An arbitration agreement is a contract through which the parties agree to settle their existing and future disputes through Arbitration and not through litigation. In Saudi Arabia, the Saudi Arbitration Law, promulgated by Royal Decree No. M/34 of 2012 governs these agreements, which are largely based on the UNCITRAL Model Law. For an arbitration agreement to be legally binding, it must be in writing and must clearly reflect the parties' intention to submit their disputes to binding arbitration.
The Saudi law recognizes two types of arbitration agreements – clause-based agreements (included as a clause within the main contract) and stand-alone agreements (entered into after a dispute arises). However, the effectiveness and enforceability of each depend on its careful drafting and lack of ambiguity. Saudi courts have historically encouraged arbitration when the agreement is properly drafted and procedural requirements are met.
Essential Legal Requirements of a Valid Arbitration Agreement
Under Article 9 of the Saudi Arbitration Law, an arbitration agreement must meet the following conditions:
- It must be in writing;
- It must be signed by authorized representatives of both parties;
- It must clearly define the scope of disputes to be submitted to arbitration;
- It must not conflict with public or mandatory policy under Saudi law.
Saudi courts may reject an arbitration agreement that omits essential procedural elements or fails to comply with legal formalities. For example, an unsigned arbitration clause in a draft contract may be deemed unenforceable even if the parties later acted thereupon.
Jurisdiction and Competence of the Arbitral Tribunal
The principle of kompetenz-kompetenz is one of the fundamental precepts of Saudi Arabian arbitration law that allows an arbitral tribunal to rule on its jurisdiction, including the validity of an arbitration agreement. This principle prevents the automatic remanding of such challenges to the tribunal's authority back to the state-level courts, provided there is no clear violation of constitutional or statutory law.
Parties, however, must note that there are certain types of disputes where parties to such cases cannot arbitrate, including those that are related to criminal liability, family law, or some labor cases, amongst others, which fall under the Saudi law. In such cases, an arbitration agreement may be declared void irrespective of the parties' consent.
Enforceability and Recognition of Foreign Arbitration Awards
Saudi Arabia has signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). This implies that arbitral awards given elsewhere, apart from the Kingdom, can be enforced in Saudi Arabia upon meeting certain requirements.
To enforce a foreign award, the requesting party must apply to the Saudi Enforcement Court and demonstrate that:
- The award does not violate Sharia principles or Saudi public policy;
- The defendant was duly notified of the arbitration proceedings;
- The award is final and binding in the jurisdiction where it was rendered.
The Enforcement Law (Royal Decree No. M/53 of 2012) provides a structured framework for recognizing and enforcing domestic and foreign arbitral awards.
The Function of the Saudi Center for Commercial Arbitration
The Saudi Center for Commercial Arbitration (SCCA), established in 2014, plays a central role in establishing best practices in arbitration within the Kingdom. Parties are encouraged to incorporate the SCCA's model arbitration clause into their contracts to benefit from institutional and procedural guidance.
Adopting the SCCA's rules, or those of a similar arbitration institution, may eliminate the procedural uncertainties and increase the enforceability of an arbitration agreement, especially in complex or high-value disputes.
Difficulties and Practical Considerations in Drafting Arbitration Agreements
Arbitration agreements often become unenforceable due to poorly drafted clauses, ambiguous wording, or a lack of necessary procedural elements. In the Saudi legal setting, parties need to ensure that the agreement:
- Stipulates the governing law and the applicable arbitration rules;
- Determines the place of arbitration (which has jurisdictional effects);
- States the number of arbitrators and the method of their appointment;
- Includes provisions for confidentiality, language, and timelines.
Additionally, the individuals signing the agreement must have express authority to bind the entity to arbitration. The lack of proper authorization is a common reason for which arbitration agreements are annulled by Saudi courts.
Special Sector Application under Saudi Law Arbitration
Certain regulated industries, such as construction, banking, and government procurement, may require special statutory requirements when it comes to the arbitration agreements. For example, the entities in the public sector in Saudi Arabia cannot consent to arbitration unless they have received the consent of the competent authority as stipulated in the Government Tenders and Procurement Law.
Thereby, even if parties agree in principle to arbitration, regulatory constraints may influence the enforceability of the agreement or execution of the award.
Contact a Legal Expert for Arbitration Agreements in Saudi Arabia
Whether you are negotiating a commercial contract, involved in cross-border transactions, or seeking enforcement of an existing arbitration award, legal expertise is essential to protect your interests under Saudi law.
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.
