In this blog, we consider developments in Saudi law in recent years. They suggest that the Kingdom is moving in the right direction in terms of the arbitration of construction disputes, albeit with somewhat tentative steps. With the potential for long term infrastructure development in Saudi, this is a positive sign for foreign businesses entering the Saudi market.
Arbitration laws in the Kingdom
Despite the central role of hydrocarbons in the Saudi economy, the Kingdom of Saudi Arabia is looking to diversify by driving forward physical infrastructure projects. It is the single largest infrastructure and energy market in the Gulf with a substantial projects’ pipeline for the foreseeable future. While developments in arbitration law in many Gulf Co-operation Council (GCC) countries have seen growing recognition of the Middle East as a forum for dispute resolution, Saudi Arabia has long been considered a challenging jurisdiction in which to resolve disputes.
The legal system of Saudi Arabia is based on Shari’a or Islamic law, like many other countries in the Middle East. The interpretation and application of Shari’a law in the Kindgom, together with the discretionary powers of government authorities and the absence of legal precedent in court decision making and the reporting of court decisions, make it difficult to predict how documents, such as arbitration agreements or awards, may be interpreted. The strict procedural rules under the Saudi legal system and unpredictable local laws see similar cases reaching very different results. These issues have discouraged outside investors from doing business in the Kingdom.
The old arbitration laws: a need for change
Arbitration in the Kingdom was previously administered by the Saudi Arbitration Law of 1983 (old law) and considerable discretion was given to the Saudi Board of Grievances (Board), an independent administrative judicial committee responsible directly to the King of Saudi Arabia.
Over time, arbitration awards came to be referred to the Board for enforcement and in doing so, the Board subjected awards to intense review to ensure they were compliant with Shari’a law. The consequences of such review could be severe, as demonstrated by the outcome in the notorious case of Jadawel International (Saudi Arabia) v Emaar Property PJSC (Saudi Arabia).
In 2006, Jadawel started a two year long arbitration in Saudi Arabia under the International Chamber of Commerce (ICC) arbitration rules and before a three-member tribunal. Jadawel’s US$1.2 billion claim was dismissed and Jadawel was ordered to pay legal costs. The award was submitted to the Board for enforcement. The Board re-examined the case on its merits and reversed the award; the damages awarded to Emaar were annulled and Emaar was ordered to pay more than US$250 million in damages to Jadawel. The possibility of reviews such as this created great uncertainty as to the outcome of arbitral proceedings in the Kingdom.
Increasingly, the old law failed to reflect the latest practices in international arbitration and was inconsistent in many respects with the provisions of the New York Convention, to which Saudi Arabia acceded in 1994. The New York Convention is a key document in international arbitration and applies to the recognition and enforcement of foreign arbitral awards. Deficiencies such as these have fuelled the need for change in recent years.
Saudi’s new arbitration law
The new Saudi arbitration law was issued by Royal Decree No. M/34 and came into force on 9 July 2012 (new arbitration law). By modelling the new arbitration law broadly on the United Nations Commission on International Trade Law (UNCITRAL) Model Law (a model set of international commercial arbitration rules designed to assist countries in reforming and modernising their laws on arbitral procedure) and codifying a comprehensive arbitration policy, it embraces international standards and brings Saudi Arabia into line with many countries in the region.
Power to the parties
Some welcome features of the new arbitration law are the reduced role of the Saudi courts in both the conduct of the arbitral proceedings and the enforcement of the award, and the increased discretion which is given to the parties. This has been achieved by:
- Preventing the re-examination of the merits of an arbitral award by the Board, by stating that the arbitration award is final and can only be challenged on the grounds prescribed in the new arbitration law.
- Permitting the parties to extend the arbitration process and, in the absence of agreement between the parties, requiring the arbitral tribunal to issue the award within 12 months of the date of commencement of the arbitration proceedings. This should allow for more thorough and representative proceedings.
- Giving the parties greater choice in the procedure, the venue, their arbitrators and the language in which the proceedings will be conducted. Under the old law all proceedings were required to be conducted in Arabic.
- Allowing parties to select a foreign law of their choice for the conduct of the arbitration (and not obliging them to choose Saudi law) and recognising the right to arbitration under an institutional set of rules, such as the ICC or Dubai International Arbitration Centre rules.
- The new arbitration law is silent on the gender, nationality and religion of the arbitrators. Previously arbitrators had to be ‘experienced, of good conduct and reputation and full legal capacity’, that is, male and of the Islamic faith.
The new enforcement law
New enforcement laws came into effect in Saudi Arabia in March 2013 by issue of Royal Decree No. M/53 (enforcement law) and are intended to introduce enforcement proceedings in the Kingdom that have a similar effect to those which apply in other international jurisdictions. Instead of enforcement proceedings coming before the Board, a relatively new jurisdiction has been established, that of the Execution Judge. This new jurisdiction deals with all arbitral enforcement issues. Whereas the procedure before the Board was lengthy and cumbersome, the procedure before a judge specialising in the enforcement of arbitral awards and judgments aims to be more expedient.
Although it remains to be seen how the Execution Judge will approach issues of enforcement and what effect these provisions will have in practice, in principle the enforcement law should guarantee that the merits of the dispute are not revisited and subject to harsh review by the local courts.
References to Shari’a law principles are made consistently throughout both the new arbitration law and the enforcement law, and arbitral awards may be unenforceable if they violate these principles or public policy. Nonetheless, the commitment to curtail the previous interventionist powers exhibited by the Saudi courts shows that the Kingdom’s arbitration laws are moving in a positive direction.
Saudi Center for Commercial Arbitration
In 2014 the Kingdom’s Council of Ministers resolved to launch the Saudi Center for Commercial Arbitration (SCCA) in Riyadh with the possibility of expanding this facility into other cities in the country. The SCCA will be the official referral centre for all aspects of commercial arbitration in the country and aims to further promote trust in the arbitration process in the Kingdom.
Arbitration in the future
Saudi Arabia’s new arbitration laws remain largely untested and we are yet to see what effect these new laws will have in practice. By reducing the involvement of the local courts and granting greater discretion to parties suggests that Saudi Arabia is moving in the right direction, towards adopting a relatively modern legislative and structural framework for the conduct of arbitrations and the enforcement of arbitral awards.
