Arbitration in the Kingdom of Saudi Arabia: the New Arbitration Law, shariah principles and enforcement of awards in the Kingdom
Arbitration as a means of resolving disputes has deep roots in the Islamic legal traditions. The shariah definition of arbitration is identical to that in the West (“two parties choosing a judge to resolve their dispute and their claim”) and the duty under the shariah to reconcile (‘sulh’) underpins an ancient tradition of seeking to resolve disputes by way of consensual mechanisms such as conciliation and arbitration. James Cameron explains more about how arbitration is viewed in the Kingdom of Saudi Arabia.
Notwithstanding its deep roots, arbitration has had a somewhat chequered history in the Kingdom in the modern era, with local courts having significant powers to intervene in the arbitral process and reopen the merits of disputes in the context of enforcement proceedings. However, a suite of new laws and the introduction of a modern, international arbitration centre in recent years have made it clear that the Kingdom intends to be more “arbitration-friendly” and encourage international organisations to feel confident in the process.
Western arbitration practitioners should be mindful though of some unique elements of arbitrating in the Kingdom, and should bear in mind the following tips:
- ensure the arbitration process is shariah compliant, even when seated outside the Kingdom and subject to international institutions’ rules, if enforcement is to take place within the Kingdom;
- ensure any award is shariah compliant. In particular, beware of issues such as interest, liquidated damages, loss of chance and consequential losses, recovery for which is not shariah compliant; and
- when dealing with government authorities, ensure proper authority has been obtained to enter into an arbitration agreement.
It is therefore important for parties who are arbitrating and/or potentially looking to enforce an award in the Kingdom to engage counsel familiar with the shariah throughout the arbitration process, even if the arbitration is subject to non-shariah rules and governed by non-shariah law.
However, the new arbitration regime does appear to be having the desired effect. In 2016, the Enforcement Court in Riyadh confirmed a US$18.5m ICC award that had been rendered in London against a Saudi entity, the first reported case under the new regime. By May 2018, the Saudi Ministry of Justice reported that over 400 applications had been made for enforcement of foreign awards/judgments under the New Enforcement Law, and that more than SAR 13bn (~US$3.4bn) had been recovered pursuant to such awards/judgments. This is encouraging news for those entering into arbitration agreements with Saudi-domiciled entities, and/or seeking to enforce foreign awards in the Kingdom.
The New Arbitration Law
Arbitration in the Kingdom was significantly reformed in 2012 with the enactment of Royal Decree No M/34 (16 April 2012) (the “New Arbitration Law”).
The New Arbitration Law, by contrast to the previous regime, is based on the UNCITRAL Model Law, and is viewed as being more “arbitration-friendly” than the law which it replaces. The New Arbitration Law has many features that will be familiar to those practising in other jurisdictions that have adopted – or adapted – the UNCITRAL Model Law.
In particular, the New Arbitration Law:
- applies to arbitrations conducted in the Kingdom, but can also apply by agreement of the parties to arbitrations conducted outside the Kingdom (Article 2);
- obliges a local court with competent jurisdiction to decline to hear a dispute to which an arbitration agreement applies, where the defendant requests referral to arbitration prior to making any claim or defence (Article 11);
- allows the competent court to appoint arbitrators where: (i) the parties fail to agree a sole arbitrator; (ii) the parties fail to appoint their respective arbitrator (where the tribunal consists of three arbitrators) within the time allowed; or (iii) the party-appointed arbitrators fail to choose a president within the time allowed (Article 15);
- enacts the “competence-competence” principle, whereby arbitral tribunals can decide questions related to their own jurisdiction (Article 20(1));
- recognises the severability of the arbitration agreement, protecting the arbitration agreement from any deficiency or defect in the underlying agreement (Article 21);
- allows the parties to choose the rules that will govern their dispute, which can include the rules of arbitration centres outside the Kingdom, e.g. the International Chamber of Commerce (Article 25); and
- allows the parties to choose a governing law other than the laws of the Kingdom, provided the application of such governing law does not contravene shariah principles (Article 38).
