Legal viewpoint: doing business in Saudi Arabia has become more regulated

Interview with Dr. Adli A. Hammad, Partner at Hammad & Al-Mehdar

When it comes to doing business, the legal side being that the environment is the most important aspect. What are the challenges of doing business in Saudi Arabia? Because one keeps hearing conflicting information, you keep hearing that things are looking up and things are getting easier according to the World Bank, the Heritage Foundation etc. But there is no difference in the economic freedom as such. So, what is your take on doing business in Saudi Arabia?

Doing business in Saudi Arabia has become more regulated. That is one of the reasons why have such split views. The role of SAGIA, the investment authority, has become more active. They are supervising the investors, checking whether the investors with license are really active or not. They are monitoring the market very closely; they have closed some of the businesses that did not progress well. This is why we have conflicting views.

Secondly, the type of information flowing in has become very complicated for investors. Now Saudi Arabia refuse to give licenses to individuals. Some kind investors ought to have a corporate structure. Such corporates should have financial information, banking references etc. These limitations complicates doing business with Saudi Arabia. 

What are some of the main challenges faced by your clients? You also have lot of investors wanting to establish themselves in Saudi Arabia. What are the main challenges faced by them?

The main challenge is the limitation in certain sectors. Some sectors are still not open for foreign investors. SAGIA believe that this is an added value for foreign companies, contractual companies, construction companies. They believe there is no added value to license these type of companies. They would like to have pharmaceutical companies, oil companies and petrochemicals. They are focusing on getting these type of projects to Saudi Arabia. Small to medium companies are facing difficulties in obtaining licenses here.

Also, if we go back to the grassroots, one of the main problems is that they have to be licensed by 3 to 4 authorities in Saudi Arabia.

This may sometimes confuse the investors and they may not sure what requirement they have to meet, what type of license they should obtain to do business in Saudi Arabia. These are some of the complaints that we regularly receive from our clients.

How can you help your clients in this respect? Is it easier to have a professional law firm behind you?

Definitely.  Having a law firm like ours, mostly focusing on corporate law and which has been practicing for the last 30 years, helps us a lot in communicating with the clients and helps us explain to them the requirements under Saudi law. The key is to understand the nature of your clients’ business. As I said, there are different requirements for different type of businesses. An example of a client with a large international company from France. They want to do business in Saudi Arabia in the energy sector. They are involved in various kinds of services in Saudi Arabia.

One of them was engineering. But when they took their investment license, they didn’t focus on the requirement for doing an engineering service in Saudi Arabia, which is an additional professional license, not commercial. Later on, when they tried to take up certain projects, they were faced with many obstacles, because they didn’t obtain the correct information from the beginning.

Contacting a lawyer, talking to a lawyer properly, explaining the nature of your business, getting information on the prospective type of projects that you are targeting in Saudi Arabia would help you in taking the right license from the beginning.

The right legal advice will also save you the time wasted in obtaining such licenses.

One aspect of Saudi Arabia is the Sharia Law. But there are also other laws such as those in the financial industry. What is difference between the law structure here when compared to other countries? As is traditional in the West – common law, case law in the UK and the US? How is the law in the Saudi different?

Yes, the law in Saudi Arabia is very different from the jurisdiction of the common law or civil law. Saudi Arabia is one of the countries with dual system. All our laws are based on Sharia, but the government were able to regulate certain sectors such as the financial sectors and others. These laws are also based on Sharia, but if there is a dispute, the court will first stand by the law. If there is no law written with reference to a certain case, then the court till apply the Sharia rules.

This also sometimes confuses the foreign investor in Saudi Arabia. I just received a request for legal opinion from a company doing business in Saudi Arabia with regard to their liability. They wanted to know if their liability will be interpreted according to the contract or according to the Sharia rule. Sharia respects the freedom of any contract. So, if both the parties have agreed to follow certain rules and confer certain rights and obligations, Sharia will respect this. If the parties are not clear about their liabilities and obligations in the contract, the Sharia will intervene and try to bring justice and end any conflict between the parties.

However, our advice to such clients doing business in Saudi Arabia is to use arbitration. Now we have a very modern arbitration law, which accepts that your dispute could be subject to the international regimes like the ICC arbitration or other well-known organisations. You can refer your case or disputes to such organizations to avoid being subject to the national courts.

Legal recourse is a big part of doing business. In case of a dispute in business, how long does it take to resolve it? Is it a big issue in Saudi Arabia? Or is it getting better?

I believe it is getting better.  One of the good things in Saudi Arabia is that for each dispute, we have a legal committee. So for example the Capital Market Authority (CMA) created a committee to resolve any dispute in relation to financial investments. The Banking Committee is also created to resolve any disputes related to any banking disputes. So, we have somewhere around 90 sub or judicial committees. These also expedites the process. However, when it comes to civil and commercial disputes, we can see some delay. It probably takes 2 to 3 years to completely resolve any disputes. Then there is also the issue of interpretation of the Sharia law.

