Saudi Arabia: New Arbitration Law In Saudi Arabia – A Major Development For Commerce In The Kingdom

The new Arbitration Law – approved on 16 April 2012 – is a significant step forward in the development in the law in the Kingdom and has wide-ranging implications for businesses (both local and international) trading in the domestic market. In particular, the new Law removes many of the negative aspects of the previous Arbitration Law such that businesses can have much greater confidence in arbitration as an effective means of dispute resolution.

For various reasons, dispute resolution under commercial contracts in Saudi Arabia is perceived as being difficult.  Businesses have three options when drafting dispute resolution clauses in their commercial contracts:

  • refer disputes to the local courts (including the Board of Grievances);
  • refer disputes to domestic arbitration (previously under the 1983 Arbitration Law, now to be subject to the new Arbitration Law); or
  • if the transaction has particular features, refer disputes to international arbitration (now also to be subject to the new Arbitration Law if the parties elect).

The best option for each business depends upon the circumstances of the relevant transaction.  That said, prior to the new Arbitration Law, domestic arbitration was not often chosen due to particular difficulties arising under the 1983 Arbitration Law.
To best explain the impact of the new Law, it is useful to summarise the key features of the 1983 Arbitration Law:

  • Parties were at liberty to refer disputes to arbitration, including prior to particular disputes arising.  That said, Government bodies were not permitted to refer disputes to arbitration without specific permission.
  • Arbitrators were required to be experienced and of good conduct and reputation and full legal capacity (which under the implementing regulations for the 1983 Law meant that arbitrators had to be male and of the Islamic faith).
  • When disputes arose, parties had to file the arbitration agreement with the court or other body originally competent to hear the dispute.  This court or other body would then supervise the conduct of the arbitration, including appointing the arbitral tribunal where the parties failed to agree the identity of the arbitrator(s) and hearing applications to replace an arbitrator.
  • Arbitral awards were required to be issued within 90 days, unless another period for determination had been agreed by the parties in the arbitration agreement or the supervising court or the arbitral tribunal itself extended the time for the award to be issued.  Upon the relevant period of time expiring, either party was entitled to commence a separate proceeding in the supervising court, thereby avoiding the effect of the arbitration agreement.
  • Upon the arbitral award being issued, it needed 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 and also ascertain that there was nothing in the award that prevented its enforcement under Shari'ah law.  There was no prohibition on the supervising court re-considering 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.

The new Arbitration Law entirely replaces the 1983 Arbitration Law.  The law will come into effect 30 days after it has been published in the Official Gazette, which has not happened yet.  Areas of substantive change between the old and the new Laws include the following:

  • The new Law makes clear that invalidity or termination of a contract does not render an arbitration agreement invalid as long as the arbitration agreement is independently valid.  While this legal principle is common in many other jurisdictions, it had not been codified in the law of Saudi Arabia previously.  The new Law also clarifies that parties may agree to refer matters to arbitration by incorporating standard form conditions into their agreements (e.g. FIDIC contracts) and by referring to the rules issued by arbitration institutions from time to time (e.g. ICC).
  • In addition to the existing requirements for arbitrators set out in the 1983 Law, the new Law requires that sole arbitrators or chairmen of panels of multiple arbitrators be holders of at least a university degree in Shari'ah science.
  • The new Law sets out a helpful procedure for the selection of arbitrators where parties cannot agree the constitution of the arbitral tribunal.  In particular, where there are multiple arbitrators, the new Law provides that each party nominate an arbitrator and that the two selected arbitrators can then choose the third arbitrator (failing which the court will appoint the third arbitrator).  This procedure overcomes a common obstacle, which would otherwise require the intervention of the supervising court.
  • Arbitrators have a positive obligation to keep parties informed of circumstances that may give rise to conflicts of interest.
  • The new Law sets out a defined process for challenges to the arbitral tribunal to be made (e.g. due to bias or conflict of interest), including time limits for complaining parties to lodge objections in the relevant court.  This removes the ability of parties to object to the enforcement of arbitral awards on the basis of such grounds when they have not been raised previously within the time limit.
  • The new Law allows the arbitral tribunal to ask a relevant authority for help in the arbitration process, such as summoning a witness or expert and ordering the production of documents.  This is a significant change, given that arbitral tribunals do not themselves have the power to make orders against parties outside of the arbitration agreement.
  • Where the parties have not agreed that particular arbitration rules apply (e.g. ICC), the new Law sets out a detailed arbitration procedure that applies by default.  Such procedure includes many features familiar to users of international rules of arbitration (such as pleadings, witness statements, expert reports and hearings).
  • Under the new Law, arbitration need not be conducted in the Arabic language, if the parties or the arbitral tribunal have decided to use other languages.  In addition, the arbitral tribunal is bound to apply the substantive law chosen by the parties in the relevant contract (even when the choice of law is not Saudi Arabian law).
  • The arbitral award must be issued within 12 months from the date that arbitration was commenced, subject to the arbitral tribunal's power to extend this by a further 6 months and the parties' ability to agree longer extensions.  This gives the arbitral tribunal a much more realistic timeframe to decide major commercial disputes than under the 1983 Law.
  • Upon the arbitral award being issued, any party seeking to invalidate the award must issue such an application within 60 days.  As such, the onus is on the aggrieved party to raise any objection within a defined time frame, rather than waiting until the successful party seeks to enforce the award.
  • Upon issuing such an application within the 60-day period, the parties have limited grounds upon which they can argue that the award should be invalidated.  In addition, arguments that the award violates Shari'ah law, public order or the arbitration agreement may only be heard if the relevant court raises such issues on its own initiative.  The new Law provides that the relevant court may not examine the subject matter and facts of the dispute in considering whether the award should be invalidated.    This is a major improvement from the 1983 Law, which gave the courts a broad discretion to revisit the merits of the dispute in the course of the enforcement process and undermined the arbitration process.
  • Subject to the invalidation process, arbitral awards made under the new Law acquire the force of res judicata and become enforceable.  That said, in order for the award to be enforced in practice, the successful party must seek an enforcement order from the courts.  In considering whether to issue an enforcement order, the court will verify that the award does not contradict a previous judgment, that it does not contain any part (which part may be severed from other parts) that violates the provisions of Shari'ah law and public order, and that it has been served on the other party.

In summary, the new Arbitration Law sets out a sophisticated regime that parties to commercial contracts can rely on to effectively govern the resolution of their disputes.  While the 1983 Arbitration was supportive of arbitration in the Kingdom, it lacked sufficient detail to give commercial parties confidence in the process and also gave rise to significant practical risks.  Accordingly, the new Law constitutes a significant step forward in the development in the law of the Kingdom.

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.

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Ben Cowling
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