Arbitration at the Forefront of Judicial Progress in Saudi Arabia

source: lexismiddleeast.com

Abstract

The scene of arbitration in Saudi Arabia started to change fundamentally in 2012, when a new Arbitration Law was passed through Saudi Arabia Royal Decree No. M34/1433, which formed part of a large overhaul of the Saudi Arabian judiciary brought on the way by King Abdullah (2005-2015), and which included also a new judiciary law, new procedural codes and execution regulations.

Analysis

I. From Ancient Greece to Saudi Oil

Arbitration as a legal phenomenon has seen its importance reaffirmed in modern times; its beginnings, however, date back to a very distant past. Arbitration was used in many old civilizations such as Ancient Greece and the times of the Romans, but also under Islamic rule. It has been driven, throughout the centuries, by the need of finding, at times, an alternative to the ordinary judiciary.

Arbitration has sometimes been preferred to the ordinary courts since it gives the parties the freedom to choose an alternative law (other than that of the country where the judgement is rendered) to govern the dispute. In Ancient Greece for example, the philosopher Aristotle wrote: “…equity is justice in that it goes beyond the written law; and it is equitable to prefer arbitration to the law court, for the arbitrator keeps equity in view, whereas the judge looks only to the law, and the reason why arbitrators were appointed was that equity might prevail…”

Islamic law, to the contrary, came about as a codex in which social justice is founded on religious beliefs. The Islamic understanding of arbitration is therefore one that is closer to reconciliation than to adjudication (“…and if you fear dissension between the two, send an arbitrator from his people and an arbitrator from her people; if they both desire reconciliation, God will cause it between them. Indeed, God is ever Knowing and Acquainted…” Quran, 4:35). Nevertheless, arbitration is reported to have been widely used by Arab merchants during the heydays of Islamic rule, though with a strong emphasis on mediation.

In modern-age Europe, arbitration re-emerged first in England and in the Netherlands. The first modern arbitral award was issued in 1610 in England, a country that enacted the first modern arbitration law in 1698, before institutionalizing arbitration by establishing the City of London Chamber of Arbitration in 1892, which is now known as the London Court of International Arbitration (LCIA).

Saudi Arabia entered the arbitration arena after the discovery of oil in 1938, shortly after the unification of the country in 1932. The Kingdom’s founder, King Abdulaziz (1932-1953) had enshrined arbitration-friendly Islamic law as the Constitution and the common law of the country, but the Government later put a stop to the development of arbitration, after a foreign arbitration panel had handed down a tough ruling against the Kingdom in the matter Saudi Arabia v. ARAMCO (1958). The Council of Ministers passed a resolution in 1963 that prohibited the use of arbitration in all public contracts. For a long time, arbitration remained an abandoned field of law and was left without a detailed body of rules, regulated only by the basic principles of Islamic law and a few scarce provisions contained in an old ‘Commercial Court Law’ which had been enacted before the unification of the Kingdom.

Only in 1983 was a much more developed statute approved which, however, had two major disadvantages: On the one hand, it prohibited the use of any language other than Arabic and, on the other hand, it made it easy for the parties to challenge arbitral awards in front of the competent court. The 1983 statute was therefore not well received by the market and arbitration was hardly ever used – until fundamental changes took place in 2012 and then even more dramatically, in 2017.

II. Emergence of a new arbitration scene

The scene of arbitration in Saudi Arabia started to change fundamentally in 2012, when a new Arbitration Law was passed (Saudi Arabia Royal Decree No. M34/1433), which formed part of a large overhaul of the Saudi Arabian judiciary brought on the way by King Abdullah (2005-2015), and which included also a new judiciary law, new procedural codes and execution regulations. The new Arbitration Law made Saudi Arabia the second Arab Gulf country – after Oman – to update its arbitration system to the UNCITRAL standard. Bahrain followed in 2015, then Qatar in 2017 and the United Arab Emirates in 2018. However, the new Saudi Arbitration Law practically entered into force only in September 2017, when the Implementing Regulation to the law was published.

The UNCITRAL Model Law on International Commercial Arbitration has received global recognition as model legislation and international best practice in arbitration. The model statute was developed in 1985 to provide uniformity in arbitration. Legislation based on the Model Law has today been adopted in a total of 111 jurisdictions worldwide. It is intended to be consistent with the principles enshrined in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which the Kingdom had acceded back in 1994.

