Commercial Disputes in Saudi Arabia: A Comprehensive Understanding of the Arbitration System

While international arbitration has undoubtedly evolved over the past decade, arbitration in the Kingdom of Saudi Arabia has a much longer history. First, the Commercial Court Law of 1350 AH/1932 AD (Article 493 et ​​seq.) provided for this, followed by the Arbitration Law of 1403 AH/1983 AD, which was subsequently issued independently. Finally, the new Arbitration Law of 1433 AH/2012 AD was issued, making it the most recent and final legislation regulating arbitration within the Kingdom of Saudi Arabia, in accordance with the latest amendments to the law issued in 1443 AH/2022 AD. It is worth noting that the Saudi Arbitration Law was formulated based on the UNCITRAL Model Law. Arbitration in Saudi Law
As always, arbitration is the exceptional and optimal way to resolve judicial and commercial disputes through the courts, eliminating the length of litigation characterized by slowness and complexity. It is the preferred means for the parties to a dispute to resolve disputes related to their investments or any other relationship (Article 2) based on unilateral will. The most important feature of the arbitration system is that its procedures are agreed upon before initiation, as well as the selection of the arbitration panel, its scope, the location of the arbitration, its duration, and other matters.

Matters that are permissible and not permissible to arbitrate
Arbitration is primarily based on the will of the parties who have chosen it and granted it the authority to resolve disputes between them. Under this principle, arbitration is convened when the parties agree to it, and the common will is the primary determinant of the scope and conditions of arbitration, with the state intervening only within narrow limits to maintain public order. In general, the rules of the Saudi arbitration system are based on two main principles, which include:

The first rule: The laws of this system apply to all matters related to arbitration, regardless of their nature or form, as the law stipulates "whatever the nature of the legal relationship surrounding the dispute." (Paragraph 1 of Article 2)
Rule 2: Certain matters are excluded from the scope of arbitration, such as matters related to personal status and criminal matters that are not subject to conciliation. (Paragraph 5 of Article 2)
Types of Arbitration
The Saudi arbitration system is an effective mechanism for resolving disputes between parties quickly and effectively. Arbitration is divided into several types, including voluntary arbitration, compulsory arbitration, judicial arbitration, conciliation arbitration, institutional arbitration, and ad hoc arbitration. These types differ in the manner in which arbitration proceedings are conducted, the method of selecting the arbitration panel, and other factors.

Voluntary Arbitration and Compulsory Arbitration
As for the types of arbitration, there are voluntary and compulsory arbitration. Voluntary arbitration occurs when the parties resort to it voluntarily as an alternative to the judiciary to resolve their dispute. Compulsory arbitration occurs when the system requires resorting to it to resolve disputes between parties on specific issues, excluding compulsory arbitration from the scope of national legislation.

Arbitration by Judicial Arbitration and Arbitration by Conciliation
Arbitration can also be divided into arbitration by judicial arbitration and arbitration by conciliation. In arbitration by judicial arbitration, the arbitrator issues his award based on the facts and evidence presented to him, without regard to the opinions of the parties. In arbitration by conciliation, the arbitrator makes efforts to bring the parties together and seek a suitable solution before issuing the award.

Institutional Arbitration and Ad Hoc Arbitration
Finally, institutional arbitration is distinguished by the fact that it is conducted by agreement between the parties through a permanent arbitration institution, while ad hoc arbitration is conducted outside the framework of permanent arbitration institutions, where the parties choose the arbitral tribunal based on their direct agreement. Now that you have learned about the history of the arbitration system in the Kingdom of Saudi Arabia and its application, I am pleased to provide you with a comprehensive understanding of the scope of the arbitration award and its enforcement mechanisms under the Saudi arbitration system.

When is arbitration considered international?
Article 4 of the law states:

"Arbitration shall be international if it relates to international trade, in the following cases:

