Category Archives: Finance

In recent years, equity crowdfunding has emerged as a transformative mechanism for raising capital, particularly for startups and small businesses seeking alternative funding. Saudi Arabia, a burgeoning hub for entrepreneurship and innovation, has seen a growing interest in equity crowdfunding, backed by a regulatory framework designed to facilitate this form of financing while ensuring investor protection and market integrity.

Regulatory Landscape

The legal framework governing equity crowdfunding in Saudi Arabia is primarily overseen by the Capital Market Authority (CMA), the kingdom’s regulatory body responsible for supervising and developing the capital market. Equity crowdfunding falls under the broader “Offer of Securities” umbrella per the CMA’s regulations. In 2020, the CMA introduced specific regulations for “Regulated Activities Related to Providing Financing through Crowdfunding Platforms,” establishing a structured approach to equity crowdfunding operations.

Under these regulations, equity crowdfunding platforms must obtain a license from the CMA and adhere to stringent governance, compliance, and requirements for operational standards, which include but is not limited to:

• Financial Stability: demonstrate financial stability and operational capability to conduct crowdfunding activities.
• Governance and Risk Management: have robust governance structures and risk management frameworks to ensure platform integrity and investor protection.
• Disclosure Requirements: disclose comprehensive information about their operations, fees, and investment risks to issuers and investors.

The CMA’s oversight aims to foster transparency and accountability within the crowdfunding ecosystem, promote investor confidence, and mitigate risks associated with early-stage investments.

Investor Protections

The CMA mandates that equity crowdfunding platforms conduct comprehensive due diligence on issuers seeking funding to safeguard investor interests. This includes evaluating the issuer’s business model, financial viability, and management team. Platforms must also disclose all material information to investors, ensuring transparency in investment opportunities.

Moreover, individual investor participation is capped to limit exposure and mitigate risks associated with high-risk investments. This regulatory approach seeks to balance facilitating startup capital formation and protecting retail investors from potential losses.

Compliance Considerations

Equity crowdfunding platforms and issuers must adhere to stringent compliance standards, including anti-money laundering (AML) and know-your-customer (KYC) requirements. These measures are essential for mitigating financial crimes and ensuring the legitimacy of funding activities within the crowdfunding space.

Furthermore, issuers must periodically update investors on the progress of funded ventures, fostering ongoing engagement and accountability. Compliance with these regulations is crucial for sustaining investor confidence and promoting a robust crowdfunding ecosystem in Saudi Arabia.

Democratising Access to Capital

The advent of equity crowdfunding in Saudi Arabia holds significant promise for democratising access to capital, particularly for startups and small businesses traditionally underserved by conventional financing channels. By enabling direct investment from diverse investors, equity crowdfunding reduces reliance on traditional banking institutions and venture capital, empowering entrepreneurs to realise their vision.

This alternative funding model injects much-needed capital into the entrepreneurial ecosystem and fosters a culture of innovation and risk-taking. With increased accessibility to funding, aspiring entrepreneurs are better positioned to transform ideas into viable businesses, driving economic growth and job creation across the kingdom.

Future Outlook and Collaborative Efforts

The future of equity crowdfunding in Saudi Arabia hinges on collaborative efforts between regulators, industry stakeholders, and investors:

• Regulatory Evolution: Ongoing regulatory developments will shape the evolution of equity crowdfunding, addressing emerging challenges and fostering market growth.
• Industry Engagement: Continuous dialogue and engagement with industry participants are vital to refining regulatory frameworks and enhancing market efficiency.
• Investor Education: Educating investors about the risks and rewards of equity crowdfunding is crucial to promoting responsible investment practices and sustaining investor confidence.

The legal framework for equity crowdfunding in Saudi Arabia underscores the kingdom’s commitment to fostering innovation and entrepreneurship while ensuring market integrity and investor protection. By embracing equity crowdfunding, Saudi Arabia is poised to unlock new opportunities for startups and small businesses, catalysing economic diversification and technological advancement.

As the regulatory landscape evolves, sustained collaboration between regulators, industry stakeholders, and investors will be essential to nurture a vibrant and sustainable equity crowdfunding ecosystem. Through effective governance and compliance, Saudi Arabia can harness the transformative potential of equity crowdfunding to propel its entrepreneurial landscape into the future.

