Middle East Economic Survey

 

VOL. LII

No 36

7-Sep-2009

 

Jurisdiction Over Banking Disputes In Saudi Arabia

 

By Zuhair S al-Herbish

 

Mr Herbish holds an LLM from Washington College of Law and is currently head of the legal department of a major stock company in Saudi Arabia. Previously, he served for five years as legal counsel to the Committee for the Settlement of Banking Disputes (CSBD) at the Saudi Monetary Agency (SAMA). This article is written in his personal capacity.

 

Introduction

The role of commercial banks in developing and developed countries alike cannot be over-emphasized. Commercial banks are indeed the pillars of any economy, acting as financial intermediaries between depositors and borrowers of deposited funds. Their significance is particularly notable in countries whose economic growth is a function of an efficient private sector, funded principally by commercial banks.

 

It is axiomatic that a healthy investment atmosphere in any jurisdiction in the modem world is the sine qua non for an efficient banking system – an atmosphere in which commercial banks are properly regulated and furnished the necessary guarantees to enable them to serve the economy and contribute to both growth and development. Thus, in all developed economies in the world today, legislation designed to protect and enhance the services of commercial banks is an integral part of the legal landscape. Unfortunately, the underlying principle of such legislation is the protection of lending banks and borrowing clients.

 

The Saudi Scene

As a leading developing country with a large economy, the Kingdom of Saudi Arabia has also felt the need for a proper legal environment for its banking system. In this respect the first in a series of regulatory measures, examined in this article, was the Royal Decree No 729/8, promulgated on 10/7/1407 H (3 October 1987). The purpose of the decree was to form a judicial body to resolve banking disputes and in a way to enable banks to collect bank debts strictly in accordance with the provisions of facility agreements and without prejudice to the legal rights and interests of borrowers. The decree set up a Committee for the Settlement of Banking Disputes (CSBD) at the Saudi Arabian Monetary Agency (SAMA). CSBD was enjoinedwith the task of reviewing bank/client disputes by reference to the provisions of the particular loan instrument. The decree was followed by a Ministry of Justice circular preventing courts from entertaining bank/client cases and demanding that all cases then pending before the courts be transferred to the Council of Ministers’ headquarters for resubmission to CSBD. Two further measures were necessary to empower CSBD to discharge its mandate: all Saudi-domiciled commercial banks were directed by SAMA’s governor to file disputes against clients before CSBD; and the Ministry of Interior instructed the ‘the Civil Rights Administration’ to accelerate the execution of all decisions reached by CSBD by ensuring that debtors pay off their debts in recognition of the application of the doctrine of res judicata to CSBD’s decisions in par with the Kingdom’s other courts.

 

CSBD was formed of three expert members assisted with technical staff comprising lawyers, accountants and administrative staff enjoined with coordinating CSBD’s work with SAMA, banks and bank clients. Soon after commencing its work in August 1987, CSBD issued its first decision in October of' the same year. The floodgate of bank/client disputes was wide open: within its first year CSBD entertained over 300 cases, deciding on over 240 of them. Twenty years later, CSBD is in full swing, gaining ever more experience, settling disputes promptly and efficiently and entertaining a daily average of eight disputes. Little wonder that CSBD currently enjoys wide respect by banks and bank clients alike. It has established new banking principles hitherto unknown in the Kingdom but uniformly applicable in other jurisdictions and has adapted legal and business practices obtaining elsewhere to the peculiar conditions of the Kingdom’s banking system. A dynamic and ever-expanding Saudi banking system is the supply source for CSBD’s work, and the volume of CSBD’s work increases simultaneously with the progress of banking activity.

 

More than 20 years into its existence and not withstanding its remarkable track record, litigants before CSBD, whether banks, individuals or companies still seem uncertain about the scope of CSBD's jurisdiction. Even lawyers appear confused with regard to the nature of disputes on which CSBD may adjudicate. The question often asked in legal and business circles alike is: is CSBD competent to entertain any dispute involving a bank? If not, what disputes are beyond CSBD’s jurisdictional reach?

 

There can be no doubt that the question of CSBD’s jurisdiction is at the heart of its mandate. Where CSBD is the appropriate forum for settling a dispute, considerable time and resources are saved by the litigant parties.

 

In view of the importance of the question of CSBD’s jurisdiction to banks, bank clientele and lawyers, it is opportune to offer a tentative definition for the word ‘bank’ in order to clarify what a ‘banking dispute’ is and, consequently, whether CSBD is the appropriate and competent forum for settlement of a particular dispute. In the pages following, the author will attempt to demarcate the jurisdiction of CSBD, both by examining the general body of law pertaining to types of jurisdiction and by drawing on the author’s practical experience, as former legal counsel to CSBD, in studying and analyzing cases that were submitted for settlement.

