Dispute Resolution in the Kingdom of Saudi Arabia
Saudi Arabia is sprinting after high-level re-architecting. Saudi Arabia has developed Prince Mohammed Bin Salman’s Vision 2030. It is a proactive policy directed mainly toward the reduction of dependency on oil exports.
It poured more than one-third of its GDP into the oil sector and it plans to work on the development of more economic areas like tourism and infrastructure. The goal is to reach 100 hundred million tourist visitors by the end of the decade.
The contractual dispute resolution system in Saudi Arabia is governed by a network of laws that are complex but vital in ensuring proper governance. This article is your guide to how you can explore commercial disputes in Saudi Arabia.
Introduction to Arbitration in Saudi Arabia
Saudi Arabia has made strategic moves to modernize its legal system as far as the dispute settlement part is concerned, which has led to many businessmen choosing the Kingdom to be a preferred venue for arbitration.
This enabled the state to establish a legal environment facilitating arbitration as a mechanism to settle disputes instead of national courts.
The accelerated pace of the arbitration process highlights the Kingdom’s intention to facilitate trade. It also enhances foreign direct investments (FDI) in Saudi Arabia as per Vision 2030 goals.
Islamic Shari’ah law’s complexities in disputes for foreign investors in Saudi Arabia
International disputes in Saudi Arabia span a range of limiting factors impacting foreign investment, one being the fact that the legal system is founded on Islamic law, which is generally known as Shari’ah.
Three key complexities arise:
1. Prohibition against uncertainties (gharar):
- This principle aims to avoid ambiguity and unfairness in contracts.
- It can affect standard clauses, such as those for consequential losses, where the exact amount of compensation might not be known upfront.
- Under Shari’ah law, clauses in contracts that stipulate liquidated damages—fixed sums agreed upon as compensation for contract breaches—could face scrutiny if they do not correspond to a particular kind or spectrum of damages.
2. Prohibition against claiming interest (riba):
- Riba refers to charging or receiving excessive interest on loans.
- This can significantly impact construction contracts if there’s a payment delay.
- Traditionally, Shari’ah prohibits excessive interest. So, in arbitration, claims for high interest rates on late payments in construction contracts might be reduced or disallowed under Shari’ah law.
3. Time bars and Shari’ah:
- Time bars are clauses setting deadlines for claims.
- Shari’ah generally supports reasonable time bars as long as they are fair.
- However, if a time bar is so strict that it completely eliminates a party’s right to claim due compensation, it might be challenged in arbitration based on Shari’ah principles of fairness and justice.
What is the Saudi Legal System for Governing Arbitration in Saudi Arabia?
Saudi Arabia’s arbitration is mainly governed by the Saudi Arbitration Law, which was enacted in 2012, as well as the Rules of SCCA (Saudi Center for Commercial Arbitration). The Arbitration Act is an inclusive legislative act that embraces the UNCITRAL Model Law.
Key Provisions in the Saudi Arbitration Law and its Compliance with International Standards
Building upon the foundation of the Saudi Arbitration Law (SAL) enacted in 2012 and the SCCA Rules, Saudi Arabia has taken significant steps towards establishing a robust framework for commercial arbitration. Here’s a detailed review of key provisions in the SAL and its alignment with international standards, highlighting areas for potential improvement:
Alignment with International Standards:
- UNCITRAL Model Law: As the SAL embraces the UNCITRAL Model Law on International Commercial Arbitration, it adheres to widely recognized principles for conducting fair and efficient arbitration proceedings. This promotes consistency and predictability for international businesses engaging in arbitration within Saudi Arabia.
- Arbitration Agreement: The SAL upholds the principle of party autonomy by allowing parties to freely choose arbitration as a dispute resolution mechanism. This aligns with international best practices.
- Appointment of Arbitrators: The SAL provides a framework for appointing qualified and impartial arbitrators, including procedures for challenging appointments if necessary. This fosters confidence in the fairness of the arbitration process.
- Taking of Evidence: The SAL upholds the right of each party to present its case and introduce evidence. This aligns with international standards of due process.
- Confidentiality: Similar to international practice, the SAL allows parties to agree on confidentiality regarding the arbitration proceedings and award. This can be beneficial for protecting sensitive information.
- Enforcement of Awards: The SAL recognizes and enforces foreign arbitral awards under the New York Convention, a key international treaty on arbitration enforcement. This facilitates cross-border enforcement of arbitral awards.
