Saudi Arabia

Introduction

Sources of law

The paramount body of law in Saudi Arabia is the shariah. The shariah com­prises a collection of fundamental principles derived from a number of different sources, which include the Holy Quran and the Sunnah.¹ There are four primary Islamic schools of juris­prudence - Hanbali, Hanafi, Maliki and Shafi.

There are no statutory enactments with respect to many areas of law. For example, there is no relevant statutory body of law in Saudi Arabia that governs mortgages or other security interests in general.

In addition to the shariah, law in Saudi Arabia is derived from promulgated legislation. Legislation is adopted in various forms, the most common of which are royal orders, royal decrees, Council of Ministers resolutions and ministerial resolutions and departmental circulars. All such laws are ultimately subject to, and may not conflict with, the provisions of the shariah.

The Basic Law came into force in 1992. Royal orders may be made by the King dealing with any matter. For example, the Basic Law, the Consultative Council Law, the Council of Ministers Law and the Provincial Councils Law were all adopted pursuant to under royal order and ministers are appointed and removed by royal order. Royal decrees are made to approve international treaties, concessions, enactments and amendments recommended by the Council of Ministers. The Council of Ministers is also permitted (pursuant to the Council of Ministers Law) to adopt resolutions to regulate specific issues without any requirement for approval by royal decree. Ministerial resolutions may be adopted by a minister pursuant to the powers conferred upon him by a specific law. Ministerial resolutions are usually used to set out rules of implementation of a specific law. Ministerial circulars are also promulgated by ministers pursuant to the powers conferred by a specific law.

All courts and adjudicatory bodies are required to interpret secular legislation in accordance with shariah principles and the Board of Grievances and, naturally, the shariah courts, will do so. The SAMA Committee has, however, exhibited some flexibility to the extent referred to later in this article.

Previous decisions of Saudi Arabian courts and adjudicatory bodies are not con­sidered to establish binding precedents for the decision of later cases. As a result of this, the courts and other adjudicatory bodies have considerable discretion in their interpretation and appli­cation of the shariah and the secular laws.

The Board of Grievances Law, which grants the Board of Grievances jurisdiction over administrative law matters, including claims or compensation from the government or challenges to a minister’s decision, contains no provision for sovereign immunity. The concept of sovereign immunity is not recognised under the shariah. The shariah is perceived as the word of God, to Whom all human beings are subordinate. Accordingly, there is no provision in the laws of Saudi Arabia for the immunity of the state’s assets from attachment. In practice, however, were any attachment required, it could only be effected by government officials.

Dispute resolution

Shariah courts

The shariah courts, generally, have jurisdiction over all civil claims, except where jurisdiction has been reserved to one of the other adjudicatory bodies established in the Kingdom (ie, the Board of Grievances or one of the specialised committees, such as the labour committees, the Banking Dispute Committee or the SAMA Committee). In particular, the shariah courts have jurisdiction over all family law, real property matters and the majority of criminal matters. The balance of criminal matters are within the jurisdiction of the Board of Grievances.

Board of Grievances

The Board of Grievances was established and laid out under article 8 of the Board of Grievances Regulations promulgated under Royal Decree No. M/51 dated 17/7/1402 H. (10 May 1982) (the Board of Grievances Law). Further, pursuant to Council of Ministers Resolution No. 241 dated 26/10/1407 H. (23 June 1987), confirmed by Royal Decree No. M/63 dated 26/11/1407 H. (23 July 1987), the commercial disputes between private sector litigants caem under the jurisdiction of the Board of Grievances. Such jurisdiction is exercised by the Board of Grievances’ commercial divisions.

There are also secondary divisions or sub-divisions of the Board of Grievances located at the Board’s headquarters and branches. These sub-divisions exercise the Board’s jurisdiction over applications for the enforcement of foreign judgments and arbitral awards, proceedings relating to the rights of government officials and under the Civil Service Law and the Civil Service Pensions Law, proceedings relating to claims for relief against government financial claims and disputes of limited significance referred to any such subdivision by the President of the Board.

Arbitration

National Arbitration Rules

Arbitration in Saudi Arabia is governed by the Arbitration Regulation issued under Royal Decree No. M/34 dated 24/5/1433H corresponding to 16/4/2012G (the Arbitration Regulation) and its Rules are yet to be finalised.