Venture capital has driven innovation and economic growth worldwide, and Saudi Arabia is no exception. With its ambitious Vision 2030 plan, the Kingdom of Saudi Arabia has been actively fostering a thriving entrepreneurial ecosystem. In this article, we will explore the venture capital landscape in Saudi Arabia, shedding light on the legal frameworks, emerging trends, and crucial considerations for businesses seeking to tap into this dynamic market.

Legal Framework for Venture Capital in Saudi Arabia

Ministry of Investment (MISA): The Ministry of Investment in the Kingdom of Saudi Arabia (KSA) is a central institution that plays a pivotal role in fostering economic growth and attracting foreign investment to the country. Among its many responsibilities, the ministry also oversees regulating and promoting venture capital activities in the Kingdom. The Ministry of Investment, in coordination with other relevant government bodies, has been actively involved in creating a conducive environment for venture capital firms and startups. They have introduced policies and regulations that facilitate venture capital investments, including measures to protect the rights of investors and entrepreneurs.

Capital Market Authority (CMA): The CMA regulates and supervises the capital market in Saudi Arabia. Venture capital firms are subject to CMA regulations, which include licensing and compliance requirements. This regulatory body ensures transparency and protects the interests of investors.

Saudi Arabian Monetary Authority (SAMA): SAMA, the central bank of Saudi Arabia, regulates financial institutions, including banks and finance companies. While SAMA does not directly control venture capital firms, they often interact with financial institutions when raising capital or structuring deals.

Emerging Trends and Insights

Tech-Driven Ventures: The Kingdom has shown a strong appetite for technology-based startups, particularly those focused on e-commerce, fintech, healthcare, and artificial intelligence. Investors are keen to support businesses that align with the objectives of Vision 2030, which emphasises diversifying the economy through innovation.

Co-Investment Initiatives: Saudi Arabia is increasingly engaging in co-investment partnerships with international venture capital firms. This trend allows for knowledge transfer, increased deal flow, and risk-sharing, ultimately benefiting both local and foreign investors.

Growth of Incubators and Accelerators: Numerous incubators and accelerators have been established in Saudi Arabia to nurture startups and facilitate their growth. These platforms provide mentorship, funding, and networking opportunities, creating a robust support system for entrepreneurs.

Government Support: The Saudi government has launched various initiatives and funds to boost the venture capital ecosystem. For instance, the Saudi Venture Capital Company (SVC), an initiative of the Public Investment Fund (PIF), has been actively investing in local startups. The National Centre for Privatization (NCP) has also promoted privatisation efforts, presenting opportunities for venture capitalists.

Considerations for Businesses

Regulatory Compliance: Businesses entering the Saudi Arabian venture capital landscape must ensure strict compliance with SAGIA, CMA, and other relevant regulations. Legal advisors with expertise in Saudi Arabian law are indispensable in navigating these requirements.

Local Partnerships: Establishing local partnerships or engaging with local experts can be invaluable in understanding the cultural nuances, market dynamics, and legal intricacies of Saudi Arabia. Local knowledge can significantly expedite business processes.

Intellectual Property Protection: Protecting intellectual property is crucial when entering any new market, including Saudi Arabia. Understanding local IP laws and taking proactive measures to safeguard your innovations is essential.

Due Diligence: Thorough due diligence is vital when selecting investment opportunities or partners. It helps mitigate risks and ensures that investments align with your strategic goals.

Venture capital in Saudi Arabia is on a dynamic trajectory, offering exciting opportunities for investors and entrepreneurs. With a supportive legal framework, a growing pool of tech-driven startups, and government-backed initiatives, the Kingdom is rapidly becoming a hub for innovation and investment. However, success in this market requires a deep understanding of the legal landscape, emerging trends, and thoughtful considerations. By navigating these aspects effectively, businesses can unlock the immense potential that Saudi Arabia has to offer in the realm of venture capital.

