Inside Arbitration Issue 16: The undeniable rise of arbitration in Saudi Arabia

A combination of the Kingdom's giga-projects and regulatory reforms are creating an attractive destination for international disputes.

The Kingdom of Saudi Arabia is pursuing high-paced redevelopment. Aiming to reduce its dependence on oil reserves (an industry accounting for 20-40% of GDP), Saudi Arabia’s plan entitled “Vision 2030” is an ambitious strategy involving enormous developments in public infrastructure, reclaimed heritage sites and tourism with the target of attracting 100 million visitors per year by the end of the decade.

Vision 2030 is built upon the pillars of a vibrant society, a thriving economy and an ambitious nation. These strategic goals have resulted in two of the largest projects in the world’s history:

• NEOM: A project site the size of Albania, which will consist of 10 different “regions”. These include Sindalah, a 1,100,000 cubic yards luxury island resort overlooking the Red Sea; OXAGON, a 200 square kilometre industrial hub and the world’s largest floating structure; The Line, a 170 kilometre linear city flanked by mirrored skyscrapers; and Trojena, a 60 square kilometre ski resort in the Sarwat Mountains offering year-round skiing. The project is estimated to cost $500 billion, dwarfing other giga-projects around the world.
• The Red Sea: A vast 28,000 square kilometre tourism destination along the Kingdom’s west coast, which aims to run entirely from renewable energy. Tourists will be invited to visit the Red Sea’s 90 islands and snorkel in waters largely untouched in human history.

Saudi Arabia has also initiated transport and mobility schemes (such as the Riyadh Metro) and introduced social infrastructure developments, such as the Ministry of Housing's Sakani (سكني) Program. The volume of engineering, procurement and construction being rolled out to implement Vision 2030 is astounding. There are currently estimated to be 5,200 construction projects underway in Saudi Arabia, with a combined value of $819 billion. This represents 35% of all projects in the Gulf Cooperation Council States. However, this increase in construction projects has presented a few challenges.

CONSTRUCTION DISPUTES IN SAUDI ARABIA

Saudi law is based on shari'ah (Islamic law), which is derived from the Holy Qur’an and Sunna (the words, practices and traditions) of the Prophet Muhammad. Essentially, the rights and obligations of parties to a dispute must be viewed through the lens of compliance with shari’ah. For foreign investors, the overlay of Saudi law can create complexities and risks in construction disputes. Below are three examples:

• The prohibition against uncertainties (gharar) prohibits contractual clauses that are excessively uncertain. This can impact standard form clauses, such as consequential loss provisions, which entitle a party to waive its claims before knowing the value of the right that is waived.
• The prohibition against claiming interest (riba) can significantly reduce entitlement under a construction contract after there is an incident of non-payment.
• Time bars tend to be upheld provided they will not offend on shar’iah But where a party’s right to claim relief would be permanently lost because of the breach of the time bar, the position is less clear.

Common concepts in construction contracts such as extensions of time, variations and delay liquidated damages can all exist and function within the rubric of Saudi law. However, the overlay of shari’ah adds uncertainty and therefore risk, which has historically driven international investors to have their contracts governed by laws more in line with international standards.

NEW CIVIL TRANSACTIONS LAW

One important way in which Saudi Arabia has sought to neutralise this perceived risk is by codifying for the first time the laws governing contracts and torts. The Civil Transactions Law, which was enacted on 19 June 2023 by Royal Decree M/191, will come into force on 16 December 2023. It brings the country's legal framework in alignment with global best practice. The landmark legislation is widely expected to provide investors with more certainty with regards to the application of the law by the Saudi courts which was historically inconsistent in comparison with other jurisdictions.

The Civil Transactions Law regulates the formation and interpretation of contracts in a similar manner to the civil codes of most other jurisdictions. Notably, it will have retroactive application on pre-existing contracts or relationships that existed prior to 16 December 2023, except in the following limited scenarios: (i) if any statutory provision or judicial principle, relating to an incident, contradicts the provisions of this law, and one of the parties invoked it; or (ii) in case of where a judgement rendered related to a cause of action that has a statutory limitation period  which started prior to the law coming into effect. To the extent that the codified provisions do not regulate a relevant term of a contract, the 41 shari'ah maxims enunciated in the final chapters of the Civil Transaction Law will operate to fill any gaps in the law, failing which the most suitable shari'ah principle will apply.

While the Civil Transaction Law is yet to be tested before the Saudi courts, and its retroactive application will need to be carefully considered (and possibly incorporated) by parties with existing contracts or relationships, those doing business in Saudi Arabia should take comfort. These latest reforms denote a major commitment to modernising the country's legal framework and will ultimately make it easier to do business in the Kingdom.

COMMERCIAL TRANSACTIONS LAW

Saudi Arabia will also be issuing the Commercial Transactions Law, which is expected to be approved and published soon. This is another example of how the Kingdom is aiming to bring its laws more in line with international best practice. The Commercial Transactions Law shall govern all commercial contracts and relationships. Both the Civil and Commercial Transaction Laws are meant to be complimentary. The Civil Transactions Law provides that it shall apply without prejudice to any other legal provisions that are specific to the underlying matter, which means in practice that the Civil Transactions Law will apply to commercial contracts or relationships only when the Commercial Transactions Law is silent on these matters. We anticipate that this will be further confirmed once the Commercial Transactions Law is issued.