Here are some areas for Potential Improvement:
- Government Entities: The SAL currently restricts government entities from resorting to arbitration without prior approval. This could be seen as a hurdle for foreign businesses seeking to resolve disputes with government bodies through arbitration. Easing these restrictions could enhance the attractiveness of Saudi Arabia as an arbitration hub.
- Expedited Procedures: While the SCCA Rules offer an expedited procedure for smaller claims, further development of such mechanisms could streamline arbitration for low-value disputes.
- Transparency: Although the SAL provides a framework for arbitration, there could be room for improvement in terms of publicly available data on arbitration cases and awards. This would enhance transparency and public confidence in the arbitration system.
Overall, the Saudi Arbitration Law offers a solid foundation for conducting commercial arbitration in line with international standards. Continued efforts towards streamlining procedures, fostering greater accessibility for government entities, and enhancing transparency will further strengthen Saudi Arabia’s position as a preferred venue for international commercial arbitration.
New Civil Transactions Law
A significant development in the Saudi legal landscape is the recent enactment of the Civil Transactions Law (CTL) enacted by a Royal Decree on 16/12/2023, according to the provisions of Law no. 191 which was published on 19/6/2023. This law represents a major step forward for Saudi Arabia by codifying key principles governing civil transactions and contracts.
What is the New Civil Transactions Law?
Prior to the CTL, Saudi Arabia relied heavily on Sharia’ah principles for resolving commercial disputes. The CTL introduces a codified legal framework that clarifies and complements existing Sharia’ah principles. This provides greater certainty and predictability for businesses operating in Saudi Arabia, especially those engaging in contractual relationships.
How Does the CTL Impact Arbitration?
The CTL does not replace arbitration as a dispute resolution mechanism. However, it has a significant impact on the context within which arbitration takes place:
- Clearer Contract Interpretation: The CTL provides a clearer legal framework for interpreting contracts, potentially reducing disputes and streamlining the arbitration process.
- Enhanced Predictability: Codifying legal principles makes outcomes in arbitration more predictable, which can be attractive for businesses seeking to mitigate risks.
- Potential for New Disputes: The introduction of new legal concepts in the CTL might lead to new types of disputes that could be subject to arbitration.
Retroactive Application:
The retroactive application of the CTL to existing contracts (with some exceptions) provides a smoother transition for businesses operating in Saudi Arabia. This ensures that ongoing contractual relationships can benefit from the clarity and predictability offered by the new law.
Anticipated Commercial Transactions Law:
In recent years, Saudi Arabia has implemented various legal reforms to enhance its commercial environment. The Commercial Franchise Regulations (Franchise Law) came into force in 2019, followed by the enactment of the Civil Transaction Regulations, which acts as Saudi Arabia’s first “Civil Code.”
The Saudi Ministry of Commerce is on the verge of introducing a significant transformation in the country’s commercial legal landscape. A draft of the new Commercial Transactions Law has been submitted for public consultation, paving the way for a comprehensive codification of commercial law for the first time in the Kingdom’s history.
This new law will replace a patchwork of older regulations, including the Commercial Courts Law dating back to 1931.The draft Commercial Transactions Law consists of nine chapters and 321 articles, covering a wide range of commercial aspects. Notable provisions include:
- Commercial Agencies:
- The law defines a contract agency as an agreement where an agent promotes, negotiates, and concludes transactions on behalf of a principal within a specific territory.
- The principal may enter into agreements with multiple contract agents within the same territory, and exclusivity can be granted if agreed upon.
- In cases where the contract agent is obligated to invest in showrooms, warehouses, or service centers, the agreement’s term must be at least five years.
- Legal Representation and Indemnity:
- If the principal is not a resident of Saudi Arabia, the commercial agent’s place of business is considered the principal’s location for the purpose of document service.
- In legal actions related to customer contracts, the contract agent is deemed the legal representative of the principal.
- If a fixed-term agreement is not renewed by the principal upon expiry, the contract agent is entitled to goodwill indemnity determined by the court, provided certain conditions are met.
- In case of termination of an unlimited term agreement or breach of obligation or negligence by the contract agent in a limited term agreement, compensation for damages and profits lost may be awarded.
- Distribution Agreements:
- Distribution agreements involve dealers promoting and distributing goods purchased from commercial or industrial businesses exclusively within a specified area.
- Provisions regarding contract agencies also apply to distribution agreements.
