Has a raft of new laws in Saudi Arabia made the job of resolving contracts disputes any easier?
Saudi Arabia performs well in the World Bank’s Ease of Doing Business 2012 report, ranked 22nd globally, but one category where it performs abysmally is enforcing contracts. In the most recent report it ranked in the bottom third of countries, 124 out of a 185 countries globally, an increase on its previous year’s position of 138th.
Enforcing contracts in Saudi Arabia is notoriously difficult, and even more so for foreign companies operating within the Kingdom, with aggrieved parties often having to wait several years just for a court appearance.
Local construction companies, who have a strong grasp of Saudi Arabia’s business culture can navigate the difficulties. Final payments are notorious for not arriving, and companies will look to write in costs up front.
However for foreign companies, operating in the Kingdom can be a daunting prospect. According to Andrew Greaves, head of the Dubai office of Addleshaw Goddard, there have been concerns among the international construction community.
In many instances, he said, contracts are, “let on standard form (government) terms which can be onerous, one sided and in need of modernisation to reflect modern ways of working; or, bespoke terms which are, in parts, lacking in clarity, detail and applicability.”
Speaking to PMV, Greaves said enforcing contracts and payment obligations in Saudi Arabia “has been problematic and fraught with procedural uncertainty. Stories abound of ‘fingers being burnt’ on many fronts.”
Yet for Saudi Arabia, with a young, growing population that is putting heavy demand on services, especially water and power, it requires outside investment and outside expertise to help fund and build the needed infrastructure.
Recently, in an effort to make the Kingdom more attractive to foreign investors, a major law reform was passed, that came into force in July.
This included a new arbitration law, based on a model international commercial arbitration law, that has been used as the basis for the arbitration law of nearly 70 countries.
One change to the model law for the Kingdom was to require the arbitration process to not “violate Shari’ah” as practised in the Kingdom. In the context of a contract dispute, this could include preventing collecting interest on disputed payments.
Lawyers in Saudi Arabia spoken to by PMV said that it too early yet to say what results will stem from the new laws, while saying the laws appear to be a step in the right direction.
Grahame Nelson, Head of the Riyadh Office for Al Tamimi & Co, said the initial signs are positive. “There are certainly grounds to be believe that [the new Arbitration Laws] will, as part of a broader mix of laws that were announced at the same time, make the dispute resolution process a lot more streamlined. It’s certainly progress.”
But, said Nelson, they are still waiting for the implementing guidelines to be published, and “the devil is in the details”.
“The final judgement will rest upon those regulations when they are out.” Overseas investors tend to “fixate” on the details of dispute resolution in Saudi Arabia, said Nelson, worrying about contingencies, so anything that can be done to make these investors feel more comfortable will be welcomed.
Greaves said despite the new arbitration laws, difficulties remain, especially for international companies.
“Whilst this was a welcome development, there is a perception that it does not eradicate completely the concerns of contractors and consultants alike as the Board of Grievances retains an overriding discretion to annul any arbitration award or contractual provision which offends the principles of Islamic Shari’ah Law and Saudi Arabian Public Policy.”
Overseas companies may face problems initially when operating in Saudi Arabia, but local companies can have less problem navigating the various issues, including slow payments from projects, and a common practice of failing to pay final payments, said a consultant working in Riyadh, speaking anonymously.
Between the practices of government clients and private companies there is large difference, he said. Private companies will often form an agreement with no formal contract at all, or instead a contract written on just a single piece of paper, with no specific terms, simply the name of the project, the budget, and perhaps a timeline.
Private companies may elect not to use a contract at all, so that there is no recourse for contractors if the project stalls or if they do not make payments. However a contract may not be a guarantee either. “Even if you have contract, be prepared to wait two-three years before you get a hearing.”
Contractors will frequently design contracts to write in the risks up front, he said. In other cases, the promise of another project will militate against any hard feelings about lost payments.
“You need to understand the local system and how it works, and if you’re prepared to do that, then Saudi Arabia offers a lot of opportunities. In the end, there’s lot of projects that need to be completed.”