Since the creation of the Kingdom of Saudi Arabia on 23 September 1932, it has been the government’s express policy that the country is governed by Islamic Law (Shari’a). This was confirmed in 1992 by the Basic Law of Rule, Royal Order No. A/90 of 27th Sha’ban 1412 Hejra corresponding to 1 March 1992, which is, in effect, the country’s constitution. Historically, the Hanbali school of Islamic Law has been dominant in the territory that is now Saudi Arabia. The Islamic law texts that Saudi jurists regard as authoritative were compiled during the 13th to 17th centuries CE; as such, they reflect the concerns of a pre-industrial society and do not address many commercial, business or economic issues.
Under Islamic Law and, therefore, Saudi law, a government may issue regulations, provided that they do not conflict with the established principles of Islamic Law. In theory, Islamic Law is meant to be all-embracing, so all legislation is intended to supplement it. Indeed, due to Islamic Law sensitivities, Saudi Arabian statutes are referred to as regulations, rather than laws or acts. In practice, there are numerous areas of law where Islamic Law offers few or no guidelines, and where government-made legislation is, therefore, the only law. However, the Saudi Arabian government tends not to legislate in areas where a given subject matter is covered in some detail in the authoritative Islamic Law texts; for example, there is no Saudi Arabian legislation setting out the general principles of contract law.
The Islamic Law texts do not set out an all-embracing theory of contract law that applies to all types of contracts. Rather, the texts address certain contracts – such as sales, hire, loans, agency and guarantees – in individual chapters. Accordingly, certain rules that apply, for example, to contracts of sale do not necessarily apply to guarantees, and vice versa. However, it is also acceptable to conclude innominate contracts – ie, contracts that do not fall within one of the contractual schemes mentioned above. The basic principle of Saudi Arabian contract law can be summed up in the maxim “The Contract is the Law of the Parties” (Al Aqd Shari’at Al Muta’aqdin), meaning that, generally, the parties to a contract are free to agree to the terms of their choosing, provided that such terms are not at odds with established Islamic Law principles.
Islamic Law also recognises the binding nature of custom and usage. Where no clear answer to a given legal issue can be found by reference to the authoritative Islamic Law texts or the contract terms, the Saudi Arabian judiciary or arbitrators may, in appropriate cases, consider custom and usage as binding on the parties to a transaction.
Saudi Arabia has courts that are administered by the Ministry of Justice, and specialised tribunals. The General Courts (also known as the Shari’a Courts), the Commercial Court and the Labour Courts are under the administration of the Ministry of Justice.
Other specialised tribunals (whose names mostly explain their scope of jurisdiction fully) include the following:
The past decade has seen considerable change to the administration of justice in Saudi Arabia, which was initiated under the Judiciary Regulation, Royal Decree No M/78 of 19 Ramadan 1428 Hejra corresponding to 1 October 2007. The Board of Grievances used to have jurisdiction in commercial disputes, which was transferred to the newly formed Commercial Courts in October 2017, and the definition of commercial disputes was widened to include construction cases and commercial property disputes. Labour disputes used to be administered by the Ministry of Labour’s Commission for the Settlement of Labour Disputes, whose jurisdiction was transferred to the new Labour Courts in October 2018.
Furthermore, the Commercial Courts Regulation Royal Decree No M/93 of 15th Sha’ban 1441 Hejra corresponding to 8 April 2020 will bring about further innovations to the Commercial Courts when it comes into force on 16 June 2020. These changes include the introduction of class action lawsuits and the enablement of commercial courts to engage the services of the private sector for functions such as mediation, notification and judgment delivery.
Where technical or complex financial issues are raised, it is common for the judges to appoint an expert or experts as advisers to the tribunal. The tribunal has discretion over who it appoints as an expert, and over whether or not it accepts or disregards all or part of the expert’s findings, but, ordinarily, the determination of technical or complex financial issues falls to the expert.
Until the year 2000, the opportunities for foreign investment in Saudi Arabia were extremely restricted, limited essentially to foreign minority shareholdings in industrial development projects involving technology transfer to Saudi Arabia. Foreign participation in service or trading businesses was not possible. At the time, the economy was dominated by state-owned monopolies.
With the assistance of The World Bank, a new foreign investment framework was created through the enactment of the new Investment Regulation and the creation of the Saudi Arabian General Investment Authority (SAGIA) in April 2000. Until then, foreign direct investment in Saudi Arabia had been treated as a privilege. Under the new law, all business activities were opened to foreign investment, unless they were expressly excluded from foreign investment under the so-called Negative List.
These reforms immediately opened most forms of industry and services to 100% foreign ownership. Trading activities remained restricted to Saudi nationals until 2007, when the sector was opened up to 75% participation. 100% ownership of trading businesses has been possible since 2016, but is subject to high entry requirements.
In 2020, SAGIA became the Ministry of Investment of Saudi Arabia (MISA). Foreign investors must now obtain approval from MISA before establishing a presence in Saudi Arabia. Approval is obtained after meeting certain conditions (depending on the investment activity) and providing the required documentation. There are various limitations on foreign ownership of joint stock companies, and these can vary depending on the nature of the activity carried out by such companies. For example, there are foreign ownership limits that apply to banks, insurance companies and telecommunication companies. In addition, the Negative List sets out a number of activities that foreign investors are prohibited from undertaking, such as real estate development in the holy cities of Makkah and Madinah.