Aside from launching the Special Integrated Logistics Zone (which is overseen by the General Authority for Civil Aviation) back on 31 October 2022, Saudi Arabia announced early 2023 the launch of four additional Special Economic Zones (“SEZs”) in Saudi Arabia’s continuing efforts to break the mold in accordance with Vision 2030. On the same day, the Economic Cities and Special Zones Authority (“ECZA”) published the draft Companies Law for SEZs (“Law”) on the Kingdom’s public consultation platform Istitlaa, which garnered public attention and feedback, thereby allowing ECZA to reconsider some of the provisions in the Law.

These five SEZs span across different provinces in the Kingdom, aiming to diversify the economy by moving it away from being oil-reliant, while encouraging innovation and growth and furthering foreign direct investment throughout the Kingdom. While the Law has yet to be promulgated, this Article aims to highlight: (1) the four SEZs and their targeted sectors (2) the key incentives of incorporating in one of the four SEZs, (3) the recognized legal forms under the Law, and (4) the impact of the Law.

 

I. Overview of the Four SEZs:

ECZA has strategically stratified the SEZs into the following four areas: (1) King Abdullah Economic City (“KAEC”), (2) Jazan, (3) Ras Al Khair, and (4) King Abdullah City for Science and Technology (“KACST”). The location of the SEZs were tailored around the Kingdom’s air, land, and waterway routes (with the exception of KACST, which is landlocked and created to build the Kingdom’s very own Silicon Valley).

The SEZs are located within the following areas:

1. KAEC: located in the Red Sea, a popular and efficient port representing 13% of the global trade passing through the Red Sea. Its targeted sectors are: (a) automobile supply chain and assembly, (b) consumer goods, (c) electronic light manufacturing, (d) pharmaceuticals, (e) medtech, and (f) logistics.
2. Ras Al Khair: catering to the maritime industry and focusing on advancing (a) the shipbuilding and Maintenance, Repair and Overhaul (“MRO”) and (b) rig platforms.
3. Jazan SEZ: also strategically located in the Red Sea by focusing on fostering the growth of the industrial sector by targeting: (a) food processing, (b) metal conversion, (c) logistics, and (d) facilitating an efficient route for export of goods and import of manufacturing materials.
4. KACST Cloud Computing SEZ: located in Riyadh and aiming to attract tech-savvy companies to foster the development of cloud computing services, allowing companies to establish data centers and cloud computing infrastructure in the Kingdom.

 

II. Perks of incorporating in SEZs:

The key incentives of incorporating in SEZs are:

1. 5% corporate income tax (in contrast to the 20% corporate income tax levied on foreign companies in the mainland) for 20 years;
2. 0% customs duties on capital equipment and inputs inside SEZ;
3. 0% VAT for all intra-SEZ goods exchanged within and between SEZs;
4. a permanent 0% withholding tax for repatriation of profits from SEZs into foreign countries;
5. flexible Saudization requirements and facilitation of foreign talent during first 5 years; and
6. expat levy ensuring fees exemption for employees and their families in the SEZs.

One of the factors that make foreign investors hesitant to incorporate in mainland KSA is the 20% income tax and the 15% on capital gains. The incentives which are mainly in respect to taxation offers foreign investors the ability to reap of the benefits locally and internationally.

However, it should be noted that foreign investors are restricted in incorporating based on the sectors that are available and recognized in the relevant SEZ. For instance, if a foreign investor wishes to set up a pharmaceutical company, it may only do so in KAEC, and cannot, for instance, set up a pharmaceutical company in Jazan SEZ, as the Jazan SEZ specifically caters to the industrial sector (as highlighted above).

 

III. Incorporation in SEZs

(1) Incorporation Process

The recognized legal forms available for investors are (a) Limited Liability Companies (LLCs), (b) branches (which can either be a branch of a foreign company, or a branch of a mainland KSA Entity), and (c) holding companies.

To incorporate a LLC, the investor(s) must demonstrate the following; (i) Stated capital, (ii) Trade name, (iii) Names of founders and their data, (iv) Names and nationality of management, (v) Draft bylaws, and (vi) Selected economic activities.

To incorporate a branch, the investor(s) must provide the following; (i) Resolution issued by whoever has authority to open a branch – and the name of the manager, and their national id/iqama/passport, (ii) Copy of the parent company’s Articles, (iii) Copy of CR of parent company, (iv) Desires companies the branch will engage in.