There are, however, elements of the New Arbitration Law that are worth bearing in mind, as they differ from the UNCITRAL Model Law, in particular:
- governmental authorities cannot agree to arbitration without the approval of the Prime Minister or explicit provision in legislation (Article 10(2));
- for arbitrations seated in the Kingdom, a sole arbitrator (or president in the case of a tribunal consisting of more than one arbitrator) must hold at least a university degree in shariah law (Article 14);
- the rules adopted by the parties (for example, the rules of the relevant international arbitral institution) only apply insofar as they do not violate shariah principles (Article 25); and
- a competent court may invalidate an arbitration award if: (i) the award includes provisions that violate shariah principles or the public policy of the Kingdom (which in practice are one and the same thing); (ii) it contravenes the agreement of the parties; or (iii) it relates to subject matter which is not permitted to be arbitrated (such as family or criminal matters) (Article 50(2)).
The Saudi Centre for Commercial Arbitration
As part of the push to make arbitrating in the Kingdom more attractive, the Saudi Centre for Commercial Arbitration (the “SCCA”) was also established by Cabinet Decree number 257 (15 March 2014) and opened in Riyadh in 2016. The SCCA administers commercial arbitration and mediation procedures, and its arbitration rules (which became effective on 15 October 2018) are based on the UNCITRAL Arbitration Rules and would therefore be familiar to international arbitration practitioners.
Challenge and Enforcement of Awards
The New Arbitration Law was complemented by a new enforcement law, enacted by Royal Decree No. M/53 (30 August 2012) (the “New Enforcement Law”), which came into force on 27 February 2013.
The Enforcement Court, established by the New Enforcement Law, replaces the Board of Grievances as the authority charged with enforcing awards. This is of significant assistance to those seeking to enforce awards in the Kingdom, as the Board of Grievances has a very broad role in the Kingdom, which meant that the process of enforcing through the Board of Grievances was often a long and arduous one. By contrast, the Enforcement Court is seen as a more streamlined and efficient avenue to enforcement.
The key features of the new enforcement regime brought about by the New Arbitration Law and the New Enforcement Law are as follows:
- unless otherwise agreed between the parties, the arbitral tribunal shall deliver its award within 12 months of the proceedings commencing (Article 40 of the New Arbitration Law);
- arbitration awards are not subject to appeal, except as set out in the New Arbitration Law (Article 49 of the New Arbitration Law);
- in any proceedings to set aside an award, the competent court is precluded from re-examining the merits of the case (Article 50(4) of the New Arbitration Law);
- a final award has the authority of a judicial ruling (Article 52 of the New Arbitration Law);
- an order to enforce the award may only be made once the court is satisfied that: (i) the award does not conflict with a decision issued by a court or other authority that has jurisdiction on the dispute in the Kingdom; (ii) the award is not contrary to principles of shariah or public policy in the Kingdom (if part of the award is offending, an order in respect of the non-offending part may be issued); and (iii) the award debtor has been properly notified (Article 55(2) of the New Arbitration Law);
- an Enforcement Judge has authority to enforce an award, provided the following are satisfied:
- the country in which the award was rendered would reciprocate and enforce awards rendered in the Kingdom;
- the local courts do not have jurisdiction over the dispute;
- the arbitration proceedings leading to the award were conducted with due process;
- the award is final (according to the law of the seat);
- the law does not contravene a decision on the same subject matter issued by a court or other authority that has jurisdiction in the Kingdom;
- the award does not contain anything that contravened the principles of shariah or public policy in the Kingdom (Article 11 of the New Enforcement Law).
You will see that it is important for parties who are arbitrating and/or potentially looking to enforce an award in the Kingdom to engage counsel familiar with the shariah throughout the arbitration process, even if the arbitration is subject to non-shariah rules and governed by non-shariah law. With this in mind we have recently launched an alliance with local lawyers Hammad & Al-Medhar in Saudi Arabia operating out of Riyadh, Jeddah and Khobar. Please contact Toby Randle for more information.