The Arbitration Regulation sets out over 58 articles a comprehensive set of provisions that govern, among other things, agreements to arbitrate existing or future disputes, the appointment and removal of arbitrators and their powers and qualifications, the conduct of arbitration proceedings, and the annulment and enforceability of the award.

Although the rules governing Saudi arbitration are in many ways comparable to those of other countries, there are few important differences. A key characteristic of arbitration in Saudi Arabia is the extent to which arbitration is supervised by the Saudi court or administrative tribunal with original jurisdiction over the dispute, which the Arbitration Regulation calls under article 54 the ‘court of jurisdiction’ (the Authority). The Authority in most commercial disputes will be the Board of Grievances, the administrative court with jurisdiction over both private commercial disputes and claims against the Saudi government as elaborated earlier. In other cases the Authority might be a shariah court (these are courts of general jurisdiction in the Kingdom) or another more specialised judicial or administrative body (ie, the Banking Settlement Committee or the Committee for the Resolution of Securities Disputes).

Since the primary role of the Authority is to ensure that arbitrators adhere closely to Saudi Arabian substantive and procedural law, this aspect of Saudi arbitration tends to make it more similar to litigation than may be the case in respect of arbitration in other countries. However, it is noteworthy that article 54 clearly mandates that a challenge against the validity of the award in relation to shariah and Saudi public policies does not automatically trigger estoppel against enforceability of the award. The award will remain enforceable by the concerned parties unless the claimant includes in their challenge and claim a request to stop enforceability and the Authority decides on it. Article 8 designates the appeal level of the competent court to be the relevant tribunal in such instances and not to litigate at first instance.

International arbitration conventions

Saudi Arabia adhered to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated 10 June 1958 (the New York Convention) with effect from 18 July 1994. Saudi Arabia is also a party to the International Convention on Settlement of Investment Disputes (ICSID), subject to a reservation with respect to oil-related disputes, as well as the 1952 Convention on the Enforcement of Foreign Judgments and Awards entered into by certain members of the Arab League, and the Convention on the Enforcement of Judgments, Disputes and Judicial Summonses in the Arab Gulf Co-operation Council States.

Agreements to arbitrate

The Arbitration Regulation recognises two types of agreements to arbitrate. The parties may agree to submit a specific existing dispute to arbitration even if a litigation has already started and can thus be stopped, or the parties may agree in advance to submit to arbitration any dispute arising from a specific contract. In any event, any arbitration agreement must be in writing or it loses the protection of the Arbitration Regulation pursuant to article 9, which requires all arbitration agreements to be documented.

Arbitration is not permitted in matters that may not be the subject of conciliation. These include criminal matters, particularly those for which fixed penalties are stipulated under Islamic Law, other matters involving public policy, and certain matrimonial disputes of a non-financial nature. In general, most commercial and financial disputes can be conciliated and thus can also be resolved by arbitration.

The Arbitration Regulation continues under article 10 a long-standing prohibition against resort to arbitration by Saudi governmental authorities for the settlement of disputes they may have with third parties. Saudi government agencies may only agree to arbitrate after having obtained prior approval from the Chairman of the Council of Ministers, or Cabinet, a position which is currently held by His Majesty the King. In practice, such permission is seldom sought. However, it is noteworthy that certain entities controlled by the government of the Kingdom of Saudi Arabia but operate primarily in the private sector are not considered subject to this restriction and do engage in arbitration.

Article 10 and the Council of Ministers Resolution No. 58

Council of Ministers Resolution No. 58 dated 17/1/1383 H. (9 June 1963) stipulates that no government authority is permitted to accept arbitration as a means of settling disputes between it and any individual, company or private organisation, other than in ‘exceptional’ circumstances in which the state grants a concession and in doing so considers that it is in the best interests of the state to include a provision for arbitration in such concession. This stand has been reinforced by article 10 of the most recent Arbitration Regulation.

Therefore, the Council of Ministers Resolution No. 58 provides the following.

The choice of law governing any dispute to which a government authority is party is to be determined ‘in accordance with the established general principles of private international law’, the most important of which, according to Council of Ministers Resolution No. 58, is the principle of the application of the law pertaining to the place of execution.²

Government authorities are not permitted to choose a foreign law to govern their relationship with individuals, companies or private organisations.

