DLA Piper recently acted on a successful strike-out application in the Commercial Court in Dammam, which was made by reference to an arbitration agreement contained in a contract between our contractor client and one of its subcontractors.
The case is an important reminder of the robust approach the Saudi courts take when upholding private arbitration agreements, and in respecting the forum of dispute resolution chosen by parties in their commercial contracts.
We expand on the facts of the case and the court's reasoning in more detail below.
Case No. 16799 for the year 1437H - Sub-Contractor v Contractor (names withheld to maintain confidentiality)
The case centered on the construction of a polysilicon factory in Jubail, Kingdom of Saudi Arabia (KSA). The Subcontractor claimed unpaid amounts from our client, the Contractor, under a subcontract executed between the parties in relation to part of the construction works.
The subcontract stipulated that any disputes were to be referred to ad hoc arbitration seated in KSA, governed by Saudi law.
Despite this, the Subcontractor commenced a claim in the Commercial Court in Dammam for the alleged unpaid amounts under the subcontract. The Subcontractor omitted to disclose the existence of a valid arbitration clause in the Contract between the parties to the court when it filed its claim.
The Contractor argued that the existence of the arbitration agreement meant that the Commercial Court had no jurisdiction over the dispute, and that the case should be dismissed on this basis.
The Commercial Court's decision
The court agreed with the Contractor and determined, with reference to the mandatory nature of the arbitration agreement, that the court lacked jurisdiction over the matter and dismissed the case on this basis.
The court based its finding on Article 11(1) of the 2012 Saudi Arbitration Law (issued by Royal Decree No. M/34) which provides that:
"A court before which a dispute, which is the subject of an arbitration agreement, is filed shall dismiss the case if the defendant raises such defence before any other claim or defence."
As a result of the court's finding, should the Subcontractor wish to pursue the Contractor for any alleged unpaid amounts under the subcontract, it would have to do so by way of ad hoc arbitration seated in KSA.
DLA Piper comment
The case is an important reminder that the Saudi courts will respect and uphold private arbitration agreements between commercial contracting parties if:
- the agreement stipulates arbitration on a mandatory basis
- the existence of the arbitration agreement, and the challenge to the court's jurisdiction, is raised before any other claim or defence is made by the party relying on the agreement. The ideal time for this is often at the first hearing of the case in court.
Lastly, it may of course be the case that the Subcontractor appeals the Commercial Court's judgment in Case No. 16799. However, for the reasons set out above, our client, the Contractor, is confident that it has very strong defences to any such appeal.