Dispute Resolution in Saudi Arabia

Dispute Resolution in Saudi Arabia

Economic Context

Saudi Arabia's economy saw significant growth in 2018, with a GDP increase of 2.43%. However, the COVID-19 pandemic caused a contraction of 4.44% in 2020. Positively, the non-oil sector GDP grew by 6.6% in 2021, driven by government initiatives aimed at diversifying the economy and promoting private sector development. The Vision 2030 program plays a crucial role in these efforts, aiming to reduce oil dependency and position Saudi Arabia as a global player across various industries.

Saudi Arabia is undergoing significant transformation under Prince Mohammed Bin Salman’s Vision 2030, aimed at reducing dependence on oil exports. The Kingdom is diversifying its economy by investing in sectors like tourism and infrastructure, with a goal of attracting 100 million tourists by the decade’s end.

The contractual dispute resolution system is governed by a complex network of laws essential for effective governance. This article serves as a guide to navigating commercial disputes in Saudi Arabia.

Major Anticipated Mega Projects

NEOM

A vast smart megacity project designed to attract global business investments.

The Red Sea Project

A luxury tourism initiative involving multiple stakeholders across various islands.

Introduction to Arbitration in Saudi Arabia

Saudi Arabia has strategically modernized its legal system, enhancing its appeal as a preferred venue for arbitration. This shift has created a legal environment that facilitates arbitration over national court proceedings, promoting trade and foreign direct investments (FDI) in line with Vision 2030.

?Trends in Dispute Resolution

The legal framework in Saudi Arabia is evolving, particularly concerning dispute resolution. Previously, commercial disputes were mainly settled through litigation. However, the 2012 Law of Arbitration marked a turning point by introducing key changes:

Choice of Law: Parties can select the applicable foreign law during arbitration.        

Timely Awards: The arbitral tribunal is required to issue an award within 12 months of arbitration commencement.        

Inclusivity: The law does not specify restrictions based on gender, religion, or nationality.        

Since the law's enactment, arbitration has gained popularity, with Saudi courts increasingly upholding arbitration awards.

?Mediation Initiatives

To promote mediation, the Taradhi platform was launched, allowing remote filing and virtual mediation. Over 300,000 claims were filed in its first year, with a government goal of mediating 25% of commercial disputes.

?Commercial Courts Law

The Commercial Courts Law, enacted in 2020, aims to modernize the commercial court system by:

Reducing unmeritorious litigation.        

Encouraging alternative dispute resolution methods.        

Enhancing court efficiency.        

Investment Laws and Anti-Concealment Measures        

Recent reforms have allowed foreign investors to wholly own businesses in Saudi Arabia. However, the Anti-Concealment Law introduced in 2020 seeks to prevent illegal foreign ownership fronting. Compliance with licensing and regulations is critical for foreign investors.

?Consumer Protection and Securities Disputes

In 2022, the government began drafting a new Consumer Protection Law, focusing on consumers' rights and fraud protection. Additionally, amendments to the Securities Disputes Proceedings Regulation aim to enhance dispute resolution efficiency in the capital market.

?New Legal Framework

Late 2021 saw the introduction of the Law of Evidence, aiming to codify Shari'a principles. This law, along with the Personal Status Law, Civil Transactions Law, and Penal Code for Discretionary Sanctions, represents significant legislative advancements.

?Judicial Cost Law

The Judicial Cost Law, also introduced in late 2021, imposes fees for initiating litigation, promoting the use of alternative dispute resolution methods while managing unmeritorious cases.

?Legal Challenges for Businesses

Despite these advancements, businesses in Saudi Arabia face several legal hurdles:

Enforcement Delays: The commercial court system can experience significant delays, frustrating businesses seeking quick resolutions.

Compliance Issues: Rapid legal changes can create compliance challenges, although grace periods are often granted for adjustment.

Selecting the appropriate arbitral institution is crucial for parties involved in disputes. It is vital to choose an institution that is capable and experienced in administering arbitrations effectively, with procedural rules that inspire confidence among all parties.

SCCA Arbitration Rules Overview

The?second edition of the SCCA Arbitration Rules?reflects the Saudi Center for Commercial Arbitration's commitment to delivering high-quality case administration services while adapting to clients' evolving needs. These rules emphasize:

• Party Autonomy: Allowing users to determine how their disputes are resolved.
• Fairness and Efficiency: Ensuring disputes are resolved promptly and fairly while upholding due process.
• Governance: Addressing key issues early to maximize process efficiency and minimize costs.

