Saudi Arabia’s new civil code aims to reassure investors

via Reuters

• 721-article code of laws incoming
• Introduced by end of 2023
• Aims to reassure foreign companies

Saudi Arabia hopes a new civil commercial code, due to go into effect by the end of the year, will finally provide foreign investors with clarity on doing business in the country as it tries to shake off a reputation for opaque and arbitrary justice. 

The code’s 721 articles, first published in June, could be a game-changer. They lay down statutory requirements for judges to follow, rather than the traditional Islamic principles that give them free rein in interpreting the law and no cause to follow recent precedent. 

Such reforms began in 2006 during the reign of King Abdullah but faced resistance from powerful interest groups including clerics, whose wings have been clipped since King Salman took power in 2015, making his law graduate son Mohammed the crown prince.

• World’s biggest law firm sets up in Saudi Arabia
• Saudi Arabia says 180 HQs moved to Riyadh so far
• Saudi Arabia shifts to Western calendar

“We are trying to minimise the space for judges to do whatever they think and believe they can do,” Majed Garoub, former head of the Jeddah Bar Association, who runs his own legal practice, told AGBI. “They have to stick to the clauses.

“In the West, 75 percent of litigation ends with a settlement before or during litigation because everyone is aware of where the case is going. That’s what will happen now in Saudi Arabia.” 

The new civil code – termed in Arabic “commercial transactions” – is comprehensive, covering everything from real estate to contracts to tort, debt and inheritance, making it one of the biggest regulatory documents Saudi Arabia has ever seen. 

Following practice in other Gulf countries, some cases will go through an arbitration court operating in English, while others will still be heard by the Saudi grievances court, said Paula Boast, a partner at Charles Russell Speechlys, based in Bahrain. 

This means that companies will need to make sure that contracts specify which body will handle different forms of litigation. 

“If you’re negotiating contracts, your lawyer needs to pay attention to make sure that your dispute resolution provisions account for usage of arbitration. Most international businesses expect to go to arbitration and don’t want to end up in local courts,” Boast said. 

Headquarters requirements

Saudi Arabia is trying to encourage foreign companies into placing regional headquarters inside the kingdom, as it vies with the United Arab Emirates for foreign direct investment. 

The government has set companies a January 2024 deadline to establish local head offices, or they will lose access to contracts worth more than SAR1 billion ($266 million). 

It was on the understanding that the civil code would come into effect that many companies entered Saudi Arabia in recent years to take part in the giga-projects at the heart of the country’s plan to diversify the economy away from oil. 

In a sign of the positive response, Garoub said 15 new licences had been awarded to foreign legal firms, and another 15 requests are under examination by the ministry of justice. 

He said the number of lawyers had doubled to around 15,000 since the Vision 2030 reforms began in 2016, 30 percent of them women. He expects the figure to rise sharply, in part due to a decree this year limiting power of attorney to Saudi Bar Association professionals. 

However, critics say it remains to be seen if judges – most of whom were trained in Islamic law – find loopholes enabling them to inject their own discretion. Much will depend on future training of judges. 

Abdullah Alaoudh, a rights lawyer based in the United States, referred to one article that lists 46 principles, including custom and intent, that judges are at liberty to apply. 

“The vast majority of judges are only trained in Islamic law,” Alaoudh said. “It’s possible that because they are more familiar with these principles, they apply them more often.”

He said the code, and new rules of evidence already in effect, should eliminate concerns over Muslim testimony counting for more than non-Muslims. 

Some of the legal practice put in place by the new code may not be very attractive to international companies – for example, on questions of employee rights.

However, Garoub said this was not a big issue as his clients care more that judges stick to agreed rules rather than the specific content of laws.

“If you go to English or American law, there are things that others do not like but people are happy to invest there because the clause is implemented for everyone,” he said. “That is really the main point.”