No government authority is permitted to conclude a contract that contains any clause subjecting such authority to the jurisdiction of any foreign court or other adjudicatory body.

Subject to the restrictions on choice of governing law and submission to jurisdiction contained in Council of Ministers Resolution No. 58, parties to contracts may, without violation of any provision of Saudi Arabian law, agree that a foreign law governs disputes arising thereunder, or submit to the jurisdiction of a foreign court. Notwithstanding any choice of a foreign law as the governing law or submission to the jurisdiction of any foreign court, if a dispute relating to such contract comes before a Saudi Arabian court or other adjudicatory body such court or other adjudicatory body will regard itself as not bound by any such choice of law or submission and will apply Saudi Arabian law, which does not recognise the doctrine of conflicts of law. In the case of an agreement that provides for dispute resolution by arbitration in a state that is a member of the New York Convention, a Saudi Arabian court or other adjudicatory body, which one party wishes to deal with a dispute under such agreement, may decline to deal with such dispute and require the parties to abide by their agreed mode of dispute resolution, even though the governing law to be applied to the substantive (ie, non-procedural) aspects of the dispute being dealt with in such arbitration is not Saudi Arabian law.

Foreign arbitration clauses

The scope of the Arbitration Regulation is not expressly limited to arbitrations in Saudi Arabia. It actually extends to extraterritorial arbitration and recognises international arbitrations and international conventions under articles 2 and 3.

The enforceability of arbitration clauses calling for arbitration outside the Kingdom under arbitration rules other than those set forth in the Arbitration Regulation must be considered in light of article 11 of the Arbitration Regulation, which states:

The court to which a claim is brought and there is an agreement to arbitrate should dismiss the case provided the defendant argued for such dismissal before submitting any other arguments.

The award

The harams

A haram under shariah is something that is forbidden and against shariah principles. Therefeore the arbitrators are required to issue an award that complies with the principles of shariah and the provisions of any applicable Saudi Arabian legislation and to avoid awards against shariah principles, haram. Among the more significant substantive shariah principles that apply in connection with commercial disputes are those that prohibit the payment of interest or the recovery of ‘speculative’ damages, eg, loss and future profit.

Under the shariah as applied in Saudi Arabia, interest in any form is not recoverable, regardless of whether it is called by a different name (eg, a ‘commission’ or ‘service charge’) or whether the contract in question requires interest payments. Any payment of the same general nature as interest or calculated by reference to prevailing interest rates is similarly prohibited.

Saudi courts, and most arbitrators as well, are also reluctant on shariah grounds to award certain types of indirect or consequential damages that might be recoverable in other countries but are deemed overly speculative by the Saudi courts. These include damages for loss of future profits or loss of goodwill. In general, recovery is limited to compensation for direct, actual losses.

Form of award and modifications

The Arbitration Regulation specifies that the award must summarise the dispute, the evidence submitted and the claims and defences presented by the parties. The reasons for the award must be stated along with the award itself. Once the award is issued, the arbitrators on their own motion may correct any material typing or arithmetical errors. They may also issue interpretations of any ambiguity in the text of the award, but only if so requested by one or both of the parties within 30 days of such party’s receipt of the award. Article 44 stipulates that the tribunal within 15 days from delivering the award shall lodge a copy of the award with the component court with a certified Arabic translation if it was in a foreign language.

Judicial review and enforcement

As a general rule, all judgments of Saudi Arabian courts, other adjudicatory bodies and specialised committees and confirmed arbitration awards are enforced only once they are final (ie, after exhaustion of all rights of appeal). Further, one of the most significant differences between the Arbitration Regulation and arbitration laws in many other countries is that the Arbitration Regulation contains no express limitations on the extent to which the Authority may review an arbitration award on the merits.

The Arbitration Regulation requires at least some level of review of an award by the Authority. Previously, the Authority must review the award before issuing an order for its execution so as to ‘confirm that there is nothing to prevent its execution legally’. However, the Enforcement Regulation issued under Royal Decree No. M/53 dated 13/8/1433H (3 July 2012) (the Enforcement Regulation) came into the picture to further strengthen the Arbitration Regulation.

