Saudi Legal Paradox Deters Investors as Disputes Go Unresolved

Turki AlBallaa wants to bring more foreign investment to Saudi Arabia, the world’s largest oil supplier. The judicial system stands in his way.

“The legal situation is complicated and must change,” AlBallaa, 32, general manager of the Saudi Investment Support Center, which helps companies set up in the country, said, smoking a Cuban cigar at one of Riyadh’s all-male lounges.

Saudi Arabia maintains some of the world’s strictest civil laws because of its brand of Islam, including sentences of public beheading for drug smugglers and lashings for sexual offenders. When it comes to commercial laws, few are enforced, hampering efforts to foster investment, curb unemployment and reduce dependency on energy revenue.

Since joining the World Trade Organization in 2005, the monarchy announced measures to meet international standards of commercial transactions. Today, the legal system is beset by hearing delays, a failure to follow through on court decisions and too few judges with international commercial law training.

“A commercial dispute can drag on for years,” Mohammed al-Qahtani, an economist working at the Institute of Diplomatic Studies in Riyadh, said in an interview.

Unresolved disputes that will need to be enforced or tried by Saudi courts include part of the $15.7 billion in debt owed by Ahmad Hamad Algosaibi & Brothers Co., a Saudi trading, shipping and banking company, and the Saad Group, owned by Saudi billionaire Maan al-Sanea, to creditors. Judges in the Cayman Islands and New York froze and dismissed in June and July cases concerning al-Sanea and the Algosaibi family.

No Enforcement

The battles will test the enforcement of court decisions in Saudi Arabia, whether made locally or abroad, said Jean-Francois Seznec, visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies. “The major problem with the commercial law in the kingdom is the lack of enforceability of judgments.”

The Arab world’s largest economy also lacks sufficient deterrent for intellectual copyright infringement.

Emaar Properties PJSC, the Middle East’s biggest publicly traded property company, hasn’t resolved a lawsuit with Jadawel International after it went to arbitration in 2005. In April last year, Emaar said it was appealing a Saudi court decision overruling a September 2008 judgment, which said its venture agreement with Jadawel wasn’t binding.

WTO Obligations

“I defy anybody to tell me what the Saudis have done to comply with their WTO obligations,” said Ronald Pump, a U.S. legal consultant practicing in the kingdom for 11 years. “All these things were supposed to happen, and, to my knowledge, nothing has really been done in the judiciary.”

King Abdullah, monarch since 2005, announced a 7 billion- riyal ($2 billion) program to modernize the judiciary two years after he assumed power. The goal was to establish a supreme court, commercial courts and train 3,000 judges.

The king, 86 this year, also wants to standardize procedures governing verdicts and corporal penalties by codifying Shariah, or Islamic law, the Jeddah-based Saudi Gazette newspaper reported in May. The Ministry of Justice said yesterday it promoted 130 judges to appellate courts to “contribute to the development” of the judicial system.

“It’s good that the government recognizes the problem, but it’s an arduous process,” John Sfakianakis, chief economist at Banque Saudi Fransi, said in Riyadh.

Unemployment

Saudi Arabia announced in August a $384 billion, five-year spending plan as the kingdom tries to reduce an unemployment rate of as high as 43 percent for Saudis between the ages of 20 and 24. The overall rate was 10.5 percent in 2009, according to data from the Central Department of Statistics and Information published in April by the Okaz newspaper.

Saudi Arabia ranked 13th in the world in terms of ease of doing business, though 140th in contract enforcement this year, according to the World Bank’s Doing Business 2010 report. The Saudi Arabian General Investment Authority, a government body responsible for bringing investment to the kingdom, had aimed for the country to be ranked among the top 10 this year, Amr al- Dabbagh, the chairman, said in an interview on May 25.

The 1982 amended Companies Law, first issued in 1965, regulates partnerships, company formation and bankruptcy, according to the Commercial Office of the Saudi Embassy in Washington. The Commercial Law dates back to 1930, before the foundation of the country in 1932.

“Enforcement is really, really difficult,” Pump said. “If you can get anything, 10 cents on the dollar, I really recommend taking it.”

Religious Law

Courts don’t provide access to written records and judges independently issue verdicts without consulting guidelines on previous cases, according to lawyers and economists.

Rulings are always based on how a judge interprets Shariah law in a country where religious rules are so strict that women are prohibited from driving. A judge in 2001 had Japanese-made Pokemon dolls pulled from store shelves after issuing a judgment that they were un-Islamic.

James Filpi, a senior attorney at the U.S. Department of Commerce’s Commercial Law Development Program, said the U.S. wants to work with the Saudi Ministry of Justice in improving the implementation of commercial law.

The department proposed in April 2009 a three-year, $6 million program to partner Saudi judges with U.S. judges. The program will be financed by the Saudi government, Filpi said.

“The goal of the proposal is to raise the capacity of Saudi judges to adjudicate complex commercial and international transactions,” he said by telephone. “International commercial actors in Saudi Arabia would like to improve the process of litigating cases in courts.”

Copyright Concerns

Members of the Arabian Anti-Piracy Alliance, established by the U.S. Motion Picture Association in 1996, see opportunities in Saudi Arabia as the growth in population raises demand for their products. The failure to enforce tough penalties against violators is the main deterrent.

“We have yet to see one imprisonment for copyright violations,” Scott Butler, chief executive officer of the alliance, said in a telephone interview.

Relaxing in a leather salon in the cigar lounge, AlBallaa, who started the center with partners earlier this year, is concerned there are too many people with a vested interest in keeping the status quo.

“Big local businesses are standing in the way of changes to the legal system,” he said. “They are worried about international competition.”

To contact the reporter on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net

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