Lastly, to incorporate a holding company, the holding company must take the form of a LLC, and must ensure that its subsidiary does not directly own shares in the holding company. In the event the subsidiary does own a stake in the holding company, the subsidiary must not (i) hold voting rights in the shareholders meeting or board of directors meetings in the holding company, and (ii) the subsidiary shall dispose of its shares in the holding company within twelve months from the date of its affiliation with the holding company, and the subsidiary cannot owning additional shares except in the case of distributing dividends.

 

(2) Shares and Capital of the Company

Companies incorporated in SEZs do not need to have a minimum capital, and can contribute the capital that is fit to meet their objectives. The shareholders can contribute to the capital by way of cash contribution or in-kind contribution, can issue different classes of shares, can place share transfer restrictions, and can also put in place drag along and tag along rights. Further, there is statutory protection for minority shareholders representing 15% of the capital in the company entitling them to file a claim should their shares be negatively impacted by a decision of the majority shareholders.

Further, the company may purchase its own shares, so long as it does not drain the entire treasury shares, provided that the company does not have any voting rights to the shares and cannot attend general meetings.

 

(3) Management

The company can be managed by a single manager or by a board, and appointed managers/directors must meet the following criteria; (i) at least 18 years of age, (ii) is a natural person (with the exception of a legal person holding a position subject to approval of ECZA), (iii) Has not been convicted for any crimes related t0o fraud, corruption or dishonesty in the past 10 years, (iv) Has not been convicted of committing insider trading, (v) Has not been removed as a director pursuant to a judicial order, (vi) Satisfies any criteria set forth under management section of the bylaws; and (vii) Must not be bankrupt or insolvent.

 

(4) Shareholders’ Meetings

Shareholders Assembly can be convened by the auditor, its directors or shareholders representing at least 5% of the shares of the company, provided that notice is given at least 14 days before the date of the meeting. Quorum is valid provided that 50% of the shareholders representing the capital are present. Ordinary decisions must be passed by 50% of the shareholders representing the capital, while extraordinary decisions must be passed by 75% of the shareholders representing the capital of the company.  Shareholders may vary profits and losses but cannot deny a shareholder from profits or exempt them from losses.

 

(5) Interplay of the Law with the Mainland KSA Laws and Regulations

Companies incorporated in SEZs are not subject to the laws and regulations of mainland KSA, with the exception of Capital Market Authority (“CMA”) rules and regulations, which companies incorporated in SEZs are subjected to.

 

IV. Impact of the Law

While incorporating in SEZs offers attractive incentives for foreign investors, specifically in respect to the tax consequences, the Law in reality is restrictive, as it only allows the incorporation of LLCs and branches and holding companies, in contrast to incorporation in mainland KSA, which allows investors to incorporate Simplified Joint Stock Companies (“SJSC”), Joint Stock Companies (public or closed) (“JSC”), and partnerships. Several public commentators have proposed introducing other legal forms to provide investors with more options to align with the legal forms recognized under the KSA Companies Law. While the legal form as described under the Law is a LLC, it introduces concepts and corporate formalities foreign to LLCs, such as the issuance of different classes of shares, which is recognized under SJSCs and JSCs. Further, the Law does not address or resolve – even after receiving feedback from the public – how companies incorporated in SEZs are subjected to the CMA laws and regulations, especially if JSCs are not recognized under the Law.

 

Further, the Law sets forth the permissible fines and penalties that may be enforced by ECZA upon SEZ entities, but as pointed out in the public discourse, fails to identify what actions amount to a violation under the Law. ECZA confirmed that it will be adding a schedule addressing the types of violations under the Law but have yet to circulate it for public feedback. It can be assumed that certain violations could be related to the SEZ entity’s relationship with mainland KSA’s market and entities, and whether SEZ entities will be unable to provide their products and services to the mainland KSA market.

 

Lastly, it is unclear whether SEZs will be able to open a bank account in mainland KSA, or, whether banks will be established in SEZs to cater to SEZ entities. When free zones were established in UAE, many companies incorporated in free zones faced difficulties in setting up bank accounts, however, as SEZs in KSA have taken lessons from free zones established in the region, it is most likely that this issue will be resolved upon the promulgation of the Law.

