This edition focuses on some of the key legal developments which have taken place in Saudi Arabia in the last few weeks, in particular the new arbitration law and the real estate mortgage law. We also look at the recent cases making the headlines in the UAE on extradition between the UK and the UAE.
- Saudi Arabia – Council of Ministers approves a suite of new laws
The Council of Ministers of the Kingdom of Saudi Arabia has approved a number of new commercial laws.
The new arbitration law was published in the Official Gazette on 8 June and came into effect 30 days later. We highlight below some of the key changes made in the 2012 Saudi law.
Then, on 2 July, the following five laws were approved which relate primarily to real estate and property financing in the Kingdom:
- the long awaited real estate mortgage law – which we also focus on below;
- a law on finance leasing (leases of land and other property);
- a law on real estate finance for banks;
- a law on the supervision and control of finance companies (setting out requirements for licensed finance and real estate finance companies);
- a law on execution and enforcement (to support the judicial implementation of the other new laws, including mortgage foreclosure proceedings).
The laws were published in the Official Gazette on 1 July 2012 and are expected to come into force 90 days after publication.
The 2012 arbitration law
The new arbitration law replaces the previous Saudi arbitration law dating from 1983.
The 1983 arbitration law presented significant obstacles to commencing arbitration proceedings with the Kingdom of Saudi Arabia as the seat of the arbitration. In particular, the heavy intervention of the state courts in arbitration proceedings under the 1983 law caused resistance by some legal practitioners in Saudi Arabia to use arbitration as a form of dispute resolution. The 1983 law required the court to act as a supervisory authority in all arbitrations conducted under the Saudi rules. This ran contrary to some of the perceived benefits of resolving a dispute through arbitration, not least because the involvement of a supervising state judge through the local courts made the proceedings more public in nature.
The 2012 arbitration law removes the court supervisory element and brings the arbitration process in the Kingdom in line with other Middle East countries. The Saudi state courts do, however, still have a role to play in an arbitration process under the new law. The relevant court is the Board of Grievances in Riyadh. In particular, the court may agree to annul an arbitration award on application by the parties, if certain grounds for annulment are made out. The court may also, only on its own initiative, annul an award if includes anything which is contrary to the Shari'ah or the laws of Saudi Arabia, or the agreement of the parties, as well as if the matter of the dispute is not capable of settlement through arbitration. It is also the court which is required to enforce an arbitration award. Again, the court may refuse to do so if it finds that the award contains anything which is contrary to Saudi law or the Shari'ah. The ability for the court to invalidate awards. or refuse their enforcement, on the grounds of non-compliance with Shari'ah principles may be interpreted widely and be difficult to predict.
The other important provisions of the 2012 law are as follows:
- Arbitrator qualifications - in addition to the requirement that arbitrators are male and Muslim, there is a new stipulation that a sole arbitrator (or the chairman of the tribunal, where there is more than one arbitrator) holds a university degree in Shari'ah or legal sciences. Although this is a welcome move in terms of quality, this may further restrict the potential pool of arbitrators whoA are capable of conducting an arbitration in Saudi Arabia to international standards. The parties to the arbitration agreement cannot contract out of this requirement. There is also a new express requirement for the arbitrators to be impartial and an on-going obligation on them to disclose any circumstances which may affect this during the course of the proceedings.
- Foreign language - it is now possible for the arbitral proceedings to be conducted in a language other than Arabic with the agreement of the parties, which includes all verbal and written submissions and the arbitral award itself. However, it is important to note that the Board of Grievances, which retains the limited role outlined above, will only accept submissions in Arabic and, therefore, for the purposes of enforcement, for example, the award will need to be translated into Arabic by accredited translators.
- Clarity of process - the 2012 law contains more detail on the conduct of an arbitration. In particular, there is a clear process to follow on the appointment of the arbitrators, defined criteria in relation to the considerations of the arbitral tribunal in reaching their decision (with respect of the parties' choice of law being the primary consideration), and a limited set of grounds on which an arbitral award may be annulled. The arbitral tribunal must now issue its decision within 12 months of the date of commencement of proceedings, or such other date as the parties agree. The tribunal is permitted one extension of six months, although the parties can agree to a longer extension. This is a more realistic time frame than the current period of 90 days from the date of agreement on the terms of reference.
- Government entities still need consent – the new law does not change the position in relation to agreeing arbitration with Saudi government entities: the consent of the President of the Council of Ministers is still generally required.
The 2012 Saudi arbitration law is a welcome move towards modernising dispute resolution in Saudi Arabia. However, the potential intervention of the local courts in the award on grounds of compliance with local law and Shari'ah, and the restricted pool of arbitrators, will still mean that a dispute resolution mechanism based in Saudi Arabia should not be agreed to without careful consideration.
The real estate mortgage law
The real estate mortgage law has been over a decade in the making. It is generally recognised that a significant number of new houses are needed to be built in Saudi Arabia within the next five years to meet housing demand. These legislative moves are designed to help meet this demand and encourage greater bank lending.
It has been reported that the Saudi Arabian Monetary Agency (SAMA), the Kingdom's Central Bank, is preparing implementing regulations and that the mortgage law will be implemented within 90 days of SAMA having completed these implementing regulations. Please also see our March 2011 e-bulletin.
