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Published: Fri, 12 Oct 2018

The Saudi Arabian system of commercial law

Table of Contents

Abstract

Introduction

What is Force Majeure?

Introduction

The American Experience

International Codification of Force Majeure Clauses

The Current Trade Climate in Saudi Arabia

A Brief Insight into Saudi Arabian Law

Introduction

Royal Decree

Traditional Islamic Law

Conclusions

Possible Remedies to Force Majeure Disputes

Saudi Arabian Courts

Arbitration

Foreign Courts

Enforcement of Foreign Awards in Arbitration

Conclusions

Bibliography

This brief offers a dynamic insight, from a socio-legal point of view, into the Saudi Arabian system of commercial law. It intends to outline its major flaws in its ability to deal with major international business transactions involving foreign parties. These flaws cannot simply be rectified by amending the laws; rather they are deeply embedded in the constitutional makeup of Saudi Arabia. Therefore, it is not the law that is preventing Saudi Arabia from being capable of handling disputes regarding major international business transactions; it is the legal system that is deficient. This is due to reliance upon interpretation of ancient religious texts in order to apply ‘God’s law’ by the shari’a (traditional Islamic law) courts. Additionally, the decisions handed down by these courts have no binding effect as a precedent, thus not contributing to the development of commercial law in Saudi Arabia. This makes it difficult for outsiders to determine what the standard rules of commercial activities are in Saudi Arabia and, more relevantly, whether they could seek to rely upon a force majeure clause in a commercial contract with a Saudi party.

The concept of force majeure has its origins very much entrenched in Western commercial trade. It is defined as an event that leads to a party’s inability to perform their obligations under the contract due to reasons beyond their control, and beyond the comprehension of the parties at the time the contract was formed. This can include a natural disaster, a military coup, a workers’ strike or any other frustrating event that makes performance impossible. This brief explores the problematic nature of such a definition in the Islamic context, given that an ‘act of God’ may be seen as necessary due to the religious ideologies of the Saudi system, and thus may not be able to be relied upon when a contract falls within the jurisdiction of the Saudi courts. The preconceived idea that God plays a significant role in law is one that is dangerous to maintain in the modern business world, and it is for these reasons that makes foreign investment in Saudi Arabia so uninviting.

The Saudi courts have no legislative abilities. That is, there is no role for them in making the law, as is so commonly the case in common law jurisdictions. Rather, it is left up to the King to proclaim various new laws by royal decree. There is no evidence of a system of checks and balances on each branch of the Saudi government, as it appears that the separation of powers is quite strict. What we see is the King, responsible for executive and legislative function, and the shari’a courts, responsible for administering the law made by the King and God. Again, this structure differs considerably from other foreign nations, which creates a certain amount of uncertainty in the minds of foreign investors. The fact that the law can often change without due regard for a rigid legislative process can be daunting to an outsider, and create hesitation and doubt in their mind as to whether they want to invest in a country that can change so rapidly. For example, the Saudi population has jumped from 6.4 million in the 1970s, to 24 million in 2004.[1] The social and political change Saudi Arabia can undergo in such a limited time makes the Saudi market and exciting, yet challenging, possibility for investment.

This brief also concludes that arbitration is an effective means of having a commercial contract dispute with a Saudi party. This is due to the fact that parties are free to agree upon their choice of law, pursuant to the choice of law provisions in the arbitration rules (also agreed upon by the parties). Therefore, it may be in the best interests of the party seeking to rely upon the force majeure clause to choose a governing law that accommodates, in its express provisions, the use of such clauses. This is best exhibited in the UN Convention on Contracts for the International Sale of Goods, which contains definitions of force majeure clauses, as this brief highlights. This would mean that this party would avoid submitting to the jurisdiction of the Saudi courts, and thus also avoids the application of vague interpretations of outdated religious texts as law. This makes the means of dispute resolution remarkably similar to the methods used in Western jurisdictions, and thus may favour the foreign party. This creates a much more level and fair way of resolving commercial disputes, as they are not based in the home jurisdiction of either party (unless otherwise agreed), and thus resolves them in an international manner. Neither party can therefore claim an element of bias or conspiracy (unless this is evident in the conduct of the arbitrators), and it does not require a dedication of either party to research the mechanics of a legal system, thus saving considerable money. It also serves to save time, as the courts can get quite backlogged with cases, thus it could take a decent amount of time before a case finally goes before a court, whereas arbitration proceedings are virtually instantaneous. This means that either party does not have to dedicate as much time and resources towards an arbitration proceeding as they would a court action, and they would not need to engage highly priced legal advice from specialists in Middle Eastern law. Therefore, this brief concludes that arbitration is much more reliable and streamlined than a court in either party’s home jurisdiction, or a foreign court, given the more efficient dispute resolution processes it provides. This brief reaches this conclusion through critically assessing Saudi Arabian commercial law, as well as the possibility of the dispute falling under the jurisdiction of another court. Eventually, it is concluded in favour of arbitration.