Saudi Arabia Royal Decree No. M34/1433, as the UNCITRAL Model Law, embodies several ‘pro-arbitration’ principles, especially the right to choose freely the applicable law, the procedure, the venue and the seat, the arbitrators, the procedure to challenge the arbitrators, the commencement of the arbitration, and whether the tribunal will be able to issue temporary or precautionary measures. It also lets the parties select the arbitration language. The law furthermore guarantees the right of the parties to choose the institutional rules, which apply to their arbitration, including rules widely recognized and used in the international arbitration community such as the LCIA Rules, or the Rules of the International Chamber of Commerce (ICC). As compared with the previous statute of 1983, the new Arbitration Law includes the novelty of granting the parties a whole set of newly regulated rights throughout the arbitration proceedings. Similar to the entrenched common law principles of due process and fair trial, they apply by default whenever the parties have failed to prescribe their own set of guarantees. Most importantly, however, the 2012 law allows the parties to effectively oust the jurisdiction of the normally competent court, as it deems any arbitral award to be final, non-appealable, and enforceable even in case a court was to declare it invalid (article 50(3) of Saudi Arabia Royal Decree No. M34/1433).

To make things even more comprehensive, the enactment of Saudi Arabia Royal Decree No. M34/1433 was accompanied by the establishment in 2016 of a modern international arbitration centre, the Saudi Center for Commercial Arbitration (SCCA). Headquartered in Riyadh, the Center published its Arbitration Rules in the same year, i.e. the year in which the Kingdom’s ‘Vision 2030’ and ‘National Transformation Plan 2020’ were unveiled. Its creation fully coincided with the Kingdom’s plan to achieve the most effective implementation of the Arbitration Law and guarantee speedy procedures, as a means of bolstering economic diversification.

III. Recognition and enforcement

Under the new laws, different recognition and enforcement regimes apply to different types of arbitration awards. Arbitration awards can be either domestic, international or foreign. The new Arbitration Law applies to domestic, international and foreign arbitration. The recognition and enforcement of foreign arbitral awards in Saudi Arabia used to be doubtful in the past, but after a number of substantial improvements, the situation has then changed considerably.

A. Domestic awards (two-step procedure)

Before an order for the enforcement of a domestic award can be issued, the competent Appeal Court must make sure that three conditions are fulfilled:

1. That the award is not in conflict with a judgment issued by a court which had jurisdiction to decide the original dispute;

2. That it does not violate Sharia law or public policy; and

3. That it has been properly notified to the other party.

Once the Appeal Court has issued the enforcement order, the award creditor must then seek to execute the order at the Execution Court, in accordance with the Execution Law, Saudi Arabia Royal Decree No. M53/1433.

B. International awards (two-step procedure)

International awards are those rendered abroad but to which the Arbitration Law has been made applicable as per an agreement of the parties.

The recognition and enforcement regime for international awards is identical to the one that applies to domestic awards, with the exception that the Law grants exclusive jurisdiction to the Appeal Court in the capital (Riyadh) for questions of recognition and nullification. This jurisdiction applies by default, i.e. the parties are free to give jurisdiction to a different Court of Appeal (e.g., Jeddah or Dammam), by a simple agreement.

C. Foreign awards (one-step procedure)

Interestingly, foreign awards, i.e. those to which the Arbitration Law does not apply, are not subject to a two-step recognition and enforcement procedure, but only to a one-step procedure.

In the case of a foreign award, only the Execution Law applies to the process, not the Arbitration Law. As per the Saudi Arabia Royal Decree No. M53/1433 the matter must be brought directly before the Execution Court (i.e. with no Appeal Court being involved). To declare a foreign arbitration award enforceable, the execution judge must make sure that six conditions are fulfilled:

1. The Saudi Arabian courts did not have jurisdiction to hear the underlying dispute;

2. The award is not inconsistent with a judgment or an order issued in relation to the same subject by a judicial authority of competent jurisdiction in Saudi Arabia;

3. The award does not contain anything that contradicts Saudi Arabian public policy and especially Sharia law;

4. The award was rendered following proceedings that complied with the principles of due process;

5. The award was rendered in a final form, according to the law of the seat of the arbitration; and

6. The country in which the award was rendered guarantees reciprocity in enforcing awards rendered in Saudi Arabia.

D. The revolution in judicial practice

In the past, foreign arbitral awards were recognized and enforced only sporadically in the Kingdom, and parties were often reluctant to submit to foreign arbitration. The situation has, however improved a lot in recent years, and even more dramatically, in recent months. The following improvements have been achieved:

1. Except for the above described procedural differences, neither the Arbitration Law nor the Execution Law distinguishes between domestic awards and foreign awards, regarding their recognition and enforcement.