Key Features of the SCCA Arbitration Rules

• Date of Adoption: First adopted on May 1, 2016, with the second edition effective from May 1, 2023.
• Amendments for Efficiency: Includes provisions for the appointment/removal of arbitrators, fixing costs, and promoting the use of technology.
• Multiple Contracts and Parties: Regulations for joinder, consolidation, and coordination of parallel arbitrations.
• Transparency: Enhanced requirements for disclosing parties with economic interests, including third-party funders.
• Cybersecurity and Data Protection: Priority given to safeguarding sensitive information.

Expedited Procedure Rules

• Purpose: For disputes with reduced size or complexity.
• Single Arbitrator: Appointed for a streamlined process, with a final award issued within 30 days after proceedings close.
• Automatic Application: For disputes not exceeding SAR 4,000,000.

Emergency Arbitrator Procedure Rules

• Purpose: Allows for emergency relief prior to the constitution of the Arbitral Tribunal.
• Application Timeline: Requires a follow-up Request for Arbitration within 10 days to avoid termination.
• Prompt Actions: Emergency Arbitrator must be appointed within one business day, and interim awards issued within 14 days.

Online Dispute Resolution Procedure Rules

• Targeted Use: For small disputes with amounts not exceeding SAR 200,000.
• Sole Arbitrator: Appointed to issue a final award within 30 days based on written submissions, typically without a hearing unless necessary.

Commercial Arbitration: A Comprehensive Guide to Saudi and International Systems

Commercial arbitration is a preferred method for resolving disputes outside traditional court systems. Renowned for its speed, flexibility, and efficiency, arbitration allows parties to maintain confidentiality and control over the proceedings. This guide explores both Saudi and international commercial arbitration systems.

What is Commercial Arbitration?

Commercial arbitration is a private legal process where independent arbitrators resolve disputes between parties based on their agreement. Key characteristics include:

• Confidentiality: Sessions are private, protecting the parties' reputations.
• Flexibility: Parties can tailor the rules and procedures to fit their needs.
• Speed: Typically faster than traditional court processes.
• Expertise: Parties can select arbitrators with relevant industry experience.
• Legal Force: Arbitration awards are binding and enforceable in courts.

In essence, commercial arbitration enhances trust and stability in business relationships.

Saudi Commercial Arbitration

In Saudi Arabia, commercial arbitration plays a crucial role in dispute resolution, especially as commercial activities grow. The legal framework has been strengthened to attract foreign investment and improve arbitration's effectiveness.

Saudi Commercial Arbitration System

The system, established by Royal Decree, includes:

• Legal Framework: A clear structure for arbitration procedures.
• Free Choice of Arbitrators: Parties can select arbitrators with relevant expertise.
• Speed and Effectiveness: Focus on expedited processes and reduced costs.
• Enforcement of Awards: Awards are binding and enforceable through Saudi courts.
• Arbitration Centers: Institutions like the Saudi Center for Commercial Arbitration provide quality services.

Arbitration Clause in Commercial Contracts

An arbitration clause specifies that disputes will be resolved through arbitration, promoting trust and efficiency. Benefits include:

• Speed and Efficiency: Generally faster and less costly than court proceedings.
• Confidentiality: Protects sensitive information.
• Flexibility: Tailored rules and procedures.
• Expertise: Access to knowledgeable arbitrators.
• Enforcement: Binding arbitration awards.

Drafting an Effective Arbitration Clause

To ensure effectiveness, consider:

1. Scope of Disputes: Clearly define what disputes are covered.
2. Arbitration Body: Specify an arbitration institution.
3. Place of Arbitration: Determine the location.
4. Language: State the language of arbitration.
5. Rules and Procedures: Agree on applicable rules.
6. Number of Arbitrators: Specify an odd number to avoid ties.

International Commercial Arbitration

International commercial arbitration addresses disputes between parties from different countries, offering a flexible and effective alternative to national courts. Key characteristics include:

• Neutrality: Parties can choose impartial arbitrators.
• Flexibility: Tailorable rules and procedures.
• Speed: Generally quicker than traditional courts.
• Enforceability: Awards are enforceable under the 1958 New York Convention.

Benefits of International Commercial Arbitration

• Peaceful Resolution: Encourages amicable settlements.
• Avoids Local Disputes: Mitigates complexities from differing national laws.
• Specialization: Allows for experienced arbitrators in relevant fields.

