DOING BUSINESS IN SAUDI ARABIA.   Term Paper ID:25919 Click to get this paper

Essay Subject: Overview of economic, govt., historical, religious & cultural factors related to foreign investment & business, focusing on legal issues. Commercial law, contracts, business organizations, labor, taxation, arbitration law, more.... More...

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Paper Abstract: Overview of economic, govt., historical, religious & cultural factors related to foreign investment & business, focusing on legal issues. Commercial law, contracts, business organizations, labor, taxation, arbitration law, more. Paper Introduction: DOING BUSINESS IN SAUDI ARABIA: AN OVERVIEW OF THE LEGAL CLIMATE Introduction Climate for Investors Although the Saudi Arabian government has been attempting to diversify the Saudi economy for over 20 years, the central source of Saudi prosperity is the petroleum industry. The petroleum industry is mature. Hence, the government is beginning to realize that it needs foreign investment in order to decrease the dependence on oil and to encourage sustainable growth and development. Foreign investors look at many factors in making the decision to invest in another country. One of the main factors is the stability of the government. Stability has not been a Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. University of Pennsylvania Journal of InternationalBusiness Law, 11(4), 811-84 . Arbitration is regulated by a Royal Decree and implementation rulesdated back to 1983. Saudinationals are not subject to a personal income tax. However, this gift must be given completely by the free will of thedonee (Rayner, 1991). The arbitration law and the implementation rules. However, it has evolved to serve asarbiter of disputes between one or more commercial companies, and to judgeif there has been a violation of the companies' aspect of the commerciallaw of Saudi Arabia. Rayner, S.E. However, thispresents a problem, since it creates a two-contract situation. Foreign capital investment is both allowed and encouraged, undercertain conditions. BackgroundA Brief History of Saudi Arabia The modern history of Saudi Arabia has been shaped by the actions ofthe House of Saud. The Foreign Capital Investment Committee decides which projectsqualify as development projects. As a consequence, it is thepractice for companies to hire Saudi lawyers in order to review allcontracts to determine if those are in accordance with Saudi law andpractice. (1993). Model contracts,of which there have been many, include clauses dealing with the term ofcontract, services provided, expenses and costs, and termination. Book 2 deals specifically with issues of hire, while Book 3deals with guarantee. NY: St.Martin's Press. It requires a license issued by the ministry ofIndustry and Electricity under the condition that the capital be investedin development projects which do not include petroleum or mineralextraction. The Majella is basically organized as a series of short statements,termed articles, which are clustered together under a number of headings inbooks dealing with specific subjects. In addition, foreign businessmen need to understand that thereare a lot of problems in applying Saudi law, which include corruption, lackof structure, the long time it takes for a judgment, and the confusionbetween the civil/commercial codes and Islamic law. The Shari'ah law courts try these two categories of crimes,determining culpability and degree of guilt. SinceSaudi law was inadequate, companies were relying on a mishmash of laws fromother countries to inform their practice with resultant chaos and disregardof Islamic law. (1982). As aconsequence, the law is not seen as changeable, since it represents thejustice and will of Allah as applied to the ummah, the whole nation ofIslam. In order for a pieceof legislation, or legal theory, to have full authority, the ulama mustagree upon it and must reach consensus about their decision. In Saudi Arabia, the king must carefully considerthe opinions of the ulama, comprised of primarily conservative jurists, andword decrees carefully. Thus, the Committee for Labor Disputes is under theMinistry of Labor, while the Commercial Papers Commission is under theMinistry of Finance. The community cannot create laws, as such, only create theregulatory mechanism that enforces that laws already given by Allah. The ulama is the community of Muslim scholars and jurists whoare involved with the contemporary interpretation and application of theShari'ah. Another problem is that there is no central authority to resolve manyof these issues. In some instances, they utilize one,in other instances, they utilize the other. Certain matters are not permitted to go toarbitration, including all those major crimes specified by the Quran,accusations of adultery, and all matters related to the public order. All penaltiesare decided upon the discretion of the Minister, with the recommendation ofthe FCIC. If a foreigner canunderstand these things and still wants to do business in Saudi Arabia,then that business is prepared. Thus, this is a conservative country that has a tradition ofreligious asceticism or austerity. The Ministry of Justice oversees the entire judicial system, whichincludes the Shari'ah courts. The most important tribunals for foreign investors are theCommittee for Labor Disputes, the Committee for Tax matters, the Commissionfor the Settlement of Banking Disputes, and the Commercial PapersCommission. Saudi employees are also entitled to severance payunder certain conditions, such as being called up to the military.However, they are not entitled to severance pay if they have assaulted asupervisor, failed to fulfill contract obligations, been proven guilty of adishonest act, disclosed secrets concerning the employer's activities, orcommitted other specific acts violating provisions of labor law. The Memorandum clearly stated that the Regulations for Companies onlyincluded provisions for organizations that were sanctioned both by theSunnah and by the Ijm'a (consensus of the ulama). Theseprecedents have held that the