Until recently, foreign investors could not generally own more than 49% of the issued shares or convertible debt instruments of a listed company. In June 2019, the Capital Markets Authority lifted the maximum foreign ownership limit, permitting foreign investors to increase their investments in some sectors, with the restriction that their shares cannot be sold until they have owned them for two years.
Foreign investors are required to obtain an investment licence from MISA, the application for which is completed online and requires the submission of several documents by each foreign shareholder. The required documentation may differ depending on the activity of the company to be incorporated, but must include the following as a minimum requirement:
The online application also requires the applicant to provide some general information with respect to each shareholder, including contact information, to specify the activities that will be carried out by the Saudi company, and to provide some general information with respect to the investment in Saudi Arabia, including the capital and estimated number of employees to be employed by the Saudi company.
Once the online application is complete, it usually takes between three and seven days for MISA to issue the investment licence.
Carrying on unlicensed economic activities or investing in Saudi Arabia without an investment licence is an offence under the so-called Anti Fronting Regulation, Royal Decree No. M/22 of 4 Jumada Awwal 1425 Hejra corresponding to 22 June 2004. The parties involved may be imprisoned and fined, and the assets used in the business may be seized. In addition, a non-Saudi may be deported, and a Saudi may have his commercial registration cancelled and be prohibited from practising the same activity for up to five years. Participation in unlicensed economic activities also often involves tax fraud, in respect of which please refer to 5.7 Anti-evasion Rules.
For most activities, the investor is only required to commit the capital that is required for the proposed activity. However, investment by non-Saudi interests in retail and wholesale activities is subject to the following requirements:
Non-Saudi interests can invest in a wholly-owned trading venture subject to the following requirements:
When an application for an investment licence is rejected, the applicant may lodge an objection with MISA’s board within 30 days of the date of receipt of the rejection notice. The board considers and rules on the objection within 30 days of submission. If the board dismisses the objection, the applicant may appeal to the Administrative Court.
Companies incorporated in Saudi Arabia are usually incorporated as limited liability companies (LLCs) or joint stock companies (JSCs). An LLC can be owned by a single person, but cannot have more than 50 shareholders. There is no minimum share capital requirement for LLCs, but the Companies Regulation, Royal Decree No. M/3 of 28th Muharram 1437 Hejra corresponding to 10 November 2015, requires the capital of a company to be sufficient for carrying out the company activities.
A JSC can be owned by a single corporate shareholder, but the sole shareholder’s capital must be at least SAR5 million. The JSC’s capital on establishment must be sufficient to achieve its object, and in any event must not be less than SAR500,000. It is possible for a JSC’s share capital to be partly paid up on establishment, provided that it is not less than 25%. An LLC’s capital must be fully paid up on establishment.
The Companies Regulation has recently formalised the establishment of holding companies, which can be either JSCs or LLCs. A holding company is an entity designed to control other JSCs or LLCs by owning more than half of their capital, or by controlling the formation of their board of managers or directors. The subsidiary company cannot be a shareholder in the holding company.
As of 8 April 2020, the Professional Companies Regulation, Royal Decree No. M/17 of 26 Muharram 1441 Hijra corresponding to 25 September 2019, allows professional partnerships to adopt the form of LLCs and JSCs as well. A professional partnership is a civil company with a separate corporate personality. It is established by one or more persons licensed to undertake one or more professions, alone or with other non-licensed persons, for the purpose of carrying out the licensed profession(s).
In addition to the above, an individual can establish a sole proprietorship without legal personality, but this is not normally approved for non-Saudi investors.
The first step towards incorporating an entity with non-Saudi shareholders is obtaining an investment licence from MISA. Once the licence has been obtained, the shareholders must submit the company’s draft articles of association to the Ministry of Commerce (MCI) for review and approval. After they have been approved, the articles must be notarised and published. The next step is to obtain the commercial registration certificate from MCI, which includes the appointment of management. Once the commercial registration certificate is issued, the company is incorporated and must complete the post-incorporation registrations with the following government authorities:
The company may also need to obtain additional approvals from the relevant authority regulating its activity.
The timing for incorporating a company from the date of the MISA application up to the issuance of the commercial registration certificate is usually four to six weeks, depending on whether the ministries have any comments on the documents submitted and the deviation of the draft articles of association from the standard articles issued from time to time by MCI.
The timing for completing the post-incorporation registrations can range from three to six months.
Any amendments to the articles of association of a company must be submitted to MCI for review and approval, and must be notarised and published. This includes any change in shareholding, any increase or decrease in the capital of the company, or any change to the activities of the company. Furthermore, the names of the general manager or members of the board of directors are included in the commercial registration certificate of a company and therefore any change in management must be reported to MCI for amendment of the commercial registration certificate.
An LLC’s management must send a report to MCI in respect of each financial year, including the company’s financial statements, a report on the company’s activity and financial status, and the management’s proposals for the distribution of profits.
JSCs are managed by a board of directors, which has the widest powers to manage the company to achieve its objects, subject to the limitations set down by the shareholders’ general assembly. Board members are elected by the shareholders in the ordinary general assembly, except for the first board, which is appointed by the constituent general assembly or in the JSC’s articles or bylaws.
