Law Firm of Dr. Khalid Alnowaiser

In recent years, arbitration has become increasingly popular in Saudi Arabia as a way to resolve business disputes. Arbitration is a process by which parties to a contract agree to resolve their dispute with a third party who is empowered to issue a legally binding decision determining the disputed issues and awarding monetary damages or other specific remedies. This process is codified in Royal Decree No. M/46 of 12-7-1403 H dated April 25, 1983.

Over the past two decades, the Kingdom’s arbitration law has become increasingly useful to businesses for four basic reasons:

· Arbitration resolves disputes faster, thus savings time and money.

· Disputes are resolved privately, rather than in a public courtroom.

· Experts who are familiar with the technology or practices of a particular trade are employed as arbitrators, and they provide continuity throughout the process by following the case from the beginning to the end.

· Most courts enforce arbitration agreements without question, except in unusually rare circumstances, and judicial enforcement of arbitration awards is now as easy as enforcing a foreign judgment.

Arbitration of commercial disputes arises in two situations. The most common is an agreement to submit future disputes to arbitration, which is incorporated in the principal contract between the parties. The second way is the parties’ agreement to submit an existing dispute to arbitration in the absence of an arbitration clause in the contract.

Saudi Arabia’s arbitration law is remarkably comprehensive in discussing all aspects of the arbitration process. Article V requires that the parties submit the agreement to arbitrate to the judicial authority having original jurisdiction over the dispute and obtain the latter’s approval. The arbitration document must be in Arabic and should be capable of being authenticated. Judicial approval is generally procedural and must be issued within fifteen days.

Unless the parties have otherwise agreed, an arbitration award must be issued within ninety days of the date of judicial approval of the arbitration document. Any award must be in Arabic and in accordance with Islamic law and applicable regulations.

Generally, the parties have the right to confront the opposing party and its witnesses, to present arguments and relevant documents, and to be represented by an attorney. Sessions are public but may be held privately if the arbitrator decides to do so or a party so requests. The arbitrator may question the parties and witnesses on his own or direct that most of the questioning be conducted by the parties’ attorneys. Testimony must be in Arabic, and any person not speaking Arabic must be accompanied by a qualified interpreter.

Unlike most judicial proceedings, the arbitrator may order independent investigations and conduct on-site inspections. He may also appoint other experts and assess expert fees against the parties as he determines appropriate.

Once an award is issued by the arbitrator, the parties have the right to object within fifteen days of being notified of the award. If no objections are filed within the stated period, the award becomes final. A final award is still subject to the process of judicial review to determine if it is fully consistent with Saudi law and public policy. When an order is issued by a court to enforce the award, it has the force and effect of a judicial decision. However, Article XX of the arbitration law provides that the decision of the court issuing the enforcement order is appealable as any other judicial ruling.

Since 1993 when Saudi Arabia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Saudi Board of Grievances remains involved in deciding whether a foreign arbitration award should be enforced. The Board considers the following circumstances which may prevent enforcement:

· When the arbitration agreement in invalid according to the law applicable to it or of the country where it was made;

· When the arbitrator exceeded his authority;

· When the composition of the arbitration panel was irregular;

· When the award is not enforceable in the country in which it was made;

· When the dispute is incapable of being settled by arbitration under Saudi Arabian law; and

· When the recognition or enforcement of the ward is contrary to the Kingdom’s strict adherence to Shariah.

If there is any question whether the foreign arbitration award will be recognized and enforced in Saudi Arabia, it may be best for a foreign firm to secure legal representation from a Saudi law firm to involve the local courts, particularly when the defendant’s assets are located in the Kingdom.

The Kingdom also is a party to certain international arbitration agreements, such as the Agreement on the Reciprocal Enforcement of Judgments among the Members of the League of Arab States and the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States. In the latter agreement, however, it is noteworthy that the Kingdom reserved the right not to permit questions pertaining to oil or discretionary executive actions which are not subject to judicial review to the International Center for Settlement of Commercial Disputes.

