Saudi Arabia Modernizes Arbitration Laws - Arbitration & Dispute Resolution

1. Introduction

The Kingdom of Saudi Arabia changed its arbitration law earlier in 2012 with the enactment of its New Arbitration Law 1433H (2012G) (the New Arbitration Law). On April 9, 2012, the Council of Ministers approved the New Arbitration Law and a Royal Decree on the law was issued on April 16, 2012. On Friday, June 8, 2012, the law was published in the official gazette (Um Al-Qura). In accordance with Article 58 of the New Arbitration Law, the law came into force after 30 days from the date of its publication, which was July 9, 2012, corresponding to 19 Sha'baan 1433H. The prior law was the Arbitration Law dated 1403H (1982G) (the Old Arbitration Law). The local business community used the Old Arbitration Law infrequently and multinational companies avoided it because it was seen as difficult and inefficient in resolving business disputes within the country.

The New Arbitration Law is based on the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). The Model Law was first adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985, was amended in 2006 and has been used as the basis for the arbitration law of nearly 70 countries.

The Model Law is designed to assist States in reforming and modernizing their laws on arbitral procedure by taking into account the particular features and needs of international commercial arbitration. It covers all stages of the arbitral process from the drafting of the arbitration agreement, the composition and jurisdiction of the arbitral tribunal, the extent of court intervention, to the recognition and enforcement of the arbitral award. It reflects a worldwide consensus on key aspects of international arbitration practice that have been accepted by States of all regions and from the different legal and economic systems of the world. Since the Model Law is designed to modernize a State's arbitration process and harmonize its practices with international norms, UNCITRAL encourages States to make as few changes as possible when incorporating the Model Law into their legal systems. Consequently, many States have incorporated the Model Law verbatim into their legislation, although Saudi Arabia has not. The Kingdom has used the Model Law as its starting point, making significant changes to address issues of concern, in particular, by repeatedly requiring the arbitration process to not "violate Shari'ah" as practised in the Kingdom.

Even though the Model Law was designed with international commercial arbitration in mind, it provides a set of basic rules that can also be used in domestic commercial arbitration (i.e., business disputes where all aspects of the arbitration are within the national boundaries of a country, including the contracting parties, the assets in dispute, the substantive law of the contract, the legal site of the arbitration, the arbitral institution and its procedural rules, etc.). Many States have successfully used the Model Law to modernize their domestic arbitration procedures. Saudi Arabia has followed that example and has included domestic commercial arbitration, along with international commercial arbitration, in its New Arbitration Law.

Overall, the New Arbitration Law provides a significant improvement over the Old Arbitration Law. The Old Arbitration Law allowed the courts to be involved in the arbitration process from the beginning and to ultimately approve the award of the arbitral tribunal. The New Arbitration Law respects the right of parties to manage their dispute resolution process without interference from the courts. Parties no longer require the approval of the courts to begin an arbitration. One party simply has to send a notice of arbitration to the other party as provided in their arbitration agreement. Under the New Arbitration Law, parties will have greater flexibility in choosing their arbitrators, in selecting the arbitral rules and institutions for their arbitration, the language they want to use in their arbitration and, ultimately, the language of their contracts. These and other improvements will result from the New Arbitration Law.

2. General Provisions

The Old Arbitration Law was not clear on what kinds of disputes were allowed to use arbitration. The New Arbitration Law provides clarity in Article 2 by stating that it "... applies on every arbitration regardless of the nature of the dispute ....". It does carve out personal-related disputes and matters where reconciliation is not allowed. Similar to the Old Arbitration Law, the New Arbitration Law does not allow government agencies to use arbitration agreements unless they obtain the approval of the Council of Ministers. Unlike the Old Arbitration Law, the New Arbitration Law does provide for prior approved blanket exemptions.