borrower must abide by the signed contracteven if it includes interest provisions that are antithetical to Islamicteaching. I. Thevictim, or victim's family has three options. It was custom that ruled their lives, although they alsoresponded to the commercial code of the region, which was similar to theLaw Merchant in Europe. In otherwords, the country is interested in obtaining foreign assistance that willeventually make some of that assistance less necessary and the country moreself-reliant. The intention of the Majella was to preserve Islamic institutionsduring the process of modernization and increasing contact with the West.It is not exactly a code, or compilation of laws in the Western sense, butit did serve as an organization of the principles of Shari'ah that could beapplied to civil life in the modern world (The Majella, 1988). Oneof the major problems that SAMA has had to deal with during the developmentprocess is the Islamic prohibition of interest payments. Next, the Royal Decree was promulgated, referencingCouncil of Ministers' decision No. However, in those instances in which present cases have no pastprecedent, jurists may rely on al-ijtihad, which is the search for the bestand most equitable solution to the problem represented by the case.However, it is important to recognize that this latter procedure has muchless credibility because it is not based directly on the Quran or Sunnah.Nonetheless, the Qiyas is accepted because it draws upon a direct line ofjudicial decisions which were based on the Quran and the Sunnah. There is a delicate balance between the royalfamily and the Islamic establishment, which must be maintained in order tomaintain the stability of the Kingdom. Riba is a term in Islamic law which is difficult to define exactly.However, its closest definition is usury, or excessive interest. A guide to the Saudi Arabian economy. 91987). Lawyers cite this precedent in the comfort letter, indicatingthat the SAMA precedent allows the company to write an interest provisioninto the contract. Although the Ministry provides a modelagreement, most foreign investors find it necessary to negotiate about anumber of its provisions in order to meet their needs. However, the regulations themselves borrowed from laws and customsfrom other countries. A valid contract can still be entered. However, the general climate does not seemconducive to people conducting business in the Kingdom. Book 1, following thisfirst section, deals with principles relating to sale of goods andproperty. In addition, other scholars indicatethat contracts are invalid even if the form and circumstances are lawful ifsomething forbidden is connected with the contract (Rayner, 1991). Finally, copyright protection was established in 1989, but noimplementing regulations have yet been issued. For instance, it requires sanitary and healthy conditions, a 48-hour week, holidays, and vacation time and sick leave (El-Mallakh, 1982).Tax Law There are several different kinds of taxes applicable to businessincome and the personal income of non-Saudi individuals. However, inmost cases, investors would prefer formal legal representation. They trace the evolution ofcontemporary business law back only to 1965 and the promulgation of theRegulations for Companies, which was one of the first important royaldecrees. The Shari'ah has two basic sources that allow for interpretation. On the other hand, theperson guaranteed does not have to be either of sound mind nor at the ageof puberty. Theagent - either individual or company - may sell goods or services, eithercontracting directly with the foreign company to sell or buying from theforeign company and reselling in Saudi Arabia. At the end of the contract period, in mostinstances, the employee is entitled to severance pay of half a month'ssalary for each of the first five years of service and one month's pay foreach subsequent year. Only three of these types of organization offer limitedliability for owners, but most business is conducted by those firms. There are four basic schools of interpretation of Shari'ah in theIslamic tradition: Hanafi, Maliki, Shafi, and Hanbali. One of the main problems is thatjudges in Saudi Arabia can choose between the Shari'ah and the civil codesthat are drawn from other countries. Thus, some judges may acceptthe inclusion of interest in contracts, while other judges will reject thatas prohibited by Islamic law. (1984). Thus, there isroom for dealing with new situations One of the most important of the procedures by which juristicdecisions are reached is the Qiyas. Each party appoints one arbitrator and the twoarbitrators appoint a third person between them. They look to those past cases for the means to make presentdecisions. (1984). However, franchise law developed in the same way as commercialagency law, with the same type of regulations, requirement for indemnity,etc. The foreign investor firstselects a Saudi agent, then requests approval of the agreement from theSaudi Ministry of Commerce. In general, the basic arrangement in registered law offices is to havea solicitor and a barrister, with the solicitor preparing the case and thebarrister representing it in court. For example, thesituation of interest is a complicated one. This enables the arrangement to proceed. Thereare several categories of nullities according to (Rayner 1991), includingabsolute nullity, defect of form, invalidity of consent, fraud, undueinfluence or duress, unfair exploitation, force majeure, riba, ghara, andmaysir, Islamic rights of option, and extrinsic conditions. Ministerial Resolution No. Muhammad's life provides thenorm of the community; an example of the way people should live whenfollowing the path set forth in the Quran. According to Lerrick and Mian (1987), the emergence of legislation inSaudi Arabia in response to modern development needs has been almostunprecedented in its scope and rapidity. Each issue is covered by different set of rules. 3,11-2 . (1986). Each school interprets and applies the law in asomewhat different way. It is this nomadicgroup that came to be termed "Arabs" (Lerrick and Mian, 1987). 