Arbitration
Arbitration & Conciliation
There is no doubt that the simplest and usually the quickest ways of achieving a settlement of a commercial dispute is negotiation between the parties or their advisers. However, negotiation requires a certain detachment and objectivity, as well as a desire to compromise. Sometimes these qualities are hard to find. If direct negotiations between the parties or their advisers fail, the intervention of a disinterested third party may be helpful. Sometimes this done formally, by a conciliator or mediator; sometimes informally, by an “ honest broker”. However, experience suggests that in practice the scope for such intervention is more limited than might be thought. In any event, a claimant with a genuine claim should be careful not to be strung along, whether by negotiations or otherwise. As time passes, it becomes increasingly difficult to bring a claim, because witnesses have moved or documents on other evidence no longer exist; and, it is too late, it may well become legally impassible to bring a claim, as it may become extinguished by prescription or bared by lapse of time under the applicable law.
Most international trade disputes are resolved by arbitration if the parties themselves are unable to reach an agreement, because the alternative is to submit the dispute to a court of law.
The comparative advantages and disadvantages of arbitration as opposed to litigation have been well established. In purely domestic disputes, the debate whether to arbitrate or litigate may be finally balanced; in the final analysis, much may depend upon the circumstances of such particular case. Where the dispute is set in an international context however, the balance comes down firmly in favor of arbitration. The reasons for that are:
- Arbitration is a private process, an advantage in the eyes of those who do not want details of their quarrels to be disclosed in open court, with the possibility of further publication elsewhere.
- Arbitration also offers the parties the opportunities to choose their own judges, in a way which is not usually possible in court proceedings. One or more arbitrations may be chosen for their special skill and expertise in commercial law, construction, engineering or some other relevant design.
- Arbitration is also, in principle, more flexible and adaptable and as a result quicker and more efficient than litigation.
- Moreover, there is continuity in an arbitration, since the arbitral tribunal is appointed to deal with one particular case. The arbitrators follow this case from the beginning to the end, unlike a judge who often only makes his appearance, like a dues ex machine, when all the pleading is about to begin.
The agreement to arbitrate is the foundation stone of commercial arbitration. It serves to evidence the consent of the parties to submit to arbitration; and this consent is indispensable to a process of settling disputes which depends the agreement of the parties for its very existence.
There are two basic types of arbitration agreement. The first, and more common, is an agreement to submit future disputes to arbitration in the form of a clause in the principle agreement between the parties. The second is an agreement to submit existing disputes to arbitration; an agreement of this kind is commonly referred to as a submission to arbitration agreement.
The most important convention on arbitration is the New York Convention, under which each contracting state undertakes to recognize and give effect to an arbitration agreement when the following requirements are fulfilled:
The agreement is in writing, however, there has been a communications’ revolution since the New Your Convention was established in 1958; the laws of most countries now recognize agreements made by modern methods of communications.
- The agreement deals with differences which have arisen or which may arise between the parties;
- The differences arise in respect of a defined legal relationship, whether contractual or not; and
- The differences concern a subject – matter capable of settlement by arbitration (“arbitrability” dispute, in the term generally used).
- The parties to the arbitration agreement have legal capacity under the law applicable to them;
- The arbitration agreement is valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of country where the award was make; in the words used in article II.3 of the New York Convention, the agreement must not be “ null and void, inoperative or incapable of being performed.”
During the last two decades, arbitration has become of increasing significance in the Kingdom of Saudi Arabia as a means of solving business disputes . In response to the phenomenon, Saudi Arabia issued its first Arbitration Regulations in 1983 ( Royal Decree No. M/46 dated 1983) , and its implementing rules by Council of Ministers Resolution No.7/2021/M dated 8/9/1405 H , corresponding to May 27,1985 G.
Article I of the Regulations provides that "arbitration may be agreed upon in a specific existing dispute. It may also be agreed in advance to arbitrate any dispute arising as a result of the execution of a specific contract." This article therefore validates arbitration generally as a means of dispute resolution and dose not limit arbitration to commercial matters. It expressly recognizes the validity both of the submission, or agreement to resolve an actual dispute between the parties by means of arbitration, and of the agreement to refer or arbitration clause in any existing contract.
Article II of the Regulations refines the scope of arbitration as generally validated by article I by providing that "arbitration is not acceptable in matters where conciliation is not permitted." Such matters , as clarified by the Implementing Rules, are generally speaking, criminal offenses, whether or not subject to the Qura'anic punishments, issues of public and administrative law and civil status, properly reserved to the state, and matters relating to inheritance, certain marital disputes and the like.
Article VII of the Regulations provides that " if the disputing parties had agreed on arbitration before the dispute arose or if a decision approving the arbitration document has been issued in a specific dispute, the subject of the dispute may not be heard except in accordance with the provisions of these Regulations." Consequently, if the appropriate judicial authority has duly approved the arbitration document, an agreement to arbitrate will be enforceable and may be submitted by a party seeking to stay judicial proceedings brought by another party with respect to the same dispute. Conversely, even if the parties have entered into a valid arbitration agreement, until judicial approval of the arbitration document, either party may commence judicial proceedings, and the court or judicial commission will not be required to decline jurisdiction under article VII. It should be noted that , although article VII does not expressly condition the enforceability of an arbitration clause on judicial approval, the parties are nonetheless required under article V to deposit the "arbitration document".