The Companies Regulation requires the shareholders of a JSC to form an audit committee of between three and five members who are not executive members of the board of directors. The resolution forming such a committee must specify its functions and rules, and the remuneration of its members.
LLCs have more flexibility than JSCs to put a management structure in place that suits the company’s shareholders. An LLC can be managed by one or more of the shareholders, or by another person or persons. The shareholders are allowed to appoint a sole manager or managers in the articles of association or by a separate contract, for either a specified or unspecified period. The shareholders can resolve to form a board of directors if there are multiple directors.
Article 78 of the Companies Regulation makes the members of the board of directors of a JSC jointly liable towards the company, its shareholders and third parties for “any damage arising out of their mismanagement of the company’s affairs or their breach of the provisions of the Regulation or the company’s bylaws.” Similarly, Article 165 (2) of the Companies Regulation makes the managers of an LLC jointly liable towards the company, its shareholders and third parties for losses caused by “any defaults on their part in the performance of their work.” The term used for managers is mudīr, which means a manager or director with the power to bind the company pursuant to its articles of association or a shareholders’ resolution. In the context of Article 165, a default is more than an honest mistake, but it does not need to be a deliberate act. Provisions absolving the board members or managers from their liabilities are void.
Saudi Arabian courts respect the juristic personality of a corporate body and will not make the shareholders liable for the company’s debts. However, there are important exceptions to this general rule under Article 150 of the Companies Regulation in respect of JSCs, and under Article 181 of the Companies Regulation in respect of LLCs.
When a JSC’s losses exceed 50% of its capital, Article 150 of the Companies Regulation requires the officers or auditors to notify the chairman of the board immediately, and the board must summon an extraordinary general shareholders’ meeting within 45 days. The shareholders must decide whether to increase the capital to bring the losses below 50%, or to dissolve the company. Failure to call the shareholders’ meeting, or to reach the requisite resolution, or to inject the capital within 90 days results in the company’s termination. Continued trading in these circumstances may expose the shareholders to responsibility for the company’s debts.
When an LLC’s losses reach 50% of its capital, Article 181 of the Companies Regulation requires the managers to record the fact in the commercial register and call a shareholders’ meeting within 90 days. At the meeting, the shareholders must pass a resolution to either carry on trading or liquidate the company. If no meeting is called or if the shareholders do not pass the required resolution, the company ceases to exist, in which case the shareholders may be liable for the company’s debts. It is not clear from the wording of Article 181 whether the liability arises only in respect of debts incurred after the cut-off point, but there is a risk that a Saudi court may hold the shareholders liable for all of the company’s debts, regardless of when they were incurred.
When the shareholders hold a meeting as required and pass a resolution to carry on trading without injecting new capital, and the shareholders’ resolution is published on MCI’s website, the company continues to exist. Article 181 is silent regarding whether or not the shareholders will become liable for the company’s debts in this scenario, but it can be argued that they will not be liable for the debts because parties that do business with the company have been put on notice by the announcement on MCI’s website.
A failure by the management to notify the shareholders pursuant to Article 150 or Article 181 is likely to be viewed as mismanagement or default, creating a liability for the directors or managers.
The main Saudi statute governing relations between employers and employees is the Labour Regulation, Royal Decree No. M/51 of 23 Sha’ban 1426 Hejra corresponding to 27 September 2005, as amended by Royal Decree No. M/46 of 5 Jumada Thani 1436 Hejra corresponding to 25 March 2015. The Labour Regulation lays down certain mandatory minimum standards, and any agreement reducing an employee’s minimum rights is void.
The basic rule under the Labour Regulation is that Saudi employees shall not represent less than 75% of the total workforce, but that the Minister of Labour may decrease the percentage temporarily. In 2011, the Saudi Ministry of Labour (now the Ministry of Human Resources and Social Development) implemented a detailed list of quotas, known as the Nitaqat system, which are determined by the business sector and size of the business entity, with the percentages of Saudi employees currently classed in Red, Low Green, Green, High Green and Platinum sections. To employ new staff, one must be in at least the Green section.
The Implementing Rules of the Labour Regulation set out a standard employment contract, certain provisions of which are mandatory. A written employment contract must be executed, but the provisions of the Labour Regulation apply if the employer fails to do so.
Employment contracts with non-Saudis must be on a fixed-term basis, but Saudi employees can be employed on fixed-term contracts or indefinite term contracts. If a fixed-term contract expires and the parties continue the relationship, it becomes an indefinite term contract for Saudi employees. If a fixed-term contract contains a renewal provision, it can be renewed twice for less than four years and remains a fixed-term contract. If the contract is renewed three times or the employment period exceeds four years, the contract becomes indefinite for Saudi employees. Accordingly, a Saudi national who has been employed by the same employer for more than four years or whose contract has been renewed three times will automatically be employed on an indefinite term basis.
As a general rule, working hours are eight hours per day for six days per week, with a total of 48 hours per week. During Ramadan, working hours for Muslims are reduced to six hours per day for six days per week, with a total of 36 hours per week. Article 99 of the Labour Regulation provides that statutory working hours may be increased to nine hours per day or decreased to seven hours per day for certain work categories. According to Article 101 of the Labour Regulation, workers may not work continuously for more than five hours at a time, with breaks for meals, rest and prayers of not less than half an hour at a time. Breaks are not counted as working hours, but workers may not remain at the workplace for more than 11 hours per day.