38,1382. Inaddition, there are numerous lower committees in the various ministrieswhich consider and adjudicate violations of regulations and decrees. The second category of crimesare those crimes which are implicit, emerging from the requirements andprohibitions of Shari'ah. Thekingdom of Saudi Arabia was proclaimed in 1932 as an Islamic country.Since that time it has been ruled by descendants of Abdul Aziz, includingFaisal, Khalid, and Fahd. The fundamental principle of contract law is derived from the Quranicinjunction, Aufu bi al-Uqud, which means "fulfill your obligations." Inaddition, mutuality and the freedom to enter into contracts is supported byinstances in both the Quran and the hadith (Rayner, 1991). However, there are problems resulting from this piecemeal creation ofbusiness law. This is the Sunni branch ofIslam and it is a conservative Islam that has its origins in the Wahhabisect. Arbitration is more and more widely used in the country for theresolution of disputes. These are problems in Saudi Arabia. (1988). This applies totaxable income over SR 1, , , which is $267, U.S. The word Shari'ah in Arabia means the "way to a wateringplace," and represents the path that Allah means for people to follow tolead to union with Him (Doi, 1984). It has theadditional privilege of gaining the foreign participants a five-year taxholiday if their Saudi partners own more than 25 percent of the capital(Johany, Berne, and Mixon, 1986). Muslim jurists concentrated on elucidating those conditions which arerequired to form a valid contract and those conditions which are important,but not intrinsic. They are comparable to rates in many other countries - betterthan some, worse than others. Decisions fromthis court can be appealed to one of the two Courts of Appeal. The Majella contains well over a thousand of these articles, whichprovide foreign lawyers with a basic understanding of the generalprinciples of Shari'ah as applicable to common legal problems andsituations. These regulations state that aforeign contractor may have more than one agent and that an agent may actfor more than one contractor, not to exceed ten foreign contractors. For foreign firms, wholly-owned subsidiaries arenot an option. However, there is the possibility of obtainingenforcement of foreign arbitration awards since the Saudi Arabiangovernment signed the 1958 United Nations Convention on the Recognition andEnforcement of Foreign Arbitral Awards. If joint venturescannot show how they advance those priorities, they are not licensed.Basic priorities in all of these plans have included diversification of theeconomy and an increase in technical skills and expertise. All interest, as defined in the West,appears to be an unlawful form of gain as the word is understood by Islamicjurists. However, after the firm is established, the venture has the sameprivileges as firms comprised totally of Saudi citizens. Those conditions include such things as the requirement that theindividual must be of sound mind and must have arrived at the age ofpuberty in order to make a contract of guarantee. Firms are refused if they cannotprove that their venture advances the priorities of the Kingdom's mostrecent development plan. If a casegoes before the courts, the judge will base any decision on the modelcontract established by the Ministry of Commerce. Inaddition, future government approval of new agency agreements may bedifficult since regulations allow for administrative liquidation of anyforeign business in violation of Commercial Agencies Law or its provisions. Another important source of law in Saudi Arabia is theKing. The state of Saudi Arabia itself did not come intoexistence until 1932, but the Saud family had sought to unify and controlthe Arabian Peninsula since the mid-17 s. In all instances, foreign firms must involve Saudi citizensin their ventures, either through partnership or agency arrangements. He began his study of thehadith literature at a very early age, gaining the reputation in maturityof being a master of that literature with a memory of almost a millionahadith. However, cases that have been resolved through theadministrative process, rather than the Shari'ah courts, have upheldinterest payments in contracts. Although dealing with commercial agents has been essential for mostforeign investors, selection of an agent should involve careful thought.In the Saudi system, once an agent has been selected, it is very difficultfor the foreign investor to terminate that agent or choose another agent.If the foreign investor terminates, or does not renew, an agent, theforeign investor may be held liable for wrongful termination, as per theregulations, able to sue for damages. Nonetheless, inmodern Saudi Arabia members of the royal family and people in high placesare basically immune from the law. Lerrick, A. There are a number of precedentsestablished through the administrative rulings under SAMA. The Commission for the Settlement of Banking Disputes deals withdisputes between banks and their customers and has a permanent office inRiyadh. Doing business in Saudi Arabia. There is no overall organizing framework, even thoughIslamic law serves as the foundation. Ultimately, Shari'ah is thelaw of the land, and the foreign investor needs to remember that. The intent of this business guide is to provide an overview ofthe Saudi legal system and its operation so that foreign investors can makegood decisions in developing their financial relationships within thekingdom.The Current Situation By the end of 1995, the total volume of foreign investment in theKingdom was approximately $22.5 billion. The highest court in Saudi Arabia is the High Court of the Shari'ahwhich is under the authority of the Ministry of Justice. The theory of contracts in Islamic law.London: Graham & Trotman. Still, thelegal profession is unregulated in Saudi Arabia, since it does not have abar association nor specific admission criteria. Dissertation to the faculty ofHarvard Law School. Karam, N.H. At that time, the Peninsula was occupied by a number of nomadicpeoples and tribal groups. However, this has not worked well inpractice. This isapplicable to taxable business income over SR 66, of $17, U.S.Employees are not taxable, but foreign self-employed professionals orforeign partners in professional partnerships are subject to income tax ontheir business net income (Doing business in Saudi Arabia, 1993). DOING BUSINESS IN SAUDI ARABIA: AN OVERVIEW OF THE LEGAL CLIMATE IntroductionClimate for Investors Although the Saudi Arabian government has been attempting to diversifythe Saudi economy for over 2 years, the central source of Saudi prosperityis the petroleum industry. Thus, the contract in SaudiArabia is even more weighty than in other countries. 