New Saudi Arbitration Law: A Positive Step, but Practical Questions Remain

• Mohammed Al-Ghamdi, John Vincent Lonsberg, John C. Boehm, Jr. and Samuel Edward Eversman

On June 8, 2012, Saudi Arabia published its long-awaited arbitration reform law. The new Arbitration Regulation (Royal Decree No. M/34) (the "New Law") replaces the Arbitration Regulation of 1983 (Royal Decree No. M/46) and the Rules for the Implementation of the Arbitration Regulation of 1985 (Ministerial Resolution No. 7/2021/M) (the "Old Law"). The New Law (which became effective on July 7, 2012) institutes a variety of reforms to Saudi Arabia's arbitration system. While not expressly stated, the New Law appears to be a part of a broader and continuing reorganization of Saudi's judicial system. However, only time will tell the extent to which the New Law's reforms will be implemented in practice.

Historical Perspective

A. The Saudi Judicial System

Saudi Arabia is an Islamic monarchy founded in Islamic Shari'ah. Saudi Arabia has a dual judicial system consisting of Shari'ah courts, which are the courts of general jurisdiction and hear criminal and civil matters, and various other tribunals. The most important of those tribunals is the Board of Grievances which was established initially to hear governmental related claims, but whose jurisdiction has been expanded to include a wide variety of commercial disputes involving non-Saudi parties and actions to enforce foreign judgments and arbitral awards affecting those parties. 

In 2007, King Abdullah initiated major reforms to the judiciary and courts of Saudi Arabia. The new Law of the Judiciary (Royal Decree No. M/78 dated October 1, 2007) reorganized the existing structure and jurisdiction of the Saudi court system. In addition, the new Board of Grievances Law (also issued under Royal Decree No. M/78 dated October 1, 2007) restricted the jurisdiction of the Board of Grievances to governmental matters. The judicial reorganization regulations also established a new "commercial court" with jurisdiction over certain commercial disputes and enforcement of arbitral awards. However, these regulations have not yet been fully implemented in practice notwithstanding that they have been duly promulgated and are technically "in effect".

B. Arbitration

Previously, arbitrations in Saudi Arabia were governed by the Old Law, which subjected arbitrations to intense judicial oversight by the Saudi courts (generally the Board of Grievances for matters involving non-Saudi parties). The Old Law required all arbitration proceedings in Saudi Arabia to be conducted in Arabic and awards could be rejected and reformed in the discretion of the court. All proceedings in Saudi courts and tribunals (including the Board of Grievances) are in Arabic. 

Under the Old Law, the relevant court was responsible for approving the parties' agreement to arbitrate and appointing arbitrators if the parties failed to do so. There were no written requirements for arbitration agreements under the Old Law. Thus the decision whether to approve arbitration as a means to resolve a dispute was in the discretion of the relevant court. The relevant court also supervised and ruled on disputes arising during the arbitration, including procedural objections, arbitrator recusals, and requests for interim or injunctive relief. 

In addition, under the Old Law the relevant court was responsible for enforcement of arbitral awards (foreign and Saudi) and conducted whatever level of review it deemed necessary to ensure that the arbitration award was compliant with Shari'ah. In practice this typically amounted to what appeared to be a de novo review of the entire matter. In fact, in some instances the Board of Grievances has reversed and re-written awards (e.g., vacated the arbitral award and awarded new damages to the party who lost on the merits in the arbitration). 

It is noteworthy that Saudi Arabia has been a party to the Convention on the Recognition and Enforcement of Arbitral Awards of 1958 (the "New York Convention") since 1994. The New York Convention provides the procedure for enforcement of arbitral awards made in other member countries. In practice, however, the Saudi courts have rarely (if ever) enforced foreign arbitral awards pursuant to the New York Convention. Presumably, this has been the result (at least in part) of the Saudi courts' finding that review, rehearing and/or revision was necessary to ensure Shari'ah compliance. This practice of the Saudi courts may be considered an application of the New York Convention's public policy exception to enforcement. 

The New Law does not change the Shari'ah compliance requirement and expressly recognizes the court's authority to review arbitral awards for Shari'ah compliance.