Article 106 of the Labour Regulation provides that the maximum actual working hours may be increased to up to ten hours per day or up to 60 hours per week without a day of rest in certain circumstances, which includes “if the worker is intended to face extraordinary work pressure.” In such situations, overtime is payable at 150% of the employee’s base wage.
Under Saudi Arabian law, staff can be dismissed in the following circumstances:
A fixed-term contract comes to an end when its term expires. Therefore, an employee can be dismissed by being given notice that the contract will not be renewed. In such circumstances, no compensation is payable other than the statutory end-of-service award, and repatriation costs for non-Saudis.
Article 80 allows an employer to terminate a contract for certain specified causes, most of which involve misconduct. Article 80 (2) permits termination “If the worker fails to perform his essential obligations arising from the employment contract, or to obey legitimate orders, or if, in spite of written warnings, he deliberately fails to observe the instructions related to the safety of work and workers as may be posted by the employer in a conspicuous place.”
This is a catch-all provision, and is applicable to any breach of the essence of the contract of employment, but the breach must be material. Ordinary, trivial errors are punishable only by disciplinary measures.
Any dismissal under Article 80 requires that the employee is given a chance to justify his conduct. For this, a meeting must be called at which at least two management representatives must be present, and which must be minuted. If the employee fails to respond within a reasonable time, it may be assumed that he has no valid objection to the termination, or that he is not interested in prolonging the employment relationship. Dismissal under Article 80 can only be invoked in isolated instances, and not, for example, to reduce a company’s workforce.
Article 75 of the Labour Regulation permits the termination of an indefinite term contract for lawful cause, upon 60 days’ notice, although the term "lawful cause" is not defined. In principle, it can include any reason, such as the Labour Regulation and other applicable laws, contractual obligations, social, religious and customary rules, public policy, impossibility or frustration of purpose, the employer’s bylaws and work rules, and real business considerations. However, anything that appears arbitrary or discriminatory will not be accepted by the Labour Courts.
When a fixed-term contract is terminated prematurely without cause, Article 77 of the Labour Regulation requires the courts to award compensation to the end of the contract (however long this may be), with a minimum of two months’ salary. The right to compensation applies not only when the employment contract is terminated early by the employer, but also when the employee terminates early without good cause.
When an indefinite term contract is terminated without cause, the employee receives 15 days’ salary for each year of service, or pro rata for an incomplete year, with a minimum of two months’ salary, unless compensation for unlawful termination is set out in the employment contract. The compensation is in addition to the end-of-service benefits (ESBs) that are payable in any event.
Under Article 84 of the Labour Regulation, when an employment contract comes to an end, as a general rule the employee is entitled to:
Where an employee has resigned for reasons other than force majeure, the ESB is calculated as follows:
A waiver of the right to ESB is ineffective under Saudi Arabian law. The ESB is calculated with reference to the employee’s gross remuneration, which includes housing and transport allowances, regular bonuses, and the like. Where housing and transport are provided to the employee, the actual value or fair market value of such benefits is taken as the basis of the calculation.
There are no trade unions in Saudi Arabia. Employees’ interests are represented by the Ministry of Human Resources and Social Development. The Labour Regulation sets out rules governing the investigation of complaints by labour inspectors.
There is no personal income tax in Saudi Arabia. However, in 2018 the government imposed monthly charges on expatriate employees, implemented on a sliding scale as follows:
Industrial firms currently benefit from a waiver of the expat fees for the next five years.
In addition, a monthly charge is imposed on expatriates’ dependents, as follows:
While the charges on expatriate employees must be borne by the employer, many employers do not cover the levy on dependents, which is therefore, in effect, a form of income tax.
Saudi Arabian interests pay zakat, which is a religious wealth tax based on the taxpayer’s net worth, not income. The effective rate is 2.5% of the net worth of natural persons and 2.5% of the total capital resources of companies. For companies, the tax base for the calculation of zakat excludes fixed assets, long-term investments and deferred costs from total capital resources, but includes profits from foreign investments that do not consist of investment in real property.
Under the Income Tax Regulation, Royal Decree No. M/1 of 15 Muharram 1425 Hejra corresponding to 7 March 2004, foreign interests that conduct business in Saudi Arabia (other than in hydrocarbon-related industries) pay income tax at a flat rate of 20% of the profits. When a company has Saudi and non-Saudi shareholders, the Saudi shareholders pay zakat, and the non-Saudi shareholders pay income tax.
Payments to a non-resident with no permanent establishment in Saudi Arabia for any amount realised from a source in the Kingdom are subject to withholding tax at the following percentages of the gross payment:
Value-added tax is currently payable at a rate of 5%, but from 1 July 2020 will be payable at a rate of 15%.
Net operating losses may be carried forward by non-Saudi investors from one year to the next. Any loss that has been carried forward may be deducted from the tax base of future taxable years until the cumulative loss is fully offset.
GAZT has launched an initiative lasting from 18 March 2020 until 30 June 2020, during which time any tax payment deadlines are extended for three months. During the initiative period, penalties are waived for registered taxpayers amending previously submitted tax declarations and submitting outstanding declarations.