Model Law on International Commercial Arbitration

Developed by UNCITRAL, the Model Law aims to unify international arbitration practices. Key objectives and features include:

• Unifying Laws: Harmonizes national laws to simplify arbitration.
• Enhancing Effectiveness: Provides a clear legal framework.
• Promoting Trade: Builds trust and encourages investment.

Characteristics of International Commercial Arbitration

• Neutrality and Independence: Ensures unbiased arbitration.
• Confidentiality: Protects sensitive information.
• Flexibility: Customizable procedures.
• Effectiveness: Efficient decision-making.
• Enforceability: Awards are binding and enforceable.

Types of International Commercial Arbitration

1. Institutional Arbitration: Managed by established arbitration institutions (e.g., ICC, LCIA).
2. Ad Hoc Arbitration: Parties appoint arbitrators directly without institutional management.
3. Court-Directed Arbitration: National courts may assist in the arbitration process.
4. Arbitration Based on National Laws: Follows specific national regulations.
5. Specialized Arbitration: Focuses on specific sectors (e.g., construction, IP).

?Saudi Arabia's Arbitration Landscape

Dispute Resolution in the Kingdom of Saudi Arabia

Complexities of Islamic Shari’ah Law for Foreign Investors

The Saudi legal system, based on Islamic law (Shari’ah), presents challenges for foreign investors. Three key complexities include:

1. Prohibition Against Uncertainties (Gharar): This principle aims to eliminate ambiguity in contracts, impacting clauses related to liquidated damages.
2. Prohibition Against Claiming Interest (Riba): Shari’ah prohibits excessive interest, which can affect claims for late payments in construction contracts.
3. Time Bars and Shari’ah: While time bars are generally supported, excessively strict time bars may be challenged under Shari’ah principles of fairness.

The Saudi Legal System Governing Arbitration

Saudi Arabia’s arbitration framework is primarily governed by the Saudi Arbitration Law (SAL) enacted in 2012 and the Rules of the Saudi Center for Commercial Arbitration (SCCA). The SAL aligns with the UNCITRAL Model Law, promoting consistency and predictability for international businesses:

• Arbitration Agreement: Upholds party autonomy.
• Appointment of Arbitrators: Provides a framework for impartiality.
• Taking of Evidence: Ensures rights to present cases.
• Confidentiality: Allows for protection of sensitive information.
• Enforcement of Awards: Recognizes foreign arbitral awards under the New York Convention.

Areas for Improvement

• Government Entities: Restrictions on government entities seeking arbitration may deter foreign businesses.
• Expedited Procedures: Enhancements could streamline arbitration for low-value disputes.
• Transparency: Increased public data on arbitration cases would foster confidence.

New Civil Transactions Law

The recently enacted Civil Transactions Law (CTL) represents a significant advancement in Saudi Arabia’s legal landscape, codifying principles that enhance clarity and predictability in commercial contracts. The CTL complements existing Shari’ah principles without replacing arbitration.

Impact of the CTL on Arbitration

• Clearer Contract Interpretation: Aids in reducing disputes.
• Enhanced Predictability: Codification promotes risk mitigation.
• Retroactive Application: Smoothens the transition for existing contracts.

Anticipated Commercial Transactions Law

The draft Commercial Transactions Law aims to modernize the legal framework governing commercial activities, replacing outdated regulations. Key provisions include:

1. Commercial Agencies: Defines contracts and terms for agents.
2. Legal Representation and Indemnity: Establishes guidelines for agents representing non-resident principals.

New Rules of the Saudi Center for Commercial Arbitration

The SCCA is set to adopt new arbitration rules aligned with recent legal reforms, focusing on the conduct of arbitration proceedings.

Enforcement of Arbitral Awards

Saudi Arabia has demonstrated a commitment to enforcing arbitral awards, with significant numbers of awards enforced since the enactment of the SAL in 2012.

Important Rules in Commercial Arbitration

1. Understanding the Legal Framework: Knowledge of the SAL and SCCA rules is crucial.
2. Cultural Awareness: Respecting local norms and traditions enhances trust.
3. Leveraging Technology: Adoption of digital tools improves efficiency.

The Rise of Institutional Arbitration

Institutional arbitration is gaining traction in Saudi Arabia, with the SCCA leading the way. This shift offers greater certainty and transparency in arbitration proceedings.

Future of Arbitration in Saudi Arabia

As part of Vision 2030, the Kingdom aims to enhance its arbitration framework to attract foreign investments and create a positive business environment, marking a pivotal component of its economic diversification strategy.