 

V. Conclusion

While the introduction of several SEZs and the Law is a welcomed incentive encouraging the growth of foreign direct investment across KSA, there is still room for improvement in respect to corporate law formalities in SEZs. Since the Law has gained public attention, one should be on the lookout for the publication of the Law and whether the public opinion has swayed the regulators in broadening the list of recognized legal forms and providing further clarity as to the relationship between companies incorporated in SEZs and the CMA regulations, especially if LLCs are the only recognized legal form in  the SEZs. As the introduction of SEZs in the Kingdom is a relatively new concept, we predict further rules, directives, and circulars to be introduced to better shape SEZs in the coming years.

 

The Kingdom of Saudi Arabia, with its rapidly evolving economic landscape and proactive approach towards technological advancement, has emerged as a hotspot for startups and innovative ventures. As the nation diversifies its economy and reduces its dependency on oil, the Saudi government has implemented robust legal frameworks to encourage entrepreneurship, attract foreign investment, and facilitate the growth of startups. Two pivotal legislations – the Companies Law and the Investment Law – stand at the forefront of this legal ecosystem, providing a solid foundation for entrepreneurs to launch and scale their new ventures.

The Companies Law: Fostering Business Formation and Operations

Starting a business in Saudi Arabia has never been more accessible, thanks to the modernised Companies Law. Enacted in 2015, this law introduced several significant changes that have simplified the business formation process and enhanced the flexibility of company structures.

One of the standout features of the Companies Law is the introduction of the “one-person company” concept, allowing single entrepreneurs to establish a limited liability company with ease. This enables solopreneurs to take advantage of the legal protection afforded by a corporate structure while maintaining a streamlined operational framework.

Furthermore, the Companies Law introduced the option for a single shareholder to hold multiple board positions, fostering a more dynamic and efficient decision-making process. This empowers startups to respond swiftly to market changes and aligns with the agility required for innovation-driven ventures.

Investment Law: Opening Doors to Foreign Investment

Recognising the importance of foreign capital and expertise in driving economic growth, Saudi Arabia has bolstered its Investment Law to attract international investors to its burgeoning startup ecosystem. Recent amendments to the Investment Law have addressed key concerns, making the country a more attractive destination for foreign investment.

Removing restrictions on foreign ownership in certain sectors and introducing a streamlined licensing process has significantly eased the path for international investors. Startups seeking foreign investment can now do so with greater confidence, knowing that the regulatory framework is designed to facilitate collaboration and growth.

Moreover, the Investment Law offers various incentives to foreign investors, including extended lease terms for real estate and the ability to repatriate profits and funds quickly. These provisions enhance the overall investment climate and give startups a competitive edge when securing funding from international sources.

Navigating the Legal Landscape: Challenges and Opportunities

While Saudi Arabia’s legal landscape has witnessed remarkable improvements, navigating it can still present challenges, especially for entrepreneurs unfamiliar with local regulations. Cultural nuances, language barriers, and evolving legal interpretations may pose hurdles. However, various legal firms and advisory services have emerged to assist startups in understanding and complying with the legal requirements.

Understanding the Companies Law and Investment Law is just the beginning. Entrepreneurs should also be well-versed in labour laws, intellectual property protection, and tax regulations to ensure their ventures’ smooth operation and growth. Collaborating with legal experts specialising in startup law can prove invaluable in avoiding potential pitfalls and seizing growth opportunities.

Paving the Way for Saudi Startup Success

Saudi Arabia’s commitment to fostering innovation and entrepreneurship is evident through its progressive legal framework, particularly the Companies Law and Investment Law. These laws simplify launching and scaling startups and demonstrate the nation’s dedication to welcoming local and foreign entrepreneurs. By embracing these legal foundations and seeking expert guidance, startups can confidently embark on their journey to contribute to Saudi Arabia’s economic transformation while reaping the rewards of a supportive and dynamic business ecosystem.

Disclaimer: This article is intended for informational purposes only and does not constitute legal advice. Readers are encouraged to seek legal advice on their specific circumstances.

The global financial landscape has been undergoing a seismic shift with the rise of cryptocurrencies. As a significant player in the Middle East, Saudi Arabia has not been immune to this transformative wave. As digital assets like Bitcoin, Ethereum, and others gain prominence, governments worldwide are grappling with the need to establish clear regulations that balance innovation, investor protection, and national security. In this article, we delve into the intriguing realm of cryptocurrency regulations in the Kingdom of Saudi Arabia (KSA), exploring how the nation navigates the complex legal landscape of digital assets.