Word limit: 15,000

In the ever changing climate of global trade and commerce, the need for a clearer understanding of a potential trading partner’s domestic law and governance have never been so important. In today’s times we see more resources and commodities being traded on a worldwide scale than ever before. The Middle East is an area rich in these resources and commodities, and it would appear that the main power broker states are keen to tap into the wealth of many of the Arab nations. Particularly, Saudi Arabia is a state that is allowing foreign investment into its resources, by taking steps within its legal system to accommodate such measures by alien entities.[2] These include reforms in the areas of company law, intellectual property and taxation, in order to make their legal system more adaptable to that of a Western investor.[3] Therefore a clear understanding of the law of the Middle East is considered to be paramount in these times, given its burgeoning economy and wealthy inhabitants; however the law of many Arab states is quite different to the law the Western states may be accustomed to dealing with in their ordinary course of trade. This is mostly due to the often vague nature of the traditional Islamic law that continues to govern a great deal of socio-legal aspects. Especially in the case of Saudi Arabia, who still relies upon shari’a (traditional Islamic law) to fill in the gaps that the incomplete codification regime provides in that jurisdiction in some areas of law.[4]

The Middle East is fast becoming a focus of global attention in an economic sense. Its various States are rich in natural resources that global companies and economies crave. The potential for a company to increase its profit margins in this economic area are astronomical, and the risks are quite significant, given a completely new legal and commercial framework are in play, and a foreign party may be seen to be acting outside its ‘comfort zone’. Generally most large companies would be used to operating in a jurisdiction that has clear and consistent rules governing commercial transactions; however Saudi Arabia does not offer such comfort. Its rules appear to be nothing more than vague at best, with a method of enforcement that would bamboozle all but the most astute and flexible of investors. In fact, most governments recommend retaining a lawyer that is conversant specifically in Saudi law, given the difficulties that most investors have experienced in the Saudi jurisdiction.[5] It has a reputation of being uninviting to the foreign market, yet global demand for its resources make it more of a necessity to deal with Saudi Arabia rather than a choice, especially in terms of the petroleum and oil industry.[6] Saudi Arabia appears to be in quite a commanding position in the international commercial arena, even though their legal and political systems appear (at least to the foreigner) to be incapable of handling disputes relating to international business transactions, due to the lack of expertise of the judiciary in dealing with such issues, as well as the structure (i.e. shari’a law combined with the supplementary system of royal decree.[7]

This brief will focus predominantly on the implications o a foreign party engaging in a commercial contract with a Saudi Arabian party in the Saudi jurisdiction. It will focus predominantly on the vague and ambiguous nature of law in Saudi Arabia, and the problems this can cause to a foreign party. It will not focus on commercial contracts between two Saudi parties as such, given that the system would most probably be appropriate for resolving domestic commercial disputes, and does not therefore create a socio-legal issue worthy of analysis. It is especially important to consider this issue in light of foreign investors given the dramatic increase in trade, especially in oil, in the Persian Gulf region in recent times, thus an increase in global attention on the area is evident.[8] Additionally, many countries are now outsourcing their resources in attempts to maintain the global monopoly in various resources and commodities. Such actions may be motivated by consumer demands for products and an inadequate domestic supply, or it may be that pursuing and pillaging the resources of another state may be a cheaper and more economically viable alternative to having to pay high award rate labour and manufacturing costs in their home country. The oil supply debate is one that is at flashpoint in current times, with the war in Iraq and Saudi Arabian trade deals with the United States creating a focus on this area.