Then there is also the need to translate all the documents, because all the documents have to be presented in Arabic. Then you also have to be able to find the right lawyer who can speak English properly so that he can explain the situation to the client. And just like you mentioned, there is no published case law in Saudi Arabia. So, there is a good chance that client’s expectation can also not be met from the beginning.

There is no telling what the result of such and such a case will be. But things are definitely improving right now. The judiciary in Saudi Arabia is subject to a lot of reforms for the last 3 years and we are expecting more improvements to help provide proper justice in Saudi Arabia Inshallah.

Coming to these reforms, what are the major highlights we can expect to see in 2015/16? I have read that there are not enough judges here and that the country is trying to resolve this by hiring more judges through the arbitration committee. There is now a body that resolves this.

In Saudi Arabia arbitration has been in practice for years, but there is a lack of a centralized body to organize arbitration. Last year a committee was created in Riyadh in the Chamber of Commerce to organize arbitration in Saudi Arabia. So they listed the different arbitrators, they supervise things, something similar to what the other international bodies are doing. So, that’s an advantage. The second advantage is the issue about the limitation of the judges, especially in the Sharia courts. There was a law called ‘Authentication law’ or ‘non republic law’, which allows us lawyers to be licensed. This will requalify almost 500 to 800 non-republics to work in the judiciary.

They will leave the offices and join the courts, to fill the gaps that the Sharia courts are facing in terms of shortage of judges. I also see that another solution to this is to accept legal graduates –law graduates to become judges. Until now only Sharia graduates were allowed to become judges. I think it is about time for Saudi Arabia to change that. Even law graduates from national or international universities can be made to do a diploma for a year or two and then qualify to join the legal system. 

Coming to reforms, one of the main reforms is the creation of a number of appeal courts. Previously, we only had 3 appeal courts in all systems, which froze the system very easily.

Your case cannot move because of the number of cases. Now, we have around 20 appeal courts in every major city. We can visibly see that cases that used to take a year, now takes a month or two to be resolved in the appeal courts. Secondly, they are creating circuits – commercial circuits, civil circuits, family circuits, criminal circuits. This will also create specialized judges.

Previously, the judges used to be like a journalist. He used to do everything. He had to handle 5 to 6 different cases in one day. Now, he is a specialized judge, who is also served by a team of assistants. This is also one of the major reforms that we have seen in the judiciary in Saudi Arabia.

What are the other reforms, especially when it comes to doing business and investments?

The amendment was made on the so-called creation of the enforcement court. A specialized court was given the authority to enforce judgments. Previously, when you get a judgment in your favor, you were at a loss as to where to take it. Do you take it to the police? Do you take it to the Imarah, the Prince of the city?

Now, this has been resolved. The special courts have great powers to enforce any judgements and even checks promissory notes, or any enforceable deeds can be enforced by the judge. The judges have the authority to freeze bank accounts, to put property on auction, to take a lot of actions that we did not previously have. I believe that this is also one of the major reforms in the Saudi judiciary. It gives some comfort to the investors that whatever payments, whatever unsettled amounts in the market can be recovered through the legal system. 

Any laws or reforms pertaining to the investment specifically?

If you are talking about the financial sector. For this sector, a group of five laws came up a year ago, the financial leasing, real estate mortgage law and two other laws. Previously, only banks were allowed to give loans, but the market is very big, and the government chose not to give license to other companies which can carry out commercial mortgage and real estate mortgage, financial leasing, especially in the automotive or other sectors. These developments are also something that the investors are very interested to see in Saudi Arabia.

Tell us about this mortgage or real estate companies. We are not even aware this. Is there really a law? Is it used?

It is very much used. There is a law. They have even created a special regulator under the central bank (SAMA). The licensing and monitoring is done by SAMA. The problem is that some people are not very keen to see this happening because the market is still dominated by banks, so the competition for real estate mortgaging companies or real estate financing company is limited.

Another problem is that the conditions imposed by law is very stringent. Even if finance is provided for real estate, you have to certain number of capital under your management. You have to own the property. So, this also limits the real estate investors and financers. The law is working and I see that in the coming years it will help to boom the Saudi real estate market very soon.

What are some of the things that you feel must be resolved in order to improve the environment? What are the main obstacles from the legal perspective?

One of the main obstacles is the different licensing requirement. If I was licensed by SAGIA as a foreign investor, why do I need to be licensed again by the Ministry of Commerce, the Municipality, Minister of Labor, jawazat the Immigration System? There are about 7 or 8 files as they call them. This can be a nightmare. If you are lucky, you will get licensed from SAGIA in 6 to 8 months, but completing the other procedural requirement to be operational in Saudi Arabia is another nightmare, unfortunately. 

