Australia: The Balancing Act: International Arbitration´s Developing Role in the Middle East

The key to effective management of dispute risk in the Middle East, as elsewhere, is a thorough assessment of the various factors before agreeing upon your dispute resolution regime in the contract.

With the development of international trade and commerce in the Middle East, and the increasing numbers of companies doing business there, there is growing interest in managing dispute risk. As with most international transactions, these companies have a choice as to the forum in which any disputes will be heard: the local courts of either party, or international arbitration.

Local courts have traditionally not been seen as an attractive prospect in part because of the very significant differences in both legal approach and business culture. In these circumstances the only other final and binding forum available has been international arbitration.

International arbitration has been viewed with some scepticism locally, but with increasing globalisation that is now starting to change. Countries in the region are acceding to international arbitration conventions (such as the New York Convention on the Enforcement of Foreign Arbitral Awards 1958) and adopting pro-enforcement, modern arbitration regimes.

Because international arbitration is still developing in the region, there is still great variation between countries. Two significant areas of difference across the region are willingness to enforce foreign arbitral awards (the enforcement risk), and the level of infrastructure and support offered for the conduct of international arbitration (the control risk). In this article we’ll look at the nature of those risks and what must be considered when designing your dispute resolution process.

Many countries in the Middle East will technically enforce foreign judgments, but - as in other parts of the world - in practice the enforcement process may be subject to local conditions. For example, in Saudi Arabia, for a foreign judgment to be enforced, it must first be proved that the jurisdiction that issued the foreign judgment will reciprocally enforce Saudi judgments, and second that the terms of the foreign judgment are consistent with Islamic law as enforced in Saudi Arabia.

In countries that have adopted the New York Convention or an equivalent treaty, an arbitration award can reduce this enforcement risk. Countries such as Jordan, Syria, Kuwait, Egypt and Saudi Arabia are signatories to the New York Convention. Generally, these countries will recognise and enforce awards arising from arbitrations conducted in a foreign country in accordance with the international principles set out in the Convention.

However, the New York Convention is only as effective as the local court that is asked to apply it. In the Middle East there is still some uncertainty as to the manner in which the Convention may be applied, particularly in relation to the problematic area of public policy. Courts in some countries have interpreted "public policy" to mean "domestic public policy" and thereby subjected awards to a degree of local control inconsistent with the aims of the Convention. For example, the Grievances Board in Saudi Arabia has invoked public policy to decline to enforce a foreign arbitral award because its terms did not comply with fundamental principles of Islamic law.

In nations that have not adopted the Model Law, or are not signatories to the New York Convention, the recognition and enforcement of foreign arbitral awards are determined by more locally based arbitration law. These laws will often not give the same level of enforceability to a foreign award as Western parties may have become accustomed to expect. For example, to enforce an arbitral award in the United Arab Emirates, the award will have to comply with the Federal Code of Civil Procedure. This Code prescribes, among other things, that for an award to be enforced, there must be a reciprocity agreement between the UAE and the country in which the award was delivered. Furthermore, a foreign award must first be ratified by a competent court in the jurisdiction where the award was issued before it is considered valid for enforcement.

Whether an international arbitration with its seat outside the Middle East is advantageous will, in part, depend upon an assessment of whether the country where you have to enforce the award is a signatory to the Convention and, if so, how the courts of that country apply the Convention.

If your arbitration is in one of the countries of the Middle East (eg. the seat of your arbitration is in Jordan) then consideration will have to be given to how the local courts will exercise supervisory control of the arbitration.

In states where modern, internationally based, legislation has not been passed, arbitration is still fairly unfamiliar to foreigners, largely because the arbitration may be subject to local procedural constraints. In these cases, the autonomy of the arbitral process gives way to requirements of local law. For example, if an arbitration is conducted in Saudi Arabia, the arbitrator must be a Saudi national or Muslim expatriate, arbitrators must apply Saudi law, regardless of whether the dispute relates to an international transaction, or the contract stipulates that another law is to apply, the hearing will be held openly and the arbitration panel and the parties may not speak a language other than Arabic.

This however is not the case across the whole of the Middle East. A number of states have passed modern national legislation supporting international arbitration. Egypt, for example, enacted an arbitration statute in 1994 based on the Model Law. Other states to enact similar legislation include Azerbaijan, Bahrain, Iran, Jordan, and Tunisia. Adoption of the Model Law - a harmonised arbitration law based upon international standards - is a significant step towards creating a hospitable legal climate and infrastructure for international commercial arbitration. By adopting such internationally based reform of their arbitration law these countries are becoming more attractive venues for arbitration (although there are local variations which need to borne in mind - for example, the retention of a merits-based review under the new arbitration legislation in Iran).

When determining whether arbitration is a viable option for disputes with Middle Eastern parties which have assets in the Middle East, it is important for parties to first determine the jurisdiction in which an award might be enforced. Ideally, the national laws will recognise arbitration agreements as binding, provide a mechanism to stay court proceedings in the face of a valid arbitration agreement, and recognise and enforce a foreign arbitral award with a minimum of judicial intervention. That approach is more likely in countries that have adopted the New York Convention (although, paradoxically, submitting to arbitration in that country and thereby securing a domestic award may prove to be a more effective choice).

A second consideration is whether the parties wish to conduct an arbitration in that jurisdiction. The supervisory control of the arbitration by the local courts will, in theory at least, be a more attractive option in a country like Egypt that has in place a modern arbitration regime based on the Model Law, than in countries like Iraq or the United Arab Emirates where traditional arbitral procedures have been retained.

The key to effective management of dispute risk in the Middle East, as elsewhere, is a thorough assessment of the various factors before agreeing upon your dispute resolution regime in the contract.

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.