1897, dated 14 1 set forth newimplementing regulations which were to be set forth in the Official Gazette(Karam, 1996). It was not until the early 19 s thatAbdul Aziz ibn Saud returned from exile in Kuwait and united the nomadictribes, rapidly extending his influence through the Hejaz and Najd. Shari'ah - The Islamic law. Even though the modern world has created the need for a modernizedadministrative code, that code has to be understood within the context ofShari'ah. Forexample, even if practices such as the use of interest in contracts iscommonly accepted, and upheld by SAMA, jurists may reject an interestprovision at any time and the company must deal with that decision.Another fact worth noting is that in all instances when there is a disputeregarding the language of a contract, the Arabic text is consideredbinding.Business Organizations Under Saudi law, there are nine different types of businessorganizations. Thus, there is no clarityregarding copyright. NY; Ernst & Young Intl. Essentially, theWahhabite movement was a conservative reform movement within Islam thatsought to purify the faith and unite people behind a more fundamentalistview of the nature of Allah. The basic law in Saudi Arabia is not a matter for legislative concern,since the sacred law is already in place. Projects can include a vast array of efforts, includingagricultural development, construction of housing and infrastructure, andcreation of manufacturing facilities. Proposed ventures arereviewed by a foreign capital investment committee which uses threecriteria for approval: (1) the project must further the Kingdom'sdevelopment, (2) the capital must be accompanied by foreign expertise, and(3) the project must have a license from the Ministry of the Interior.This license can be difficult to obtain. All arbitrators must be either Saudi nationalsor Muslims of foreign nationality from among the professions. Much of commercial law is impacted by this and other administrativetribunals. Through this justification, the Memorandum provided a link to Islamiclaw, through tradition, for the new regulations and the new developmenteffort. Saudi culture is heavily reliant on the concept ofhonor in personal relationships of all types. However, personaljudgement, or the Ijima, is allowed, which means that judges and thegovernment can adopt solutions or give legal opinions that are new, as longas those do not contradict the main Islamic principles. In addition, the Ottoman Empire had an interestin the region. It was not until the Quran was received andpromulgated that a codified system of law came to rule these people. (1996). Johany, A.D., Berne, M. The House of Saud began its period of conquest in 1744, ledby Muhammad ibn Saud, a follower of the Wahhabi sect. All of these sources are drawn upon to solve many ofthe specific day-to-day problems happening during the conduct of business. The Majella was compiled by Islamic scholars in order to promulgatesome of the general principles of law according to the Shari'ah. There are currently 541 registered lawoffices in the country, with only about a dozen affiliated with foreign lawfirms from the United States, England, Germany, and France.Modern Developments Between the time of Muhammad and the emergence of the nation state ofSaudi Arabia, there was development of the law through the interpretationof the jurists and through the influence of other countries. Ali, M. The SaudiArabian economy. However, the Saud family had to endure almost two centuries of takingand retaking areas of the Peninsula. The only significant tax incentive availableto foreign investors is the ten-year tax holiday from corporate tax on theforeign investor's share of profits if the project has a minimum 25 percentequity participation by Saudi nationals.Intellectual Property Law There are strong intellectual property laws in Saudi Arabia related totrademarks, copyrights, and patents. Hence, thegovernment is beginning to realize that it needs foreign investment inorder to decrease the dependence on oil and to encourage sustainable growthand development. Saudicitizens may use either limited liability partnerships or joint stockcompanies, of this type. One example of the development of business law through these sourcesis commercial agency regulation. They were not as clear about those conditions whichnullified contracts or made them non-enforceable. The Sunnah is baseddirectly on the sayings and actions of the prophet Muhammad as related tothe community through stories and anecdotes. Again, legislation is not exactly the appropriate term,since there is no law-making body per se. This is a major intellectual property issue that needs tobe addressed within the Kingdom.Foreign Capital Investment Law Much of Saudi commercial law and business procedures is shaped bySaudi priorities that are set forth in the five-year development plans.For example, as noted earlier, the Ministry of the Interior is charged withrestricting licenses to those joint ventures which can be shown to advancethe priorities set forth in the latest development plan. This creates one of the fundamentalproblems of Saudi business law, since interest is included in many businesscontracts and accepted by the ministries and administrative tribunals, butnot by any Shari'ah court. There is also areligious tax, known as Zakat, which applies to Saudi Arabian businesses.In general, the maximum corporate tax rate is 45 percent. Foreign lawyers must register withthe Ministry