Transparency of the Regulatory System
Currently, there is no competition law in force in Bahrain. However, Bahrain’s so-called Law of Commerce (Legislative Decree No. 7, passed in 1987) addresses the concept of unfair competition and prohibits acts that would have a damaging effect on competition. Companies also are forbidden from undertaking practices detrimental to their competitors or from attracting the customers of their competitors. There is no official competition authority in Bahrain.
The Government of Bahrain (GOB) uses International Financial Reporting Standards (IFRS) as part of its implementation of Generally Accepted Accounting Principles (GAAP). IFRS are used by domestic listed and unlisted companies in their consolidated financial statements for external financial reporting.
Bahrain adopted International Accounting Standard 1 (IAS 1) in 1994 in the absence of other local standards. Non-listed banks and other business enterprises use IASs in the preparation of financial statements.
The 2001 Bahrain Commercial Companies Law required each registered entity to produce a balance sheet, a profit-and-loss account and the director’s report for each financial year. All branches of foreign companies, limited liability companies and corporations must submit annual audited financial statements to the Directorate of Commerce and Company Affairs at the Ministry of Industry, Commerce and Tourism, along with the company’s articles and /or articles of association.
Depending on the company’s business, financial statements may be subject to other regulatory agencies such as the Bahrain Monetary Agency (BMA) and the Bahrain Stock Exchange (banks and listed companies).
Bahrain encourages firms to adhere to both the IFRS and Bahrain’s Code of Corporate Governance. Statistics indicate that the level of corporate governance applied to Bahrain listed companies is 72.5 percent, and Bahrain-based companies by-and-large remain in compliance with IAS-1 disclosure requirements.
There are no informal regulatory processes managed by non-governmental organizations or private sector associations. According to the World Bank, the GOB does not solicit comments on proposed regulations from the general public or businesses that might be impacted. Bahrain, therefore, ranks among the countries with low rule making transparency.
Entrenched local business interests with government influence can sometimes cause problems for foreign companies. Interpretation and application of the law sometimes varies by ministry, and may be dependent on the stature and connections of an investor’s local partner. These departures from the consistent, transparent application of regulations and the law remain rare, and investors report general satisfaction with government cooperation and support.
International Regulatory Considerations
Bahrain is a member of the Gulf Cooperation Council (GCC), and the Government of Bahrain (GOB) has agreed to enforce GCC standards and regulations where they exist, and not to create any domestic rules that contradict established GCC-wide standards and regulations. In certain cases, the GOB applies international standards where domestic or GCC standards have not been developed. For example, the GOB mandates that imported vehicles meet either the U.S. Federal Motor Vehicle Safety Standards or the so-called “1958 Agreement” standards developed by the United Nations Economic Commission for Europe. Bahrain is a member of the WTO and notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
Bahrain’s Constitution defines the Kingdom as a sovereign, independent, Arab Islamic State. Although Article 2 of the Constitution states that Islamic Sharia (Islamic law) is the main source of legislation, general matters and private transactions are governed mainly by laws derived from modern legislation. In practice, Bahrain has a dual court system, consisting of civil and sharia courts. Sharia courts deal primarily with personal status matters (such as marriage, divorce, and inheritance).
The civil court system consists of summary courts and a Supreme Court. Summary courts deal with all commercial, civil, and criminal cases, as well disputes related to the personal status of non-Muslims. The Supreme Court hears appeals from the summary courts. The Supreme Court of Appeal, also known as the Court of Cassation, is the highest appellate court in the Kingdom. The Supreme Court of Appeal also decides on the constitutionality of laws and regulations.
Many of the high-ranking judges in Bahrain are either members of the ruling family or non-Bahrainis (mainly Egyptians). Bahraini law borrows a great deal from other Arab states, particularly Egyptian codes. While Islamic Sharia is the major source of legislation, custom, natural law and principles of equity and good conscience also inform the legal system.
Bahrain has a long-established framework of commercial law. English is widely used, and well-known international (including U.S.) law firms, working in association with local partners, provide expert legal services both nationally and regionally. Fees are charged according to internationally accepted practices. Although only a Bahraini lawyer can argue in a Bahraini court of law, lawyers of other nationalities can and do work on cases. In April 2007, the government permitted international law firms to be established in Bahrain; these firms provide services such as commercial and financial consultancy in legal matters.
Entrenched local business interests with government influence can sometimes cause problems for foreign companies. Interpretation and application of the law sometimes varies by Ministry, and may be dependent on the stature and connections of an investor’s local partner. These departures from the consistent, transparent application of regulations and the law are not common, and investors report general satisfaction with government cooperation and support.
The GOB is eager to develop its legal framework further. The U.S. Department of Commerce’s Commercial Law Development Program has conducted training and capacity building programs in Bahrain for several years, in cooperation with the Ministry of Justice, Higher Supreme Council for Judges, and the Judicial and Legal Studies Institute.
Judgments of foreign courts are recognized and enforceable under local courts. Article nine of the U.S.-Bahrain Bilateral Investment Treaty outlines how problems with U.S. investments should be handled within the Bahraini legal system. The most common source of investment-related problems in Bahrain is slow or incomplete application of the law.
Laws and Regulations on Foreign Direct Investment
The U.S.-Bahrain Bilateral Investment Treaty (BIT) provides benefits and protection to U.S. investors in Bahrain, such as most-favored nation and national treatment, the right to make financial transfers freely and without delay, the application of international legal standards for expropriation and compensation cases, and access to international arbitration. The BIT guarantees national treatment for U.S. investments across most sectors, with exceptions only for ownership of television, radio or other media, fisheries, and dredging or oil exploration. Bahrain also provides most-favored nation or national treatment status to U.S. investments in air transportation, the purchase or ownership of land, and the purchase or ownership of shares traded on the Bahrain Bourse.
