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Saudi Arabia implemented its first written civil code on December 16, replacing the previous system that relied on judges’ discretion guided by Islamic law, Sharia. The overhaul is a pivotal element of the Vision 2030 reform plan aimed at steering the nation away from its heavy dependence on the oil and gas sector.
Private equity investor Imad Ghandour, co-founder and managing director at CedarBridge Capital Partners, views these changes as a catalyst for his firm to explore minority stakes in Saudi companies, a strategy they hadn’t considered before. With over $140 million in assets in Europe and the Middle East, Ghandour emphasizes that the new framework provides better and more predictable protection than the previous legal system.
The civil transactions law is a key component of Saudi Arabia’s broader strategy to attract foreign capital and achieve its ambitious goal of $100 billion in foreign direct investment by 2030. However, recent data reveals that the country received just under $33 billion in inflows in 2022, indicating a significant gap to bridge.
Legal experts suggest that the new law could be a game-changer by offering much-needed legal clarity for banks, law firms, asset managers, and corporations engaging in the Saudi market. Joseph Chedrawe, a partner at Covington & Burling, emphasizes that having a clear legal code boosts investor confidence by defining legal positions on various issues such as contract formation, damages, and termination.
Despite the optimistic outlook, doubts linger among lawyers, bankers, and investors regarding the practical application of the new laws. Andrew Mackenzie, head of litigation, arbitration, and investigations for the Middle East at DLA Piper, notes that seeing the laws applied in real cases will be a learning process for judges and businesses alike.
Ghandour echoes this sentiment, stating that his firm would carefully observe how the new law functions in practice before making any firm commitments. However, the legal framework itself is no longer seen as a deterrent for business leaders, addressing the previous concerns about the high political risk of operating in Saudi Arabia.
While the new law broadly aligns with Sharia principles, it is based on Egypt’s 1849 civil law, following the Napoleonic Code. The legal guidelines set for judges aim to bring more consistency and predictability. Ghandour highlights that the new code introduces provisions allowing shareholder deals to include exit clauses and the ability to force minority shareholders to join a company sale, strengthening investor positions.
Despite these positive changes, questions remain about how foreign and local parties would be treated in business disputes. Some investors, preferring deals governed by European laws, express concerns about potential bias in Saudi courts. Many continue to opt for contracts drafted under British law with arbitration clauses to avoid litigation in Saudi courts, fearing a perceived inclination towards the government’s interests.