of Commerce, filing a copy of their legal qualifications,along with a contract of employment (Doing business in Saudi Arabia, 1993). Finally, thePreliminary and Higher Tax Appeal Committees hear disputes between theTreasury and taxpayers (Doing business in Saudi Arabia, 1993). The patent must be exploitedwithin two years of the grant and is effective for 15 years, with potentialrenewal. Joint venture regulation in Saudi Arabia: Alegal labyrinth? It is also responsible for consideringapplications, examining complaints, and recommending penalties for anyviolation of the law (Foreign capital investment law, 1995). Legal, tax and fiscal engineering forindustrial cooperation in Saudi Arabia. London:Kluwer Law International. The petroleum industry is mature. And Mian, Q.J. The bookis useful for lawyers because it gives them an idea of how the Shari'ahviews a certain issues, but it has no authority in the Saudi court system.It is simply a guide to principles that can help clarify specific issues.It is especially helpful for thinking about developing contracts ordetermining property damage issues. The system of laws is based onShari'ah, religious law with its roots in the Quran. Investment incentives currently offered by the government, andaccruing to foreign investors in partnership with Saudi citizens, includepre-investment assistance, land, low cost utilities and fuel, customs dutyexemption, industrial loans, and government procurement preference, amongother things. If the establishment violates any of the provisions of ForeignCapital Regulation law, the Minister of Industry and electricity shallserve notice on the establishment requiring compliance within a specifiedtime limit set by him. The second source is the Sunnah,which also refers back to the Quran, but includes the tradition and sayingsthat have been compiled in explicating the Quran. They were all essentially teachers and pupils to each other,working together for the common goal of elucidating the way of Islam. JeddahChamber of Commerce and Industry. The Labour Disputes Commission deals withdisputes between employees and their employers, and their decision can beappealed to the Supreme Labour Dispute Committee in Riyadh. However, the Ministry of Commerce alsoannounced that it would no longer renew the temporary licenses obtained bythese non-Saudi lawyers after their term was over. Weber, D.T. (1993). A third business type that has grown increasingly popular in SaudiArabia is the franchise. The Memorandum quotedthe Sunnah to justify the creation of partnerships as formal businessentities. The HighCourt has jurisdiction over all civil and penal matters, since Shari'ah isthe ultimate law of the land, but practically speaking, commercial mattersare dealt with through the Board of Grievances. Bothparties can agree to premature termination, but when either party rescindsthe contract unilaterally without justification or lawful cause, the otherparty is entitled to claim damages (Karam, 1996). Doi, A.R.I. Journal of Islamic Corporative Law, pt. Problems arise with this dual court system, however. These were vague and not particularlyhelpful, but they were the first attempt to codify regulations so that theywould be understandable to, and usable by, foreign investors. In this system, a foreign company operatesstrictly through a Saudi commercial agent who establishes the firm'spresence and operations in the country. However, there areindications that things are changing in the Ministry of Commerce and thatit will become more open about accepting negotiated contracts, rather thanrequiring the use of the model contract. For example, King Faisalestablished the system in 1976 by releasing a royal decree which outlined27 Commercial Agency Regulations. Each started withone individual and his followers and developed into a specificinterpretative mode. The use of Islamic law as the fundamental law of theKingdom was established in the Saudi Arabian constitution, in Article 6.It commands adherence to the Shari'ah. Non-Saudi Arabic-speaking legal officers were allowed to continue operating inthe Kingdom on a provisional basis as long as they were full-time legalrepresentatives residing for at least nine months continuously anduninterruptedly in the Kingdom. Another possible penalty is thewithdrawal of some of the privileges of the establishment. If the establishment fails to comply, the Ministercan, upon the recommendation of the FCIC, withdraw the license of theestablishment or liquidate the enterprise. 119 dated 16.2.14 2 H provides the mostcurrent regulations dealing with legal consultancy in the Kingdom. It replaced the old Commission for the Settlement ofCommercial Disputes. A lawful form of riba is anygift which is given in addition to the return of the original gift, orloan. TheHanbali school of law teaches that the King, in his capacity of theocraticruler, does have the power to promulgate solutions to new situations thathe deems appropriate. The most common way for foreign investors to create businessopportunities in Saudi Arabia is to work through a commercial agency. The judge, or qadi,determines the facts of the matter and the guilt of the accused party. The commercial agent can fill one of several different functions. On the other hand, the parties involved can refer the matter tothe Grievance Board within 3 days of official notice of the minister'sOrder. It explained that the new development effortwas creating strains within the Kingdom that could not be met by using theRegulations for the Commercial Court which had previously existed. However,these are only broad principles, rather than specific citations. The use of franchises increased becauseforeign investors wished to avoid the bureaucratic over-regulation whichthey were subjected to when working with the commercial agents andagencies. According to Doi (1984), the four schools do notdiffer in regard to the major principles of Islam, but have differences ofopinion dealing with some of the smaller branches of Islamic theology. They areroyal decrees that serve as guidelines, regulations, and solutions to newproblems. Foreign