The New Arbitration Law came into force in Saudi Arabia on 9 July 2012 ("New Law"). The New Law, based on the UNCITRAL Model Law on International Commercial Arbitration, removed many of the barriers of the previous arbitration law so that businesses could, in theory, have more confidence in arbitration as a means of dispute resolution in Saudi Arabia. At the time the New Law was enacted it was envisaged that it would have a wide reaching impact on both local and international businesses trading in the domestic market. However, with regards to insurance disputes, it is only recently that local litigators have seen a change in approach by the Insurance Disputes Committee ("IDC") towards the New Law and that the insurance market is starting to see the benefits.
There now appears to be a real option for (re)insurers to include in their policies an arbitration clause capable of being upheld and, therefore, it is important for parties to consider the practical impact of their choice of jurisdiction, should any dispute arise under the policy.
Regulation of insurance in Saudi Arabia
Regulated insurers in Saudi Arabia are overseen by SAMA pursuant to the Saudi Arabian Insurance Law of 2006 and it's implementing regulations.
The IDC, which was established under the auspices of SAMA but which now operates separately from the regulator, has jurisdiction for all insurance claims involving SAMA regulated entities in Saudi Arabia (pursuant to Article 20 of the Insurance Law). A recent amendment to Article 20 on 1 April 2013 gave jurisdiction to the IDC on all disputes arising from insurance policies, including disputes between insurers and insureds, insurers and reinsurers, and also some subrogated recoveries.
Previous approach of IDC in Saudi Arabia
Is it possible to contract out of the IDC regime and, instead, opt for arbitration of any policy disputes?
There is no legislative prohibition on arbitration of insurance disputes in Saudi Arabia and, practically speaking, an insurance dispute should have been able to proceed in arbitration subject to the ultimate supervision and oversight of the IDC Appeal Committee, which is the competent court of jurisdiction by regulation under the Insurance Law and is responsible, therefore, for supervising any insurance-related arbitration in Saudi Arabia. However, in practice, until recently, it was not clear whether the validity of an arbitration clause in an insurance policy would have been accepted by the IDC.
In addition, strictly speaking, any arbitration clause that was not drafted in Arabic or pre-approved by SAMA as part of its strict policy wording pre-approval process would have been open to challenge and, ultimately, any clause not fulfilling these requirements would also have been likely to lead to acceptance of jurisdiction by the IDC. This has been the case in practice until very recently despite the New Law which contained a provision stating that the sole requirement for an arbitration clause was that it be in writing and that the parties agreeing to arbitrate have authority to do so (Articles 9(2) and 10(1)) of the New Law).
Change in stance of IDC
Litigators in Saudi Arabia are expecting a significant change in position by the IDC with the IDC Appeal Committee upholding arbitration clauses and more strictly applying the provisions set out in the New Law in several insurance cases, even where such clauses provide for a foreign jurisdiction. This shift in position may have come about as it was, in fact, the Chairman of the IDC Appeal Committee who participated in drafting the New Law and who seems, therefore, extremely keen to see it put into practice as widely as possible, and who included a chapter in his PHD thesis about the need of local courts to approve arbitration agreements and the principle of party autonomy. In addition, other members of the IDC Appeal Committee are arbitrators and one of them is the author of the book, “Arbitration in Saudi Arabia”, which considers some of the issues summarised in this article.
It now appears to be the case that, where there is an arbitration agreement in an insurance policy, a dispute must proceed in arbitration unless both parties agree to proceed through alternative means. If proceedings are issued before the IDC (as opposed to through arbitration) and there is an arbitration clause, the responding party can raise the arbitration clause as a jurisdictional defence. The IDC will be obliged to refer the matter to arbitration. If one party objects, the matter will be referred to the IDC Appeal Committee for a final decision (Article 11(1) of the New Arbitration Law) and the IDC Appeal Committee would almost certainly refer the case to arbitration if the arbitration clause/agreement satisfies any defects. Even in the case where both parties agree to forego the arbitration clause, the IDC or the IDC Appeal Committee may be asked to rule on jurisdiction and, if so, each party would then likely be requested by the IDC Appeal Committee to demonstrate that it has full authority to enter into/exit from agreements to arbitrate on behalf of their respective companies.
Considerations when deciding whether to opt for arbitration
it is expected that as a result of the new rules and procedures before IDC which came into effect on 13 April 2014, regarding the application by the IDC of international insurance principles and doctrines to insurance disputes in Saudi Arabia, many insurance companies have started to honour their contacts without entering into formal litigation. However, it remains highly important for insurance companies to carefully consider the jurisdiction dispute clause of any contractual arrangement in the event that a dispute arises which is not capable of amicable resolution.
Arbitration tends to have the advantage over court litigation of achieving a quicker final result. The New Law anticipates that a final award should be rendered within 12 months of the arbitration being issued, although this can be extended. If the case is heard through the IDC, the Court of First Instance stage tends to take between a few weeks to six months for a standard case and, if the case is appealed (which is likely as matters are often appealed as a matter of course), then the matter may take up to approximately six months to conclude. Cases of a more complex nature may take notably longer.
In addition, the aim of the New Law is to give the parties more autonomy to decide how to manage their case and, for example, it allows the parties the option of choosing one member of their panel of arbitrators and agreeing their own timescales. Further, close supervision by the IDC Appeal Committee may give parties some assurance that any award obtained in their favour would likely be readily enforced by the enforcement courts.
Arbitration may also particularly provide some parties with greater certainty in matters related to life insurance. Historically, life insurance has been an area of uncertainty under Sharia law and before the Sharia courts. This has led to policies being declared invalid for various religious reasons that allegedly offend Sharia principles. Conversely, we understand that the IDC Appeal Committee will only intervene in arbitrations in matters related to procedural or award errors, but will not necessarily look into the merit or substantive grounds of the award, although this may fall under the remit of the enforcement courts at a later stage.
Further, under the New Law, the arbitration need not be conducted in Arabic if the parties or Tribunal elect to use another language, which may be an attractive option for international parties, although it should be noted that there will remain advantages of conducting proceedings in Arabic in any case because of the IDC Appeal Committee's ultimate supervision and the fact that at least one party to the contract will be locally based.
On the other hand, it certainly remains the case that the IDC process is more established than arbitration in Saudi Arabia and tends to be cheaper as there are no arbitrator fees. In addition, any appeal judgment would be enforceable as of right. Further, if the case is allowed to proceed through the IDC Courts, it eliminates the uncertainty of proceedings in arbitration which is not yet an established jurisdiction for insurance disputes in Saudi Arabia.
Further, it may be considered that members of the IDC First Instance and Appeal Committee may be the best qualified individuals to hear any insurance related case as they have gleaned knowledge and experience of the growing insurance market in Saudi Arabia from their previous cases.
The New Law sets out a more sophisticated regime that is aligned with internationally recognised principles so that parties to commercial contracts, including (re)insurance contracts, can now rely on an arbitration clause to effectively govern the resolution of their disputes. It is a positive step forward that active measures are now being taken by the supervisory bodies to put this New Law into practice in the (re)insurance market and it should give international parties more confidence that disputes with local insurance companies will be conducted more in line with international standards.
To conclude, there now appears to be a real option for (re)insurers to include in their policies an arbitration clause capable of being upheld and, therefore, it is important for parties to consider the practical impact of their choice of jurisdiction, should any dispute arise under the policy.