A Tale of Technological Advancement and Prudent Regulation

Saudi Arabia, known for its rich oil reserves, has been gradually expanding its technological prowess and diversifying its economy in recent years. Cryptocurrencies, often hailed as the technological disruptors of traditional finance, have caught the attention of both investors and regulators in the nation. The Kingdom’s approach to cryptocurrency regulation is a delicate dance between embracing innovation and safeguarding its financial ecosystem.

The Regulatory Landscape: A Balancing Act

The Saudi Arabian Monetary Authority (SAMA), the country’s central bank, has taken a measured approach to regulating cryptocurrencies. In 2017, SAMA issued a public warning about the risks of trading cryptocurrencies due to their highly speculative nature and potential links to illicit activities. This cautious stance highlighted the need for investor education and protection.

Fast forward to 2021, and Saudi Arabia made a significant stride by introducing the Draft Electronic Transactions Law, which includes provisions related to virtual currencies. This draft law aimed to establish a legal framework for various electronic transactions, including those involving cryptocurrencies. While the details of the law’s final version are awaited, the move underscores the government’s acknowledgement of the growing importance of digital assets.

Investor Protection and Anti-Money Laundering (AML) Measures

As cryptocurrencies gained popularity, concerns about their potential misuse for money laundering and terrorist financing also emerged. In response, Saudi Arabia has been working on bolstering its AML regulations. Cryptocurrency exchanges and service providers must now register with relevant authorities and adhere to stringent AML and counter-terrorism financing standards.

The Saudi Arabian Vision 2030 and Blockchain

Saudi Arabia’s Vision 2030, a comprehensive plan aimed at reducing the nation’s dependence on oil and diversifying its economy, has recognised the potential of blockchain technology. Blockchain, the underlying technology behind cryptocurrencies, is seen as a tool that can enhance transparency, efficiency, and security across various sectors, including finance, supply chain, and government services. As a result, the nation has been investing in blockchain-related initiatives, signalling a nuanced approach to technological innovation.

Challenges on the Horizon

While Saudi Arabia has taken notable steps toward regulating cryptocurrencies, challenges remain. The volatile nature of cryptocurrencies presents a constant challenge for regulators worldwide. Striking the right balance between fostering innovation and mitigating risks is an ongoing endeavour. Moreover, the evolving global regulatory landscape adds complexity as nations grapple with harmonising their digital asset approaches.

Navigating the Future

Cryptocurrency regulations in Saudi Arabia are emblematic of a more significant global trend – the convergence of technology and finance. As the nation regulates digital assets, it seeks to harness the potential benefits while minimising risks. The journey entails not only the creation of a legal framework but also continuous adaptation to a rapidly evolving technological landscape.

As Saudi Arabia works toward achieving its Vision 2030 and embraces the transformative potential of blockchain technology, its approach to cryptocurrency regulations will likely serve as a template for other nations in the region and beyond. Striking the right balance between innovation and prudence is a challenge, but it’s a challenge that reflects the dynamic nature of the financial world in the 21st century.

Disclaimer: This article is intended for informational purposes only and does not constitute legal advice. Readers are encouraged to seek legal advice on their specific circumstances.

Introduction

In Saudi Arabia’s continuous efforts to maintain its position as a global powerhouse in the international field, Saudi Arabia becomes the 96^th country to accede to the Convention on Contracts for the International Sale of Goods (the “Convention”), as evidenced in Royal Decree No. M/196 dated 4/12/1444H (corresponding to 22/06/2023 G) (“Royal Decree M/196”). The Convention shall come into force in Saudi Arabia on 1 September 2024, and is a welcomed opportunity to continue shaping contracts related to the provision of international goods, as local legislation only speaks to the provision of goods in respect to agreements between foreign principals with local agents and/or distributors under the Commercial Agencies Law issued by Royal Decree No.11 dated 1/1/1382H (corresponding to 30/6/1962 G) and, most recently, the E-Commerce Law issued by Royal Decree No. M/126 dated 7/11/1440H (corresponding to 10/7/2019 G). By Saudi Arabia acceding to the Convention, this invites further clarity as to the defined terms between the parties to an agreement for the provision of goods in cross-border transactions but carries certain implications should a dispute arise.  This article will walk merchants through the subtle yet significant changes and how this may impact their business with Saudi Arabian buyers and sellers.