The Old Arbitration Law was restricted to domestic arbitrations. The New Arbitration Law covers both domestic and international commercial disputes. Article 3 of the New Arbitration Law defines what is considered "international". It follows the principles found in the Model Law and provides that an arbitration is international in the following situations:

If the main business centre for each arbitration party falls in more than one country at the time the arbitration agreement is concluded. If either party has several business centres, the centre that is more attached to the dispute shall prevail. If either party or both do not have specific business centres, their usual place of residence shall prevail.
If the main business centre for each arbitration party falls in the same country at the time the arbitration agreement is concluded, while one of the places mentioned below is outside that country:
- The arbitration venue as specified in or referred to in the arbitration agreement.
- The place of implementation of a significant part of the commitments arising out of the business relationship between the two parties.
If the arbitration parties agree to resort to an organization, permanent arbitration commission or an arbitration centre whose head office is located outside Saudi Arabia.
If the subject of dispute covered by the arbitration agreement relates to more than one country.

The New Arbitration Law recognizes the right of parties to choose arbitration over litigation in courts, the procedural rules they want to use and whether they wish to use arbitration centres inside or outside of Saudi Arabia, provided that Shari'ah is not violated.

3. Arbitration Agreement

Similar to the Model Law, the New Arbitration Law requires that the arbitration agreement be in writing. It can be entered into prior to or at the time of the dispute. It can be in a contract or independent of it. It can be in print or electronic format and it can be as simple as making reference to arbitration provisions found in another document, contract or international treaty or by referring to the procedural rules of an arbitration institute or to ad hoc rules. The Old Arbitration Law was not as definitive or as expansive.

Article 21 of the New Arbitration Law provides that the arbitration agreement is separate from the contract itself. This is supportive of the internationally accepted doctrine of separability, i.e., an arbitration clause can be "separable" from the contract in which it is included. This allows the arbitration clause to continue to be valid even if the contract is not and allows an arbitration to proceed regardless of whether any of the parties argue that the contract is invalid.

4. Arbitral Tribunal

Article 3 of the Implementing Regulations of the Old Arbitration Law required that arbitrators had to be either Saudi citizens or non-Saudi Muslims with a professional designation. They had to be experienced, of good conduct and reputation, and be of full legal capacity. The Implementing Regulations then required arbitrators to have the same qualifications as Saudi judges which, in practice, meant that arbitrators had to be male and Muslim.

The New Arbitration Law requires that arbitrators be of full legal capacity, of good conduct and reputation, and have a university degree in either Shari'ah science or law. Where the tribunal has more than one arbitrator, only the tribunal chair has to meet this last condition.

The Old Arbitration Law provided that the court would supervise the conduct of the arbitration, including appointing the arbitral tribunal where the parties failed to agree upon the arbitrators and replacing an arbitrator when needed.

The New Arbitration Law is similar to the Model Law in allowing the parties to select their arbitral tribunal without the intervention of the courts. It provides a detailed procedure for selecting an arbitral tribunal in the event the parties have not done so in their agreement. It also provides procedures for challenging the appointment of arbitrators. It requires arbitrators to be independent, neutral and impartial and state so in writing. In addition, arbitral tribunals have the authority to rule on their own jurisdiction (the doctrine of Kompetenz-Kompetenz) and they do not have to turn to the courts to determine if they have the authority to proceed with an arbitration.

5. Arbitration Proceedings

Under the Old Arbitration Law, parties had to file the arbitration agreement with the court or competent authority to proceed. Article 9 of the Old Arbitration Law specifically required the approval of the courts to initiate an arbitration, however, that requirement has disappeared under the New Arbitration Law, as Article 26 states that: "... The arbitration procedures shall begin from the day on which either arbitration party receives the arbitration request from the other party, unless the arbitration parties agree otherwise." This procedure under the New Arbitration Law follows standard international practice where any party can start an arbitration by serving notice to the other party without any involvement of the courts.

