We see plenty of coverage these days of Saudi Arabia’s growing economy; and justifiably so. Expansionary government spending, elevated oil prices, a strong banking system, a maturing private-sector, increasing diversification, growing foreign investment and other factors contribute to an exciting period for Saudi Arabia.
While elevated oil prices have fueled Saudi Arabia’s impressive recent growth, the Kingdom’s decade-long effort to improve the regulatory and legal environment for commerce and trade has been an essential part of maximizing the economic good news.
Well in advance of its accession to the WTO in 2005 Saudi Arabia began scrutinizing its regulatory and legal framework with the intent of aligning it more closely with international standards. Significant progress has been made. The annual World Bank Ease of Doing Business Index has Saudi Arabia progressing up the ranks from #115 (out of 183) in 2005 to #38 in 2007 to #15 in 2009 and all the way to #10 in 2011 (it was #12 in 2012).
Clearly, by almost every measure, the Saudi Arabian market is considerably more competitive and an easier place to do business than it was only seven years ago. If you look closely at the World Bank’s numbers, you’ll note the Kingdom excelled in many areas. It was ranked in the top 20 in seven of the ten subcategories including top 10 in Starting a Business, Dealing with Construction Permits, Registering Property (#1 ranking of all countries surveyed) and Paying Taxes.
Where did Saudi Arabia lag? #45 for Getting Credit, #69 for Resolving Insolvency and #138 for Enforcing Contracts.
As any businessperson will attest, this last ranking is critical to a prospective investor’s confidence as they consider the Saudi market. Which is why the impact of Saudi Arabia’s new Arbitration Law introduced in June 2012 will be watched with great interest.
SUSTG has featured analysis of this law by Khaled Alnowaiser writing in the Arab News and, today, we are very pleased to bring you further commentary on this important regulation by John Balouziyeh and Amgad Husein, corporate attorneys in Saudi Arabia and co-authors of the Legal Guide to Doing Business in Saudi Arabia (Thomson Reuters, forthcoming).
By a quirk of timing, the World Bank’s Ease of Doing Business Rankings are benchmarked to June of each year. So, data for the World Bank’s 2013 ranking for the Enforcing Contracts sub-category was collected by June 2012; about the same time as the new Arbitration Law was introduced. Consequently, improvements in that category – if they are to be had – may not show up until the 2014 rankings.
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Public policy considerations in Saudi Arabia’s new Arbitration Law
By John Balouziyeh and Amgad Husein
On June 8, 2012, Saudi Arabia published in the Official Gazette the text of its new Arbitration Law, which took effect thirty days later. The new law has been welcomed by many analysts as a reflection of Saudi Arabia’s embracement of international standards, as the law is largely modeled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law. However, there remain certain local considerations that parties must take into consideration when entering into arbitration or seeking to enforce arbitral awards in Saudi Arabia.
As stated in the April 13, 2012 edition of the Official Gazette of Saudi Arabia, Um Al-Qura, the provisions of the new Arbitration Law would apply to arbitrations held under the Saudi Arbitration Law “without prejudice to the provisions of the Islamic Shari’a.” The Islamic Shari’a reservation is one that is reiterated throughout the Law, nearly a dozen times.
Perhaps the most important of the Shari’a reservations is in Part 6 of the Law, which deals with the annulment of arbitration awards (including foreign awards). Under Article 50.2, an award can be annulled if it contains any violation to the provisions of Islamic Shari’a and Saudi Arabian public policy or any violation to the agreement of the arbitration parties. Such an award can also be annulled in the following cases (Art. 50.1):
– If the party to an arbitration agreement lacked capacity at the time of concluding the agreement;
– If a party failed to submit his defence due to insufficient notice;
– If the arbitration award excluded any of the regular rules agreed to be applied by the parties;
– If the arbitration panel was formed in violation of the Law or of the agreement of the parties;
– If the arbitration award settled issues not included in the Arbitration Agreement; nevertheless, if it shall be possible to isolate parts of the award related to arbitration from such parts related to issues not subject to the arbitration, annulment shall only be applied to the parts that are not subject to arbitration.
– If the Arbitration Panel failed to take the conditions that should be available in the award into consideration in a way that shall effect the content thereof or if the award depended on void arbitration procedures that have affected it.
Although the new Arbitration Law demonstrates the Saudi government’s endorsement of and embracing of a legal framework that brings certainty to the legal marketplace and to foreign investment, the continuous, repeated reservations on the basis of Islamic law and Saudi public policy do, to a certain extent, undermine this certainty. Interpreting and predicting how a Saudi judge or arbitrator will apply the Shari’a remains difficult and somewhat evasive. Whereas some Shari’a principles are well-established principles rooted in tradition, others are subject to a judge’s individual view or considerations as to fair application under equity.
One thing that remains clear is that a Saudi judge could still refuse to apply a contract or a foreign arbitral award on the basis of Saudi Arabian public policy and Shari’a considerations, as under the old Arbitration Law. This risk can, however, be managed by agreeing to apply Saudi law in arbitration proceedings, and ensuring that the arbitration panel is exclusively comprised of legal experts with extensive training in Saudi law, who can bring their experience to identify any issues that could potentially impede the certification of an award based on public policy considerations and ensure no such elements make it into the final arbitral award.
John Balouziyeh and Amgad Husein are corporate attorneys in Saudi Arabia and co-authors of the Legal Guide to Doing Business in Saudi Arabia (Thomson Reuters, forthcoming).