2. The analysis of recent case law shows that unlike in the past, there is nowadays much less reluctance towards the recognition of foreign awards (and even foreign judgements). For example, in May 2017, an USD 18.5 million ICC award rendered in London was recognized and enforced against a Saudi Arabia based debtor whereas in May 2018, a USD 3.8 million judgment of a court in the US state of Virginia was recognized and enforced against a company based in the Kingdom. Whereas a few successful cases were known also before the coming into force of the Execution Law, recognition and enforcement today usually takes only months and not years. The statistics of the Ministry of Justice show that the increased efficiency of the recognition and enforcement procedures has led to significantly increased numbers of applications and enforcement decisions. The number of execution cases involving foreign decisions has spiked from somewhere close to zero, back in 2012, to hundreds of cases per year nowadays.

IV. The last roadblock

The entire area of arbitration in Saudi Arabia has improved significantly in recent times. Laws and regulations have undergone deep changes to implement international best practices while at the same time, the enforcement of foreign awards has improved significantly in the practice and attitude of the courts. Furthermore, a new institutional arbitration represented by the SCCA demonstrates the readiness of the Kingdom to open its doors wide to modern and flexible settlement of cross-border disputes, which includes even the possibility to shift the hearings abroad if need be.

The road to forming an efficient international commercial arbitration system in Saudi Arabia was not smooth but rather met by setbacks such as the disappointment surrounding the Saudi Arabia v. ARAMCO (1958) case, the cold reception of the 1983 Arbitration Law and the Kingdom’s accession to the New York Convention that remained largely without effect during more than two decades.

Now, however, as the Implementing Regulations to the new Arbitration Law entered into force in September 2017, and the courts have started recognizing and enforcing foreign awards by the hundreds, the Saudi Minister of Justice can finally report a resounding ‘mission accomplished’ to his new Sovereign King Salman (2015- ), the new Crown Prince Mohammed bin Salman and to the world of trade. It is expected that the resulting new confidence in the Saudi Arabian practice of dispute settlement will boost foreign investment levels in the Kingdom, as envisaged in the Government’s ‘Vision 2030’ economic diversification program.

At the same time, the business world and legal professionals are now awaiting the final roadblock to be removed by the Government to allow a fully-fledged development of arbitration in all sectors including public contracts. In this respect it is encouraging to see that that the draft new Government Tenders and Procurement Law, which was circulated and published for comments in November 2017, intends to end the prohibition to arbitrate over government contracts, which was decreed in 1963 in the aftermath of the ruling Saudi Arabia v. ARAMCO. The final boost for arbitration in the Kingdom is therefore believed to be given in the year 2019, at the latest.

About the Authors

Jochen Hundt – Managing Partner at Hundt Legal Consultancy in association with The Law Office of Khalid O. Alattas (Riyadh/Jeddah, Saudi Arabia)

+966 50 423 3752

Jochen Hundt is a German legal consultant born in 1969, educated in France and in the United Kingdom (double LL.M), admitted to practice in Saudi Arabia since 1998. He is the founder and owner of Hundt Legal Consultancy, a legal and tax consultancy established in 2011 in the UAE, operating in various jurisdictions (Saudi Arabia, UAE, Bahrain, and Algeria, with a strong focus on KSA) through its local cooperation partners. In Saudi Arabia, Jochen is advising over a dozen European embassies and foreign trade missions. He has published many articles in regional and international reviews and he is a frequent speaker at conferences both in the MENA region and in Europe. Jochen is a founding member of several lawyers’ and business organisations.

With input from Yassen Azeroil and Nouf A. S. Al-Qhtani, Hundt Legal Consultancy in association with The Law Office of Khalid O. Alattas (Riyadh/Jeddah, Saudi Arabia) – ‘Alattas & Hundt’