The New Arbitration Law allows the parties to use procedural rules of their choosing, as long as they do not contravene Shari'ah. This is similar to the Model Law in dealing with a situation where parties have not agreed on the procedural rules that should apply to their arbitration. In such a situation, the New Arbitration Law sets out a detailed arbitration procedure that applies by default and which includes features commonly used in international arbitration (such as pleadings, witness statements, expert reports and hearings). The parties are free to choose the seat of their arbitration, whether inside or outside of Saudi Arabia. If the parties cannot agree, the tribunal has the authority to decide.

The New Arbitration Law permits parties to use either international arbitration institutions and their procedural rules or ad hoc international arbitration rules, as long as those procedures do not violate Shari'ah (seeArticles 3, 5 and 25(1) of the New Arbitration Law). There are three major international arbitration institutions that administer commercial disputes: the International Court of Arbitration of the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR) that is the international division of the American Arbitration Association (AAA), and the London Court of International Arbitration (LCIA). In addition, there are a number of experienced arbitration institutions in the region including: the Bahrain Chamber for Dispute Resolution (BCDR) that is a joint venture between the Bahrain Ministry of Justice and the AAA, the GCC Commercial Arbitration Centre in Bahrain, the Dubai International Arbitration Centre (DIAC), and the DIFC/LCIA Arbitration Centre that is a joint venture between the Dubai International Finance Centre and the LCIA. The most commonly used international ad hoc procedural rules used are the United Nations.

Most parties tend to choose one of the better-known arbitration institutions and its procedural rules, rather than ad hoc arbitration. Currently, there are no arbitration institutions in the Kingdom with sufficient experience or competency to appoint arbitrators or administer domestic or international commercial arbitrations. Typically, arbitration proceedings have been administered in local chambers of commerce that do not have such expertise. We understand that the Bureau of Experts (the Legal Department of the Council of Ministers) which drafted the New Arbitration Law is considering new legislation to create a National Arbitration Centre. This planned new centre will administer arbitration proceedings and will oversee and regulate private arbitration centers that would be created under the new legislation. This should result in a better selection of arbitration institutions within the Kingdom. Parties wishing to use arbitration institutions to administer their arbitrations will have to look outside the Kingdom for the short term.

Parties using ad hoc arbitration rules, such as the UNCITRAL Arbitration Rules, have to rely upon the tribunal, with the assistance of the parties' counsel, to administer the arbitration. This requires counsel who are experienced in arbitration and parties who are co-operative. When parties are unco-operative, it can present a significant problem in the appointment of the arbitrators. If the parties fail to designate an appointing authority, the UNCITRAL Rules provide that the Secretary-General of the Permanent Court of Arbitration in the Hague will designate the appointing authority.

This usually adds more time and expense to the process, so it is best for parties to clearly designate an acceptable appointing authority in their arbitration clause if they choose ad hoc arbitration.

The New Arbitration Law also allows parties to select their own arbitration rules and institutions for domestic commercial arbitrations. Article 2 states that "the provisions of this Law apply on every arbitration regardless of the nature of the dispute if the arbitration is done in Saudi Arabia...". This allows Saudi companies to utilize arbitration rules and institutions of their choosing in contracts with other Saudi parties for work within Saudi Arabia. Any such contracts and any arbitral disputes arising from such contracts would be subject to the New Arbitration Law.

6. Language of the Contract and of the Arbitration

Article 25 of the Implementing Regulations of the Old Arbitration Law required that "... Arabic shall be the official language to be used before the arbitral tribunal whether in the discussion or correspondence. Neither the tribunal nor the arbitrators shall speak any language but Arabic. The foreigner who cannot speak Arabic may bring a trusted translator who will sign with him the record of the session on the statements he interpreted."