Positive Steps

On its face, the New Law borrows from the 1985 - UNCITRAL Model Law on International Commercial Arbitration, as amended in 2006 and, accordingly, more closely aligns Saudi law with international arbitration norms, allows more control to the parties, and provides greater clarity on several issues, including the following:

• The New Law provides written guidelines for determining whether an agreement to arbitrate may be enforced. Previously, there were no written guidelines for arbitration agreements (except the requirement that the arbitration agreement be made by a person with full legal capacity) and it was the responsibility of the Saudi court to approve the parties' agreement to arbitrate before the arbitration process could begin.
• The New Law provides clear and detailed procedures for the appointment and/or recusal of arbitrators. Under the Old Law there were no detailed guidelines.
• The New Law allows arbitrations to be conducted in a language other than Arabic if ordered by the arbitration panel or the parties agree (although awards must be translated to Arabic prior to enforcement). Under the Old Law, arbitrations were required to be conducted in Arabic.
• The New Law increases the length of time to complete the arbitration process. Under the Old Law, the arbitrator was required to issue an award within 90 days (unless the parties otherwise agreed), although this requirement was not typically observed in practice. Under the New Law, the arbitration process is allowed to take at least 12 months and can be extended by 6 months or more if the parties agree.
• The New Law now expressly prohibits government bodies from entering into arbitration agreements, unless approved by the Prime Minister. The Old Law was less specific in this regard and merely stated that government authorities could not resort to arbitration for settlement of disputes except after having obtained the approval of the Prime Minister.
• The New Law allows parties the freedom to choose which law will apply. The Old Law was silent in this regard (other than requiring that arbitral awards must be pursuant to the provisions of Islamic Shari'ah and the "laws in force", i.e. applicable Saudi law).

Practical Questions

Although the New Law provides additional detail and clarity on issues that were lacking under the Old Law, only time and experience will tell whether, when and how these reforms will be implemented in practice. More specifically, from a practical perspective it is important to recognize that:

• The new arbitration law affirms that Shari'ah is paramount and that arbitration awards may be enforced only if they are Shari'ah compliant.
• As noted above, the appropriate Saudi tribunal (typically the Board of Grievances at least until the new Law of the Judiciary, Board of Grievances Law and related judiciary reorganization regulations are fully implemented) remains responsible for approving awards and ensuring that awards are Shari'ah compliant as a condition of enforcement.
• Although the New Law provides increased flexibility with respect to selecting the location of the arbitration, the choice of governing law, language, selection of arbitrators and other matters, this flexibility is still clearly subject to the Saudi courts' oversight and mandate to ensure Shari'ah compliance. For example, while the New Law expressly states that arbitrators need not be "competent" in Shari'ah (e.g., arbitrators may have a civil law degree), the impact on the court's review and enforcement of an arbitral award issued through an arbitrator who is not deemed "competent" in Shari'ah is not addressed other than to confirm the paramount requirement of Shari'ah compliance. The same observation and uncertainty arises in connection with venue, language of the arbitration, choice of law and other matters. In sum, while the New Law allows significant flexibility and control with respect to the procedures for conducting an arbitration, the parties will want to take the Shari'ah compliance requirement into consideration when making such decisions.
• The New Law requires the Saudi court to act within a certain amount of time when performing its supervisory functions during the arbitration process. For example, if the parties fail to agree on the appointment of the arbitrator, the court must do so (according to the procedures set out in the New Law) within 30 days of the parties' application. These time limits should help to move the arbitration process along more quickly. However, in practice, it is unclear whether the courts will adhere to such time limits or other "mandatory" aspects of the law.
• The New Law permits the arbitration panel to issue temporary or injunctive relief if the parties agree that the arbitration panel may do so. However, this appears to conflict with another provision in the New Law which reserves such action for the "competent court". It is unclear in practice whether the court or arbitration panel will issue or enforce such temporary or injunctive orders, which are extremely rare in practice in Saudi Arabia.

Conclusion

The New Law appears to be a further step in reforming Saudi Arabia's judicial system. It is unclear how and to what extent the new Arbitration Regulation will "take hold" pending the full implementation of other judicial system reforms. As a result, parties must still consider many Saudi-specific practice issues in deciding what dispute resolution mechanism to choose in their contracts relating to Saudi Arabia. For many contracts, choosing Saudi courts as the forum for dispute resolution may remain a better alternative than choosing arbitration in Saudi Arabia, even under the New Law. 

If you have any questions, please contact any of the following attorneys in Fulbright's Middle East Practice Group: 

Mohammed Al-Ghamdi
mal-ghamdi@fulbright.com
+966 1 279 5401 

John V. Lonsberg
jlonsberg@fulbright.com
+966 1 279 5400 

John C. Boehm, Jr.
jboehm@fulbright.com
+966 1 279 5400 

Samuel E. Eversman
seversman@fulbright.com
+966 1 279 5400 

Source: fulbright