For zakat payment purposes, Article 15 of the Implementing Regulation for Zakat Collection permits companies owned by the same partner, or holding companies and their wholly owned subsidiaries both inside and outside Saudi Arabia, to submit consolidated accounts and consolidated declarations.
There are no thin capitalisation rules.
Article 63 (c) of the Income Tax Regulation gives GAZT the power to re-allocate income and expenses between related parties as may be necessary to reflect the income that would have been realised if the parties had been independent and unrelated. While this rule has been in force since 2004, it was not widely applied until 2019. On 15 February 2019, GAZT introduced transfer pricing by-laws based on the OECD’s Base Erosion and Profit Shifting Recommendations.
Under the Income Tax Regulation, failure to pay income tax results in a delay fine of 1% of the unpaid tax for each 30 days of the delayed payment, plus an additional 25% of the unpaid tax if fraud is involved.
Under Article 7 of the Competition Regulation Royal Decree No. M/75 of 29 Jumada Thani 1440 Hejra corresponding to 6 March 2019, businesses that plan to engage in a transaction resulting in an economic concentration must notify the General Authority for Competition (GAC) at least 90 days before the transaction is completed, if the total value of the annual sales for all the enterprises taking part in the economic concentration surpasses SAR100 million.
Economic concentration is defined as “any action that results in a total or partial transfer of ownership of assets, rights, equity, stocks, shares, or liabilities of a firm to another by way of merger, acquisition, takeover, or the joining of two or more managements in a joint management, or any other form that leads to the control of a firm(s) including influencing its decision, the organization of its administrative structure, or its voting system.” Therefore, a full merger or acquisition is not necessary to trigger the reporting requirement; for example, the formation of an unincorporated joint venture or a consortium may also be sufficient.
Depending on the parties’ activities, it may also be necessary to obtain approvals and comply with the additional requirements of sector-specific regulatory bodies, such as the Saudi Arabian Monetary Agency (SAMA) for banks and insurance companies, and the Communications and Information Technology Commission (CITC) for telecommunication companies.
Special rules apply to mergers and acquisitions involving listed companies, which are set out in the Merger and Acquisitions Regulations, Resolution of the Board of the Capital Market Authority No. 1-50-2007 of 21 Ramadan 1428 Hejra corresponding to 3 October 2007, as amended by Resolution No. 3-45-2018 of 7 Sha’ban 1439 Hejra corresponding to 23 April 2018.
Under the 2019 Competition Regulation and its Implementing Rules, the parties to the economic concentration exceeding the threshold must submit a report for GAC approval at least 90 days before the action’s completion. The report must contain descriptions of:
It must also contain any other data GAC requires to review the economic concentration.
Once the report is received, GAC may publish basic information on the economic concentration and request comments from the public. GAC must evaluate the application in light of the following factors:
At the conclusion of the enquiry, GAC may approve or reject the application, or may set conditions for its approval. If no ruling is made within 90 days of submission of the application, the application is deemed to be approved.
Article 5 of the 2019 Regulation prohibits practices that have the effect of disturbing competition, or that are intended to disturb competition. Such practices can involve express or implied agreements between businesses, but a single entity can also be guilty of engaging in anti-competitive practices.
Article 5 sets out a non-exclusive list of practices that are considered anti-competitive, as follows:
Since GAC was established in 2004, originally as the Competition Protection Council, it has brought actions against and convicted businesses in the cement, medical gases, rice, sugar and soft drinks industries, among others.
Under the 2019 Regulation, a dominant entity is defined as having a 40% market share or the ability to influence a particular market.
Dominant businesses may not abuse their position, nor disturb or limit competition. Article 6 of the 2019 Regulation sets out the following non-exclusive list of practices that are prohibited for dominant businesses:
Until relatively recently, intellectual property rights were administered and protected by three different government authorities:
These functions are now handled by the Saudi Authority for Intellectual Property (SAIP), which aims to organise, support, sponsor, protect and promote intellectual property in the Kingdom, in accordance with global best practices.
There are currently two overlapping patent systems in Saudi Arabia. The GCC Patents of Inventions Regulation of 2001 was approved in Saudi Arabia by Royal Decree No. M/28 of 2001, and is an amendment of an earlier statute of 1992. It permits the registration of patents with effect throughout the GCC countries. The GCC Patent Office is based in Riyadh.
Patents are governed by the Patent, Layout Designs of Integrated Circuits, Plant Varieties, and Industrial Models Regulation, Royal Decree No. M/27 of 20 Jumada Awwal 1425 Hejra corresponding to 17 July 2005, which gives effect to the Paris Convention for the Protection of Industrial Property under Saudi law.
A protection document is granted by the Saudi Patent Office at King Abdulaziz City for Science and Technology, which gives full protection within the Kingdom to an invention, a layout design of an integrated circuit, a plant variety, or an industrial design. The protection document grants the owner the right to commercially exploit the subject matter of protection.
In accordance with the provisions of the Patent, Layout Designs of Integrated Circuits, Plant Varieties, and Industrial Models Regulation, a patent may be granted for an invention if it is novel, involves a creative step, and is capable of industrial application. The invention may be a product or an industrial process, or may relate to either.