If the principal place of arbitration proceedings is located in more than one country at the time of concluding the arbitration agreement, and if one of the parties to the arbitration has multiple business centers, the center associated with the subject of the dispute shall prevail. If neither party to the arbitration has a specific business center, the place of their usual residence shall prevail.
If the principal place of business of the two parties to the arbitration was in the same country at the time of concluding the arbitration agreement, but those locations are outside that country, these locations shall be:
The place of arbitration as stipulated in the arbitration agreement, or as indicated by the method of its designation.
The place of performance of the substantive aspect of the obligations arising from the commercial relationship between the parties.
The place most closely connected to the subject of the dispute.
If the parties to the arbitration agree to resort to a permanent arbitration organization, tribunal, or arbitration center located outside the Kingdom of Saudi Arabia.
If the subject of the dispute related to the arbitration agreement relates to more than one country."
What is an arbitration agreement according to Saudi law?
An arbitration agreement, according to Article 1 of the Law, is an agreement between two or more parties to refer all or some disputes that have arisen or may arise between them in a legal relationship, whether contractual or non-contractual, to arbitration. This agreement can be in the form of an arbitration clause included in the contract (Article 9-1) or an independent arbitration agreement (Article 9-2). In all cases, the arbitration clause must be in writing (Article 9-2). The Law also follows the same approach as the Model Law regarding the interpretation of the written clause and referral issues (Article 9-3).

It is worth noting that Saudi law emphasizes the independence of arbitration, as the arbitration agreement is considered an independent clause in the contract, meaning that the invalidity of the contract does not affect the validity of the arbitration agreement, and vice versa (Article 21). The law also stipulates that arbitration may only be agreed upon by those who have the authority to dispose of their rights, whether natural or legal persons. Government agencies may not agree to arbitration without the approval of the Prime Minister, unless a special provision permits it (Article 10).

Arbitration Procedures in the Saudi Arbitration Law?
The Saudi Arbitration Law includes a set of steps regulating the arbitration process in the Kingdom of Saudi Arabia. According to Article 25-1, "The parties to arbitration have the right to agree on the procedures to be followed by the arbitration tribunal, including the possibility of subjecting these procedures to the laws in force in any arbitration body, whether inside or outside the Kingdom, provided that they are consistent with the principles of Islamic Sharia." It also emphasizes the right of the arbitration tribunal—in the absence of an agreement between the parties—to take appropriate measures (Article 25-2), provided that the parties to the arbitration are notified of these procedures at least ten days in advance. Below are the most important steps in Saudi commercial arbitration.

Commencement of Arbitration Proceedings
"Arbitration proceedings shall commence on the day on which one of the parties to the arbitration receives the request for arbitration, unless the parties to the arbitration agree otherwise" (Article 26).

Place of Arbitration
Saudi law distinguishes, as it stands, between the place of arbitration (the legal place regulating the arbitration) and any other place where part of the proceedings may take place. Article 28 states that "the place of arbitration shall be agreed upon by the parties to the arbitration, whether inside or outside the Kingdom. In the event of failure to agree, the arbitral tribunal shall determine the place of arbitration, taking into account the circumstances of the case and the suitability of the place for the parties to the arbitration. This shall not prejudice the arbitral tribunal's authority to select an appropriate place for deliberations, hear the statements of witnesses, experts, or the parties to the dispute, inspect the subject matter of the dispute, or examine or review the documents."

Arbitration Language
Saudi law stipulates that arbitration shall be conducted in Arabic unless the arbitral tribunal decides or the parties agree on other languages. The agreement or decision shall apply to the language of written statements, memoranda, oral pleadings, all decisions taken by the arbitral tribunal, communications sent by the arbitral tribunal, or the award it issues, unless the parties agree otherwise or the arbitral tribunal decides otherwise (Article 29-1).

The arbitral tribunal has the right to attach a translation into the language used in the arbitration to all or some of the written documents. In the event of multiple languages, the arbitral tribunal may limit the translation to some of them (Article 29-2).

Presenting defenses and requests, ensuring proper and sound conduct of proceedings, and procedural fairness
First, the law emphasizes equality between the parties to arbitration and giving them the opportunity to present their case or defense, which is one of the established procedural rights. (Article 27)

Articles (30, 31, and 32) of the Saudi Arbitration Law, issued by Royal Decree No. M/39 dated 24/5/1433 AH, stipulate that:

The law stipulates that the claimant shall, within the period agreed upon by the parties or specified by the arbitration tribunal, send to the defendant and each arbitrator a written statement of the claim, including the claimant's name and address, the defendant's name and address, an explanation of the facts of the case, his claims and grounds, and any other matter that the parties agree to include in the statement (Article 30-1).