capital investment law and the implementation rules. First, the Council of Ministers releasedits approval of the agency regulations and approved preparation of a Billof Royal Decree. There are prescribedpunishments, called hadd, for the defined crimes. As a consequence, when matters reach the court system,the outcome is influenced by the legal orientation of the judge. One of the main factors is the stability of thegovernment. Stability has not been a problem in Saudi Arabia. Thefirst, fundamental, source is the Quran. It is currently reviewing the ForeignCapital Investment Act with changes planned to facilitate foreigninvestment, while providing new incentive and tax exemptions for foreigninvestors. Courts. The agent is entitled to a maximumof 5 percent of any contract's value and is regulated by a number ofdecrees promulgated by the government. (1996). Thecompulsory or model contract is the only one that is enforceable in court.The negotiated contract, which represents the real agreement between thecompany and its agent has not been accepted by the court system. I.A. Anothermajor factor is the overall investment climate, especially the structure ofthe legal system and its predictability, as well as the commercial laws.The commercial laws must not be restrictive and protectionist, nor obscure. It is responsible fordeveloping a modern financial system in Saudi Arabia within the parametersof Islamic law, or at least in a way that is acceptable to the ulama. Computer software is the source of largeamounts of revenue in the United States, and designers and distributors areloath to allow their work to enter the public domain or be pirated withoutlegal recourse. Finally, Ministerial Order No. In disputes beforethis committee, interest payments are recognized as appropriate andenforceable. For example,Hanbal learned ahadith from al-Qattan who was a famous disciple of ImamHanifah. Inparticular, a major reform effort in Turkey saw the creation of theMajella, which was a compilation of civil law influenced by the NapoleonicCode. As a consequence, mostforeign investors prefer to stay out of the court system and resolvebusiness and commercial disputes more amicably. Some Practical Applications for Foreign InvestorsArbitration Law As is apparent from this overview, there are problems in dealing withthe Saudi legal system because there are two different kinds of codes andcourts. Other aspects of the Labor Code are very similar to Western laborpractices. In addition, it is required thatthe capital investment be accompanied by foreign technical skills andexpertise which is to be taught to Saudi employees and managers. Business laws of Saudi Arabia - Vol. Arab Law Quarterly, August 1988. (1969). For example, Doi (1984)contends that all the four schools of fiqh, including the Hanbali school,subscribe to a common theory about the fundamental sources of Islamic lawbeing the Qur'an, the Sunnah, the Ijima, and the Qiyas. Onthe other hand, the current patent law was adopted only in 1989. However, in instances in which interest payments are includedin contracts that do not go before the SAMA committee, the interestprovision will be excluded by judges in the Shari'ah court system. A Memorandum of explanation was attached to this decree to explain thereason for its promulgation. Saudi Arabia has needed to draw upon both unskilled and highlyskilled foreign workers. (1995).Jeddah Chamber of Commerce & Industry. (1991). The first part of the Majellaincludes general maxims of Muslim jurisprudence. In strictly legalterms, contracts that require interest are not enforceable if Islamic lawis applied. The Majella: Introduction. Since the late 198 s, enforcement hasbeen tougher. In allinstances, contracts indicate that the contract is terminated with theexpiration of its term or by completion of the project specified. The Commercial Papers Commission resolves disputes concerningdefaults in paper transactions. These arepromulgated through Royal Decrees and Ministerial Circulars. Still, the precedent at SAMA ishelpful. Imam Hanbal was born in the year 164 A.H. Thearbitrators' award and decisions must be congruent with Shari'ah and anyapplicable laws (The arbitration law, 1995).SAMA SAMA is the Saudi Arabian Monetary Agency. According to Ali and Sulaiman (1969), the fact that Saudi Arabiachose the Hanbali school of law enables the law to continue evolving.There seems to be disagreement among the Islamic scholars themselves aboutthe degree of rigidity of the Hanbali school. They are not to supersede or limit Shari'ah law in any respect.They also must not violate any of the fundamental principles of theShari'ah. The fact is that when commercial codes come into conflict with Islamiclaw, Islamic law will always take precedence. The general practice involves the use of a three-person arbitration panel. Since interest is forbidden under Islamic law, thecomfort letter must acknowledge this fact. It may demand that the haddbe applied, grant clemency, or request diya, or the payment of blood money,as a recompense for the crime. As a consequence, royal decrees generally have explanatorymemorandums attached to them explaining the reason for the decree andasserting that the decree does not violate Shari'ah or conflict with any ofits basic principles. There were a total of over 14 joint venture projects in process involving $34.3 billion in overallinvestment, with the United States the largest investor. Only Saudi nationalsand GCC citizens have the right to appear before Saudi courts, althoughforeign lawyers can offer legal advice. The intention was torequire all non-Saudi nationals to practice only with licensed Saudilawyers. London: Ta HaPublishers. However, in cases before the Shari'ahcourts, interest provisions in contracts are unenforceable and the Shari'ahcourts have supreme authority in the Kingdom.Comfort Letters It is difficult for foreign companies and their attorneys tounderstand the ramifications of Saudi law. Foreign investors must be represented in court by Saudi nationals.However, the representative does not have to be a lawyer. As long as cases stay within the administrative court system,these contracts are enforceable. 