I believe that SAGIA created something called a one-stop shop. If you go to SAGIA, you will see every representative of these departments, but they are really not cooperative. Some of the investors did face a lot of obstacles while establishing their businesses. Recruiting their manpower, opening bank accounts – that alone became a nightmare. These obstacles have to be removed if we want to continue being a foreign-investment attractive country.

But this is very difficult to do. The ministries have histories that go back to the beginning of the kingdom. These ministries each had a strong hold in their areas, but they were separated from each other. They were each dominated by the prince. When they created SAGIA, they thought “okay, one institution will take care of everything”, but no, they are in conflict with each other.  They just created another layer. They just didn’t resolve anything. 

I agree. They did not resolve anything. SAGIA became the interface of the Saudi legal system. But definitely, it itself became an obstacle. Its own requirement became an obstacle. I have been practicing since the last 30 years. Foreign investment in Saudi Arabia was managed by the Ministry of Industry. That was a very easy and straightforward process. When they created SAGIA, it became a layer. And this layer became very thick. Even if you meet the requirement of the layer, you are still subject to the other requirement of the other 7 to 8 regulators.

One of the solutions is that when you create these economic cities, where you make it self-regulated. If I am an investor, I start my plant or company in one of the economic cities, you should relieve me from all other requirements. So, it is at least it is attractive to me. I am not in the main city. I am going to these remote economic cities. I am hiring Saudis, so you let me go. Don’t hook me down with the same main requirements as is required if I were doing business in the main cities.   

So, this could have truly worked? Is this the case with the economic cities?

They are some relief. I have had some clients who have set up their business in the economic cities. They have had some advantages for a cost, not for free. They have to pay something extra. But they definitely get some privileges from being in the economic city, but not to maximum. They cannot bypass some of the requirements.

Can you tell us a little bit about your firm? I heard that you have a strategic alliance with Simmons & Simmons, which is a very well established global law firm. Your firm goes back 30 years. Can you tell us about some of your key milestones, and your outlook for the future?

Definitely, my firm has been in practice for the last 30 years. We were only focused on being a corporate law firm. We mainly serve foreign investors doing business in Saudi Arabia. That was our main aim. That focus was also highlighted, when we got our strategic alliance with Simmons & Simmons 4 years ago. Helping our clients in the IT sectors, projects, petrochemicals, Islamic Finance and Banking and real estate. These are the sectors that we are involved in Saudi Arabia. We have different type of lawyers coming from different jurisdictions like the US, UK and the Saudi Arabia. We are one of the few firms that has a mixed team. We have female and male lawyers. Our female lawyers are Saudis and non-Saudis.

We love to teach them and introduce them to the market. One of the very first female lawyers licensed by the Minister of Justice was one of my trainees. Last year Hammad & Al-Mehdar have successfully opened a branch in Riyadh. We have 4 lawyers on the ground. Riyadh is handling mega projects like Riyadh Metro and other main projects. Our ambition is to be a national law firm, to cover all the major cities in Saudi Arabia, maybe then grow regionally, to be in Dubai, Qatar and the GCC countries, Inshallah.

Who do you believe are your main competitors?

Our main competitors are the large law firms mainly in Riyadh. We believe we are the largest here in Jeddah. But our main competitors are the large law firms in Riyadh working with international allies, either US or UK firms. 

Can you mention names?

Clifford Chance, Baker & Mckenzie, White & Case. These are the main competitors. We see them across the table during certain transactions.

But the market is so big there is still place for all players?

Yes, I believe the market is big. And as I said, the more the regulators in Saudi Arabia, the more the codified laws in Saudi Arabia. To change the judiciary here more qualified lawyers are required, especially in the corporate field. That is why we think that the market can accommodate more number of new lawyers in Saudi Arabia.

The question about female judges is a most discussed topic here. What are the likelihood of this happening?

I wish that one day we will see female judges. But it is not going to happen in the near future. Maybe I will be retired before I see that. But I believe that we have made a small beginning. If we let them to be assistant judges, especially in the family cases. Now we have female prosecutors. That is a good step. We also see female police officers.

Hopefully we will get to see female assistant judges in the family courts. We will reach that stage. But let’s not forget that it took even the most developed countries a while to have female judges. Even the most modern countries in the Arab world, like Egypt for example, I think they started having female judges just about 2 to 3 years ago. It takes time to bring about such a change.

Would you like to add anything else about Saudi Arabia? Maybe a message to the investors?

I would like to call upon all the investors to study the Saudi market carefully. The government is investing more and more on the infrastructure. We have heard that King Salman is investing 20 billion riyals in the development of energy, water and real estate. There is a huge need for infrastructure in Saudi Arabia. This is a big motivation to come to Saudi Arabia, to be one of the big leading markets in Saudi Arabia. Also, I advise them to get the right consultation from the beginning, so that they can come focused, knowing what they are going to do, targeting the right kind of programs and also so that they don’t waste their time in legal obstacles, if they chose the right consultant from the beginning.