Investment Contracts under the Saudi Legal Framework
Investment is one of the primary drivers of national and institutional development, playing a pivotal role in boosting economic growth. It facilitates the inflow of substantial capital aimed at advancing the host country’s economic development, while also creating employment opportunities and enabling the transfer of technological advancements. Consequently, a clear legal framework is essential to define the rights and obligations of investors within the territory of the host state. This is typically achieved through a well-structured legislative or contractual regime. For this purpose, investment contracts have emerged to regulate the relationship between the involved parties.
In this article, Al-Salamah Law Firm provides an overview of the legal framework governing investment contracts in the Kingdom of Saudi Arabia.
What Are Investment Contracts?
Foreign investment generally involves allocating capital into viable investment opportunities through the establishment of economic projects that fulfill market needs and generate profits. Typically, international or foreign investment relates to the movement of goods, services, and capital across borders.
Under the updated Saudi Investment Law, “investment” is defined as the use of capital to establish, expand, develop, finance, manage, or partially or wholly own an investment project within the Kingdom, for the purpose of generating economic returns.
However, the law does not define investment contracts explicitly, leaving the interpretation to legal scholarship and jurisprudence. Scholars generally define these contracts as agreements between a domestic party (the state or a public entity) and a foreign private party, whereby the latter undertakes to execute a project (such as construction or civil engineering works) in return for compensation. This compensation may include profit-sharing mechanisms, whereby costs, profits, and losses are distributed between the parties.
International legal bodies have also attempted to define investment contracts:
- The Institute of International Law considers investment contracts to be those involving international economic relations.
- The United Nations Commission on International Trade Law (UNCITRAL) defines them as commercial agreements of a contractual nature.
In essence, investment contracts are typically of an international character, concluded between a sovereign state (or one of its agencies) and foreign public or private entities for the purpose of establishing or managing public facilities, or supplying them with advanced goods and services.
Characteristics of Investment Contracts
Investment contracts possess distinct features that differentiate them from other contractual arrangements:
International Nature
The contract is considered international if the state or one of its public bodies is a party. Contracts between private entities from different countries do not fall within this definition.
Foreign Party Involvement
The second party is a foreign national or entity, whether natural or legal.
Public Utility as Subject Matter
The contract pertains to a public utility, serving a public interest.
Purpose
The goal is to establish, maintain, or manage public utilities or to supply them with modern technological goods and services.
Negotiation Framework
Such contracts are typically negotiated directly between the state and the foreign investor.
Long-Term Engagement
These contracts are usually long-term, involving the exploitation of resources and the establishment of permanent facilities owned by the foreign party for the duration of the contract.
Types of Investment Contracts
Investment contracts vary in form, depending on the host country’s developmental needs. The most common and widely recognized types include:
1. Petroleum Service Contracts
These are among the most prevalent in Saudi Arabia, wherein the state engages foreign parties for exploration, production, and marketing of petroleum resources. These contracts aim to strike a balance between national sovereignty and the technological and operational expertise of foreign companies.
Examples include:
Concession Agreements
As defined in Article 1 of the Franchise Law, a concession involves granting a franchisee the right to operate a business associated with a trademark or trade name, under specific operational guidelines, in exchange for a financial or non-financial consideration (excluding payments for goods or services).
Participation Agreements (Joint Ventures)
The state enters into joint ventures with foreign investors to develop major projects.
Example: The joint venture agreement between Saudi Aramco and TotalEnergies (France) in 2008 to establish an integrated refinery. Commercial operations commenced in 2014.- Shared costs and profits (initially 62.5% for Aramco, 37.5% for TotalEnergies).
- Design, financing, construction, and operation of a high-capacity refinery.
- Aramco supplied the crude oil; TotalEnergies contributed technical expertise.
- Operational profits and capital risks were allocated proportionally.
Contractor Agreements
These are based on government-initiated projects with foreign contractors responsible for exploration and development.
Example: The EPC (Engineering, Procurement, Construction) contract for the Sakaka Solar Power Plant, signed between the Saudi Power Procurement Company (a Public Investment Fund entity) and ACWA Power in partnership with TSK Group (Spain). It was Saudi Arabia’s first renewable energy project under its clean energy initiative.
2. Technology Transfer Agreements
These agreements involve the legal transfer of technology from one party to another for consideration. The contract subject is the technology itself and may take the form of:
- Technical know-how transfer.
- Technical assistance agreements.
Example: The agreement between SABIC and Yokogawa Electric Corporation (Japan) to transfer control systems and digital technologies used in SABIC’s petrochemical plants.
Key clauses included:
- Limited license for use within Saudi Arabia.
- Training programs for Saudi personnel.
- Non-disclosure obligations.
- International arbitration clause (jurisdiction: London).
- Retention of intellectual property rights by Yokogawa.
3. Public Works Contracts
These are contracts wherein the government entrusts a foreign entity with executing public works under specified terms and conditions and for an agreed price.
Example: The Haramain High-Speed Rail project between the Saudi Ministry of Transport and Logistics Services and the Al-Shoula Consortium led by Talgo (Spain). The contract was based on the Design & Build model.
Conclusion
Investment plays a vital role in the Kingdom’s Vision 2030, which seeks to position Saudi Arabia as a leading global investment powerhouse. To achieve this, the Kingdom has updated its investment legislation and procedures.
At Al-Salamah Law Firm, we provide comprehensive legal services in connection with investment contracts. We work closely with both public authorities and foreign investors, offering extensive expertise to ensure the sustainability and legal soundness of investment arrangements. Do not hesitate to contact us for assistance tailored to your investment needs.