 

What is a bank? And what is banking business? Article 1(a) of the Banking Control Act (issued by Royal Decree No M/5 of 22/2/1386 [11 June 1966]) defines a bank as “any natural or juristic person principally practicing any banking business in the Kingdom.” Thus, an entity is only a bank if it carries on banking business as its sole profession. Banking business was defined by paragraph (b) of the same Article as “the business of receiving money on current or fixed deposit account, opening of current accounts, issuing letters of credit, guarantees, payment and collection of checks, effecting payment orders, promissory notes and similar commercial paper, dealing in foreign exchange transactions and in other types of banking business.” The banking activities enumerated in the said paragraph are not exclusive. The legislature has left considerable room for the evolution of new activities in a dynamic banking system. Teller machine transactions, not in existence at the time of the passing of the Act, as well as margin trade on currencies and valuable metals all qualify as ‘banking businesses’ although not specifically covered by the Act. Indeed, much credence was given to a liberal interpretation of the Act by the Royal Decree No 4/110 of 2/1/1409 H (14 August 1988), which categorically endowed CSBD with clear jurisdiction over disputes resulting from business practices carried out by an authorized bank.

 

Thus, the jurisdiction of CSBD in any given dispute is determined exclusively by a two-sided test: what was the nature of the business where the dispute arose? And what was the legal nature of the ‘person’ who carried out the activity that gave rise to the dispute? As commonly recognized in the Kingdom, there are two categories of banks: commercial banks, such as the Arab National Bank and Samba Financial Group; and non-commercial or specialized banks such the Industrial Development Bank and the Agricultural Fund. Neither the latter category nor investment banks, or financial companies that practice only one type of banking business, are ‘banks’ within the meaning of Article 1 of the Banking Control Act, 1966. CSBD’s jurisdiction is limited to hearing and deciding on disputes to which a party is a ‘commercial bank’ in the sense in which the term is described above. Thus, a wide range of banks and financial intuitions operating in the Kingdom are beyond the legal reach of CSBD. It follows that in the event of dispute between any of these entities and a client, the plaintiff will have to resort to the Kingdom’s ordinary courts for redress.

 

Judicial Jurisdiction

In the following part of this paper, an attempt will be made to examine briefly the various theories of judicial jurisdiction in order to understand the legal basis of CSBD’s competence in settling disputes brought before it by the parties.

 

Jurisdiction may be defined as “the authority for adjudication” in relation to a particular case, whether such authority derives from Islamic Shari'a or from temporal legislation. Jurisdiction, thus, is the competence of a particular court to decide over a dispute brought before it by a plaintiff. In this legal sense of the term, jurisdiction may be divided into four distinct types. These are: the subject matter jurisdiction; territorial jurisdiction; the ‘merit of the case’ or ‘special jurisdiction’; and international judicial jurisdiction.

 

Under the subject matter jurisdiction, a variety of cases are allocated to various judicial bodies depending on the subject matter of the case in question. As the ordinary Shari'a courts of the Kingdom are entrusted with all matters pertaining to justice, they are naturally endowed with unlimited subject matter jurisdiction and are, therefore, the usual destinations for people seeking justice. A limitation on their jurisdiction may however be imposed by special legislation, such as, for instance the Royal Decree No 729/8, which established CSBD and enjoined it with the task of reviewing bank/client disputes by reference to the provisions of the particular loan instrument. CSBD, thus, is clothed with ‘subject matter’ jurisdiction in relation to a certain category of disputes that may not be adjudicated before the Kingdom’s ordinary courts.

 

Territorial jurisdiction rests on a principle that requires the plaintiff to pursue the defendant by bringing the claim before a local court where the defendant is domiciled because the defendant’s indebtedness to the plaintiff must be proven to the satisfaction of a court with territorial jurisdiction over the defendant. This is particularly so because repayment of a debt must be sought by the plaintiff, not rendered by the defendant. This is an established principle in Islamic jurisprudence and has found expression in Article 34 of the Law of Procedure before Shari'a Courts, issued by Royal Decree No M/21 of 20/5/l421 H (19 August 2000).

 

Jurisdiction pertaining to the merit of the case is recognized in all systems of administration of justice and is adhered to both in relation to civil and criminal cases. Lower courts are usually competent to adjudicate certain types of claims, for instance involving amounts below a specified sum, or try cases in a certain class, leaving cases of the same nature, albeit of more significance, to the higher courts of the land. Of its very nature, this type of jurisdiction has no relevance to CSDB, which is categorically empowered to review all disputes pertaining to banking transactions as long as one of the parties to the dispute is a commercial bank.

 

International judicial jurisdiction rests primarily on the general rule requiring that jurisdiction be exercised by a court where the defendant is domiciled, unless the parties had agreed that judicial authority over possible disputes shall be exercised by courts in a particular location. Except for disputes pertaining to real estate, this general rule is also recognized by Islamic jurisprudence.

