Saudi Arabia: Governing Law and Dispute Resolution Provisions for Commercial Agreements

Last Updated: 19 March 2010
Article by Nicholas Diacos

For the reasons set out in this article, it is even more important in the Kingdom of Saudi Arabia ("KSA"), than in most other jurisdictions, to carefully consider the wording of governing law and dispute resolution provisions in commercial documentation involving foreign parties.

Governing Law Provisions

It has been common practice in KSA for major commercial and project transaction documentation, involving foreign parties, to nominate English law as the governing law. This is consistent with international practice because English law is widely understood within the international commercial community. However in KSA the choice of English law as the governing law may not always be in the best interests of the parties.

Under the Basic Law of Governance of KSA ("Basic Law") the fundamental law of KSA is the Shari'ah. The Shari'ah is a collection of principles derived from different sources but principally the Holy Quran and Sunnah (the witnessed sayings and actions of the Prophet Mohammad, peace be upon him). The government also issues laws particularly for commercial, administrative and business applications that under the Basic Law have to be consistent with the Shari'ah. Accordingly KSA courts, as a policy, generally only apply KSA law, regardless of the choice of governing law of the parties.

Not only does this mean that any choice of foreign law in a governing law provision may be totally ineffective, but it may also result in the parties not addressing any implications arising from the application of KSA law in the mistaken belief that it will not be applicable. This is regrettable as it is better that the issues arising, for instance, from an inability to claim interest under the Shari'ah, be resolved at the outset of the transaction rather than when the parties are in dispute.

There will be situations where the choice of a foreign law as the governing law is more appropriate. A common example are KSA transactions which involve parties and/or assets in more expedient jurisdictions in which to resolve a dispute and obtain recourse. In those cases choosing the law of that jurisdiction, as the governing law, is usually preferable.

Dispute Resolution Provision

It is also common practice in KSA, in respect of major commercial and project transactions, involving foreign parties, that dispute resolution provisions nominate foreign courts or foreign arbitral tribunals as the agreed dispute resolution forum.

The main reasons for this are the lack of certainty, and consequent lack of confidence, in the KSA court and arbitral system which arises from the following:

  • As the Shari'ah is the fundamental law of KSA the courts (with one exception discussed below) will not enforce any contractual provisions that are inconsistent with the Shari'ah such as interest, the waiver of future rights, or the treatment of money as a commodity, for instance in foreign exchange contracts.
  • There is no doctrine of precedent in KSA and accordingly a court may deliver a decision totally contrary to its prior decisions. In any event as there is no court reporting system or centrally accessible database of decisions it is difficult to predict the attitude of the court.
  • As most judges are Shari'ah scholars, without formal legal training, there are instances where they may not predictably interpret secular law.
  • The Board of Grievances ("BG") which has the principal commercial jurisdiction in KSA has a long court list. It takes a minimum of 2-3 years from commencement to judgment.
  • The KSA arbitration law requires that each arbitration be supervised by the court that would normally have jurisdiction. The parties can appeal to that court from any decision. There are no commonly accepted arbitral rules or centers. Accordingly arbitration can often be lengthy, lack finality because of the right of appeal and be expensive.

Despite the above issues in many instances it is still more appropriate for the parties to specify that Saudi courts have at least non-exclusive jurisdiction for the following reasons:

  • As explained further in this article, the enforceability of foreign judgments in KSA can be problematic.
  • If the choice of a KSA forum is on a non-exclusive basis the parties have maximum flexibility as they can resolve their disputes in a foreign jurisdiction should it be more appropriate to do so at that time, for instance if either party and/or assets are in a foreign jurisdiction.

Enforceability of Foreign Judgments in Saudi Arabia

Pursuant to article 8 (1) (g) of Royal Decree No. 10/51 dated 17/7/1402 (H) [11/5/1982 (G)] ("Grievances Board Law"), the BG has jurisdiction for the enforcement of foreign judgments in KSA. Article 6 of the Rules of Pleadings and Proceedings of the Grievance Board pursuant to Council of Ministers Resolution No. 190 dated 16/11/1409 (H) [20/6/1989 (G)] ("Rules") specifies the requirements that must be satisfied for enforcement of a foreign judgment in KSA.

