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.
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.
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.
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.
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.