In April 2012, the Kingdom of Saudi Arabia (KSA) enacted a new Arbitration Law which was hailed as a boon for investors and a major step forward for commerce. Two years on, we consider  whether the law is having the positive impact anticipated. As the largest economy in the Arabian Gulf, KSA offers a wealth of potential for both domestic and international companies seeking to do business in the  Kingdom. Yet its legal system remains a somewhat uninviting jurisdiction for foreign investors: its  substantive law is based on Shari’ah, and the absence of a system of binding precedent means local  courts are bestowed with broad discretion to determine disputes. Unsurprisingly, foreign investors seek to mitigate risk by including  arbitration clauses when contracting with Saudi parties. Arbitration, however, is not a panacea for  any given problem a party may encounter when seeking to resolve a dispute in the Kingdom.

The construction landscape

The KSA construction market is very strong, with an estimated USD 600 billion in construction  projects planned or underway2. Projects such as the USD 22.5 billion Riyadh Metro Project (the  world’s largest) have attracted foreign construction companies and consultants from a diverse range  of countries, including Spain, Italy, Germany, India, Korea, Canada, the USA and the UK. Other current landmark projects are King Abdullah  Financial District,  the Riyadh Airport redevelopment and the Haramain High Speed Rail project.  Having taken on obligations to deliver projects of this scale, foreign companies need to actively  manage many large legal and commercial risks and we commonly see arbitration clauses in main  contracts (subject to the restrictions in the government tenders law), subcontracts, joint venture  arrangements and consultancy appointments.

Revised legislation

In theory, the 2012 Arbitration Law significantly improved the legal landscape for arbitration in  KSA, which had previously been governed by an Arbitration Law enacted in 1983. In the intervening  years, the Kingdom acceded to the New York Convention (1994) and the United National Commission on  International Trade Law (UNCITRAL) created the ‘Model Law on International Commercial Arbitration’ (1985, with amendments in 2006). The 2012 Arbitration Law is based on the Model Law but incorporates significant local law elements; for  example, any arbitral award can be challenged if it is inconsistent with Shari’ah. The Law applies  to both domestic arbitration and international commercial arbitration with a Saudi seat, but not to  foreign arbitral awards; with its remit limited in this way, the new law only went so far in  ameliorating the legal environment for parties arbitrating disputes in the Kingdom.

Positive outcomes

Even so, a number of positive trends have materialised as a result of the new legislation: the  local courts have been generally supportive, for example in a number of cases they have declined to hear claims subject to binding arbitration clauses; and courts have  recognised parties’ rights under the 2012 Law to adopt the rules of external arbitration centres as  their agreed procedures. Indeed, in a recent case concerning an arbitration governed by   the International Chamber of Commerce  (ICC) Rules, the Dammam Court of Appeal required the claimant to file its Request for Arbitration  with the ICC as the first step, and therefore declined the claimant’s application for the court to  appoint the arbitrators.

Furthermore, arbitral awards (domestic and foreign awards with Saudi seats) made under the 2012 Law  have the same status as court decisions once they are ratified; and, combined with the 2013  Enforcement Law, there is now a detailed process available to parties for converting an arbitral  award into a recovery.

This recent Enforcement Law also provides true benefit to parties attempting to enforce foreign  awards in KSA. For  a foreign award to be successfully enforced, it has long been a requirement that the award be both consistent with Shari’ah and made in a location that  reciprocally enforces Saudi judgements and awards. The benefit of the 2013 Enforcement Law is that the reciprocity requirement can be satisfied by the Ministry of Justice releasing an official statement  that the issuing jurisdiction is on the approved list, if applicable. This obviates the need for  courts to decide whether the seat of the arbitration is “reciprocal” and is a great step forward in  overcoming practical obstacles to the recognition and enforcement of foreign arbitral awards in  Saudi Arabia.

Room for improvement

Whilst elements of the legal framework necessary for arbitration have been put in place,  significant drawbacks to arbitrating disputes remain. For example, courts still display a tendency  to intervene in arbitration cases, contrary to the 2012 Law: in a recent case under UNCITRAL  Arbitration Rules, the Dammam Court of Appeal has required the parties to nominate their  arbitrators at scheduled court hearings, rather than allowing them to follow the procedure for  appointing arbitrators under the Rules.

There is also a degree of uncertainty surrounding how the 2012 Law should be applied, given that  Implementing Regulations (common with Saudi legislation) have yet to be passed in relation to the 2012 Law. For  example, at present, it is not clear whether a sole arbitrator or a tribunal chairman must be a  Saudi national, or a foreign Muslim,  as per the requirements under the 1983 Law. The 2012 Law states only that a sole arbitrator or chairman must  be ‘of full capacity, of good conduct and  reputation and the holder of at least a university degree in legal science’. Accordingly, it is  unclear whether an arbitral award made on the basis of the 2012 Law could be challenged if the sole  arbitrator or chairman was not a Saudi national or a Muslim foreigner. Prompt enactment of the  Implementing Regulations would resolve this issue, and others, before they develop.

Demonstrable commitment

Another development which should serve to improve the situation is the recent announcement (April  2014) that a new arbitration centre – the Saudi Centre for Commercial Arbitration – will be  established in Riyadh, possibly with branches outside of Saudi Arabia (including the UK). Full  details are yet to be released, but the announcement demonstrates the commitment of the Saudi  Government to nurturing arbitration as vital to continued foreign investment in KSA. The Centre  will have its own set of local arbitration rules, tailored to the requirements of   the 2012  Arbitration Law; this will greatly streamline the domestic arbitral process by avoiding the need to  rely on international arbitration centres, and their respective rules. Moreover, parties still  wishing to arbitrate disputes at centres outside KSA will have recourse to the 2013 Enforcement Law as a means of recovering sums awarded.

In conclusion

Although the enactment of the 2012 Law has provided an element of comfort to investors, and greater  certainty of outcome should a dispute arise, there remains work to do. Two years on, the trend  remains for arbitration concerning Saudi contracts to be seated in foreign centres and there are  relatively few Saudi arbitrations: largely due to the inevitable lead time after parties began  writing the 2012 Law into arbitration clauses.

Further measures are being put in place to improve the situation (as outlined above), after which  KSA will be in a better position to establish a stronger track record of arbitration; giving  foreign investors increased confidence that that the Kingdom is a good place to do business. In the meantime, parties should beware of the  fault-lines in the existing legal framework.