Focusing specifically on the ability of a foreign party to enforce a force majeure clause in a commercial contract with a Saudi Arabian party, this brief will seek to examine what, in the eyes of various legal institutions and scholars, constitutes force majeure. It will focus on everything from natural disasters to workers’ strikes, from political coups to military action, and the effects these events would have on commercial contracts. The perception of the Western world is that force majeure is an event beyond the comprehension of both parties at the time the contract was formed, and thus the party who was affected by such an event should not be held liable for performance under the terms of the contract. This would minimise losses for that party that were associated with non-performance under that event. It is now incumbent upon me to highlight some examples of force majeure events that might affect a party’s ability to perform their obligations under the terms of the contract. For example, a Saudi company may have been shipping oil to a company based in the United States. Large seas then affect the carrier’s ability (a third party) from being able to deliver the freight to the United States on time, thus the delivery breaches the express terms of the contract. Could the Saudi company rely upon the force majeure clause in the contract to limit their liability? How would the United States company go about bringing an action against the Saudi company? What jurisdiction would the contract fall under? All these questions are endeavoured to be answer by the brief in its various relevant sections. Additionally, what if the force majeure event was an industrial strike at the oil refinery, thus preventing the products from being manufactured and delivered altogether? What if it was an earthquake? This brief intends on touching upon what, I believe, Saudi law would perceive as a valid cause for force majeure, if they believe any such excuse exists. It is difficult to arrive at such a conclusion, given that the shari’a courts of Saudi Arabia are bound to apply the fiqh, God’s law, and their decisions have no binding effect as a precedent. It makes it significantly difficult to establish a clear set of guiding principles in this regard, as no rigid legal framework exists, which makes investment in Saudi Arabia often unattractive and unsafe for foreign investors from common law jurisdictions.[9]

This brief will also focus on ways that an action can be brought by a foreign party against a Saudi party (or vice versa) without resorting to the jurisdiction of the courts. It may even be more desirable for the parties to avoid having to go to court, either in Saudi Arabia or a foreign jurisdiction, given that it may expedite the process therefore resolving the dispute in a cheaper and more cost-efficient manner. It will explore how arbitration is being used more frequently in commercial contract disputes that cross national borders, given the difficulty associated with obtaining enforcement in foreign courts, and then subsequently having these decisions enforced by a party’s domestic court. The fact that Saudi Arabia is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”) signifies a step in a positive direction in regards to the ability to have commercial contract disputes enforced in Saudi Arabia, without having to resort to costly, lengthy and unreliable judicial methods. It is important to note that, while this brief deals with the broad principles of commercial contract dispute resolution, the primary issue at hand is the ability to enforce a force majeure clause in a contract involving a Saudi party. The ability to do so in a court will be critically assessed, while other means of enforcing such a clause will also be considered. All in all, the concept of force majeure in Saudi commercial contracts is an issue that requires analysis of the fundamental principles of commercial contracts and dispute resolution, as the addition of a foreign party to the equation creates all sorts of conflicting socio-legal ideologies, particularly if a foreign court holds that it has jurisdiction over the issue as well as a Saudi court.

Introduction

With the social, political and economic uncertainty that today’s society provides, it is important to consider the impact of this on commercial contracts. The possibility of a natural disaster, political coup, industrial dispute or military action (among other things) is quite obviously an event that would be beyond the control of either party, and also may be an event that may frustrate the contract between the two parties. So, to avoid any accusations of liability on the part of either of the two parties, it is commonplace for commercial agreements to contain a “force majeure” (or “force majure”, in the United States) clause, which specifically provides for the comprehension of such events at the time the contract was formed, and thus avoids either party being liable. The term is defined as “irresistible compulsion”, and it is used in commercial agreements to describe and place such events within the comprehension of the parties, and thus within the scope of the contract.[10] It is generally accepted that such clauses define events such as “act of god”, war or “the failure of third parties… to perform their obligations to the contracting party” (such as subcontractors etc).[11] It is also accepted that such clauses only excuse those events where the failure to perform under the terms of the contract was unavoidable after “due care” was exercised by that party.[12] Therefore, these clauses are not expected to absolve liability should these events occur, unless the frustrated party can have been adjudged to have taken all reasonable steps to ensure that their obligation under the contract was carried out, but prevented through reasons beyond their control. Generally, force majeure clauses will not allow the contract to come to an end should one of the large number of specified events occur, at least not immediately.[13] Rather, in normal terms, the event would need to have lasted a specified period of time, or render the party incapable of performing for a specified period of time, before the contract may be deemed to be frustrated and thus be brought to an end.[14] In other words, a force majeure clause is only intended to give standing to temporarily suspend the performance of the terms of the agreement while this event is taking place, unless it severely affects the ability of the contract to be performed. Additionally, the force majeure clause will generally specify the consequences on each party arising from the suspension or ending of the contract under the clause.[15] Examples of such consequences that could arise from a force majeure clause include the specification of extra time for the completion of the obligations in a construction contract, for example.[16]

