose the rules governing the dispute, whether those rules are part of a State law or not. Further, in the absence of choice of applicable rules, arbitrators are empowered to apply the law that is most connected with the dispute. Compared to arbitration, Saudi courts do not have specific rules of conflict of laws, and the possibility of applying a foreign law or rules not belonging to a State law, e.g., Unidroit principles of international contracts, is not certain. Arbitration provides predictability in this regard.
Further, recognizing the need for finality of arbitration awards, the Saudi Regulation of Arbitration provides for an exclusive list of grounds to challenge an arbitration awards through a nullifying action. The competent court is not empowered to review the merits of the dispute according to Article 52(4) of the said Regulation. It follows that the court only reviews the award per se.
Even if a party alleges that the arbitrators have applied rules that are incompatible with Shariah, the court may only set the award aside if it appears from the award itself that it is in conflict with Shariah principles. The Court of Appeal of the Eastern Province has rejected allegations of violating Shariah because, on the face of it, the relevant award did not indicate that it conflicted with Shariah.[2] While Shariah remains paramount, the Regulation of Arbitration shifts the responsibility for ensuring the compliance with mandatory rules of Shariah to the parties and their chosen arbitrators. A court that has jurisdiction to annul or enforce an arbitral award, as opposed to the underlying dispute, will not retake jurisdiction to decide the dispute afresh.
Further, the Kingdom of Saudi Arabia embraces international commercial arbitration for investment disputes. Saudi Arabia has ratified the Washington Convention for the Settlement of Investment Dispute in 1979. In addition, the bilateral investment treaties that Saudi Arabia has signed almost invariably contain a provision to the effect that, if amicable settlement is not reached, the foreign investor may have recourse to litigation or to arbitration at the International Center for the Settlement of Investment Disputes (ICSID) under the Washington Convention.
A promised legal regime for Neom that is compatible with international principles and conducive to business and investment sounds realistic given the fact that the Saudi laws relating to commerce, investment, and arbitration already reconcile solutions with international principles, let alone the relevant, binding international conventions and treaties.
Legal education has been responsive to those and prospective changes. For instance, PMU has a bilingual law program that started in 2011, which graduates students acquainted with solid knowledge of Saudi and comparative law. Besides, a new program in international legal studies will start in 2022. That program is designed to be taught in English and will focus on international law and international trade. Further, PMU plans a master’s program in international business law, which will also be taught in English.
Thus, legal education can foster a new legal regime that may even be autonomous by virtue of a special regulation to establish a governing body for the region that can have the authority to produce bylaws governing various aspects of business, drawing on international practices and norms. In accordance with the declared policies, an electronic form of governance can be developed to engage stakeholders in the policy-making and legislative process. And a center for dispute resolution that operates according to a special regulation may have its own appellate procedure. The review of the arbitration awards of ICSID by the board of the World Bank is an example.
It has even been suggested that Neom, which borders Jordan and is close to Egypt across the Gulf of Aqaba, may span across those countries. This may entail a triparty treaty, which could override domestic law to create a truly autonomous legal regime.
Neom as envisioned may still lead to more innovative legal solutions and systems.
[1] Commercial case number 626 of the year 1432 H, Court of Appeal, 29/6/1432 H.
[2] Commercial case 600 of the year 1441 H, 15/7/1441 H.
09-Mar-2021