The Saudi Center for Commercial Arbitration (SCCA) plans to enhance transparency in arbitration proceedings through several initiatives:

1. Publicly Available Data: The SCCA aims to increase the availability of data regarding arbitration cases and awards. This would provide stakeholders with insights into past decisions and trends, fostering trust in the arbitration process.
2. Clear Rules and Procedures: By adopting clear and comprehensive arbitration rules, the SCCA ensures that all parties understand the procedural steps, which can improve the predictability and consistency of outcomes.
3. Regular Reporting: The SCCA may implement regular reporting on arbitration activities, including statistics on case durations and outcomes, which can help stakeholders gauge the efficiency and effectiveness of the arbitration process.
4. Training and Education: Offering training programs and workshops for arbitrators, legal practitioners, and businesses can promote an understanding of arbitration processes and best practices, contributing to a more transparent environment.
5. Stakeholder Engagement: Actively engaging with the business community and legal professionals to gather feedback and address concerns can lead to improvements in the arbitration framework, ensuring it meets the needs of users.

By focusing on these areas, the SCCA aims to build confidence in arbitration as a reliable method of dispute resolution in Saudi Arabia.

Dispute Resolution Services in Saudi Arabia

Overview of the Saudi Judicial System

In the Kingdom of Saudi Arabia, the judicial system is primarily based on?Shari’a law. It consists of:

• Shari’a Courts: These courts handle all civil controversies unless specified otherwise.
• Board of Grievances: This body addresses administrative disputes.
• Specialized Committees: Certain committees focus on specific areas, such as the Committee for the Settlement of Banking Disputes, particularly for foreign business interests.

In 2007, significant reforms were initiated to restructure this system, including the evolution of alternative dispute resolution (ADR) methods. This restructuring is ongoing.

Alternative Dispute Resolution (ADR)

Saudi Arabia is increasingly adopting alternative dispute resolution methods as a viable option for resolving disputes without formal litigation. This is particularly beneficial for foreign investors who may be more familiar with ADR processes like court-ordered mediation.

Types of ADR Available

Arbitration: New Arbitration Law (2012): This law has enhanced the arbitration process, making it more efficient and suitable for international businesses. Arbitration is gaining acceptance as a preferred method for resolving disputes.        

Settlement Negotiations: Many conflicts can be resolved through settlements arising from contractual negotiations.         

The new Civil Transactions Law in Saudi Arabia, has several implications for existing contracts. Here are some key points to consider:

1.?Retrospective Effect

The new law generally applies to existing contracts unless explicitly stated otherwise. This means that provisions of the new law may affect the interpretation and enforcement of contracts made before its enactment.

2.?Contractual Freedom

The law emphasizes the principle of freedom of contract, allowing parties greater flexibility in defining their obligations. However, it also sets out certain mandatory provisions that cannot be waived.

3.?Clarity and Consistency

The new law aims to provide clearer guidelines on contract formation, performance, and termination. This can reduce ambiguity and disputes in existing contracts.

4.?Good Faith and Fair Dealing

The law introduces provisions on good faith and fair dealing, which could influence the conduct of the parties in executing existing contracts and may lead to reassessments of obligations.

5.?Remedies and Liabilities

The law outlines specific remedies for breach of contract and clarifies liabilities, which could affect claims arising from existing contractual disputes.

6.?Changes in Legal Terminology

The new law may introduce different terminology or concepts that could impact the interpretation of existing contracts, requiring parties to adapt to these changes in legal language.

7.?Impact on Commercial Practices

Businesses may need to revise their contract templates and practices to align with the new legal framework, potentially leading to increased compliance costs and adjustments in commercial dealings.

8.?Transitional Provisions

The law includes transitional provisions that may provide guidance on how existing contracts should be treated during the shift to the new legal framework.

?Conclusion

Overall, recent developments in Saudi Arabia's legal system enhance dispute resolution efficiency while providing greater clarity for businesses navigating the evolving landscape. The second edition of the SCCA Arbitration Rules and its appendices represent a comprehensive and modern approach to international arbitration. They provide parties with the flexibility and efficiency needed to resolve disputes effectively in today's evolving legal landscape. As Saudi Arabia continues to develop its dispute resolution landscape, various options are emerging to cater to the needs of local and international clients. Parties involved in existing contracts should review their agreements in light of the new Civil Transactions Law to ensure compliance and to understand how the changes may affect their rights and obligations.