In brief
Promissory notes, also referred to as order notes, have held high importance over the years in the Kingdom of Saudi Arabia. They are typically required as quasi-security on a majority of financing transactions, including as support for guarantees.
Properly drafted and duly executed promissory notes are appealing to banks (and other creditors) in the Kingdom for two main reasons: (i) that they operate as primary obligations independent of the underlying transaction in connection with which they are issued, and (ii) the ease of prompt and straightforward enforcement, when compared to other alternatives such as guarantees.
While the Enforcement Department has always retained the discretion to raise queries at enforcement, it was usual and expected practice that they would not do so, and accordingly, promissory notes would operate as independent primary obligations without any reliance on the underlying transaction. Recently, however, there appears to have been a change in usual practice by the Enforcement Department.
Recent developments
A Saudi Arabian financial institution was recently asked, at the point of enforcement of promissory notes held in its favor, to evidence the link between the promissory notes and the underlying finance documents.
Separately, we understand that several borrowers had successfully challenged the enforcement of promissory notes issued in relation to revolving facilities. The relevant borrowers argued that, where repayments were made during the term of the facilities, these shall be considered on an aggregate basis as being repayments of the promissory note(s).
The above examples, although limited so far, are understandably concerning for creditors relying on promissory notes because of their enforceability and are of relevance to both funded and unfunded facilities, the latter being perhaps a bit more straightforward to assess.
Next steps
It may be that, rather than simply issuing single promissory notes for the entire facility amount which are renewed through the term of the facility, financial institutions instead look to receive separate promissory notes for each payment installment, or perhaps refreshed notes for the specific outstanding amount each time a payment or early repayment is made in order to mitigate the risk of impacting enforceability.
It may also be worth considering whether waiver language should be included in the relevant facility documentation to solve for claims being made (as were made above) that may not necessarily reflect the factual matrix or the commercial intention behind the relevant transaction and documentary structure.
We are keen to see how market practice develops in light of the above, from the perspective of the Enforcement Department, the Saudi Courts and financial institutions and their counsel. It remains to be seen whether this approach becomes customary on all promissory note enforcements or whether these are simply unlikely and occasional risks that all creditors will simply need to accept when doing business in the Kingdom with reliance on promissory notes.
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Please reach out to the contacts above should you wish to discuss these recent developments in further detail.
