This year there have been some notable legal developments in the Kingdom of Saudi Arabia. This article provides an overview of some of the new laws and regulations that have been introduced during 2012.
New Arbitration Law
The new Arbitration Law was approved in April 2012 by Royal Decree No. M46/1403 and replaces the Arbitration Law of 1983 in its entirety. It is hoped that the new Arbitration Law will encourage parties to use arbitration within the Kingdom. The 1983 Arbitration Law was seen as lacking sufficient detail to give the parties confidence in the arbitration process. It was perceived that there were significant practical challenges in terms of conducting arbitration within the Kingdom and that there were barriers to the enforcement of an arbitral award through the Saudi courts. The 2012 Arbitration Law builds on the international best practice to create a new arbitration system.
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). If the parties have not agreed on a particular set of arbitration rules to apply to their contract, the arbitration procedure set out in the 2012 Arbitration Law will apply by default. 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 shari’ah law. If the panel consists of multiple arbitrators, this requirement is satisfied if the chairman of the panel holds such a degree.
There have also been some welcome changes to the ways in which arbitral awards are made. An arbitration award must be issued within the deadline agreed by the parties or, failing such agreement, within one year from the date of the commencement of arbitration, subject to the tribunal’s power to extend this by further six months and the parties’ ability to agree to longer extensions. Any party seeking to overturn the award must lodge an annulment application with the competent court within 60 days. Limited grounds for invalidation of an arbitration award (e.g., the arbitrators were not appointed in accordance with the arbitration agreement) are listed in Article 50. The appellant may not argue that the award violates shari’ah law or public order. These arguments can be raised only by the court itself. Unlike the 1983 Arbitration Law, under the 2012 Arbitration Law 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. This should give parties some degree of certainty and confidence in the arbitration process.
Subject to the invalidation process, arbitral awards made under the 2012 Arbitration Law acquire the force of res judicata and become enforceable. In practice, the award will need to be enforced through the courts by obtaining an enforcement order. The execution of the award may not be ordered unless the relevant court has verified the following:
- That the award does not contradict a judgment or decision issued by a court and the other relevant authority in Saudi Arabia having jurisdiction over the subject matter of the dispute.
- That the award does not violate shari’ah law and public order in Saudi Arabia.
- That the award was validly notified to the defendant.
In summary, the 2012 Arbitration Law is a step forward in aligning the Saudi arbitration practice with international standards and removing many of the challenges posed by the 1983 Arbitration Law. The test for the 2012 Arbitration Law will be whether it can win the confidence of businesses, especially foreign investors, and encourage arbitration in Saudi Arabia going forward.
The Committee for the Settlement of Banking Disputes, under the aegis of the Saudi Arabian Monetary Agency (the “Committee”), has traditionally been known to have jurisdiction over banking disputes in Saudi Arabia, but there has been uncertainty as to its exact status and the parameters of its mandate. Royal Order 37441, dated 1 July 1 2012, clarified the status of the Committee and introduced a few changes in its work. The name of the Committee has been changed to “Committee for Banking Disputes” and this reflects the simplification and clarification that the Royal Order seeks to introduce. It is not yet clear whether the Committee’s jurisdiction will extend to disputes arising from shari’ah-compliant financing structures.
The Committee and each circuit will have three members. There will be one alternate member to allow a rotation. All members must have a legal qualification and experience in financial transactions. One member must also be shari’ah-qualified. The term of appointment is four years.
The Committee’s decisions will be passed by majority vote. The Royal Order further envisages the establishment of an appellate committee called the Committee of Appeal for Banking Disputes and Violations (the “Appeal Committee”), which will hear appeals in respect of decisions of both the Committee and the Committee for Resolution of Violation of the Banking Control Law. The Appeal Committee’s decisions will not be subject to any appeal. The parties will have 30 days to appeal to the Appeal Committee, otherwise any decision of the Committee will be non-appealable before any other authority in Saudi Arabia.
The Committee has wide enforcement powers, including the power to freeze a debtor’s bank accounts, restrict the debtor from dealing with the governmental bodies and banks, and issue travel bans. The competent authorities of Saudi Arabia will be required to implement the Committee’s decisions and sanctions.
Changes to the Listing Rules
In January 2012, the Saudi Arabian Capital Markets Authority (CMA) published revised Listing Rules. The revised Listing Rules follow the public consultation launched by the CMA in May 2011 and contain a number of changes that will operate to create a more international-standard regime within the Kingdom and open up the market for a wider range of securities. The listing of convertible debt instruments, contractually based securities and warrants is now permissible.
It is now mandatory for issuers to appoint independent financial and legal advisers, each of whom must satisfy a new independence test set out in the Listing Rules. Further, offers of securities must be fully underwritten, and underwriters must comply with the CMA’s Prudential Rules. The disclosure obligations of issuers have also been broadened. All disclosures made to the market and to the CMA must be clear, fair and not misleading. The Listing Rules now provide investors with a withdrawal right or a right to amend their subscription application where they have subscribed for securities prior to the publication of a supplementary prospectus related to the offering.
The Listing Rules now permit cross listings of a foreign issuer’s securities on the Saudi Stock Exchange. However, this is in the CMA’s discretion and provided that the listing rules applicable in the foreign issuer’s jurisdiction of primary listing are at least equivalent to the Listing Rules. The Listing Rules do not provide any guidance as to which jurisdictions the CMA considers to be equivalent for this purpose. It is also not clear which provisions of the Listing Rules foreign issuers seeking cross listing on the Saudi Stock Exchange will be required to comply with.
There are now specific conditions that must be met by issuers seeking to increase their capital through a rights issue, capitalization issue or capital increase to acquire a company or an asset. On rights issues, the prospectus must contain a detailed breakdown of the use of proceeds. It should be noted that the Listing Rules now provide that no more than 25 percent of the total proceeds of a rights issue can be used for general investment purposes.
On 2 July 2012, the Kingdom of Saudi Arabia enacted the long-debated ‘real estate mortgage law’. The ‘real estate mortgage law’, which has been debated for over a decade, was held up due to the global real estate market crises, the concerns on providing mortgages within the Kingdom in a shari’ah-compliant manner and balancing the rights of both the borrower and the financier. The ‘real estate mortgage law’ is actually a package of five separate laws, collectively referred to as the “Real Estate and Financing Laws”. In our next issue of measure, we shall summarize and discuss the new laws in detail.
The above developments show the continuing progress and development of the legal system within the Kingdom of Saudi Arabia.