Article 29 of the New Arbitration Law is much more flexible in providing that "... the arbitration shall be made in Arabic unless the arbitral tribunal decides, or the arbitration parties agree, on another language or languages. Such agreement shall apply on the language of the statements, written memoranda and verbal proceedings and also on every decision taken by the arbitral tribunal or on any message or ruling it releases; unless the parties agreement or the arbitral tribunal's decision state otherwise." The result is that parties can choose to have their contracts in a non-Arabic language, such as English, conduct their arbitration in that language and have the arbitral tribunal issue its award in that language and still be recognized and enforced in Saudi courts. Article 53 (3) of the New Arbitration Law simply requires that when Saudi courts are requested to enforce an award that there is a "... [t]ranslation of the arbitration award in Arabic duly attested by an authorized entity if issued in a foreign language."

7. Interim Measures and Preliminary Orders

The Model Law was significantly expanded in 2006 to increase an arbitral tribunal's power to grant interim measures and issue preliminary orders. These are temporary measures prior to the issuance of a final award where the arbitral tribunal can order a party to take measures to maintain the status quo, preserve assets or evidence, etc.

Article 23 of the New Arbitration Law follows the example of the 1985 Model Law, which is short in nature, rather than the 2006 expanded version. The New Arbitration Law simply provides that the "... arbitral tribunal can, based on the request of either party, order any of them to take temporary or precautionary measures it deems necessary and required in relation to the nature of the dispute." If the order is ignored, the party that requested the order can turn to the "competent authority", which would be the Saudi courts, to require the order to be executed.

8. Arbitration Award

The New Arbitration Law requires that the arbitration award not contravene Shari'ah and the public order of Saudi Arabia. Tribunals can issue interim or partial awards and such awards must be rendered by a majority of the tribunal. The award must be in writing, reasoned and signed by the arbitrators and must be kept confidential unless the parties have otherwise given their written consent.

Under the Old Arbitration Law, arbitral awards were required to be issued within 90 days from commencing the arbitration, unless the parties had agreed upon another period in the arbitration agreement or the supervising court or the arbitral tribunal itself extended the time for the award to be issued. Upon that time period expiring, either party was entitled to commence a separate proceeding in the supervising court. This allowed a party to ignore the arbitration process, which often resulted in the arbitration agreement and award having no effect.

The New Arbitration Law provides that the arbitral award is be issued within 12 months from the date that the arbitration was commenced, subject to the tribunal's authority to extend it for six months. This is a much more realistic time-frame to hear and decide upon major commercial disputes than was the case under the Old Arbitration Law.

9. Recognition and Enforcement of an Award

Article 20 of the Implementing Regulations of the Old Arbitration Law provided that "the award of the arbitrators shall be applicable when it is final by order of the entity which is primarily competent to look into the dispute ...". This meant that the award had to be ratified by the supervising court to be enforceable. Before ratifying any arbitral award, the supervising court would hear any objection raised by any party to ascertain whether there was anything in the award that prevented its enforcement under Shari'ah. The supervising court could re-consider the merits of the dispute in the course of the enforcement process, which meant that there was a significant risk that the court would impose its own decision on the dispute notwithstanding the decision of the arbitral tribunal.

This has changed under the New Arbitration Law. Article 52 of the New Arbitration Law simply states that: "... the arbitration award issued in accordance with this Law shall be valid and in force." Article 53 goes on to state: "...The competent court shall issue an order for the putting into effect of the arbitration award and shall submit a request for execution of the award ....".

Saudi law now follows international arbitration practice where arbitration awards are accepted as valid from their issuance and courts are required to recognize and enforce them except for limited public policy reasons. Article 49 of the New Arbitration Law states that the "... arbitration awards issued in accordance with this Law are not to be challenged in any way except through the filing of a lawsuit to nullify an arbitration award according to the provisions of this Law." Article 50 (1) specifies those instances:

