Arbitrating in the Kingdom of Saudi Arabia

Arbitration in the Kingdom of Saudi Arabia has been subject to material reform in recent years which has had a positive effect in the realm of dispute resolution. The new arbitration law, enacted by Royal Decree No. M/34 published in the Official Gazette on 8 June 2012 (the “New Arbitration Law”) has facilitated the Kingdom in adopting international norms and practices when promulgating new laws. This New Arbitration Law is broadly modelled on the UNCITRAL Model Law and replaces the previous Arbitration Law issued by Royal Decree No. M/46 on April 25, 1983 and supplemented by an Executive Regulation dated June 22 1987.

The New Arbitration Law has paved the way for the adoption of 'arbitration friendly' provisions that facilitate the resolution of disputes in the Kingdom and complement the recent arbitral progress. For example, the UNCITRAL-based New Arbitration Law led to the enactment, in 2013, of a new enforcement law (the “Enforcement Law”).

The Enforcement Law is intended to replace the 1989 Rules of Civil Procedure before the Board of Grievances (''BoG''). The provisions contained in the Enforcement Law address all aspects of enforcement of domestic and foreign judgments as well as arbitral awards. Before the enactment of the Enforcement Law, parties were required to bring applications for the enforcement of foreign judgments and arbitral awards before the BoG, which was deemed a lengthy and daunting process. The BoG would conduct a full review on the merits of each award to ensure that it was Shari'ah compliant. Given that the BoG is assigned with a large number of various responsibilities other than the review of enforcement requests, parties would experience inevitable delays on a regular basis in seeking enforcement of foreign judgments or awards and, in certain cases, would endure re-trials of the dispute on the merits by the BoG. In order to expedite the enforcement process, the Enforcement Law places this responsibility on an enforcement judge (''Enforcement Judge''), who must follow Shari'ah rules and principles unless the law expressly stipulates otherwise. In compliance with the changes intended to ease the arbitral process, the Enforcement Judge is required to apply the pro-enforcement and execution provisions depicted in the Enforcement Law. Although the Enforcement Judge's decision is considered final and not subject to appeal, it should be noted that a decision can still be stayed in the event the respondent is able to successfully prove a deficiency in the conditions and enforceability pursuant to the Enforcement Law and initiate an enforcement dispute. Any rulings issued in enforcement disputes are, however, subject to appeal.

Pursuant to Article 11 of the Enforcement Law, the Enforcement Judge may only enforce a foreign arbitral award based on principles of reciprocity, provided the enforcement seeking party satisfies the following conditions:

a) the Saudi courts do not have jurisdiction over the dispute;

b) the arbitral proceedings were in compliance with due process;

c) the award is final (as per the law of the seat of arbitration);

d) the award does not contravene a judgment or order issued on the same subject by a judicial authority of competent jurisdiction in Saudi Arabia; and

e) the award does not contravene Saudi public policy or Shari'ah principles.

Given that Saudi judges enjoy broad discretion in issuing rulings according to their own interpretation of Shari'ah law, there is no doctrine of legal precedent in Saudi Arabian jurisprudence and judicial or administrative decisions are not systematically reported, it is difficult to determine with certainty the extent to which foreign arbitral awards will be enforced by Saudi courts. Therefore in practice, establishing whether the judgment or award is Shari'ah complaint may warrant the Enforcement Judge examining the case on its merits.

Nevertheless, these arbitral reforms were further complemented by the opening of the Saudi Centre for Commercial Arbitration ("SCCA") in Riyadh in 2016, as well as the publication of the SCCA Arbitration Rules ("SCCA Rules"). This was followed by the publication of the Implementing Regulations ("Implementing Regulations") of the New Arbitration Law in the Official Gazette on 9 June 2017, which have played a significant role in providing clearer guidance in relation to the New Arbitration Law. The product of such change, however, is still subject to scrutiny and must be in line with Shari'ah principles and public policy of the Kingdom, which remains the back-bone of its legal system.

In this article, we set out some of the key provisions of the Kingdom's New Arbitration Law.

Scope of the New Arbitration Law

Article 2 provides that the New Arbitration Law applies to all arbitrations, whether seated in the Kingdom or abroad, where the parties have agreed that the arbitration shall be subject to its provisions.

Whilst the definition of international arbitration under Article 3 broadly corresponds to Article 1(3) in the UNCITRAL Model Law, the New Arbitration Law does not otherwise make a distinction between international and domestic arbitration. It will apply irrespective of the nature of the dispute. However, there are exceptions for personal disputes (which would include certain civil matters such as child custody) and matters that cannot be reconciled (such as criminal matters).

Composition of the Arbitral Tribunal

Article 13 requires the arbitral tribunal to be composed of one (1) arbitrator or more, provided the number of arbitrators is an odd number; otherwise, the arbitration shall be void.

Article 14 goes further in setting conditions in the selection of the arbitrator, requiring the arbitrator to be:

a) legally competent;

b) of good conduct and behaviour; and

c) a holder of at least a university degree in Shari'ah or law. If the arbitral tribunal is composed of more than one (1) arbitrator, it is sufficient that the chairman meet such requirement.

Article 15 grants the court of competent jurisdiction the authority to select an arbitrator where (i) the parties fail to select a sole arbitrator, (ii) one party fails to appoint an arbitrator within the permitted time period where the tribunal shall consist of three arbitrators, or (iii) two party-appointed arbitrators fail to agree on the appointment of a third arbitrator. The New Arbitration Law does not specify the gender of any of the arbitrators, which consequently allows the appointment of females as arbitrators. This is evidenced by the appointment of the first female arbitrator in 2016, which is a particularly significant development following concerns raised surrounding the lack of female participation within the KSA arbitral sphere.