Arbitration generally is preferable to mediation for its binding effect upon the parties. Mediation involves submitting a dispute to a mutually acceptable third party in an effort to reach an amicable solution. However, if a party is unwilling to accept the recommendation of the mediator, he may disregard it and commence litigation. In commercial disputes, particularly those involving non-Saudis, the binding effect of arbitration is much more attractive by providing the certainty that the arbitration decision will resolve the matter once and for all.

It remains to be seen if the costs associated with arbitration can be restrained so that arbitration will remain a more cost-effective means of dispute resolution than litigation in Saudi courts.

Challenges Facing Saudi Family Businesses

Ninety percent of all companies in the Middle East are family-owned. Of the 25,000 registered companies in Jeddah, Saudi Arabia, 99 percent are family-owned enterprises. Globally, about one-third of Fortune 500 companies and 75 percent of all companies in the industrialized world are family-owned. Yet, the very nature of these businesses presents unique challenges.

There is a great need to separate business issues from family issues. Control of the business is of particular importance to the family members involved in its operation. Family firms must ensure that young family members are competent and possess the requisite skills and knowledge to make a positive contribution to the continued success of the enterprise.

Another challenge is the requirements of Islamic law (“Shariah”) upon the laws of inheritance and its effect upon the freedom to transfer a business to the next generation. In the West, the owner of a family-owned, non-public business can make a Will bequeathing ownership of his business to whomever he chooses. The transfer can be an outright bequest at his death or by way of a trust created during his lifetime or at his death.

By contrast, a Saudi business owner is bound by Shariah inheritance rules which restrict his bequest to no more than one-third of his net estate after payment of funeral expenses and debts unless all of his heirs consent, or there are no legal heirs at all, or his only legal heir is his spouse who receives her legal share, leaving the residue of the estate to be bequeathed. No bequest is permissible for any person who will automatically inherit from the estate, such as a child or spouse. Similarly, gifts made during the owner’s last illness will be counted against the one-third share permitted by Islamic law.

The Koran clearly states that the share of a male is twice that of a female. Specific shares are provided for every possible survivor depending upon his or her degree of relationship to the deceased person and class. Two kinds of heirs are disqualified from inheriting under Islamic law: a non-Muslim and a murderer. Also, neither illegitimate children nor adopted children may inherit under Shariah.

Although most Saudi family businesses are structured as limited liability companies, and other are run as sole proprietorship or partnerships, there has been increasing interest in forming joint stock companies. One compelling reason is to attract outside investment and increase company capital to ensure continued business growth. Another reason is to continue the business for many generations to come. Only one-third of family businesses survive up to the second generation, and only ten percent make it to the third generation.

Some companies believe that going public is necessary in order to compete globally. In order to do so, family businesses must relinquish at least sixty percent of their shares and offer it to the public. This ultimately places control of the company out of the family’s hands. It also creates corporate governance issues.

Shares that are publicly traded generally command higher prices than shares held by a privately owned company. Shareholders have a ready market for their shares and can diversify their investment portfolios.

Management is generally compensated at a higher level than management in private companies. But when a company goes public, management loses some of its freedom to act without obtaining the approval of its board of directors or, in some cases, its stockholders. Further, shareholders measure the company by its profits, dividends and stock price. This can cause management to focus on short-term strategies rather than long term goals. Management can even lose control of the company if a dissident group of investors obtains majority control of the stock entitled to vote.

Only a few Saudi companies have gone public in recent years, primarily because of the costs and time needed to comply with regulators. Business strategies, financial results, executive salaries, and compensation arrangements all have to be disclosed publicly. Periodic financial reports and proxy statements must be filed with regulatory agencies and distributed to shareholders. Time devoted to complying with these requirements necessitates time away from the management of company operations.

Yet, survival of family businesses after the third generation, if not before, may require conversion to a joint stock company with a broad base of shareholders to provide the necessary operating capital and management succession planning to ensure a company’s continued success.

A new resource for Saudi family-owned firms is the Family Business Academy located in Jeddah. The Academy has been established to offer advice on conflict resolution, succession planning, and other issues unique to family businesses. It plans to offer workshops to family business owners on a regular basis to promote overall economic development in the Kingdom.