Demystifying the Scope of the Convention

• Who is subject to the Convention?

The Convention applies to any contract for the sale of goods between parties whose places of business are in different states. The Convention considers states as different states when the parties are Contracting States (meaning, states that have ratified or acceded to the Convention) or when the rules of private international law (meaning, a conflict of law analysis) lead to the application of the law of a Contracting State (even if the other party’s country is not a Contracting State). Further, determining the place of business is not extrapolated from the nationality of the parties, rather, it considers whether the place of business is a permanent establishment (which means warehouses or seller’s agent’s offices disqualify as a place of business), and whether the substance of the contract between the parties or from prior dealings speaks to the place of business.

• What types of goods are covered under the Convention?

The Convention inversely defines goods by determining what’s out rather than what’s in. The Convention’s reach  does not extend to the sale of goods intended for personal use (such as household items), by auction, execution or by authority of law,  stocks, shares, investment securities, negotiable instruments, or money, ships, vessels, hovercraft or aircraft, electricity, and contracts for the provision of services (such as manufacturing or producing the goods supplied, supply of labor or other services) in which the provision of goods is incidental to the services contract.

• What does the Convention Cover?

The Convention only governs the formation of the contract for the sale of goods (i.e. what constitutes an offer, acceptance, rejection) and the rights and obligations between seller and buyer. The Convention does not speak to the validity of the contract, the effect on title of goods, and third-party rights. Neither does it address liability of seller for death or personal injury caused by the goods to any person.

Filling in the Gaps: Interpretation of the Convention, the Contract, and the Parties’ Conduct  

While in principle, the Convention promotes uniformity, it does have gaps in application. The Convention permits Contracting States’ courts to interpret Convention on a good-faith basis (an international principle set in stone and promotes finding solutions rather than findings ways to terminating agreements). In respect to interpreting the parties conduct, the Convention allows courts to consider the intent of the parties (from a subjective standpoint), the parties’ statements made to each other (from an objective standpoint), and/or to consider any usage of trade or prior dealings between the parties.

Main Pillars of Contract Formation Under the Convention

Part II of the Convention governs the process of formation of an international sale of goods contract. In general, proposals with definite terms (including quantity and price) and an intention to be bound is deemed as an offer, however, a proposal addressed to multiple people is an indication to make offers.

Other principles are worth noting, such as receipt, which is a definitive factor in determining whether an offer or acceptance has been satisfied. For instance, an offer becomes effective upon receipt by the offeree. An irrevocable offer can be withdrawn or rejected upon the offeror’s receipt of the offeree’s intention to withdraw or reject arrives prior to the offeree’s acceptance.

Moreover, methods of accepting an offer is not limited to written statements; an offeree’s conduct (unless such conduct is in the form of silence or inactivity by the offeree), or verbal statements can be deemed as an acceptance. However, silence may be sufficient if followed by affirmative conduct.

Further, modifications to offers is not necessarily an outright rejection of the offer (and thereby creating a counteroffer). As a general rule, the Convention considers different terms that do not materially alter the offer to form an integral part of the offeree’s acceptance. However, should the offeree materially alter the offer in respect to: price, payment, quality, quantity of goods, place and time of delivery, extent of party’s liability to another, and settlement of disputes, such deviation will be deemed as a rejection of the offer and the creation of a counteroffer.

For example, let’s say you are a seller whose head office is domiciled in Bahrain (a Contracting Party) and wish to enter into a sales agreement for office furniture with a buyer whose headquartered in Saudi Arabia (another Contracting Party). You draft up an offer which includes the quantity and the price of the office furniture but does not specify the manner in which your proposal may be accepted. You send the proposal across to your buyer in Saudi Arabia, and buyer goes silent; neither accepting nor rejecting your proposal. Two weeks later, you receive information from a third-party that the buyer is selling all his previous office furniture for a significant amount. Under the Convention, the buyer would be deemed to have accepted the offer; while the buyer was silent, his affirmative conduct (freeing up space and securing additional financing in order to facilitate a purchase order) can be deemed as acceptance.

