Which governing law and jurisdiction should one choose when acquiring shares in a Saudi company or entering into a Saudi joint venture? Can the parties opt for arbitration instead of courts? What about the enforcement of foreign judgments and foreign arbitral awards in Saudi Arabia? These are typical questions, which arise when documenting Saudi M&A and private equity deals. The Basic Law of Saudi Arabia, which serves as the constitution of the kingdom, provides that Shariah, consisting of the Holy Qur'an and the Hadiths (traditions) of the Prophet Mohammed, is the fundamental law of Saudi Arabia.
The kingdom follows the Hanbali guild/school of jurisprudence. Thus, Saudi Arabian law is a natural choice for a share purchase agreement (SPA) to acquire shares in a Saudi company and a Saudi joint venture/shareholders' agreement (SHA) and this is often utilized in Saudi M&A deals. However, it is not uncommon to see English law and sometimes, albeit rare, to see New York law being chosen by the parties to govern their SPA and SHA. We have also often seen examples where the SPA is governed by English law and the SHA is governed by Saudi law.
One would think that choosing English law is a sensible thing to do given that most of the legal concepts and terminology used in a typical SPA/SHA are all based on and borrowed from English law, and that the legal counsel of the parties are familiar with them. The situation, however, becomes complicated when the parties choose English law (or some other foreign law) and jurisdiction of the Saudi courts.
It should be noted that Saudi law does not have conflict of law rules. As a result, if a party brings a claim before a Saudi court based on a contract governed by foreign law the Saudi court will normally ignore the governing law of the contract and apply Saudi law instead. Therefore, the combination of foreign law and Saudi courts does not work in practice.
The choice of forum for dispute resolution is closely linked to the choice of governing law of the contract. Therefore, the choice of Saudi law and the Saudi courts is a formula widely used in Saudi M&A documentation. Again, it is not uncommon to see the combination of English law and the English courts.
One factor which influences the choice of jurisdiction is the country of incorporation of the contracting parties and the location of their assets. It would be an odd thing to choose the English courts for an SPA or an SHA between two Saudi incorporated companies or Saudi nationals.
Having said that, from a Saudi party's perspective, it is arguably preferable to choose English law and the English courts if its counterparty is UK/EU based as this would allow: (a) the enforcement of an English court judgment against that foreign party in the UK and the other countries of the EU; and (b) the Saudi party to challenge the English court judgment against it at the enforcement stage before a Saudi court (e.g. on the ground of incompatibility of the judgment with Shariah if the judgment imposes payment of interest).
Therefore, Saudi parties historically would agree to foreign governing law and jurisdiction, if the Saudi party does not have significant assets outside of Saudi Arabia, under the belief that any attempt at enforcement in Saudi Arabia will lead to the matter being heard de novo.
As an alternative to litigating in courts, the parties may opt for arbitration. In 2012, Saudi Arabia adopted the new Arbitration Law (Royal Decree No. M46/1403), which replaced the old Arbitration Law of 1983. The 2012 Arbitration Law builds on the international best practice to create a new arbitration system. The 2012 Arbitration Law applies to: (a) all arbitration proceedings conducted in Saudi Arabia; and (b) international arbitration proceedings conducted outside of Saudi Arabia, where the parties to the dispute have agreed to subject the arbitration proceedings to the provisions of the 2012 Arbitration Law.
The parties may agree to arbitration by incorporating industry-standard arbitration clauses in their contracts or by referring to the arbitration rules issued by arbitration institutions (e.g. LCIA, ICC). Arbitration need not be conducted in Arabic if the parties or the arbitral tribunal have elected to use another language (e.g. English). This provision is particularly useful for international parties and where the underlying contracts are not concluded in Arabic.
The arbitral tribunal must apply the substantive law chosen by the parties in the relevant agreement. The arbitration panel must comprise one or more arbitrators, provided that the number of arbitrators is odd, otherwise arbitration will be invalid. The arbitrator must have a university degree in Shariah law. If the panel consists of multiple arbitrators, this requirement is satisfied if the chairman of the panel holds such a degree.
There are limited grounds for invalidation of an arbitral award (e.g. the arbitrators were not appointed in accordance with the arbitration agreement). The court may not examine the merits of the dispute in considering whether or not to annul the award. Any court decision to annul the award may be appealed. Subject to the invalidation process, the arbitral award acquires the force of res judicata and becomes enforceable. In practice, the award will need to be enforced through the Saudi courts by obtaining an enforcement order.
In terms of arbitration choices in Saudi M&A deals, we often see the parties (particularly, those based in the GCC countries) choosing arbitration under the Rules of the LCIA-DIFC in the Dubai International Financial Centre, Dubai International Arbitration Centre or the Rules of the GCC Commercial Arbitration Centre in Bahrain.
ENFORCEMENT OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS
The enforcement of local and foreign judgments and arbitral awards in Saudi Arabia is regulated by the Enforcement Law (Royal Decree No. M/53), which became effective in March 2013. The decree provides that the provisions of the Enforcement Law will not prejudice the international conventions and agreements by which Saudi Arabia is bound.
It will be interesting to see how the Enforcement Law will be implemented in practice by the Saudi courts in light of the provisions of the New York Convention on the Enforcement of Foreign Arbitral Awards of 1958 and the Riyadh Convention on Judicial Cooperation of 1983, both of which Saudi Arabia is a party.
The Enforcement Law has introduced the institution of an execution judge who will be responsible for the enforcement of all judgments and arbitral awards in Saudi Arabia (except for judgments and decisions related to administrative and criminal cases). The execution judge can only enforce local and foreign judgments and awards if they are issued in the form of an execution deed which include: (a) final judgments, decisions and orders issued by the Saudi courts; (b) arbitral awards marked by an execution order in accordance with the 2012 Arbitration Law; and (c) final foreign judgments, judicial orders and arbitral awards.
The Enforcement Law provides that the execution judge may only enforce a foreign judgment or arbitral award on the basis of reciprocity and if the following conditions are met:
- The Saudi courts are not competent to consider the dispute, which is the subject-matter of the judgment/award and the foreign court/arbitration tribunal which issued the judgment/award is competent in accordance with its own conflict of law rules.
- The parties to the dispute have been summoned and they have been represented to defend themselves.
- The judgment/award does not contradict a judgment or order on the same subject issued by a competent judicial authority in Saudi Arabia.
- The judgment/award does not violate or contradict the provisions of Islamic Shariah.
In general, no foreign judgment and arbitral award on matters over which the Saudi courts have sole jurisdiction (such as in-kind claims related to real estate property located in Saudi Arabia) are enforceable in Saudi Arabia.
In summary, the Enforcement Law should in theory expedite the enforcement of foreign judgments and arbitral awards. It remains to be seen how this play out in practice and whether this will encourage or deter foreign parties from seeking enforcement before the Saudi courts.