Historically, both litigation and arbitration have been regarded as unattractive methods of dispute resolution by overseas parties operating within the Kingdom of Saudi Arabia (KSA). However, recent developments within KSA coupled with a changing economic environment have led to more parties investigating arbitration to resolve disputes.
Despite the existence of a well-qualified and consistent judiciary, the KSA courts have been an unpopular route for the resolution of disputes in the past. This is largely due to foreign parties’ concerns about a prohibitive bureaucracy and fear of local respondents having a ‘home advantage’.
Until recently, the establishment of international arbitration in KSA has also been problematic for a number of reasons.
KSA courts previously had to approve arbitration procedures prior to their initiation which effectively operated as a block on submitting proceedings. The courts also previously had the power to ratify the appointment of arbitrators, and this would effectively permit a responding party to obstruct a dispute by simply refusing to participate.
Once a tribunal was formed outside KSA, any award would then be subject to a fresh review by local courts which would then frequently apply the principles of KSA law to the substance of the dispute, effectively re-hearing the matter.
Shari’a law applies in KSA, and such principles include the enforcement of arbitral awards. As a result, a foreign award would be prevented from enforcement where non-compliant aspects of a contract (such as interest payments) would be reassessed locally.
In 2012, to address the various procedural problems, new rules were introduced to actively support the use of arbitration within KSA. These rules effectively swept away the restrictions outlined above, requiring the courts to give priority to the arbitration rules chosen by the parties.
Compliance with Islamic shari’a is still required at all stages, but it is now not possible for the court to deviate from either permitting an arbitration to continue or from enforcing an award. Further minor positive changes were also introduced, such as the permission to carry on the proceedings in a language other than Arabic.
It must be borne in mind that arbitration of itself does not conflict with the principles of shari’a. However, parties seeking to arbitrate must still provide the appropriate safeguards that the principles of shari’a are not only upheld by the laws that apply to the matter subject to arbitration, but that such principles are seen to underpin any arbitral procedures that are adopted.
This could still have a far-reaching effect. For example shari’a law could rule against enforcing interim applications as the inability of a party to be able to present a case in full may be regarded as rendering an award unlawful. It may also impact upon more prosaic matters such as invalidating expert testimony not given under a binding oath.
The choice of English law, for example, would not be automatically non-compliant, but there remains an opportunity for matters to be challenged if either the law or the principles of the contract are not compliant. Parties would be wise to choose the law of KSA (or at least another GCC country) to apply to the contract in the first place to avoid such concerns.
A significant step to overcoming the remaining procedural hurdles to arbitration in KSA was announced in 2014 with the establishment of the Saudi Centre for Commercial Arbitration (SCCA). When it comes into formal operation it is widely anticipated that a dedicated centre of expertise will provide a suitable forum where the ‘pinch points’ mentioned above will be dealt with.
The SCCA would be able to ensure that the tribunal would always possess the requisite skills for compliance with law, such as the requirement that at least one tribunal member should hold a degree in Islamic legal studies.
Until such time as the SCCA comes into operation, parties should ensure arbitration clauses are drafted to ensure that procedures are compliant with local law. This will provide a much greater degree of confidence in the enforceability of any award.