The draft Commercial Transactions Law represents a significant step forward in the modernization of Saudi Arabia’s commercial legal system. However, certain provisions on compensation and goodwill indemnity differ from those outlined in the draft Commercial Distribution and Agency Regulations. It remains to be seen how these inconsistencies will be resolved when the regulations come into force.
New Rules of the Saudi Center for Commercial Arbitration
The Saudi Center for Commercial Arbitration (SCCA) is likely to adopt new Arbitration Rules that would be consistent with the amended Arbitration Law and other legal reforms. These rules are expected to deal in detail with how arbitration proceedings are conducted under the auspices of the SCCA.
Enforcement of Arbitral Awards in Saudi Arabia: Proven Success In The Track
During 2021, Tribunals in Saudi Arabia rendered 204 local and international arbitral awards valued at USD 2.1 billion, and the process of work resolution was completed on average in 2 weeks. In the period of January-September 2022, more than 522 awards have also been enforced by Saudi courts. The fact that Saudi Arabia takes swift and effective action is further demonstrated in this case.
Since the Saudi Arbitration Act in 2012 there have been approximately 35,000 applications for enforcement with an aggregate value of enforced arbitral awards coming in at just over US$ 6.16 billion,, demonstrating the Kingdom’s inclination towards arbitration and respect towards best practices in international matters of finality and enforceability of arbitral awards.
Major Anticipated Mega Projects in Saudi Arabia
NEOM
NEOM is a large smart megacity with an area of about 10,000 square miles. It was built in northwestern Saudi Arabia. The project is intended for the pursuit of commercial activities. It will focus on bringing in business investors and talents from all over the world.
The Red Sea Project
The Red Sea Project is a luxury touristic development project along the western shore of Saudi Arabia. Specific locations include luxury resorts, residential areas, and recreational facilities developed across a widespread group of over 90 islands. A multi-party building project is characterized by different stakeholders, construction projects, and investments.
Other mega projects are expected in the near future as the Kingdom seeks to reposition itself as a regional and global business center.
Important Rules in Commercial Arbitration in Saudi Arabia
Rule 1: Understanding the Local Legal Landscape
Law firms must have an in-depth understanding of not only the Saudi Arbitration Law, the rules of the SCCA, case law, but also a thorough understanding the principles of Shari’ah. Train teams staffed with Saudi-qualified lawyers and invest in local relationships.
Rule 2: Cultural Awareness and Sensitivity
There should be respect of cultural norms and traditions. Offer cultural training and also include members who are experts in the region. Adapt to building a trusted and credible organization.
Rule 3: Leveraging Technology
Utilize virtual platforms and advanced technology as well as digital document management for efficiency. Train staff and upgrade the infrastructure for virtual hearings and electronic screening.
Such rules aim at greater procedural effectiveness, clarity, and parties’ autonomy.
Saudi Arabia is an active participant in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”)
The New York Convention is an international treaty that aims to facilitate the recognition and enforcement of arbitral awards across different jurisdictions.
Saudi Arabia became a party to the New York Convention in 1994. As a signatory to the Convention, Saudi Arabia recognizes and enforces foreign arbitral awards issued in other contracting states. This means that arbitral awards rendered in countries that are also party to the New York Convention can generally be enforced in Saudi Arabia, and vice versa.
It is worth noting that while Saudi Arabia is a party to the NYC, there may be certain limited grounds on which the recognition and enforcement of arbitral awards can be refused in accordance with the provisions of the Convention.
These grounds typically relate to issues such as public policy. Specifically Article V(2)(b) of the convention allows a country to refuse the recognition and enforcement of an arbitral award if it is found to be contrary to the public policy of that country essentially providing a loophole for Saudi Arabia, to appear to embrace NYC while still being able to reject awards that contradict their own public policy.
Emerging Arbitration and Judicial Perspectives in Saudi Arabia
Additionally, one of the critical factors to consider when contemplating the initiation of a claim, whether through litigation or arbitration, is the presence and accessibility of the Respondent’s assets, as well as the feasibility of converting any resulting order or award into actual monetary recovery.
The main objective of the New York Convention was to simplify the previously cumbersome process required by the Geneva Convention of 1927, known as the double exequatur.
Under the old system, an arbitral award had to be first recognized by the courts of the country where the award was made, through a procedure called exequatur, before it could be taken to the courts of the country where the assets were located for a second recognition.