Certainly, the Authority’s review of the award is likely to be more extensive if an objection has been filed as previously stated pursuant to article 54. However, the Enforcement Regulations stipulates in article 9 that forcible enforcement shall be based on certain enforcement resolutions and documents among which are arbitration awards. The Enforcement Regulation’s Implementing Regulation was adopted by the Minister of Justice on 17/4/1434H (27 February 2013). It provides that any enforcement document must be verified by the enforcement judge for validity and enforceability. This is in line with article 55 of the Arbitration Regulation, which also mandates that any request to enforce an award shall be filed only after the lapse of the appeal period to annul the award and the relevant judge must confirm validity in relation to any parallel or prior judgments by competent authorities or public policy and shariah principle issues. Any certain provision of the award that is not enforceable can be eliminated on its own and segregated from the remainder of the enforceable award.

Having the Enforcement Regulation adopted and effective, the enforcement judges now have full autonomy to enforce against defendants’ assets and can further request extraterritorial enforcement on a reciprocal basis.

Domestic awards

Article 52 of the Arbitration Regulations states that an arbitration award ‘shall have the force and validity of a final judgment and shall be enforceable’. Upon the completion of an arbitration, the award of the arbitrators must be submitted to the court or other adjudicatory body that would otherwise have entertained the dispute for its approval and confirmation. Once an arbitral award has been confirmed, it may be enforced as an order of such body.

In the case of a private arbitration, the unsuccessful party is responsible for complying with the arbitration award. If the unsuccessful party is unwilling to comply with the arbitration award, the successful party may seek enforcement of the arbitration award by applying to the enforcement court.

Cross-border awards

Arab Gulf Cooperation Council (GCC) Arbitration

The Gulf Cooperation Council Convention was entered into in May 1981 by Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman, and provided mainly for the establishment of the Gulf Cooperation Council, citing the special relations between member states as one of the main reasons for establishing it (the GCC Convention).

Pursuant to the Gulf Cooperation Council Arbitration Charter and the Arbitration Rules of the Commercial Arbitration Center in Bahrain, agreements where at least one party is a national of a Gulf Cooperation Council member state may refer disputes arising from contracts to which they are party to arbitration before the Gulf Cooperation Council Commercial Arbitration Center in Bahrain in accordance with the GCC Arbitration Rules.

By Royal Decree No. M/3 dated 28/4/1417 H (11 September 1996) Saudi Arabia ratified the GCC Convention on the Enforcement of Judgments and Judicial Representation and Notices among members of the GCC.

The Convention includes provisions with respect to the reciprocal recognition and enforcement of judgments of the courts of member states and arbitral awards of arbitrators made in member states which are not substantially different from those of the Arab League Convention.

The Arab League Convention for the Enforcement of Judgments of 1952

In 1953 Saudi Arabia signed, and in 1954 ratified, the Arab League Convention for the Enforcement of Judgments of 14 September 1952.

The Arab League Convention applies to judgments deciding ‘civil or commercial rights or requiring [the payment of] compensation by [virtue of any sentence imposed by] criminal courts or relating to personal status.’ With regard to such matters, the Arab League Convention provides that the final judgment of a court in a member state shall be ‘capable of execution’ in any other member state of the Arab League.

Under the Arab League Convention, the judicial body in the country in which enforcement of the judgment is sought may not re-examine the subject matter of the underlying case. Judicial review is limited to ensuring compliance with fundamental legal principles (eg, the public policy of the country in which enforcement of the judgment is sought) and specified procedural requirements (eg, the jurisdiction of the country that issued the judgment and due notice).

The Arab League Convention requires each member state to designate the appropriate judicial body to which applications for enforcement should be submitted. Pursuant to Council of Ministers Resolution No. 251 of 28/12/1379 H (22 June 1960), Saudi Arabia has designated the Board of Grievances for such purposes.

Several foreign judgments have been submitted to the Board of Grievances for enforcement in Saudi Arabia under the terms of the Arab League Convention and, in at least one reported decision, a judgment has been recognised and enforced. Other Arab League judgments may have been enforced, but have not been reported.

The Arab League Convention also provides for recognition and enforcement of arbitral awards made in member states.

Riyadh Convention

Saudi Arabia has signed the Riyadh Convention on Judicial Cooperation (the Riyadh Convention). The Riyadh Convention will supersede the Arab League Convention when Saudi Arabia effectively accedes to the Riyadh Convention.

