Following Mayer Brown and Al Akeel & Partners' recent alliance in May 2022, we are delighted to launch this joint series about arbitration in the Kingdom of Saudi Arabia.
Part 1 - Arbitration in Saudi Arabia: why it's on the rise
Arbitration in the Kingdom of Saudi Arabia (the "KSA") has changed significantly in recent years and is on the rise. In this Legal Update we summarise the key developments that have precipitated this change, including:
- a new arbitration law;
- a new enforcement law;
- increased support from the KSA's judiciary; and
- the work of a dynamic and modern arbitration institution - the Saudi Center for Commercial Arbitration (the "SCCA").
These developments mean that the KSA is increasingly being recognised as an arbitration-friendly jurisdiction. The increased use of arbitration also goes hand in hand with the goals of Saudi Vision 2030, a strategic framework aimed at reducing the KSA's dependence on oil, diversifying its economy and developing public service sectors like infrastructure, health and tourism.
The increasing popularity of arbitration in the KSA
Under the former arbitration regime governed by a 1983 statute (the "Old Law"), ad hoc arbitration was most prevalent in the KSA and the courts had mandatory oversight of, and heavy involvement in, the arbitral process. Due to discontentment with the Old Law amongst the Saudi population, as well as a general aversion and scepticism within the region, arbitration was rarely the 'forum of choice' for dispute resolution.
However, over the last decade, with the introduction of an improved legal framework for arbitration and a new, modern arbitration institution (the SCCA), there has been a shift towards institutional arbitration and increasing confidence to select arbitration over other methods of dispute resolution. Below, we explore four instrumental reasons for this trend.
1. The KSA's New Arbitration Law
On 9 July 2012, a new arbitration law (Royal Decree No. M/34 on 24/5/1433H) (the "New Arbitration Law") came into effect which aimed to correct certain deficiencies in the Old Law. Based broadly on the UNCITRAL Model Law, but adapted to deal with Sharia law, the New Arbitration Law brings the KSA's arbitral framework in line with best practices in international commercial arbitration. It applies to KSA-seated and foreign-seated arbitrations where the parties have agreed that the arbitration shall be subject to its provisions.
The Executive Regulations implementing the New Arbitration Law came into force in June 2017 and provided certain practical clarifications in relation to certain provisions of the New Arbitration Law.
Whilst retaining the court's supervisory role over the arbitral process, the New Arbitration Law significantly reduces the level of judicial intervention in arbitration and provides more control to tribunals and parties to conduct cost-effective and efficient proceedings.
Key features of the New Arbitration Law, which are likely to account for the increased popularity of arbitration in the KSA, include:
- A new power for a tribunal to adjudicate disputes under its jurisdiction, including disputes over the validity of the arbitration agreement (a domain previously reserved for the judiciary).
- Parties now have wide discretion to choose the substantive law, procedure/institutional rules, venue, their arbitrators, the arbitration language (Arabic no longer mandatory), whether the tribunal can order temporary measures etc. However, the application of the selected rules and applicable law must not contravene Sharia law or public policy.
- An express recognition of the separability of the arbitration clause (protecting arbitration agreements from defects affecting the underlying agreement).
- Parties may select any legal representative, whether local or foreign, and there are no gender, nationality or religious constraints in terms of appointment of arbitrators, mediators, lawyers, experts and other representatives (only a requirement that a sole arbitrator or chairperson must have a degree in law or Sharia).
- The Saudi judiciary now only reviews decisions in relation to jurisdiction and procedural issues, having eliminated a review on the merits (available under the Old Law).
- If a KSA court finds that the arbitral award conflicts with Sharia law as applied in the KSA, then an execution order may be issued in respect of that part of the award that is compliant with Sharia law. The law disallows any appeal against the issuance of an execution order. If an execution order is not issued upon application to the court, then the court's decision not to issue it may be appealed.
The New Arbitration Law represents a major step forward in modernizing the arbitration process in the KSA and goes further than addressing purely domestic issues as it provides for recognition of foreign arbitral awards without those awards being required to go through a process of re-hearing or re-arbitration under KSA rules before they can be enforced in the country.
2. The KSA's New Enforcement Law
To complement the New Arbitration Law, a revised enforcement law came into effect in March 2013 (Royal Decree No. M/53) ("New Enforcement Law") seeking to address prior concerns about the inconsistent enforcement of awards.
Prior to the New Enforcement Law, the Saudi Board of Grievances first had to review awards for compliance with Sharia law, a step which was lengthy and rigid and often resulted in refusals to enforce awards. Under the New Enforcement Law, arbitration awards can be enforced more quickly and effectively before an Enforcement Judge1. However, a State court can still refuse to enforce an award (or part of it) if its reasoning violates Sharia law (for example: interest or usury is forbidden under Sharia law).