The national treatment clause in the BIT ensures American firms interested in selling products exclusively in Bahrain are no longer required to appoint a commercial agent, though they may opt to do so anyway. A commercial agent is any Bahraini party appointed by a foreign party to represent the foreign party’s product or service in Bahrain.
Bahrain permits 100 percent foreign-ownership of new industrial entities and the establishment of representative offices or branches of foreign companies without local sponsors. Wholly foreign-owned companies may be set up for regional distribution services and may operate within the domestic market as long as they do not exclusively pursue domestic commercial sales. Private investment (foreign or Bahraini) in petroleum extraction is permitted only under a production-sharing agreement with BAPCO, the state-owned petroleum company.
Expatriates may own land in Bahrain, though certain areas are restricted to them. Non-GCC nationals, including Americans, may own high-rise commercial and residential properties, as well as properties used for tourism, banking, financial and health projects and training centers. Expatriates may only own land in specific geographic areas designated via edict from the Government of Bahrain.
Officials from U.S. companies with investments in Bahrain occasionally have reported their belief that certain court cases brought against members of the Royal Family have languished in the court system. These officials believed the delays could be attributed to subtle executive pressure put on the judiciary to use administrative means to postpone court cases and ensure the Royal Family member would not be found liable in court.
Below are links to sites designed to assist foreign investors in navigating the laws, rules and procedures related to investing in Bahrain:
Competition and Anti-Trust Laws
There is no formal competition law in Bahrain, nor is there a specific agency that monitors competition-related issues. There are general restrictions on FDI in some sectors, including the oil and gas and petrochemicals sectors, in which all companies are government-owned.
Expropriation and Compensation
There have been no expropriations in recent years, and there are no cases in contention. The U.S.-Bahrain Bilateral Investment Treaty (BIT) protects U.S. investments by banning all expropriations (including “creeping” and “measures tantamount to”) except those for a public purpose. Such transactions must be carried out in a non-discriminatory manner, with due process, and prompt, adequate, effective compensation.
ICSID Convention and New York Convention
Bahrain uses multiple international and regional conventions to enhance its commercial arbitration legal framework. Bahrain is a party to the UNCITRAL Model Law on International Commercial Arbitration, the New York Convention, the International Centre for the Settlement of Investment Disputes (ICSID), and the GCC Convention for Execution of Judgments, among others. These conventions and international agreements established the foundation for the GCC Arbitration body, and the Bahrain Chamber for Disputes & Resolution (BCDR). Bahrain’s Constitution stipulates international conventions and treaties have the power of law.
Investor-State Dispute Settlement
The U.S.-Bahrain Bilateral Investment Treaty (BIT) provides for three dispute settlement options:
- Submitting the dispute to a local court;
- Invoking dispute-resolution procedures previously agreed upon by the national or company and the host country government; or,
- Submitting the dispute for binding arbitration to the International Center for Settlement of Investment Disputes (ICSID) or any other arbitral institution agreed upon by both parties.
In 2009, the Ministry of Justice established the Bahrain Chamber for Dispute Resolution (BCDR). In partnership with the American Arbitration Association, the BCDR specializes in alternative dispute resolution services. As of December 2014, BCDR officials claimed 125 cases had been referred to the chamber, with the total value of claims exceeding $2.3 billion. Of those, roughly one-quarter had been awarded/settled within six months. Most of the companies’ cases involved family-owned companies in the GCC region.
Bahrain Chamber for Dispute Resolution
Suite 301, Park Plaza
Bldg 247, Road 1704
P.O. Box 20006
Manama, Kingdom of Bahrain
+ (973) 17-511-311
International Commercial Arbitration and Foreign Courts
Arbitration procedures are largely a contractual matter in Bahrain. Disputes historically have been referred to an arbitration body as specified in the contract, or to the local courts. In dealings with both local and foreign firms, Bahraini companies have increasingly included arbitration procedures in their contracts. Most commercial disputes are resolved privately without recourse to the courts or formal arbitration. Bahraini law is generally specified in all contracts for the settlement of disputes that reach the stage of formal resolution, but is optional in those designating the BCDR. Bahrain’s court system has adequately handled occasional lawsuits against individuals or companies for nonpayment of debts.
The GCC Commercial Arbitration Center, established in 1995, serves as a regional specialized body providing arbitration services. It assists in resolving disputes among GCC countries or between other parties and GCC countries. The Center implements rules and regulations in line with accepted international practice. Thus far, few cases have been brought to arbitration. The Center conducts seminars, symposia, and workshops to help educate and update its members of any new arbitration related matters.
GCC Commercial Arbitration Center
P.O. Box 2338
Manama, Kingdom of Bahrain
Arbitration Boards’ Secretariat
The GOB enacted its bankruptcy and insolvency law in 1987. Chapter three of the law states that if a business is facing financial difficulties, fails to make consistent financial payments, or fails to pay commercial transactions within a 30-day timeframe, either the company or debt collectors may declare bankruptcy or ask that the company be liquidated. Chapter 7 of the law specifies that the Supreme Court specializes in bankruptcy and liquidation cases. Chapter 2 briefly describes the procedures for managing insolvency: the Supreme Court designates a firm to represent the business in all legal and business procedures. The representative will be involved in managing the firm’s funds, making payments, and other administrative procedures.
CLDP attorneys have been working with the GOB for the last several years to help draft and ratify a new bankruptcy law. The GOB has prioritized updating its bankruptcy law as part of efforts to spur entrepreneurship and the growth of small and medium-sized enterprises.