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Enforcement of Foreign Arbitral Awards in Saudi Arabia           Date: 2011-01-10

Article prepared by Dale E. Stephenson And Khulaif Al-Enezee and published the Financier Worldwide December 2010 Issue.

 

The growth of international trade, foreign investment, and complex commercial transactions in The Kingdom of Saudi Arabia has been accompanied by increasing reliance on contractual choice-of-law and international arbitration provisions to resolve commercial disputes that arise between Saudi and foreign parties.

 

The ability to enforce any foreign arbitral award in Saudi Arabia, however, may be particularly difficult given the prevailing legal regime and limitations under applicable international treaties. While ‘freedom of contract’ and the concept of arbitration are well founded under Islamic (or Shari’ah) law, there has been a particular wariness in Saudi Arabia towards international dispute resolution that seeks to designate a neutral choice-of-law and independent arbitral forum as an alternative to judicial enforcement of contractual rights in the Saudi courts. Governmental entities in the Kingdom have been prohibited since 1963 by Royal Decree from submitting to mechanisms for international dispute resolution or the selection of any foreign law to govern a dispute, absent a specific waiver from the Council of Ministers. This situation stems from a historic dispute between the Arabian American Oil Company (Aramco) and the Saudi government in which non-Arab arbitrators determined that Shari’ah was not a sufficiently detailed legal system to handle a complex energy dispute and thus could not serve as governing law.

 

 

Saudi Arabia has the reputation of being highly sceptical towards the recognition and enforcement of non-domestic arbitral awards, particularly those applying non-Saudi govern ing law. Saudi Arabia also remains one of the few jurisdictions in the region that has not es tablished its own regional commercial arbitra tion centre or enacted an international arbitra tion law based on a recognised standard.

 

 

Under the current structure, it is entirely possible that a complex dispute may proceed through the significant business distraction, time, and expense of international arbitration only to find that the entire case will be subject to de novo judicial review and subsequent ap peal in the Saudi courts – applying Saudi law regardless of the designated standard – and that all or a significant part of the arbitral award may not be enforced for reasons that are a surprise to the foreign party.

 

 

Shari’ah law derives from the Qur’an (Ko ran), which is the foundational Constitution of Saudi Arabia, and other secondary religious sources. While the Saudi government periodically issues rules and regulations to supplement Islamic law, such supplemental authorities cannot modify or restrict funda mental Shari’ah principles. In the event that governmental rules and regulations – or the express provisions of a contractual agreement – present any conflict, Shari’ah law as applied in Saudi Arabia will prevail. Thus, negotiated terms may sometimes give way to certain Is lamic legal principles in a commercial dispute. Indeed, even if a contract expressly designates a choice-of-law such as English or New York law, Saudi courts will be inclined to disregard the governing law provision and decide the case before them in accordance with Saudi law.

 

 

It is well recognised that any obligation to pay interest or a sum in the nature of interest (riba) is not enforceable under Shari’ah law as applied in Saudi Arabia, and this limitation may even extend to concepts such as indexing to cover inflation, options, futures, and for ward exchange transactions. While parties are free to negotiate the terms of their contracts, Islamic law also requires that parties must maintain general principles of fairness and equity in their dealings and that there should be no element of deception, speculation or un certainty (gharar). In other contexts, there are prohibitions on consequential damages, liqui dated damages, indemnification without direct cause of loss, and certain prospective consents such as future waiver or ‘agreements to agree’. There may also be limitations on the permissi ble assignment of contractual rights (including contract proceeds) without the counterparty’s express written consent. Generally, injunctive relief is not available as a remedy for breach of contract, and Saudi courts may not enforce agreed time limits on a party’s ability to bring a claim or dispute a matter. Finally, Saudi courts do not award costs to a successful litigant.

 

 

The reservation of general controlling con cepts under Islamic law (as applied in Saudi Arabia) is further compounded by the fact that there is no concept of judicial precedent, which means that the decisions of a court or a committee will have no binding authority in a subsequent dispute. Most judges are Shari’ah scholars without formal legal training and may not predictably follow non-Saudi procedures, legal principles, secular regulations, or inter national law. There is also no system of court reporting or published decisions.

 

 

While Saudi Arabia acceded to the 1958 Con vention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Con vention’) in 1994, the Kingdom has not enact ed any domestic implementing regulations and has broadly invoked the ‘public policy’ excep tion in previous cases. Under Article V (2)(b), a member state may decline to recognise or enforce an arbitral award that is contrary to the public policy of that country, and Saudi Ara bia has raised this exception where the arbi tral award has been deemed to be inconsistent with Islamic law as applied in the Kingdom. Saudi Arabia has also enforced the ‘reciproc ity’ reservation to the New York Convention differently than other member states, refusing to ratify foreign arbitral awards of a jurisdic tion that would not enforce a Saudi judgment. Overall, while Saudi Arabia’s accession to the New York Convention represents a posi tive step towards respect for internationally recognised contracting and dispute resolution standards, it remains the most uncertain juris diction among the Gulf Cooperation Council (GCC) states regarding the predictable and ef ficient enforcement of foreign arbitral awards.

 

 

Most types of general commercial disputes and related enforcement of foreign judgments or arbitral awards are assigned to the Saudi Board of Grievances. Thus, any foreign arbi tral award must be ratified by the Board which undertakes a full merits review (essentially a re-trial) to ensure that the award does not vio late any of the Shari’ah law principles as de termined subjectively by the presiding Judge, without the benefit of any judicial precedent. This process – including all documents, sub missions, and oral presentations – must be in Arabic and comply with all other procedural requirements imposed by Saudi courts. The system can take years through complete judi cial review and subsequent appeal.

 

 

It should be noted that Saudi Arabia has its own domestic arbitration system (Saudi Arbi tration Act issued by Royal Decree in 1983), which is not based on the UNCITRAL Model Law, and which has far greater duplicative ju dicial involvement by the Board of Grievances and subsequent appeal rights than other arbitration laws in the region. In a recent dispute, an initial ruling in favour of Emaar Proper ties PSSJ after two years of proceedings was reversed by the Board of Grievances without deference to the Saudi arbitrators. The King dom is also a party to the 1983 Convention on Judicial Co-operation between the States of the Arab League (Riyadh Convention) and the 1995 GCC Protocol. Article 37 of the Riyadh Convention provides that arbitral awards and judgments from originating states generally will be recognised and enforced in recipient states. A draft unified arbitration law for GCC countries is pending before the GCC Secre tariat in Riyadh but has not yet been enacted or ratified by member states.

 

 

Given the current legal and practical limita tions, careful consideration must be given to drafting contractual dispute resolution pro visions involving commercial matters, par ties, and assets in Saudi Arabia. International arbitration may not be the preferred or most practical approach, and the following consid erations should be taken into account. First, if the other party and its assets are in Saudi Arabia, careful thought should be given to the effectiveness of relying on standard arbitration provisions that, for example, seek to have an international Tribunal apply English law. Sec ond, try to maintain sufficient assets or other security for the enforcement of any arbitral award in another jurisdiction where effective enforcement is more predictable. Third, if a future dispute ultimately will be subject to de novo judicial review and appeal in Saudi Arabia, evaluate whether it is more cost ef fective to simply designate Saudi law and the Saudi Board of Grievances as having original jurisdiction, or consider whether reference to an arbitral forum in a jurisdiction subject to a regional treaty may be more viable. Finally, if a commercial dispute is going to be governed by Shari’ah law as applied in Saudi Arabia, carefully review the contractual provisions for terms or conditions that may be rejected by Saudi courts and structure all agreements to minimise the risk of unwelcome surprises down the road.

 

 

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