The American Experience

The American courts have sought to illustrate the effects of force majeure clauses on letters of credit, which were drawn to fund a specific contract. In the case of Itek Corp. v First Nat’l Bank of Boston, it was held that a letter of credit is not automatically terminated when a force majeure clause is brought into effect in the underlying contract.[17] This was further supported in subsequent cases.[18] While the letter of credit remains valid, it is important to note that any attempt to draw on the letter while the contract is suspended as a result of force majeure would constitute fraud, and thus the bank who receives the letter would not be required to pay out.[19] While these clear cut rules on the consequences of force majeure clauses on contracts clearly exist in the United States (a fully codified jurisdiction), the existence of these rules in a jurisdiction like Saudi Arabia is questionable due to the vague nature of their commercial law. This will be discussed in more detail in due course in the relevant sections of this brief, however it is important to note in passing that Saudi Arabia does not have a fully codified commercial law, making such interaction with this state somewhat daunting for foreign investors.[20] However, it is important to understand the concept of force majeure in a broad sense before judgement can be passed on the Saudi Arabian system which, for all we know, may function effectively for their needs. But, by considering these examples, we can see that force majeure clauses are important to foreign investors as it can be used to restrict liability on the contracting parties where an act beyond their control occurs. Additionally, if a foreign investor was involved in a construction project for example, they may use the force majeure clause to seek “impact” costs from the Saudi party, which would cover the costs associated with the delay of the force majeure.[21] These unilateral clauses are not uncommon, and may be a good way for the foreign company to maximise its profit if it is dealing with another party that is somewhat unaware of Western commercial practices such as this.[22] Perhaps the best description of a force majeure clause was that which was given in Harris Corporation v National Iranian Radio and Television, where is was held that a force majeure clause acts like a warranty from the beneficiary, who undertakes not to draw upon the funds when the contract has been suspended or ended under the clause.[23] Essentially then, when we relate this ratio back to the broad concept of force majeure, we can see that the clause operates as an undertaking between the two parties so they will not act in a way that would bring the integrity of the agreement into question while the force majeure event is taking place.

International Codification of Force Majeure Clauses

There have been attempts by international institutions to codify the concept of force majeure in commercial contracts on a global scale. Perhaps the most recognisable is Article 79 of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). This Article allows for an excuse where a party can prove that their failure to perform is due to “an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences”.[24] This, obviously, puts into a more legislative form the principles that were outlined in the cases decided in the United States courts. It puts into consideration the fact that there might be unexpected events that are beyond the control of either party during the duration of the contract, and thus gives either party an excuse for non-performance. It does not specify that the contract will be brought to an end, but rather implies that the contract should be temporarily suspended until that event comes to an end. Superficially, this is quite similar to the Foreign Economic Contract Law of the People’s Republic of China (“FECL”),[25] which states:

A party should be exempted from his obligations in whole or in part in case he fails to perform all or part of his obligations as a result of a force majeure event.

In case a party cannot perform his obligations within the time limit set in the contract due to a force majeure event, he should be relieved from the liability for delayed performance during the period of continued influence of the effects of the event. An event of force majeure means the event that the parties could not foresee at the time of conclusion of the contract and its occurrence and consequences cannot be avoided and cannot be overcome.