Article 17 grants the tribunal the power to rule on any challenges to arbitrators where there is no agreement between the parties on the procedure for doing so.

Article 20 recognises the "competence-competence" principle and expressly states that the tribunal has the power to determine its own jurisdiction. It may do so prior to deciding the merits of the case or by joining the issue to the merits and determining both issues together.

Arbitration Agreement and Procedures

The New Arbitration Law requires the arbitration agreement to be in writing (Article 9). The New Arbitration Law also expressly provides for the separability of the arbitration clause, therefore preventing any nullification, revocation or termination of the underlying agreement from affecting the arbitration clause (Article 21).

Parties are granted greater autonomy by virtue of the New Arbitration Law; Article 25 allows the parties to choose the procedures to be followed by the arbitral tribunal when conducting the arbitral proceedings, which includes the right to subject the proceedings to the effective rules of any organization, agency or arbitration centre within the Kingdom or abroad, provided that the chosen rules do not conflict with the provisions of Shari'ah. Therefore, parties are permitted to choose rules such as the Rules of Arbitration of the International Chamber of Commerce ("ICC Rules"), the London Court of International Arbitration Rules ("LCIA"), or the UNCITRAL Rules.

Pursuant to Article 28, the parties may reserve the right to specify the venue of the arbitration within the Kingdom or abroad in their arbitration agreement. In the absence of such agreement, the arbitral tribunal shall determine the venue of arbitration, taking into account the circumstances of the case and the convenience of the venue to both parties. Nevertheless, this shall not prejudice the power of the arbitral tribunal to convene at any venue it deems appropriate for deliberation, hearing of witnesses or experts, inspection of the subject matter and the examination and review of relevant documents.

Article 29 grants the parties the freedom to choose to have the arbitration conducted in a language other than Arabic. The chosen language shall apply to the language of the written statements, oral arguments and any decision, message or award made by the arbitral tribunal, unless otherwise agreed by the parties or decided by the arbitral tribunal.

Article 38 gives the parties the choice to adopt a law other than Saudi Arabian law to govern the arbitral proceedings. Nevertheless, the application of the rules or law must not contravene the principles of Shari'ah or public policy.

Arbitration Award

Article 40 provides that the arbitration award shall be rendered by the arbitral tribunal within the period agreed by the parties; however, in the absence of such agreement, the award shall be issued within twelve (12) months from the date of commencement of proceedings. A further six (6) month extension may be granted by the tribunal. In the event that no further extension is sought or granted, either party may apply to terminate the arbitration.

Pursuant to Article 52, an arbitral award is final and has the authority of a judicial ruling. Article 49 provides that such arbitral award is not subject to appeal, provided that it is in compliance with Sharia'h principles and public policy. However, an action may be made to set aside the award under Article 50 on the following grounds:

a) if no arbitration agreement exists, or if such agreement is void, voidable, or terminated due to expiry of its term;

b) if either party, at the time of concluding the arbitration agreement, lacks legal capacity, pursuant to the law governing his capacity;

c) if either arbitration party fails to present his defence due to lack of proper notification of the appointment of an arbitrator or of the arbitration proceedings or for any other reason beyond his control;

d) if the arbitration award excludes the application of the rules which the parties have agreed to apply;

e) if the arbitral tribunal was formed or the arbitrator was appointed in a manner that is contrary to the New Arbitration Law or the agreement of the parties;

f) if the arbitral tribunal ruled on issues not covered by the arbitration agreement. However, these issues may be separated from other parts of the award; or

g) if the arbitral tribunal fails to observe conditions required for the award in a way that affects its substance, or if the award is based on void arbitration proceedings.

Pursuant to Article 55(2), before an order for the enforcement of the arbitral award is issued, the court must be satisfied that the award:

a) is not in conflict with a judgment or decision issued by a court, committee or commission which had jurisdiction to decide the dispute;

b) does not violate Shari'ah law or public policy. Although in the event that the award is divisible, an order enforcing the part of the award not in violation may be issued; and

c) has been properly notified to the party against whom it is sought to be enforced.

Given that the parties are granted the right to select the law governing the substance of their arbitral proceedings, the arbitral award must not contain any findings or make any determinations which are contrary to Shari'ah law and public policy. It is likely that arbitral awards that provide for interest will be unenforceable in Saudi Arabia if the interest element cannot be separated from the award for damages. If the interest element is separable from the remainder of the award, the award may be held to be unenforceable in part. Furthermore, punitive or exemplary damages are prohibited by Shari'ah law and, as such, awards that provide for such damages may be unenforceable in Saudi Arabia (either in whole or in part).

In the past, enforcement of foreign arbitral awards in Saudi Arabia could be described as somewhat challenging and problematic. However, the recent movement towards a more arbitration-friendly era has had a significant impact on streamlining the enforcement process, provided such foreign awards are in compliance with Shari'ah principles.

Conclusion

In summary, the New Arbitration Law has changed the way in which disputes are resolved in Saudi Arabia and has facilitated the court system in reducing its case load. It is a welcome relief for parties seeking alternatives to litigation, who want to expedite the dispute resolution process, promote better communication between adverse parties and enhance their involvement in that process, while potentially saving expenses and time.

For further information, please contact Craig Shepherd, Partner, Caroline Kehoe, Partner, Anna Wren, Senior Associate, Dana Aldhuwaihi, Associate or your usual Herbert Smith Freehills contact.