89, and numbered as Royal Decree No. In order to gain a complete understanding, however, lawyersmust go directly to Shari'ah and to the royal decrees. Instead, regulations and decreesare issues which have the force of law, subject to Shari'ah. Thus, foreign investors need to select their agents carefully, negotiateclear, fair contracts, and make sure that any changes in their agencyarrangements are done in a way as to provide the old agent with a fair andequitable settlement (A Business Guide, 1996). The Ijimais accepted because it too has an indirect basis in the Quran, through theSunnah, and through the ahadith. Feesare established and appropriate activities are set forth. Saudi Arabia: Rush to development.Baltimore, MD: Johns Hopkins University Press. These courts have jurisdiction over criminalcases and family law cases. Other majorinvestors in the Kingdom were Japan, the United Kingdom, Switzerland,France, and Germany (A Business Guide, 1996). Thisconsensus, or ijim'a, gives the law or theory its final, and binding,authority. Many of the bureaucratic and civil codes of theNapoleonic Code, and from Egypt and Turkey are used, as well as Anglo-American concepts. However, the situation is stilluncertain, which makes for potential problems in court. The interpretation of these twosources (Quran and Sunnah) belongs to the entire community, in theory, butbasically revolves around the opinions of the ulama. He can simply bea representative speaking on behalf of the foreign investor. In addition to the work permit, all workers are required to have alabor contract with their company that ensures the rights of both parties.This contract must be very specific and include provisions on theconditions of employment, date of termination, end-of-service indemnities,and other pertinent details. Forexample, trademarks are covered in a law that was set forth in 1984,providing for a protection period of ten years, with renewal possible. For example, in Book III, Section II, dealing with a contract ofguarantee, the Majella specifies conditions attaching to this type ofcontract. A Saudi court is a place to avoid. Foreign investors look at many factors in making the decision toinvest in another country. Thefoundation of Shari'ah is the Quran itself, and the revelation of Allahwithin its pages. In addition, the law does not provide for anyprotection of original works published outside Saudi Arabia, nor does itprotect computer software. The ulama are the final arbiters of Islamic law. The ahadith were the specific source of his juristic opinions.The Imams of his day referred to him all major questions that had to dowith the ahadith, since he was considered the premium authority on thatliterature. While limited to administrative functions, it provides the foreigninvestor with a direct presence in Saudi Arabia that can serve as liaisonfor investor interests.Labor Law There are a number of special considerations in Saudi Arabian laborlaw. At the present time, two government ministries grantlicenses to lawyers. The firstcategory includes those crimes, such as homicide and adultery, which aredescribed, clearly defined, and prohibited. The commercial law isalso protectionist, which means that Saudi Arabia is not currently a memberof GATT or the WTO. Contracts wereconsidered valid if both their nature and circumstances were in accordancewith the law, but invalid, null and void if the nature was in accord withthe law, but not the circumstances. Qiyas is the process by which juristssearch for cases from the past which are close analogies to present-daycases. Washington, D.C.: U.S.-Saudi Arabian Business Council, Royal Embassy of Saudi Arabia CommercialOffice. (199 ). This franchise law has been in effect since 1992, which is not longenough to determine if it is an improvement over the commercial agencysystem. The application of the law is the responsibility of thecourts. Necessity maybring about change in the near future, but conditions are not yetfavorable. Lawyers review and evaluate the contracts, and issue what istermed a "comfort" letter if they believe the contract is suitable.Comfort letters indicate that the contract is congruent with Saudi law.However, there is a special problem in dealing with any contracts in whichinterest is mentioned. El-Mallakh, R. In part, this arrangement has expanded because ofthe problems involved in working with commercial agents. On the otherhand, individuals can be taxed only at a rate of 3 percent. The model contract specificallynotes that when the contract is terminated at an inopportune time renderingeither party liable to suffer loss, the party causing the damage shall bebound to compensate the aggrieved party for the loss suffered. A Final Word There are many legal details that the foreign businessperson needs toresearch before doing business in Saudi Arabia. One group lived in theYemen, a fairly settled existence, while another group, the nomadic tribes,lived in the central and northern Arabian Peninsula. Allah then is the lawgiver, rather than human beings. One of the preferredmethods for doing this is arbitration. These are not, strictly speaking, laws. Baltimore, MD: John Hopkins University Press. This latter could be a major problem for the Kingdom in its efforts toattract high technology ventures. The award of the Grievance Board is then final (Karam, 1996). Lawyers. The Legal System During the early history of the Arabian Peninsula, there were twodifferent groups of people inhabiting the region. First, the focus in Saudi development plans is on limiting the use offoreign nationals in the labor force. Thearbitrator may also be a government official, provided approval of hisdepartment is obtained. Before the time of Muhammad, the tribes basically lived withoutcodified law. This has been aclear influence on the development of commercial law as evidence by anotherlicensing requirement which demands that joint ventures show how theirefforts will improve technical skills and expertise within the Kingdom. Bancal, J.