The scope of force majeure events may be specified in the contract.[26]

This Article is significantly more detailed than the provisions of CISG, especially in the sense that it expressly confers the ability to terminate the contract under the force majeure clause. However, the overall structure of the provision is quite similar to CISG in the sense that it covers the same definitions and principles that were demonstrated in the decisions of the US courts outlined earlier. The real differences between the two sets of rules emerge when they are applied to acts of government. Because CISG is a lot more short and succinct in nature, there is more chance that an act of government would be classified as a force majeure than under the FECL.[27] The Chinese appear to have taken a more rigid stance, by effectively stating that acts of a government will not be considered force majeure under the FECL, which limits the scope of the application of force majeure clauses under this choice of law.[28] Therefore, when one rereads Article 24 of the FECL with this in mind, it can be seen that the Chinese are of the opinion that natural disasters (given that other events are not force majeure in this law) will only affect a contract for a fixed amount of time, and thus makes no reference to possible permanent impairment to the contract under force majeure.[29] These few points have highlighted some key differences in the way attempts to codify force majeure clauses on global scale have accomplished their missions. There are clear inconsistencies in these measures, which makes enforcing these clauses much more difficult depending on the jurisdiction, as we will see later in this brief.

So why have we spent time highlighting the different ways force majeure clauses are dealt with around the world? Firstly, it is important to understand the American viewpoint of force majeure, considering they are the largest economy in the world, and thus it would be reasonable to assume that United States companies would want to invest in Saudi Arabia. Thus, it is important to consider their definition of force majeure in conjunction with the international opinions. It is also, of course, important to get an idea of the subject matter that this brief intends to deal with. After all, one cannot appropriately analyse a topic if they do not first understand and appreciate it. It is also important to consider the international provisions in the event that a commercial contract with a Saudi party contains a choice of law provision that specifies rules similar to CISG or FECL. This would mean that arbitration proceedings, which will be discussed in more detail later, would use these international definitions as the governing law of the contract, and thus the use of the law would determine the applicability of the clause. The use of Saudi law will be examined in more detail later, as will the enforcement of arbitration awards and clauses in the Saudi jurisdiction, due to the uncodified nature of the law. All in all the concept of force majeure in Saudi commercial contracts provides an interesting socio-legal issue for analysis, as it is a concept which is difficult to enforce due to the problematic nature of the Saudi legal system to foreign investors.

The opportunity to invest in the Saudi Arabian economy has never been better. Without mentioning the copious supplies of crude oil that makes investment attractive for foreign petroleum companies, there are many opportunities for foreign entities to reap the benefits of investment in this nation. The US State Department has highlighted these in its 2006 Investment Climate Statement, by saying:

The [Saudi Arabian] Government encourages investment in infrastructure, including power, water, telecommunications and transportation… Prospective investors will find attractive Saudi Arabia’s economic stability, the largest market in the Gulf (with a population of over 24 million), sound infrastructure, a well-regulated banking system and relatively high per capita income.[30]

They went on to add:

There are also disincentives to investment, specifically, the absence of accurate economic data, a government requirement that companies hire Saudi nationals, slow payment of some government contracts, an increasingly restrictive visa policy for all workers, a very conservative cultural environment, and enforced segregation of the sexes in most business and social settings. The government must take steps to ensure that there is a transparent, comprehensive legal framework in place for resolving commercial disputes.[31]

These passages spell out how attractive Saudi Arabia has become to foreign investors. Given that the market for Western products is quite obviously opening up in this country, and they have the market for it, it would only seem logical that other companies are seeking to invest in the Saudi economy. The State Department makes reference to Saudi Arabia’s economic stability, and high per capita income, which could only make it more tantalising for money-hungry corporate juggernauts to spread their wings from the safety of their domestic and conservative foreign markets, and invest in a market that is relatively untried, low risk and possibly high return. Additionally, according to the United States government, Saudi Arabia is the largest market in the Gulf which means that there is a possibility that a company’s goods or services can reach a large audience, thus maximising profit.

With the global demand for oil increasing, and foreign states feeling the squeeze on high petroleum prices, this creates in extra incentive for investing in Saudi Arabia. Raj Bhala, a scholar on Middle Eastern trade, has highlighted the significance of oil, and the Saudi Arabian supply thereof:

Economic significance, specifically oil, is one reason for focusing on the Kingdom [of Saudi Arabia]… Over 60 percent of the world’s proven oil reserves are in the Persian Gulf, and the Kingdom has 25 percent of these deposits – roughly double the next highest depository (Iraq, with 11 percent), and roughly triple the third rung of depositories (Iran, Kuwait and the United Arab Emirates, with 9 percent each). The Kingdom itself produces approximately 40 percent of the world’s population. [32]

This shows that oil supplies are a major focus of the current global market, and thus demonstrates why Saudi Arabia is finding itself in a commanding position in international trading. It holds a monopoly on muc


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