The KSA has also signed the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the "New York Convention") obliging it to recognise and enforce awards made in other Contracting States. Under the New Enforcement Law, the conditions for enforcing foreign arbitral awards in the KSA are more demanding than those prescribed under the New York Convention. The Enforcement Judge must be satisfied that:
- the KSA courts do not have jurisdiction with regards to the dispute;
- the award was rendered following proceedings in compliance with the requirements of due process;
- the award is final (as per the law of the arbitral seat);
- the award does not conflict with any other judgment or order issued on the same subject by a judicial authority of competent jurisdiction in the KSA; and
- the award does not contradict Saudi public policy.
The New Enforcement Law appears to have been well-received in the KSA in light of the sharp increase in enforcement applications since its implementation (approximately 35,000 enforcement applications with an aggregate value of just over US$6.16 billion2).
3. Strong judicial support for arbitration
Another positive development has been the shift in judicial attitude towards arbitration. Traditionally, the judiciary's track record for enforcing foreign awards was erratic, hence parties were reluctant to submit to foreign arbitration. Following a judicial reshuffle and the introduction of the new laws discussed above, this state of affairs has changed dramatically; the KSA judiciary now consistently enforce both national and foreign arbitral awards. In 2021 alone, its judiciary enforced 204 domestic and foreign awards and enforcement proceedings were, on average, resolved within two weeks3.
The Saudi judiciary is also supporting the growth of arbitration in the KSA in other meaningful ways, including:
- By recognising arbitration agreements and respecting the parties' choice of arbitration to resolve their disputes.
- By competently and consistently adjudicating arbitration-related matters.
- By ranking highly when it comes to judicial independence and efficiency4.
- By approving the appointment of female arbitrators (the first female appointee, Ms. Shaima Aljubran, took place in May 2016), demonstrating that there is no clear basis in Saudi law that prevents women from being arbitrators.
- By deepening their own experience in international arbitration through initiatives like strategic engagements with the SCCA.
4. The strong efforts of the SCCA
Pursuant to its Vision 2030 initiative (announced in 2016), the KSA seeks to bolster economic diversification and is actively encouraging foreign investment in the Kingdom. As part of these goals, the KSA is keen to ensure investor confidence in the KSA's commercial disputes framework and accordingly, it established the SCCA, the KSA's first arbitral institution, designed to effectively implement the New Arbitration Law and provide flexible, time-and-cost effective dispute resolution procedures that comply with Sharia law.
While officially established by a Saudi Minister council decision in 2014, the SCCA became operational in late 2016 when it physically opened in Riyadh and published its Arbitration Rules. The SCCA administers arbitration and mediation proceedings in both Arabic and English. The SCCA's vision is to become the region's preferred ADR provider by 2030. The SCCA is a sophisticated institution, which, to date, has taken impressive steps to promote ADR, including:
- by establishing a modern, effective set of Arbitration Rules which are based on the UNCITRAL Arbitration Rules and drafted in accordance with the New Arbitration Law, with 2021 revisions to permit more cost-effective proceedings and an expedited arbitration procedure;
- by introducing Codes of Ethics for arbitrators and mediators respectively;
- by forging partnerships with government and the private sector to promote arbitration and by closely collaborating with the judiciary;
- by providing state of the art facilities in Jeddah and Riyadh with modern hearing rooms and a wide range of services, including an online interactive SCCA costs calculator; and
- by investing in ADR education - for example, the SCCA partnered with CIArb to create a "SCCA-CIArb Pathways to Fellowship" (an arbitrator and mediator accreditation programme).
Users' confidence in SCCA arbitration is apparent from the statistics: between October 2016 and 2021, the SCCA received in the region of 200 cases, totalling circa USD one billion, involving domestic and international parties5. Over 70% of those cases were filed in the years 2020 and 2021, highlighting the SCCA's increased popularity in the last few years as the institution has gained increased local and global traction.
Over the last decade, the KSA has made significant progress in creating a robust and effective arbitration regime. Arbitration is a mechanism well suited to handling disputes that may arise out of Saudi Vision 2030 and it will be interesting to see if, in the coming years, the KSA attracts an increasing number of international arbitration cases and is perceived as an effective, efficient and safe international seat, competing with other established centres in London, Paris, Singapore, Hong Kong, New York, Geneva, Stockholm and Dubai.
Introducing Part 2
In our next Legal Update in this Saudi Arabia Series, we will focus specifically on the SCCA, including its current activities, its Arbitration Rules and its Arbitrator Code of Ethics.
1 Defined in the New Enforcement Law as "the Chairman and Judges of the Enforcement Circuit, the Enforcement Circuit Judge, or the Judge of the Single Court", effectively a new jurisdiction created in 2007 to handle all enforcement issues.
2 As at the end of 2021 according to "A Progress Report on Saudi-Arabia's arbitration-friendliness" by James McPherson (SCCA), GAR Middle East and Africa Arbitration Review 2022.
4 Saudi Arabia was ranked 16th out of 141 economies for "judicial independence" and 17th for "efficiency of legal framework in settling disputes" in the World Economic Forum's Global Competitiveness Report (2019)
5 "A Progress Report on Saudi-Arabia's arbitration-friendliness" by James McPherson (SCCA), GAR Middle East and Africa Arbitration Review 2022.
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