The New York Convention aimed to streamline this process, compelling the member states to acknowledge and enforce arbitral awards from other member states more efficiently and directly.
Moreover, Saudi Arabia is a contracting Party to the Riyadh Arab Agreement for Judicial Cooperation which requires, in its Article 37, a double exequatur for the enforcement of a judgement within its Contracting States.
In other words, the Riyadh Agreement requires a double exequatur allowing a signatory to reject enforcement of an award if it has not been recognized by the court of the seat of arbitration in a concerning development.
The Rise of Institutional Arbitration:
Institutional arbitrations are increasingly widespread and popular in the Kingdom as is expected to become the main pivot for international arbitration in Saudi Arabia, with the SCCA playing a major role in it.
This transition will benefit from greater certainty in internationally conventional tribunals, which strengthens the legal system and its transparency.
Increased Caseload and Expertise:
The demands for arbitration in the region have become sky high resulting in the SCCA and other arbitration centers within the country to manage a greater number of arbitration cases.
This resulted in the emergence and increase of competent arbitrators and practitioners, who are well versed in international best practices.
Capacity Building and Training Initiatives:
To build and fill the gap in the expertise of the arbitration field, Saudi Arabia has been allocating investments in capability-building programs and training with the goal to push for a new group of lawyers, arbitrators, and experts experienced with the complexities of international arbitration.
Collaboration with International Law Firms:
Saudi Arabia has experienced an increase in foreign law firms settling in the Kingdom performing beyond excellence in processing intricate international transactions.
This synergy obtained in just the past three years has given room for the sharing of knowledge and promoted the greater adoption of arbitration principles practiced around the world.
Embracing Technology and Virtual Proceedings:
In parallel to the global tendencies, arbitration in Saudi Arabia has accepted the introduction of technology with the rise of hearings. Virtual and remote presence has provided arbitration practitioners an enhanced accessibility and efficiency, specifically during the COVID-19 pandemic.
Article 29.2 of the SCCA Arbitration Rules pertains to the regulations and guidelines governing the conduct of hearings in a virtual setting. This provision ensures that despite the physical absence of the parties involved, the integrity and efficacy of the arbitration process are maintained.
The Arbitration Body in Dubai vs. Saudi Arabia
Dubai established the well known Dubai International Arbitration Centre (DIAC)1. It was established in 1994 and is a prestigious establishment that provides arbitration support in the Middle East.
DIAC has its own set of arbitration rules and is based on the alignment with international best practices.
In the Kingdom, the SCCA is considered the leading arbitration institution2 and was established in 2016.
Although the DIAC has a longer tradition, the SCCA still follows the trends and is seeking to adjust its rules to the emerging changes in the arbitration world.
Correspondingly, arbitration centers render institutional and legal aid in arbitration proceedings.
Among its achievements, SCCA has gradually come into use as the most practical arbitration center in the Kingdom promoting the growth of the arbitral map of Saudi Arabia.
The Future of Arbitration in Saudi Arabia: Looking at 2030 and Farther Ahead
The Saudi Vision 2030 is a planned Roadmap for transforming the economic activity of Saudi Arabia: the transition from oil production to a new economy that is more diverse and less prone to oil price changes.
To make this dream come true, attracting foreign investment and creating a positive business environment for both locals and foreigners in the country should be top priorities.
A strong and future-oriented arbitration system is one of the most significant components of Vision 2030 and in that regard, the government of the Kingdom of Saudi Arabia can only expect that there will be an overall increase in international investments and businesses oriented toward their country because of the benefits of settlement of disputes in a more refined set of legal institutions.
FAQs
Does a Saudi company have the right to choose a seat of arbitration outside of Saudi?
Under the provisions of the Saudi Arbitration Law, parties have the right to make appropriate choices for foreign rules as well as for the seats of their arbitral proceedings.
Can foreign arbitral awards be enforced in Saudi Arabia?
Saudi courts are mostly enforcing the awards from international arbitrations in compliance with the provisions of the New York Convention.
What is the impact of the new rules of SCCA Arbitration?
The new rules of Arbitration promulgated by SCCA are in line with the key emerging international standards with the benefit of quick, transparent, and cost-efficient proceedings.
Which human assets is Saudi Arabia nurturing through the establishment of its local arbitration capabilities?
The Kingdom is supplying training programs and capacity-building projects to build the necessary human capital to fill crucial positions of Saudi arbitrators.