Based on the liberal interpretation of offer, acceptance, and counteroffer under the Convention, it is best for any buyer and seller to draft up letters of intents, proposals, and acceptances with the Convention in mind, i.e. the seller may limit the method of acceptance to be in writing, draft proposals with specificity and certainty. The more terms not addressed, the more likely the agreement between the parties will be prone to interpretation or gap filling by Contracting States’ courts.

Reservations and its Implications

The Convention permits Contracting States to declare that they will not be bound by Part II (Formation of the Contract) or Part III (Sale of Goods) of the Convention upon its accession or ratification of the Convention. Saudi Arabia has submitted its reservation both to the United Nations Depository including its reservation to Part III of the Convention, and in the Royal Decree M/196, expressly stating that Saudi Arabia will not be bound by Part III of the Convention.

Part III forms a substantial part of the Convention, detailing the rights and obligations of the parties, passage of risk of loss, payment and delivery terms, damages, anticipatory breach, and instalment contracts. However, Saudi Arabia has indicated in Royal Decree M/196 that the main purpose of its reservation to Part III is the presence of the application of interest for failure to pay in a timely manner and payment of any interest rate on refunds. Islamic (Shariah) law strictly forbids the application of interest on payments or receipt of interest on payments (also known as riba under Islamic law), any provision within an agreement including interests would render the agreement void.

In light of the above, Royal Decree M/196 mandates that the Minister of Commerce continue investigating ways for Saudi Arabia to accede to the entire Convention permitted under international law – with the exception of provisions related to the application of interests – thereby allowing the remaining provisions of Part III to form part of Saudi’s accession to the Convention.

In the event that Saudi Arabia and another Contracting State have certain disputes arising as to the formation of the contract, and, one Contracting State has not made a reservation to either Part II or Part III of the Convention, the rules of private international law (such as a conflicts of law analysis) may lead to the law of either the Contracting State who has not made any reservation, or Saudi Arabia’s laws (who is not bound by Part III). Should the forum of the dispute be in Saudi Arabia, the Saudi Arabian courts will need to conduct a conflict of laws analysis to reach a determination as to which of the two Contracting States law would apply.

Let’s take the same example as above. Imagine the Bahraini seller and the Saudi buyer face a dispute, and resort to a Bahraini court to seek resolution. The agreement between the buyer and the seller fails to specify the governing law and the damages recognized under the agreement. Bahrain has not declared any reservations, while Saudi has declared not being bound by Part III of the Convention. The Bahraini court will need to conduct a conflict of law analysis, determining which Contracting States’ law will apply. The Bahraini court conducts the conflict of law analysis and concludes that Saudi’s law applies, because of majority of the transaction occurred in Saudi Arabia. Since Saudi Arabia is not bound by Part III (which addresses damages), the Bahraini court cannot apply damages based on the Convention and will consider other Saudi laws, such as shariah principles, or the recently promulgated Saudi Civil Transactions Law, issued by Royal Decree No. M/191 dated 29/11/1444H (corresponding to 18/6/2023G) (“Royal Decree M/191”)

Similarly, should Saudi Arabia and a non-Contracting State have a dispute arising in respect to a contract for the sale of goods, the non-Contracting State would possibly be subjected to the Convention pursuant to a conflicts of law determination, despite not acceding to it.

Conclusion

Saudi Arabia’s accession to the Convention may appear on its face to provide much needed clarity to how goods will be governed in cross-border transactions. However, it is unclear how certain rights and obligations between sellers and buyers will be determined given Saudi Arabia’s reservation to Part III of the Convention, perhaps Royal Decree No. M/191 will provide guidance as to defenses to contracts, damages, and rights and obligations. Further, non-Contracting States should be wary that agreements concluded with Saudi Arabia for the provision of goods may subject them to the Convention. When preparing a proposal or accepting an offer, parties to an international sale of good transactions should draft up agreements with the Convention in mind, expressly stating the terms of the agreement, the manner in which a contract is formed, and create a solid foundation for damages and governing law (without inviting the application of a conflicts of law analysis).