- Recent legal developments
UK-UAE extradition cases for dishonoured cheques issued as security
There have been two recent cases before the UK courts where the UAE government has sought extradition of an individual resident in the UK in relation to acts which took place in the UAE. The cases were heard by the same first instance judge and then at the same time on appeal. Both of the cases involved the commonplace UAE practice of issuing post-dated or undated cheques as security for financial obligations.
In the case of the Government of the United Arab Emirates v Amanda Jane Allen, the court had to decide whether to extradite Ms Allen on the basis of a cheque she had written in favour of a local bank as security for a mortgage over a UAE property. The cheque was undated and made out in the full amount of the loan. In the event that Ms Allen defaulted on the loan, the bank was entitled to date and present the cheque (to clear against her account held with the same bank). Ms Allen gave a commitment to update the bank on any changes in her circumstances in period between the date of her application for the loan and the date that the loan account was opened. Crucially, she did not commit to update the bank in relation to changes in personal circumstance at any time up to repayment of the loan, once the loan had been made.
Ms Allen defaulted on the loan. She then left the UAE for the UK. The bank presented the cheque, in full knowledge that she was unable to honour it from her accounts held with the bank. She was tried before the Abu Dhabi criminal court in her absence and convicted of having issued a cheque which she did not have the financial resources to cover. This offence is committed under Article 401 of the Federal Penal Code which captures:
"any person who, in bad faith draws a cheque without existing or drawable provision, or who, after issuing the cheque, withdraws all or part of the funds so that the balance becomes insufficient to settle the amount of the cheque, who orders the drawee not to pay cheque, or deliberately makes or signs the cheque in such a manner as to prevent it from being paid.
Any person who endorses or delivers to another a cheque payable to bearer, whilst being aware that there are no existing funds covering its value or that it cannot be drawn..."
She was sentenced to three years' imprisonment. The UAE government sought to have Ms Allen extradited to serve her sentence.
The court decision turned on whether the offence of issuing an uncovered cheque would have constituted a criminal offence in UK, which is one of the requirements for an extradition order to be issued. The UAE government argued that Ms Allen's conduct constituted the UK offence of fraud by representation. The first instance court held that Ms Allen's conduct did not amount to a criminal offence in the UK, and the court on appeal agreed.
The court reached its decision on the following grounds:
- it was not commercially realistic for the UAE government to characterise Ms Allen's conduct as dishonesty. The loan was for a 20 year period and there may be a number of reasons for a default over such a period, other than a deliberate intention to do so;
- it was also not reasonable to imply, by the issuance of the cheque, that Ms Allen was representing throughout the 20 year loan period that she was able to honour it if presented. If she had been able to do so, she would not have needed the loan in the first place;
- representations have to relate to a statement of present or past circumstances. There can be a continuing representation of present circumstances, such as an obligation to provide an update on changes in personal circumstances, but in this case Ms Allen did not make any such representation beyond the date of the loan.
The second case of the Government of the United Arab Emirates v Sheeraz Amir was a case of suspected fraud. Sheeraz Amir allegedly offered to sell the same apartment to two separate individuals and took a deposit from each of them. His obligation to sell the apartment was secured by a post-dated cheque in relation to one of the prospective purchasers, which subsequently bounced. The UK court allowed the extradition in this case because there was evidence of dishonest conduct in the form of fraudulent deception. However, the court confirmed that the bounced cheque was not, in itself, an offence under the UK Fraud Act.
Local banks will need to reconsider the value which they put on post-dated or undated cheques as security because these cases show that the impact of the criminal offence has geographical limitations. On-going warranties as to creditworthiness during the life of the loan may assist in pursuing defaulters and to keep information up to date so as to be able to pre-empt any payment problems. For individuals, these cases serve as a useful reminder of the importance of monitoring cash flow against outgoings by cheque in the Middle East.
Dubai – principle of constructive dismissal recognised by the Court of Cassation
It has been reported that, in a recent case before the Dubai Court of Cassation, the court has recognised that an arbitrary termination may occur where an employee is forced out of employment by his employer changing the terms and conditions of employment to the detriment of the employee. In the case before the court, the employer hired a new employee to take a more senior role within the company, effectively replacing the complainant and downgrading his role and responsibilities. Although the complainant's contract of employment was not terminated, he felt he had to resign in the circumstances.
This case brings into the scope of an "arbitrary termination" under the UAE Labour Law a similar concept to constructive dismissal found in other jurisdictions, where an employee is entitled to terminate his employment contract without notice by virtue of the employer's conduct which amounts to a breach of contract.
DFSA enacts new markets law 2012
The Markets Law 2012, which is administered by the Dubai Financial Services Authority ("DFSA") has been enacted and came into force on 5 July 2012. The new Markets Law 2012 replaces the Markets Law 2004 and introduces a number of significant changes. Please see our recent detailed regulatory e-bulletin.
UAE Central Bank issues liquidity regulations for banks
On 12 July 2012, the UAE Central Bank issued Circular No. 30/2012 concerning liquidity regulations at banks. The objective of the regulations is to ensure that liquidity risks are well managed at banks operating in the UAE and are in line with the Basel Committee for Banking Supervision's recommendations and international best practices.
The regulations will come into effect in a staggered manner between 1 January 2013 and 1 January 2018.