 

We may now turn to the question of which of the above types of judicial jurisdiction is relevant to CSBD. Neither territorial jurisdiction nor the ‘merit of the case jurisdiction’ has any relevance to CSBD. Situated in Riyadh, the capital city of the Kingdom, with no similar committees in Riyadh or elsewhere in the Kingdom, questions of territorial jurisdiction do not arise at all in relation to CSDB. There is no hierarchy within CSDB and no procedure whereby disputes below a particular threshold are reviewed by a lower echelon of CSBD. Thus, questions pertaining to the ‘merit of the case’ also have no relevance to the competence of CSBD, which entertains all claims regardless of the material value in dispute.

 

In light of the above, the types of jurisdiction that are germane to the core mission of CSBD are the international judicial jurisdiction and the subject matter jurisdiction. These are examined below.

 

International Judicial Jurisdiction

By virtue of the law of procedure before the Kingdom’s Shari'a courts, CSBD has jurisdiction over banking cases filed against a Saudi citizen even when domiciled abroad. Likewise, CSBD has jurisdiction over non-Saudis domiciled in the Kingdom where the subject matter of the dispute, whether money or movable property, is in the Kingdom as well as in cases where an obligation by a non-national was agreed to be discharged in the Kingdom. Indeed, CSBD can exercise jurisdiction where the party to an eligible dispute is a group of natural or juristic persons one of whom only is domiciled in the Kingdom.

 

Subject Matter Jurisdiction

Subject matter jurisdiction or ‘functional jurisdiction’, as known to some jurists, has a direct bearing on CSBD and the discharge of its mandate. Needless to emphasize that, while CSBD has competence over disputes involving commercial banks, not all disputes to which a bank is a party fall under the jurisdiction of CSBD.

 

Subject matter jurisdiction of CSBD may be clarified by reference to several examples of disputes involving commercial banks as parties, but which where nonetheless outside the jurisdiction of CSBD, given the nature of the ‘subject matter’ of the disagreement. For instance, when the matter in dispute relates to the conditions of employment of a bank branch manager, the dispute in question does not amount to a ‘banking business dispute’ such as would confer jurisdiction on CSBD to review the claim, the matter being a Labor Law dispute more suited to a Labor Tribunal or, indeed, to the ordinary courts. The fact that a party to the dispute was a commercial bank does not, in and of itself, furnish CSBD with competence to entertain a dispute.

 

Nor would CSBD have jurisdiction with regard to a disagreement between a bank client and the branch manager who acted in a personal capacity as an agent of the client for the purpose of selling a parcel of land. Although the land in question was sold by the agent manager for the purposes of settling the client’s indebtedness to the bank, the transaction in question was not a ‘banking business’ matter of the type eligible for CSBD’s review or intervention. The substance of the dispute in that case was the agent’s violation of the terms of the power of attorney furnished to him by his principal to sell the parcel of land at a specific price range. The actual sale price was lower than the agent had been instructed to accept. In essence, therefore, the dispute was a law of agency matter, more appropriate for settlement by ordinary courts.

 

Another class of disputes of relevance to the ‘subject matter’ jurisdiction of CSBD is represented by disagreements between commercial banks and their shareholders. A claim by a founding shareholder of a commercial bank, disputing the legality of the board of directors’ decision with regard to the capital increase and the allocation of free shares to founding shareholders, was not in the nature of a banking business dispute and, accordingly, CSBD had no jurisdiction to intervene. Company/shareholder relationship is governed by Companies’ Regulations and the Kingdom’s Commercial Law and a disagreement of the type described above is within the jurisdiction of ordinary courts. It is submitted that the contention by some experts that a dispute of this kind ranks as a ‘banking relationship’ issue and is therefore covered by the words ‘other types of banking business’ in paragraph (b) of Article 1 the Banking Control Act is without merit. Ordinary ‘banking business’ contemplated by the Act does not encompass capital increase by a bank because changes to capital structure are resorted to by banks in their capacity as ‘companies’, not financial intermediaries.

 

A fortiori, CSBD has no jurisdiction at all with regard to disputes to which the ‘bank party’ is a financial institution and/or an insurance company and not a commercial bank.

 

It is worthy of note, in concluding this part of the paper, to emphasize the fact that, as a judicial body, the decisions of CSBD with regard to its jurisdiction are interlocutory in nature and do not finalize a dispute between the litigants.

 

Recommendations

The establishment of CSBD was a milestone in the development of the Kingdom’s banking system. Its mere existence as a dispute settlement forum for eligible claims has provided the Kingdom’s commercial banks with a significant measure of assurance that their valuable services to the Kingdom’s economy will not be derailed through lengthy litigation by non-specialized entities.

 

In the opinion of the author, however, the role of CSBD can be significantly enhanced and reinforced by the implementation of two measures:

It is very likely that the implementation of the above recommendations will have a positive bearing on the mandate of CSBD and will enable it to magnify its role in settling banking disputes across the Kingdom.