Drafting an Arbitration Agreement for Contracts Related to Saudi Arabia By Abdulrahman Hammad

While much has been written about the enforceability of arbitral awards, foreign and domestic, in The Kingdom of Saudi Arabia (“The Kingdom”), articles seldom advise on the practicalities of drafting international arbitration agreements recognizable and enforceable by The Kingdom’s courts. Generally, such agreements are added to contracts entered into with a domiciliary of The Kingdom, or contracts the principal place of performance of which is within the territorial boundaries of The Kingdom. This article will focus on effectively drafting an arbitration agreement (also known as an arbitration clause) for contracts relating to The Kingdom. It will address the relevant issues to be reviewed in such agreements, and conclude with a sample agreement for Saudi-related contracts. It will not focus on the enforcement or scope of review of arbitral awards by Saudi courts.

Recognition of the Arbitration Agreement

For an arbitration agreement to be effective, it must be recognized by relevant national laws. This recognition is generally the fruit of national arbitration legislation. Only through such recognition can the agreement command the adherence of national courts to its exclusive governance of covered dispute resolutions. Court adherence, in turn, binds the parties to the arbitral proceedings. Without recognition, respondents will be much more inclined to ignore the terms of their arbitration agreements, either to maintain the status quo of contract violation, or to coerce the claimant into national courts of applicable jurisdiction. For a court to bind the parties to arbitration, however, it must have jurisdiction over the dispute.

The courts of The Kingdom have jurisdiction over contractual disputes where:[1]

• the defendant is a Saudi person, except in rem disputes regarding real property located outside The Kingdom;
• the defendant is not a Saudi person, but with a place of residence or business in The Kingdom, except in rem disputes regarding real property located outside The Kingdom; or
• absent the above, the claim is:
  • regarding property located in The Kingdom;
  • regarding a contract entered into in The Kingdom;
  • regarding a contract expressly providing for performance in The Kingdom, either partially or fully; or
  • against multiple persons one of whom has a place of residence or business in The Kingdom.

If a given contract satisfies any of the legislated criteria, The Kingdom’s courts will have jurisdiction over disputes arising under it. Therefore, should the parties elect to arbitrate such disputes, they must do so in a manner recognized and enforceable by the Saudi courts in order to prevent a dissatisfied party’s seek of refuge under their auspices, either via initiating parallel claims or refusing to satisfy rendered awards. For our purposes, a properly drafted arbitration agreement will command the adherence of Saudi courts to arbitration as the exclusive method of dispute resolution. The Kingdom’s Law of Arbitration (hereinafter, the Law of Arbitration) provides that an arbitration agreement precludes court review of the covered disputes, except as provided by the Law of Arbitration.[2]

This broad provision, however, should not be taken for granted, as the Law of Arbitration has many requirements and provisions. It should also be noted that the Law of Arbitration does not distinguish between arbitration agreements providing for a seat of arbitration within The Kingdom (domestic arbitration) or outside of it (foreign arbitration). This results in the uniform recognition of arbitration agreements by Saudi courts, regardless of the stated seat of arbitration.[3] The uniformity, however, carries with it a potential risk to the parties: the mutual application of the requirements and provisions of the Law of Arbitration to domestic and foreign arbitrations, at least at the recognition stage. The Kingdom is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York” Convention).[4] As of the date of this Article, however, The Kingdom had not issued laws or regulations fully aligning its Law of Arbitration with the Convention. As such, The Kingdom’s courts are more inclined to apply the promulgated Law of Arbitration when considering the recognition of foreign arbitrations. This calls on the prudent drafter of an arbitration agreement to take both the Convention and the Law of Arbitration into consideration when drafting the agreement.