If an arbitration agreement does not exist or such agreement is null and void or apt to be null and void or discontinued on expiry of its period.
If any of the arbitration parties happens to be, upon the concluding of the agreement, legally ineligible in accordance with the Law which governs the eligibility.
If it is not possible for any of the arbitration parties to submit its defense because it was not correctly informed on the appointing of an arbitrator or of the arbitration procedures or for any other reason falling beyond his control.
If the arbitration award ruled out the application of any of the rules which the arbitration parties agreed to apply on the subject of the dispute.
If the arbitral tribunal is formed or if the arbitrators are appointed in a manner that contravenes with this Law or with the agreement of the two parties.
If the arbitration award adjudicated on matters not covered by the arbitration agreement. If the parts of the award relative to the matters which are subject to the arbitration are separated from the other matters which are not subject to arbitration, the nullity shall only fall on the parts which are not subject to the arbitration.
If the arbitral tribunal does not observe the conditions that should exist in the award in a manner that affects its content or that the award relied on invalid arbitration procedures that adversely affected it.

A party wanting to invalidate an arbitration award must submit an application – the Arabic legal term is ta'an, which translates as "challenge" – to the competent court within 60 days of the issuance of the award. The New Arbitration Law places the onus on the complaining party to raise any objection about the award within the 60-day period, rather than putting the onus on the successful party to justify the award when it seeks to enforce it. If the successful party requires an enforcement order from a court, under Article 52 of the New Arbitration Law, the court will verify that the award does not contradict a previous judgment having jurisdiction, that it does not contain any part that violates the provisions of Shari'ah and public order (subject to such part being severable from other parts that can be enforced), and that the award has been properly served on the other party.

10. The Competent Court in the Kingdom

Like courts in most jurisdictions, parties in an arbitration will need to occasionally call upon local Saudi courts to address issues such as the appointment of arbitrators in an ad hoc arbitration when they cannot agree on such an appointment, temporary or injunctive relief, and the recognition and enforcement of an arbitral award (whether it be foreign or domestic). The New Arbitration Law provides that the "competent court" will decide such matters.

Article 1.3 of the New Arbitration Law simply states that the "competent court" is the "... court with legal jurisdiction to settle disputes for which an arbitration agreement is reached." Article 15.1 of the New Arbitration Law addresses the appointment of arbitrators. It states that when two parties to an arbitration agreement are not able to agree upon the selection of an arbitrator (either the sole arbitrator or the chair of the arbitral tribunal), then "... the competent court shall select him." No further description of that court is provided in that article.

Article 8 of the New Arbitration Law provides the detail on the "competent court." Firstly, that article states that the "competent court" will be a court of appeal (rather than a court of first instance) and secondly, there is a distinction made between international commercial disputes and domestic commercial disputes as to what court of appeal has jurisdiction.

Article 8.1 deals with commercial domestic arbitrations for which "... competence to hear a case of invalidity of an arbitration award and issues referred by this Law to the competent court shall be given to the court of appeal that has original competence to hear the dispute." Article 8.2 states that the "competent court" for an "international commercial arbitration" (as defined in Article 3), held inside or outside of the Kingdom, is "... the court of appeal that has original competence to hear the dispute in the city of Riyadh unless the two parties to the arbitration agree upon another court of appeal in the Kingdom."

This last point is a significant development since it prevents lower courts and judges from interpreting the law with regard to international arbitrations. This approach has been used successfully in other jurisdictions which have used specially designated appeal courts and trained judges who are supportive of the arbitration process. It is unknown at this time how Saudi courts will eventually interpret and apply the New Arbitration Law; however, Article 8 improves its chances of being interpreted and applied correctly.

Commercial cases in Saudi Arabia are heard in the administrative judicial body formerly known as the Board of Grievances (Diwan al-Mazalem). Under the Board of Grievances Law of 2007, commercial cases were placed under the umbrella of the Administrative Courts. There are presently three branches of the Saudi Administrative Courts: Commercial Circuit, Criminal Circuit and Administrative Circuit. The hierarchy of the courts within each branch starts with the Administrative Courts (which are the trial courts or courts of first instance), followed by the Administrative Courts of Appeal and finally the most senior court, the High Administrative Court. The court of appeal referred to in the new Arbitration Law would therefore be the Administrative Court of Appeal for the Commercial Circuit.