Provided that the defendant shall send, within the period agreed upon by the parties, or the period specified by the arbitral tribunal to the claimant and each arbitrator, a written response to the contents of the statement of claim. The defendant may include in his response any request related to the subject matter of the dispute, or invoke a right arising therefrom with the intention of pleading a set-off. He may do so even at a later stage of the proceedings if the arbitral tribunal deems the circumstances justify the delay (Article 30-2).

Each party may also attach to the statement of claim or its response copies of the documents it relies on, and may indicate all or some of the documents and evidence it intends to submit. This does not prejudice the right of the arbitral tribunal, at any stage of the case, to request the submission of the originals or copies of the documents relied upon by either party (Article 30-3).

In all cases, a copy of the memoranda, documents, or other papers submitted by one party to the arbitral tribunal must be sent to the other party. Both parties shall be sent a copy of everything submitted to the arbitral tribunal, including expert reports, documents, or other evidence upon which the tribunal bases the arbitral award (Article 31).

Arbitration Sessions Before the Arbitral Tribunal
Arbitration sessions shall be held to enable the parties to the arbitration to present the merits of the case, present their arguments and evidence, and submit written memoranda and documents, unless the parties to the arbitration agree otherwise. The parties to the arbitration shall be notified of the dates of the oral hearing, the date of the award, and any arbitral tribunal meetings to inspect the disputed property, other property, or documents, sufficiently in advance. The hearing shall be recorded in minutes signed by the witnesses, experts, or those present from both parties or their representatives, as well as the members of the arbitral tribunal. A copy of the minutes shall be delivered to the parties, unless the parties to the arbitration agree otherwise (Article 33).

It is worth noting that the law grants both parties to arbitration the right to amend or supplement claims or defenses during the arbitration proceedings, unless the arbitral tribunal decides not to accept this in order to prevent delaying the resolution of the dispute (Article 32).

Continuing Proceedings
Saudi law gives priority to continuing arbitration proceedings in several ways. On the one hand, the law stipulates that the existence of a lawsuit pending before the courts does not preclude the right to initiate or continue arbitration proceedings or issue an arbitration award (Article 11). The law also stipulates the continuation of arbitration proceedings in the event of a legal issue outside the scope of the arbitral tribunal's jurisdiction, provided that the dispute before it can be resolved independently (Article 37). The law also recognizes the tribunal's right to continue arbitration proceedings in the event that one of the parties fails—without an acceptable excuse—to submit written documents (Article 34) or attend hearings (Article 35).

Termination of Arbitration Procedures and Termination of Dispute
Arbitration proceedings shall terminate with the issuance of an award concluding the dispute, or with the arbitral tribunal's decision to terminate the arbitration proceedings, either by agreement between the arbitration parties to terminate the arbitration, or by the claimant's abandonment of the arbitration dispute unless the arbitral tribunal, at the request of the respondent, decides that it has a serious interest in continuing the arbitration proceedings until the dispute is resolved. Arbitration proceedings shall terminate if the arbitral tribunal deems it futile or impossible to continue the arbitration proceedings (Article 41-1), or if the arbitral tribunal orders the termination of the arbitration proceedings due to the claimant's or respondent's failure to present their arguments and requests in accordance with the first paragraph of Article 34 above.

Arbitration proceedings shall not terminate with the death or loss of capacity of one of the parties to the arbitration, unless the party with a standing in the dispute agrees with the other party to terminate the arbitration proceedings. The arbitration period shall be extended by thirty days unless the arbitral tribunal decides to extend the period by a similar period or the parties agree otherwise (Article 41-2).

It is worth noting that if the two parties to the arbitration agree to a settlement by ending the dispute during the arbitration proceedings, they have the right to request proof of the settlement terms before the arbitration panel. The latter must issue a ruling containing the terms of the settlement and the termination of the proceedings. This ruling has the same enforceable force as arbitration awards (Article 45).

In conclusion:
The arbitration system is an effective means of resolving disputes, whereby the two parties appoint an arbitrator who issues a decision. This process is characterized by speed and effectiveness in resolving disputes, while adhering to the principles of Islamic Sharia and local laws. At our law firm, we pride ourselves on our ability to provide legal advice and answer all inquiries related to the Saudi arbitration system. We are committed to supporting and assisting our clients in understanding and applying this system in an effective and innovative manner. We can provide customized and specialized legal advice to meet your needs and ensure that your rights and interests are protected during the arbitration proceedings. Do not hesitate to contact us for assistance and guidance regarding the Saudi arbitration system and any other legal matters related to your business.