Applications for a protection document must be filed at the Saudi Patent Office in the Arabic language, and must include the following:
The protection document is the personal right of the owner, who may transfer or assign it, or grant a contractual licence to others to commercially exploit the subject matter of protection. Protection is granted to the owner for 20 years for an invention, ten years for an industrial design and a layout design of an integrated circuit, and 20 to 25 years for a new plant variety. These periods are renewable, for an annual fee.
Disputes arising from patent infringement are handled by the Commercial Courts.
Trade marks are regulated under the Trademarks Regulation, Royal Decree No. M/21 of 28 Jumada Awwal 1423 Hejra corresponding to 8 August 2002, which defines a trade mark as “anything having a distinctive form such as names, words, signatures, letters, figures, drawings, logos, titles, hallmarks, seals, pictures, engravings, packs or any other mark or group of marks if used or intended to be used either to distinguish goods, products or services of a facility or other facilities or to indicate the rendering of a service or the control of inspection of goods or services.”
Applications for the registration of trade marks are made online and must include the following:
In Saudi Arabia, it is not permitted for anyone other than the rightful owner to register a trade mark that is similar to an internationally known mark. Registration of a trade mark provides the holder with protection for ten years from the date of registration, renewable for similar periods. Any renewal must be specifically applied for before the end of the last year of expiry of the registration, and the procedure for renewal is the same as that for the initial registration of the trade mark. A trade mark is deemed owned by the person who effects the registration. Once the registration is effected in the trade marks register, the party who has registered the trade mark shall be considered the owner thereof, to the exclusion of others.
A trade mark can be licensed, pledged or transferred by the rightful owner. The trade mark may be deleted or cancelled if it is not used for five consecutive years.
Penalties for infringement of a valid trade mark include imprisonment for a period of no more than one year and a fine of no less than SAR50,000 and no more than SAR1,000,000. The Commercial Courts preside over infringement-related disputes.
Industrial design is defined as “a collection of two-dimensional lines or colours, or a three-dimensional form that gives any industrial product or product of traditional crafts a special appearance, provided that it is not merely for a functional or technical purpose, including textile designs.” The industrial design is protected by a protection document called an “industrial design certificate”.
Industrial designs are governed by the Patent, Layout Designs of Integrated Circuits, Plant Varieties, and Industrial Models Regulation. A protection certificate shall be granted for an industrial model if it is novel and has features that distinguish it from known industrial models. The industrial model shall be deemed novel if it was not disclosed to the public through publication anywhere in a tangible form, by use or by any other way, prior to the date of filing the registration application or the priority application.
Protection is granted to the owner for ten years for an industrial design. The abovementioned regulation gives the owner of an industrial model protection certificate the right to initiate an action before the Commercial Courts against any person who infringes the industrial model by exploiting it for commercial purposes without his consent within the Kingdom through the manufacture, sale or importation of a product that includes or represents a wholly or substantially copied industrial model.
Note that the procedure for applying for a protection certificate for an industrial design is similar to the procedure for registering a patent, as described above (please see 7.1 Patents).
The Copyright Regulation, Royal Decree No. M/41 of 2 Rajab 1424 Hejra corresponding to 30 August 2003 and its Implementing Rules define copyright protection to include architectural designs, speeches, and theatrical, musical, photographic and cinematographic works, as well as works for radio and television, maps, video tapes and computer software. The Regulation gives the author financial and moral rights to print or publish the work, make amendments or delete the work, withdraw it from circulation, and assign it as they wish.
In 2019, SAIP launched an optional copyright registration service for computer software, apps and architectural designs. To register, applicants must complete the registration application on the SAIP website and pay the requisite examination fee.
Upon successful registration, the copyright holder is issued a registration certificate. However, it does not grant the holder permissions such as usage, circulation and publication of the work; the registry’s primary function is documentation of details regarding the work’s status and its authorship.
In general, the duration of protection afforded to different types of copyrighted works is as follows:
Disputes arising from copyright infringement are handled by the Commercial Courts. Infringers of copyright may be punished with a fine of up to SAR250,000 for first-time offenders, which may be doubled to SAR500,000 for repeated infringement.
The Regulations for the Protection of Confidential Commercial Information, issued by the Minister of Commerce and Industry's decision No. 3218 dated 25 Rabi Awwal 1426 Hejra corresponding to 4 May 2005, as amended by His Excellency's decision No. 431 dated 1 Jumada Awwal 1426 Hejra corresponding to 8 June 2005, enumerate a list of situations where information is considered a commercial secret, namely where:
The obtainment, usage or disclosure of commercial secrets without the owner’s consent, through a manner deemed “inconsistent with honest commercial practices”, is deemed an abuse of commercial secrets under the Regulation.
Activities considered contrary to honest commercial practice include the breaching of contracts concerning commercial secrets, breaching or encouraging the breaching of confidential information, and obtaining commercial secrets from a third party who is known to have obtained the information through one of the aforesaid activities. Persons harmed by an abuse of commercial secrets may file a lawsuit to claim compensation for damages they have sustained.
There is no specific data protection regulation in force in the Kingdom. However, data protection is regulated under several regulations, including the following.