-C. These tax rates are neither disincentive nor incentive for the foreigninvestor. A final arrangement that offers certain advantages to foreigninvestors without as much difficulty in establishment is the branch office. As aconsequence, any contracts that include interest provisions will be ruledas void by the Shari'ah judges. It is easy to understand why thatterm, in the desert, would represent the desired path for people to followand, essentially, the path to life. There is a parallel court system in whichcivil cases are tried before specialized administrative tribunals. Presley, J.R. All ventures involving foreign participation must be established underthe Foreign Companies Involvement Code (FCIC). Again, it isthe Quran that gives the justification for all business transactions basedon contracts, and it provides the conditions for what can be included andwhat is prohibited. Still, the government is interested in foreign investment and has madesome efforts to encourage that. Somecitizens are immune from the legal system completely, although Islamic lawemphasizes the equality of all citizens before the law. In addition, financial infrastructure is unevenlydeveloped, at least partly because of the problem of modernizing commerciallaw in a country ruled by religious law that did not deal with many of ourmodern problems or issues. However, most important isa basic understanding of the Saudi Arabian culture and the importance ofIslamic law. The focus is on interpretation,with the power vested primarily in the ulama, or scholars, and in thecourts. At asecondary level, administrative circulars also serve as a source of legalrules, although with a lower degree of authority. Saudi business and labor law.London: Graham & Trotman. Inorder to deal with modern economic issues, the Kingdom created theCommercial Agency system. Obviously, this is confusing, unclear, andunfair because in the same legal system interest is acceptable in onecourt, but unacceptable in another court. In addition, the system is inefficient, corrupt, andunpredictable. However, othersdisagree with this, noting that in the Hanbali school reasoning by analogy,as with the Qiyas, is not seen as a source of law. Islam is the religion of Saudi Arabia. The Ministry of Justice has sole jurisdiction overthe Shari'ah lawyers, while the Ministry of Commerce has its own registryof lawyers prepared to assist on commercial matters. However, there are some loopholes. Patentsmay be obtained on new products or processes, or on improvements, but apatent application must have a local agent. Ulama. It also noted that companies existed when the Prophet was aliveand he allowed that activity without any objection or prohibition. And Mixon, J.W., Jr. References A Business guide to Saudi Arabia. Each Ministry has committees which rule on matters undertheir jurisdiction. SAMA has a committee whichdeals with banking disputes, which was basically created to avoid conflictswith the Shari'ah judges regarding interest payments. Shari'ah is Islamic law. Another major problem with the court system is corruption. However, it seemslikely to lead to some of the same difficulties, since the foreign investorneeds to select a franchisee - similar to the selection of a commercialagent - have the agreement approved by the Ministry of Commerce, and followthe same commercial agency law. Saudi criminal law is quite clear, stringent, and strictly applied.Although most foreigners are deported rather than tried in Saudi courts,the foreign investor needs to be aware of this stringency.Overview of Commercial Law for Foreigners As noted earlier, the use of the Hanbali school of Islamic law enablesthe government and jurists to engage in the promulgation of special laws tomeet changing circumstances, as long as those do not conflict with basicIslamic principles. And Sulaiman, A.W.A. Thus, special commercial and labor legislation hasbeen created. In all instances a work permit is required.Legally, the foreign worker must possess a skill which the employer cannotobtain through using a Saudi national; however, in practice, foreignworkers are preferred for their alleged higher productivity and lower cost. Each of these includes principles relevant to thecreation of contracts. Anycontracts that are not under the jurisdiction of a special committee, orfor any reason go before the Shari'ah court system, will be dealt withaccording to Shari'ah law rather than commercial regulations. However,this is not totally accurate. It isthis law derived from the Quran that is the fundamental law in SaudiArabia.The Components of the System Shari'ah. Inaddition, the leaders of each of these schools were influenced by eachother, either personally or through a line of teachers. This is the general process by which commercial regulationsare developed.Contractual Agreements Under Saudi Law According to Diane Weber (199 ), contracts are considered sacred andrank third on the list of the individual's obligations below only those toGod and to family. (1995). In other words, a lawful form of riba could not bewritten into a contract that would be valid in a Shari'ah court asunderstood by Islamic jurists. Royal decrees. Recent judicialdevelopments in Saudi Arabia. There islittle standardization in business law, although criminal law is quiteconsistent in interpretation.Brief Note on Criminal Law There are two categories of crime recognized by Shari'ah. The Board of Grievances was initially created to deal with disputesbetween ministries of the government. A breach of contractis a breach of a semi-sacred agreement and an affront to honor. The relations between a foreign contractor and his Saudi agent arespecified in the commercial regulations. Judgment of foreign courts are not currently accepted or enforced bycourts in Saudi Arabia. Although he does not have official, formal authority in creatinglaw, he has the practical power to do so through royal decrees. They both sustain and extend the tradition in their rulings.The ulama draw upon the tradition and process of one of the schools ofinterpretation that have arisen in working with Islamic law. 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