With regards to recognition, amongst the major requirements and provisions of the Law of Arbitration and the Implementing Regulations to the Law of Arbitration (hereinafter, the Implementing Regulations) are:

• Arbitration is not allowed in cases in which settlement is not allowed.[5]
  • Arbitration is not allowed in criminal disputes, matrimonial disputes, and disputes of the general law.[6]
• Entities of the Saudi government may not utilize arbitration to resolve their disputes with non-governmental entities without the approval of the Prime Minister.[7]
• Arbitrators must be experienced, with good standing, and with full capacity. A tribunal panel may be composed of more than one arbitrator, so long as it is composed of an odd number of arbitrators. [8]
  • Arbitrators may be Saudi nationals or foreign Muslims who are self employed or otherwise. Employees of the Saudi public sector may only serve as arbitrators after the approval of their employing entity. And should more than one arbitrator be employed, the chief arbitrator must have knowledge of the Islamic (Shari’ah) and commercial laws applicable in Saudi Arabia.[9]
• Agreements to arbitrate an existing dispute must be submitted for adoption by the court of original jurisdiction.[10]
  • The court of original jurisdiction shall adopt the arbitration agreement within fifteen days.[11]

These requirements and provisions will be applied by The Kingdom’s courts when asked to recognize an arbitration agreement, regardless of the place of arbitration. The New York Convention allows signatory states to refuse recognition of an agreement if the subject matter of the dispute is not capable of being settled by arbitration under the law of the recognizing country, or where the recognition would be against the public policy of the country.[12]

The Applicable (Proper) Law of the Dispute

The applicable law in an arbitration agreement is the law that governs the substantive matters of the disputes arising under such agreement.[13] Generally, arbitration agreements afford the parties the ability to choose the law that applies to the substantive matters of their disputes. This is to be distinguished from the lex arbitri, the law governing the arbitral proceeding, and which tends to be the national arbitration law of the place of arbitration.

In The Kingdom, courts will apply Saudi law to all disputes falling under their jurisdiction, regardless of the parties’ agreement. The Law of Arbitration, however, is silent on the parties’ choice of law with regards to a given arbitration. The Law of Arbitration also limits the scope of review by a reviewing court to compliance with the Law of Arbitration.[14] This results in allowing the parties to select a foreign applicable law in an arbitration agreement.

The complications with regards to the applicable law arise when The Kingdom’s courts are asked to enforce foreign arbitral awards rendered in disputes subject to their original jurisdiction. The courts will refuse to enforce the aspects of the award that contradict the principals of Shari’ah or the general law of The Kingdom, such as awards of interest or dismissal based on statutes of limitation. The refusal finds grounds in the Implementing Regulations’ requirement that arbitral awards be within the ambits of Shari’ah principals,[15] a requirement that is echoed in the Guidance for Enforcing Foreign Arbitral Awards issued by the Board of Grievances.[16] [17] This does not violate the New York Convention, as The Kingdom views the application of the general law and Shari’ah principals as a matter of public policy, a recognized refusal ground under Article V(1)(b) of the Convention.

Therefore, to avoid partial enforcements and lengthy award reviews by The Kingdom’s courts (and strengthen the case for recognition), parties are encouraged to elect the laws of The Kingdom as the laws applicable to disputes arising under their arbitration agreements, or that the awards be compliant with its general law and principals of Islamic Shari’ah.

The Lex Arbitri

Every country regulates the procedures of the arbitrations held within its boundaries to ensure that such arbitrations resolve disputes in a manner reflective of the country’s sense of justice. The regulations governing arbitration procedures held within The Kingdom are provided by the Law of Arbitration and its Implementing Regulations. Generally, conflicts do not arise as to which lex arbitri is applicable to a given arbitration proceeding because the applicable lex arbitri is that of the seat of arbitration. Furthermore, awards are rarely denied enforcement at a jurisdiction foreign to the seat of arbitration because the arbitration did not follow the enforcing country’s procedures.[18]