The Anti Cyber Crime Regulation, Royal Decree No. M/17 of 8 Rabi Awwal 1428 Hejra corresponding to 26 March 2007 defines data as “information, commands, messages, voices, or images which are prepared or have been prepared for use in computers” and imposes a penalty of imprisonment for a period not exceeding one year and/or a fine not exceeding SAR500,000 for committing any of the following crimes:
The Health Profession Practice Regulation, Royal Decree No. M/59 of 4 Dhul Qada 1426 Hejra corresponding to 6 December 2005 provides that a medical practitioner must not disclose any confidential information obtained during the course of his or her work. The regulation lists a few exceptions to this rule, such as a court order requiring disclosure.
The Telecommunications Regulation, Royal Decree No. M/12 of 12 Rabi Awwal 1422 Hejra corresponding to 3 June 2011 provides that “the privacy and confidentiality of telephone calls and information transmitted or received through public telecommunications networks shall be maintained. Disclosing, listening or recording the same is not permitted, except for the cases stipulated by the relevant regulations.”
Article 5 of the E-Commerce Regulation, Royal Decree No. M/126 of 7 Dhul Qada 1440 Hejra corresponding to 9 July 2019 provides that online merchants may not retain consumer data beyond the period required for an electronic commerce transaction, and that online merchants must adopt the necessary safeguards to protect consumer data while it is retained. The same regulation prohibits online retailers from unauthorised disclosure and usage of consumer data.
The Cloud Computing Regulatory Framework defines customer data as any data falling under at least one of the following categories, insofar as that data is, or has been, part of the customer content or is, or has been, generated by the cloud service provider with regard to one or more of its cloud customers or cloud users:
The Cloud Computing Regulatory Framework provides for the protection of customer data and states that a CSP may not provide or authorise another party to provide customer content or customer data to any third party (including but not limited to any individuals, legal entities, domestic or foreign government or public authorities), nor process or use customer content or customer data for purposes other than those allowed under the cloud computing agreement with the cloud customer concerned.
Article 2 (b) of the 2018 E-Commerce Regulation details the provisions and sanctions in place to safeguard the protection of consumer data, and also applies to traders outside Saudi Arabia who provide products or services inside the country by offering them in a manner enabling the consumer to obtain them.
There is no single agency in charge of enforcing data protection rules: each government authority supervising an activity listed in 8.1 Applicable Regulations is responsible for enforcing its specific data protection rules.
Managing Contractual Obligations Through the Covid-19 Pandemic
Seemingly overnight, in the process of delivering a global contagious recession, the COVID-19 outbreak transmuted from a healthcare hazard into a socio-economic and financial calamity that has shaken up every aspect of life as we know it in unpredictable and inevitable ways.
Much further along its trajectory, the outbreak has generated unprecedented challenges for businesses in all sectors and across all continents. As countries throughout the world struggled to grab hold of the scope and scale of the outbreak, governments including the government of the Kingdom of Saudi Arabia had to make challenging decisions in order to survive this ongoing pandemic: a nationwide curfew, travel restrictions and lockdown, to name a few.
To keep businesses afloat, the Saudi government has initiated and continues to respond with co-ordinated measures to tackle the outbreak and to alleviate the distress and detrimental effects instigated therefrom. For instance, the government introduced certain exemptions and/or deferral of various governmental dues and fees, announced support packages targeting the private sector as well as small and medium-sized enterprises, and subsidised 60% of the salaries of Saudi employees in the private sector.
Hindrance to Fulfilment of Contractual Obligations
The global pandemic as well as the implemented government measures covering the nationwide curfew, travel bans, closures and restrictions on business operations have had a detrimental effect on the ability of contracting parties to satisfy underlying contractual obligations, rendering the implementation thereof extraordinarily difficult, costly, and sometimes impossible. Consequently, affected parties have contemplated the possibility of treating the pandemic as a relief event, entitling such parties to delay, amend or terminate their contract.
Contractual Remedies for Default
Prior to assessing the legal implications and remedies that may result from the parties’ default in fulfilling their contractual obligations under the governing legal framework, we believe that it is worth contracting parties trying to renegotiate, adapt and review their contractual arrangements in an aim to apply some level of relief from strict contractual obligations under the current circumstances, and without having recourse to any dispute resolution forum or court. Commercial forbearance may prove to be the ultimate mutually convenient solution for the parties, ensuring smooth business continuity and preserving commercial relationships. However, in order to be valid, binding and enforceable, commercially agreed reliefs must be duly executed as per the variation and amendment requirements provided for under the contract, bearing in mind potential third parties’ consent or notification requirements.
Parties should initially examine and familiarise themselves with the provisions of their own arrangements and revisit key provisions therein, particularly those relating to material adverse changes, force majeure events and consequences, limitation of liability, and termination, as some contracts may address events outside of the parties' control (force majeure, or otherwise) that may excuse the affected party from the performance of its contractual obligations.
However, an affected party should not automatically assume that it can rely on a guaranteed contractual relief, declare force majeure and cease the execution of its contractual obligations; rather, it shall profoundly consider the triggering event (be it the pandemic itself, or the measures imposed by the government in connection therewith), the applicability of the contractual relief to such event, the requirements to grant relief and the notice provision, while documenting and recording each and every step it has taken in the specific circumstance. It should be noted that wrongfully declaring a force majeure event may result in the defaulting party being considered to have breached its contractual obligations, and may provide the other party with a right to request damages and compensation.