With respect to the reciprocal recognition and enforcement of judgments and arbitral awards of member states, the provisions of the Riyadh Convention are not substantially different from those of the Arab League Convention.

Like the Arab League Convention, the Riyadh Convention permits the judicial body of the country in which enforcement of the judgment is sought to inquire into the competence of the court in the country that issued the judgment. The Riyadh Convention also provides limited grounds for denying enforcement of a foreign judgment. These grounds are similar to the criteria provided in the Arab League Convention for determining whether the formal prerequisites for enforcement of the judgment in the country in which such enforcement is sought have been satisfied (eg, compliance with certain procedural requirements of the country issuing the judgment, such as jurisdiction and notice and with fundamental legal principles, such as the public policy of the country in which such enforcement is sought).

Saudi Arabia is further signatory to:

• the Unified Convention for the Investment of Arab Capital in Arab Countries of 1980;
• the Convention for the Settlement of Investment Disputes between the Hosting Countries and the Investors of other Arab Countries of 1974; and
• the Amman Arab Convention for Commercial Arbitration of 1987.

Non-Arab League

The New York Convention

Saudi Arabia acceded to the New York Convention by Royal Decree No. M/11 dated 16/7/1414 H. (29 December 1993), with effect from 1994. The authorising decree incorporates the requisite reciprocity requirement, but limits such reciprocity to awards rendered in other signatory states. The decree specifies that jurisdiction over actions seeking enforcement of foreign arbitral awards is vested in the Board of Grievances.

The New York Convention permits signatory states to deny recognition and enforcement of a foreign arbitral award on certain limited grounds. In reliance on this provision of the New York Convention, the Board of Grievances would be able to refuse recognition and enforcement of any foreign arbitral award contrary to the laws or public policy of Saudi Arabia (ie, contrary to the shariah). Saudi Arabia did not make the commercial reservation that, if invoked, limits application of the New York Convention to awards arising out of disputes that are commercial in nature.

Washington Convention

By Royal Decree No. M/8 of 22/3/1394 H. (28 September 1979), Saudi Arabia ratified to the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States, also known as the Washington Convention. The Washington Convention was initiated by the International Bank for Reconstruction and Development (the World Bank).

The Royal Decree, in ratifying the Washington Convention, expressly excluded investment disputes relating to ‘oil and pertaining to acts of sovereignty’.

The Washington Convention was designed to promote private foreign investment for economic development by making it possible for a member state and a foreign investor, who is a national of another member state, to settle investment disputes before an impartial international forum. Under the Washington Convention, the parties waive local jurisdiction and agree that arbitration awards of the International Center for Settlement of Investment Disputes (ICSID), a branch of the World Bank, are legally binding in the courts of any member state. The jurisdiction of ICSID is limited to investment disputes between a state and a private contracting party.

The Washington Convention specifies the circumstances under which disputes may be submitted to ICSID, the methods by which conciliation commissions and arbitral tribunals are to be constituted and to conduct their proceedings and the form and effect of the resulting conciliation reports or arbitral awards. ICSID maintains panels of conciliators and arbitrators who are designated by the member states and by the President of the World Bank, who acts as Chairman of the ICSID’s Administrative Council. The parties to a dispute are free to choose the form and method of constituting their conciliation commissions set out in the Convention. If they are unable to agree, the Convention provides machinery for constituting such bodies.

The Washington Convention imposes no obligation on the governments of member states to submit disputes with foreign investors to the ICSID arbitral mechanism. Under article 25(3) of the Washington Convention, a governmental subdivision or agency may not give its consent to arbitration under the ICSID rules without the approval of the state, unless the state has notified the ICSID that no such approval is required. Saudi Arabia has given no such notification and, accordingly, no government entity may submit to ICSID arbitration without government approval. This requirement for approval has been explicitly included in article 3 of the Arbitration Regulations, which provides that government authorities may not submit their disputes to arbitration with third parties except after having obtained the approval of the Prime Minister.

Notes

1. The witnessed sayings and actions of the Prophet Mohammed.
2. It is understood that ‘place of execution’ refers to the place where the contract is to be performed, rather than the place where it is signed.