NEW RULES OF THE SAUDI CENTRE FOR COMMERCIAL ARBITRATION

Another way in which Saudi Arabia is seeking to enhance investor comfort is by swiftly bringing its legal and regulatory framework into alignment with global arbitration best practice. The Saudi Centre for Commercial Arbitration (SCCA) was established in 2014 and has until recently remained a relatively nascent institution through which to resolve international arbitrations, in comparison to its commercial counterparts such as the LCIA, ICC, HKIAC or SIAC.

But given the inflow of international investment into Saudi Arabia necessary to facilitate Vision 2023, on 1 May 2023, the SCCA published its revised SCCA Arbitration Rules, which aim to strengthen the governance and efficiency of SCCA arbitration. The key changes include:

• Wider discretionary powers for the arbitral tribunal: The SCCA Arbitration Rules now vest in a tribunal the power to determine the appropriateness of holding a hearing and the format of any hearing. The Rules also empower the tribunal to encourage parties to resolve their dispute by negotiation or mediation. The Tribunal may also now limit the length of any written submissions, or testimony of witnesses. In the spirit of promoting cost-efficient and expeditious resolution of disputes, these discretionary powers of a tribunal accord with best practice in international arbitration.
• Use of technology: The SCCA Arbitration Rules now allow the parties to engage in the use of technology in a manner which mirrors the progress we have seen with other recognised institutional rules. By way of example, the 2023 Rules provide for the electronic filing of documents and hearings may be conducted, in whole or in part, by videoconference or through other appropriate means of communication.
• Establishment of the SCCA Court: The SCCA Court is a new creation under the new SCCA Arbitration Rules that is comprised of 15 members independent of the SCCA, including international arbitrators, retired appellate judges, former leaders of arbitral institutions and renowned practitioners and academics. It is empowered to perform supervisory functions related to the administrative aspects of SCCA-administered arbitrations, such as appointing arbitrators, determining arbitrator challenges, reviewing emergency applications and the fixing of advance on costs. The separation of administrative workload from the responsibilities of arbitral tribunals is a welcome approach to the management of the SCCA's capacity for caseload, at a time when SCCA is expecting a significant increase in demand for its services.

CURRENT PROGRESS

These latest reforms are a few of the many steps that Saudi Arabia has taken to position itself as an arbitration-friendly jurisdiction. The result is that arbitration is making strides to become the preferred choice of dispute resolution in Saudi Arabia.

One of the key challenges for any emerging arbitration landscape is the supervision of process and treatment of arbitration awards by the courts. However, this is not a concern when it comes to Saudi Arabia as it has a proven track record of enforcing awards (whether international or domestic) as further set out below.

In 2021, courts in Saudi Arabia enforced 204 domestic and foreign awards representing an aggregate value of $2.1 billion, with enforcement proceedings being resolved on average within two weeks. In addition, between January and September 2022, the Saudi Courts enforced a further 522 arbitral awards. Since the Saudi Arbitration Law in 2012 there have been approximately 35,000 applications for enforcement with an aggregate value of enforced arbitral awards coming in at just over $6.16 billion. Meanwhile, of the 131 motions to annul received by the Saudi Courts between 2017 and 2021, 92% were denied, only 5% were granted in full, with the remaining 3% granted in part.  Moreover, of the arbitral awards that were partially or fully annulled, only 3.8% were annulled because of a violation of shari'ah or public policy. Additionally, we understand that between January and September 2022, there were no annulments based on a violation of public policy.

In 2019, Royal Order No. 28004 of 28 January 2019 also opened the doors to government agencies and state-owned entities settling disputes with foreign investors by way of SCCA-administered arbitrations. This was followed by amendments to the Government Tenders and Procurement Law and its implementing regulations, which permitted government agencies to enter into arbitration agreements with the approval of the Minister of Finance. Most recently, on 6 June 2023, the Minister of Finance issued a resolution approving a model general arbitration agreement and a model SCCA arbitration agreement. These new changes mean more disputes will be resolved by arbitration, and more arbitrations will be governed by the SCCA Arbitration Rules.

NEW REGULATIONS AND THE REGIONAL HEADQUARTERS PROGRAM

In parallel, new regulations governing professional services in Saudi Arabia have for the first time granted some foreign law firms a licence to set up a direct presence, rather than relying on partnerships with existing groups in the Kingdom. The new regulations were designed by Crown Prince Mohammed bin Salman’s administration to “enhance the Kingdom’s competitiveness”, " develop the legal profession by training Saudi lawyers and staff members" and “attract wider foreign investments”. The introduction of the licensing laws, which come into force this summer, is aligned with the Regional Headquarters Program that was launched in 2020, which is also aimed at encouraging international entities to establish their headquarters in the Kingdom.

WHAT NEXT?

The future in Saudi Arabia is promising to be more international and more connected with the wider international market. Through a series of carefully curated reforms, Saudi Arabia has demonstrated a genuine commitment to becoming an arbitration-friendly jurisdiction. There is no doubt that the ambition behind Vision 2030 is continuing to solidify Saudi Arabia's position as an attractive destination for arbitration.

This article was originally published in our INSIDE ARBITRATION publication (Issue 16, September 2023). To read the full publication, please click here. To watch Nick Oury discuss construction arbitration trends in Saudi Arabia please click here. 

For more information, please contact Joza Al Rasheed, Nick Oury, Sean Whitham, Jean Hamilton-Smith, Jason Han or your usual Herbert Smith Freehills contact.