Yesterday, Elliot posted an informative overview of the Saudi Arabian sharia law concept of a “pledge” to secure a debt, and how it compares to lien rights in the United States. As long as certain requirements are met, a “rahn” or “pledge” over certain property provides security to a creditor. There are significant differences, however, between a pledge under the law of Saudia Arabia, and a mechanics lien (or even other types of lien) in American law.
A Pledge In Saudi Arabia Is Dissimilar to a Mechanics Lien
A pledge does not arise automatically on the basis of any particular action taken by a party – it must be explicitly agreed to by the debtor. There is little in common between a pledge in Saudi Arabia, and a mechanics lien in the United States. The primary reason for this is that a pledge (or rahn) is a contract between two parties, while a mechanics lien is a right granted by statute. A pledge does not arise automatically on the basis of any particular action taken by a party – it must be explicitly agreed to by the debtor. This is in direct contradiction to mechanics lien law in the U.S., where a mechanics lien arises because work is performed on the property, not through any agreement of the parties. In fact, it is generally the case that the property owner and the lien claimant disagree about lien claims, especially since many states allow a mechanics lien claimant to force the owner to pay twice.
Further, a mechanics lien is an interest in real property – land and the structures attached to land. This is different than a pledge in Saudi Arabia, which generally attaches to personal property chosen to be subject to the pledge by the contracting parties. While there is some disagreement as to the practicality of whether a pledge can attach to a residence or other piece of real estate in Saudi Arabia; the fact that a pledge can (and likely should) attach to personal property distinguishes the pledge from the American concept of a mechanics lien. However, these distinctions place the pledge much closer to another security device commonly used in the U.S., a UCC security interest.
A Pledge In Saudi Arabia Is Similar to a UCC Lien
We have recently discussed the security interests provided by, and perfected through, the UCC as opportunities for businesses outside the construction industry to secure outlays on credit. Review of the requirements for creating and perfecting a security interest under the UCC, and the conditions of a valid contract of ar-rahn in Saudi Arabia, provides many striking similarities. These security interests work in much the same way as does a pledge in Saudi Arabia. Two parties contract that a security interest will be given in a piece of property to secure a debt. The parties agree on the property to be encumbered by the security interest, the “financing statement” is filed with the proper authority, and in the event of non-payment, the property can be taken and sold to satisfy the debt.
In further support of this comparison, the Unified Center for Lien Registration in Saudi Arabia performs a similar function as the Secretary of State’s office in the United States (as related to this type of security interest), as the proper depository for the agreements perfecting the interest. A brief review of the requirements for creating and perfecting a security interest under the UCC, and the conditions of a valid contract of ar-rahn in Saudi Arabia, provides many striking similarities – even down to the fact that collateral that cannot be uniquely identified, i.e. accounts receivable/inventory, can be subject to this type of security interest.
That’s Great, But How Do I Get Paid in Saudi Arabia?
Just like everywhere else, the best way to secure payment in Saudi Arabia depends on the type of work done, as well as other factors. The first option is to enter into a contract of ar-rahn with the party with whom you are doing business to establish a pledge. As seen above, the pledge works similarly to a UCC security interest in personal or business property (with the added bonus that it may be theoretically possible, but not easy to secure a pledge in real estate).
Since the concept of the mechanics lien is an American construction, parties who perform work and/or supply material in foreign countries should be aware that their rights to secure payment will be different. Since there is no automatic property right in real estate created by law to secure labor and/or materials furnished to that property under Saudi Arabian law, parties in the construction industry may need to get creative. It may be possible to get a personal guarantee, (potentially coupled with a forum selection clause in the contract), it may be possible to secure a pledge from the indebted party, if the work is being done on the U.S. Embassy a Miller Act claim would apply (and be the appropriate remedy for non-payment), or in a country with a very liquid economy – just make all deliveries of material C.O.D., or request payment up-front.
Since the concept of the mechanics lien is an American construction, parties who perform work and/or supply material in foreign countries should be aware that their rights to secure payment will be different. In some countries this may be a pledge that functions like a UCC lien, or a personal guarantee; in other countries, security for foreign businesses might not exist at all.