Relief Events Under Shari'a and Applicable Law
In the absence of express relief events clauses in the contract, parties should consider the applicable doctrines and legal framework used to excuse or suspend performance, counting on former patterns of historical outbreaks.
Verse 1 of Surat Al-Ma’idah elucidated the overarching principle governing the implementation of contractual obligations, stating “Believers, honour your contracts”, and thereby rendering the parties absolutely bound to fulfil their contractual obligations and the relief therefrom to be bound by the rule of strict and narrow interpretation.
In this sense, Shari'a and Hadith addressed events and circumstances allowing the parties relief from their stringent obligation to honour their contracts. For instance, Al-Ja’eha and Al-Uthur refer to circumstances granting parties relief from their contractual obligations, provided all conditions related thereto are met.
It is also within that same context that the laws and regulations of the Kingdom of Saudi Arabia dealt with the concepts of force majeure and emergency events; however, such concepts have been addressed therein in a sporadic and incidental manner without providing an integrated straightforward approach as to the definition, characteristics and consequences of such events. Therefore, in the absence of statutory provisions that explicitly and sufficiently deal with relief events (force majeure and the like) in Saudi Arabia reference shall be made to Shari'a, the latter being the basic and primary law that serves as a guideline for all legal matters in the Kingdom. Shari'a scholars have different opinions in terms of the interpretation of a relief event, but there are three main legal doctrines that govern emergencies and unexpected events as follows: the force majeure event, the emergency event, and the impossibility.
The “Force Majeure” doctrine applies where an event was unforeseeable at the time of contracting and impacted the party’s ability to perform its contractual obligations in an uncontrollable manner, and there must also have been some external force, such as a natural disaster or "Act of God" type of event that had been brought to bear to the detriment of the impacted party seeking relief.
This doctrine does not only apply where an obligation is said to be physically impossible to achieve, but does apply to circumstances in which the performance of an obligation has become substantially different from what was initially agreed upon between the parties, resulting in the alteration of the rights and responsibilities under the contract.
The impact of the force majeure, as addressed by this doctrine, may be partial or complete, and may be permanent or temporary. This means that, in the event of a force majeure, the performance of an obligation could be suspended in its entirety or partially, and could be suspended permanently or for as long as the inability to perform exists, as the contract may resume and become enforceable once the force majeure event ceases to exist.
The “Emergency Event” doctrine applies in events where the parties are in an ongoing relationship and an exceptional change of a public and general nature has occurred, which was entirely unforeseen by all parties, and the consequences of which are overly onerous to at least one of the contracting parties so that it tilts the commercial balance that was intended at the onset of the contract.
The distinction between a force majeure and an emergency event under Shari'a is that while the first has been typically used to refer to natural events or "Acts of God" (eg, heavy rain, volcano, flooding or disease), the latter concept has been typically used in relation to "worldly" events. For instance, this would include the radical increase in the price of a commodity or material that is indispensable for the implementation of a contract, the loss of a commodity from the market, a great increase in the cost of manufacturing or importing of a commodity, the imposition by the state of high taxes on a specific activity on which the contract was held, or labour strikes.
The primary effect of an emergency event is the suspension of the contract performance for the duration of the event, and/or the amendment of the contractual obligations or the termination of the future performance of the contract with regards to the unexecuted obligations.
The concept of “Impossibility” allows a party to be released from a contract on the grounds that an event that has occurred after the contract has been entered into (for which neither party is at fault) has rendered performance of the obligation physically or legally impossible. Impossibility may be partial or absolute. The concept of absolute impossibility is reflected in Article 478 of Al-Mejelle (which is the first codification of Islamic principles), which states: “If any event happens whereby the reason for the conclusion of the contract disappears so that the contract cannot be carried out, such contract is cancelled.”
While the COVID-19 pandemic and the governmental measures imposed in connection therewith present several parameters and characteristics that appear likely to pertain to the concept of force majeure, it is to be noted that, even when it comes to the same event occurring in the same market and under the same jurisdiction, there is no one solution that fits all scenarios. The same relief event might be regarded as a force majeure, an emergency event or an impossibility based on the scope and nature of the event and depending on its severity and its effect on the defaulting party’s ability to perform and the expected duration of such default. Therefore, an attentive assessment and analysis on a case-by-case basis for each situation at hand are crucial.
Planning for the Way Ahead
As outlined above, businesses, companies and people around the world are facing similar situations, coping with unprecedented levels of uncertainty in between disruption and the ongoing threat of the pandemic; though we are all in this together, we do not have to be inevitably in the same boat.
Businesses are highly advised to find possibilities and opportunities – whether in the current legal and regulatory framework or in the extraordinary governmental measures that are being implemented to curb the outbreak – to consider all of the non-obvious options, taking into consideration all the particularities of the case at hand, in order to make an informed decision on their way forward.
Whilst the Kingdom has begun to ease lockdown provisions and workplaces are set to reopen in different capacities, concerns still arise on the return to the new normal amid the likelihood of a second wave of infection and potentially a second lockdown. Proper early-stage planning is crucial to survive and limit the severity of any such casualty and the potential governmental measures to be implemented in connection therewith. Noting such, if restrictions are re-imposed, reliance on emergency events, force majeure or any other relief provisions may not be as straightforward as it was during the initial wave.