The Administrative Courts have branches based in the following cities: Riyadh, Jeddah, Dammam and Abha. Under Shari'ah, unless the parties designate otherwise, the "... court with legal jurisdiction to settle disputes" is normally the court located in the area where the defendant is located.

Based on the above, the "competent court" for an international commercial arbitration under the new Arbitration Law would be the Administrative Court of Appeal for the Commercial Circuit in Riyadh, unless the parties agree on one of the three other Administrative Courts of Appeal in the Kingdom. The "competent court" for a domestic commercial arbitration would be the Administrative Court of Appeal for the Commercial Circuit located where the defendant is located.

The Saudi government plans on changing the organization of its court system in the future. It is therefore likely that the name and designation of the "competent court" found in the New Arbitration Law will change. However, it will still be a commercial court of appeal and it will still be located in the cities mentioned above.

11. Shari'ah and International Arbitration Practice

Shari'ah prohibits practices such as riba (interest/usury) and gharar (speculation on uncertainty). Those are the primary issues that Saudi courts will look for in an international arbitration award when asked to recognize and enforce it. None of the major international institutional arbitration rules or the UNCITRAL ad hoc rules address or deal with gharar – that would only arise in either the arbitral award or the contract itself.

The UNCITRAL ad hoc arbitration rules and the ICC arbitration rules are silent on the issue of interest. The ICDR arbitration rules provide that "the tribunal may award such pre-award and post-award interest, simple or compound, as it considers appropriate, taking into consideration the contract and applicable law." The LCIA arbitration rules state that "... The Arbitral Tribunal may order that simple or compound interest shall be paid by any party on any sum awarded at such rates as the Arbitral Tribunal determines to be appropriate, without being bound by legal rates of interest imposed by any state court, in respect of any period which the Arbitral Tribunal determines to be appropriate ending not later than the date upon which the award is complied with."

The imposition of interest is not mandatory under any of those international arbitration rules. Instead, those rules are either silent on the issue or allow the tribunal to include interest at their discretion based upon the contract and applicable law. The net result for all of these procedural rules is the same. They neither encourage nor discourage the use of interest. They are essentially neutral on the issue.

Therefore, both issues would only arise either in the contract itself or in an arbitration tribunal's award. If those issues are not included in either of those two situations and, in particular, in the award itself, then an arbitration award would not violate Shari'ah and it should be recognized and enforced by Saudi courts. In their arbitration clauses and agreements, companies are thus free to use any of the major international or regional arbitration institutions and their rules.

12. Implementing Regulations

The Implementing Regulations for the New Arbitration Law are meant to complement and explain how the Law is to be implemented in detail. The Regulations are not supposed to add any new articles or legislative provisions. The Implementing Regulations of the New Arbitration Law are being prepared by the Ministry of Justice, the Higher Judicial Council, the Board of Grievances and other competent authorities. The Council of Ministers then issues the Implementing Regulations.

To date, the Implementing Regulations for the New Arbitration Law have not been issued and promulgated. They may impact how the New Arbitration Law is applied and interpreted within the Kingdom and need to be considered in the final assessment of the New Arbitration Law.

13. Conclusion

The New Arbitration Law provides a significant improvement over the Old Arbitration Law. By using the Model Law as its framework, the New Arbitration Law applies modern international practices to Saudi arbitration. It cuts back on the ability of the Saudi courts to intervene and recognizes the principle of party autonomy by allowing the parties to determine how they want their commercial disputes resolved. It incorporates widely accepted international arbitration doctrines such as Kompetenz-Kompetenz and the separability of the arbitration agreement.

The New Arbitration Law does require that Shari'ah is adhered to at all times in the arbitration agreement, throughout the arbitration process and in the final award issued. Those issues can be properly managed under the New Arbitration Law for an arbitration held in Saudi Arabia without unduly burdening the parties, which was not the case under the Old Arbitration Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United Arab Emirates: Saudi Arabia Modernizes Arbitration Laws