The uniform application of The Kingdom’s Law of Arbitration and its Implementing Regulations to foreign and domestic arbitrations, however, imposes restrictions on the parties’ free use of the lex arbitri of a foreign seat of arbitration. Territoriality dictates that the lex arbitri of the seat of arbitration governs arbitration procedures. Where the arbitration is regarding a dispute to which The Kingdom’s courts have jurisdiction, the recognition of the arbitration, however, may be challenged for violations of the procedural provisions of The Kingdom’s arbitration laws and regulations, such as the neutrality of arbitrators or the prohibition against even-numbered arbitral tribunals. A challenge on the same grounds at the enforcement stage, however, is not as feasible since enforcement of foreign arbitral awards is subject to the Guidance for Enforcing Foreign Arbitral Awards, which expressly limits the enforcing court’s scope of review to verifying a number of requirements that do not include complying with The Kingdom’s arbitration rules.[19]

Only a limited number of procedural requirements, however, may be violated prior to the start of the arbitration. These are:

• Contractually violating the allowed number of arbitrators under Art. 4 of the Law of Arbitration;
• Contractually violating the arbitrator qualification requirements of Art. 4 of the Law of Arbitration and Art. 3-4 of the Implementing Regulations;
• Contractually violating the arbitrators’ neutrality and independence requirements of Art. 4 of the Implementing Regulations;
• Contractually violating the Arabic language requirement of Art. 25 of the Implementing Regulations;
• Contractually violating the fairness requirements of Art. 36 of the Implementing Regulations.

A carefully drafted arbitration agreement will consider the above requirements so that violating terms may not be instituted by the parties or the courts of the seat of arbitration when a dispute arises. Furthermore, it is unlikely for a Saudi court to allow a parallel judicial proceeding simply because the arbitration agreement violates these four requirements. The conventional remedy would be to order the parties to comply with the Law of Arbitration and its Implementing Regulations. As such, where claimants are envisioning enforcing default awards in The Kingdom, it is advisable for them to adhere to the procedural rules of the Saudi Law of Arbitration and its Implementing Regulations.

The Arbitration Agreement

This is a sample arbitration agreement to be included in contracts related to The Kingdom. While it does not specify the seat of arbitration, it is drafted with a view of it being outside the Kingdom, and is best suited for contracts where at least one of the parties is not a Saudi domiciliary. Should all the parties be of Saudi Arab domicile, convenience would dictate holding the arbitration in The Kingdom. The agreement is for institutional arbitration based on the model arbitration agreement of the London Court of International Arbitration (the LCIA).[20] Naturally, the agreement may be modified by users to accommodate a different institution or to supplement one for Ad Hoc arbitration.

Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause, except where otherwise modified hereunder.

The number of arbitrators shall be [an odd number, preferably one or three].

The seat, or legal place, of arbitration shall be [  ].

The governing law of the contract shall be the substantive law of [The Kingdom of Saudi Arabia].

A sole arbitrator or chairman of the Arbitral Tribunal shall have knowledge of the Islamic (Shari’ah) laws and commercial laws applicable in The Kingdom of Saudi Arabia, and maybe a national of The Kingdom of Saudi Arabia.

Parties looking to arbitrate according to rules that do not provide for the neutrality and independence of arbitrators or the fairness of the arbitral procedures in line with the Implementing Regulations, should also add the following:

All arbitrators shall be and remain at all times impartial and independent of the parties; and none shall act in the arbitration as advocates for any party. No arbitrator, whether before or after appointment, shall advise any party on the merits or outcome of the dispute.

The Arbitral Tribunal shall act fairly and impartially as between all parties, giving each a reasonable opportunity of putting its case and dealing with that of its opponent.

The Arbitral Tribunal shall adopt procedures suitable to the circumstances of the arbitration, avoiding unnecessary delay or expense, so as to provide fair and efficient means for the final resolution of the parties’ dispute.

Final Words

While The Kingdom of Saudi Arabia has, to a certain extent, legislated on the enforcement of foreign arbitral awards in light of its treaties, recognition of arbitration agreements remains largely subject to the Law of Arbitration and its Implementing Regulations, both of which drafted primarily for domestic arbitrations. As such, the path to successful Saudi-related arbitrations is through arbitration agreements acceptable to The Kingdom’s courts. Such agreements require a thorough knowledge of the laws and legal practices applied in the country. A superficial provision for disputes may render parties intending to do business in The Kingdom frustrated.