The BG must be satisfied that the jurisdiction in which the foreign judgment was made will reciprocally enforce judgments of KSA courts and the judgment is consistent with the law of KSA. In the past it has proven difficult to satisfy these criteria for the following reasons:

  • There are no guidelines from the BG nor is there any doctrine of precedent in KSA to give guidance as to how these criteria can be satisfied.
  • As there is no doctrine of precedent in KSA, previous decisions where the criteria have been satisfied are not binding on the BG and in any event because there is no system of court reporting are not often available.
  • As judges are usually not lawyers but Shari'ah scholars they may not be familiar with the principal reciprocal enforcement treaties to which KSA is a party.
  • As foreign judgments will often have an interest component and other aspects inconsistent with KSA law, the BG may sever that part of judgment or decline to enforce the judgment entirely.

However, in respect of lending transactions there is a quasi judicial tribunal, the Special Committee for the Resolution of Banking Disputes ("Committee") (comprising at least two members with banking experience) operating under the auspices of the Saudi Arabian Monetary Agency ("SAMA").

The Committee has a reputation for being pragmatic and has in the past awarded compensation equivalent to interest claims made by banks. It will also generally recognise other transactions that would be considered "haram" by the BG and unenforceable such as foreign exchange contracts and option agreements, provided they are part of a banking transaction.

Clearly for banks recovering interest or in respect of other haram transactions, the preferable course is to nominate the Committee as the agreed forum rather than a foreign tribunal, because the foreign judgment would have to be enforced before the BG.

For the above reasons we recommend where the principal enforcement in any dispute arising from a transaction is contemplated against a party and/or asset in KSA, or involves a bank, the dispute resolution provision include the courts and tribunals of KSA, at least, on a non-exclusive basis.

Preferred Foreign Forums

If for whatever reason the parties wish to have a dispute resolution forum outside KSA it is preferable, ideally, that the forum be within a GCC state or otherwise within an Arab League state. This is because the three reciprocal enforcement treaties to which KSA is a party in two cases exclusively relate to either GCC or Arab League states and in the third case only apply to arbitral awards.

Reciprocal Enforcement Treaties

KSA is a party to the 1983 Convention on Judicial Co-operation between the States of the Arab League ("Riyadh Convention"), the 1995 Protocol on Enforcement of Judgments Letters Rogatory and Judicial Notices issued by the Courts of the Member States of the Arab Gulf Co-operation Council ("GCC Protocol") and the 1958 Convention for the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention").

In the Riyadh Convention, article 37 provides that arbitral awards and judgments from Originating States will be recognised and enforced in Recipient States subject to certain exceptions.

The GCC Protocol provides similar reciprocal enforcement arrangements for arbitral awards and judgments between GCC states.

The New York Convention, in respect of arbitral awards, was adopted by Royal Decree No. M/11 dated 16/7/1414 (H) 13/12/1993 (G). This provides for the recognition of enforcement of arbitral awards between member states. The New York convention also sets out criteria by which a member state can decline to enforce an arbitral award, in particular the "public policy" exception in article 5.

KSA has in the past invoked the "public policy" exception set out in article 5 whereby a member state may decline to recognise or enforce an arbitral award contrary to the public policy of that member state. In KSA this exception has been raised where the arbitral award is inconsistent with KSA law in particular the Shari'ah.

Conclusion

Too often, little attention is paid to the governing law and dispute resolution provisions in major commercial agreements involving foreign parties in KSA. As outlined above, in KSA it is particularly important that the parties direct their attention to these provisions and make informed choices. This will inevitably be more efficient than enforcing an agreement, with less than optimum governing law or dispute resolution provisions, when the parties are in dispute.

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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