Whether the parties are proceeding to arbitration on the basis of an arbitration clause or a submission agreement, an "arbitration document", or term of reference, must be submitted for approval to the judicial authority having original jurisdiction over the dispute. Article V provides that "the parties to the dispute shall deposit the arbitration document with the authority originally having jurisdiction over the dispute. This document shall be signed by the parties or their official authorized representatives and by the arbitrators and shall state the subject of the dispute, the names of the parties, the names of the arbitrators, and their consent to hear the dispute. Copies of documents relating to the dispute shall be attached thereto."
The arbitration document is required to be in Arabic. It is not required to be notarized, authenticated, or witnessed, although any of these formalities may serve to forestall disputes relating to the authenticity of the document. In addition to the mandatory items stated in article V, the parties are free to include other terms. In particular, they should specify the time period within which the arbitrators are to issue their award. Article VI provides that “the authority originally having jurisdiction over the dispute shall record the requests for arbitration submitted to it and shall issue a decision approving the arbitration document.” The requirement of judicial approval is viewed as procedural and intended to avoid the eventuality of disputes between the parties as to the substance of their agreement. Hence, unless the provisions of the arbitration document are contrary to Saudi law or public policy, approval should not normally be withheld. The competent judicial authority is to issue its decision approving the arbitration document within fifteen days.
Specific legal consequences flow from the issuance of the judicial approval decision. Most important, article VII provides that, upon issuance of such a decision in the case of an arbitration agreement relating to a specific existing dispute, the authority having jurisdiction over the dispute may only hear the subject of the dispute in accordance with the provisions of the Regulations. However, the Regulations contain no formal procedures for obtaining a stay of judicial proceedings and do not address the case where one party commences a judicial action prior to submission of the request for arbitration. All fees as yet unpaid to the arbitrators are to be deposited with the authority having original jurisdiction within five days of approval of the arbitration document. If the parties have not set a time limit for issuance of the award, the regulatory period will begin to run from the date of approval of the arbitration document.
According to article IX of the Arbitration Regulations the award in the dispute shall be made on the date set in the arbitration document unless it is agreed to extend it. If the parties have not set a period for issuance of the award in the arbitration document, the arbitrators shall issue their award within ninety days of the date of issuance of the decision approving the arbitration document. Otherwise, any of the parties so desiring may refer the matter to the authority originally having jurisdiction over the dispute to decide whether to hear the subject or to extend the time limit for another period. Thus the parties are given the right to specify the period of arbitration in the initial document and also to extend it by mutual agreement. In addition, either party-determined or regulatory time limits may be extended under certain circumstances. If an arbitrator is appointed to replace a removed or resigning arbitrator, the period for issuance of the award is extended by thirty days. In the event of the death of one of the parties, the arbitration Continues, and the period is extended for thirty days, unless the arbitrators decide to extend it for a longer period. Finally, article XV provides that the arbitrators, by the same majority required to issue an award, may in a reasoned decision extend the time limit for rendering the award due to Circumstances relating to the subject of the dispute.
The Arbitration Regulations are silent on the issue of the law applicable in the arbitration proceedings. However, article XXXIX of the Implementing Rules requires awards to be issued in accordance with Islamic law and applicable regulations.
The Implementing Rules set forth the procedures to be followed in the arbitration proceedings. Article XXXIX provides that the arbitrators, in issuing awards, are not bound by regulatory procedures with the exception of those provided in the Regulations and the Implementing Rules. Article XXXVI generally requires the arbitrators to comply with Islamic litigation principles such as a party’s right to confront the opposing party, to present its arguments, defenses and documents, and to examine documents relating to the ease. Article XXVII provides for the establishment of a record by the arbitral tribunal and specifies the formal requirements thereof.
All notices specified in the Regulations are required to be effected by the clerk of the judicial authority having original jurisdiction over the dispute. Notices must be in Arabic and contain certain particulars. Within five days of receipt of notification of the judicial decision approving the arbitration document, the arbitrators are to fix the date of the session and notify the parties thereof. Sessions are public but may be held privately if the arbitrators so determine, either sua sponte or on a party’s request. The arbitrators are empowered to fix the time periods for the submission of the parties’ oral and written arguments. Parties are entitled to be represented by an attorney. However, the arbitrators may require a party’s personal appearance if the circumstances so require. The proceedings are directed by the chairman of the arbitral tribunal, who may question parties and witnesses on his own initiative or pursuant to the request of the other arbitrators or the parties. The proceedings are required to be conducted in Arabic. Persons not speaking Arabic must be accompanied by an accredited interpreter. The defendant is entitled to present his oral arguments last. If, during the proceedings, an issue that is outside the arbitrators’ competence arises, documents are attacked on the grounds of falsification or criminal proceedings are instigated with respect to the case, the arbitrators are required to stay the arbitration proceedings until a final judgment is rendered by the authority having jurisdiction over the matter.
Evidence
According to article XXXI of the Imp1ementing Rules subjects the admissibility and receipt of oral testimony to Islamic rules, Parties are permitted to introduce both oral and documentary evidence. The arbitrators may, sua sponre or on a party’s request, require parties to produce documentary evidence in their possession in certain cases. Parties are entitled to request one or more adjournments for a reasonable period as determined by the arbitrators in order to produce documents. The arbitrators are empowered to order independent investigations and to conduct on-site inspections. They are also authorized to appoint one or more experts to report on technical or other matters and to set such experts' fee and determine which party will pear them. Parties may submit advisory reports on the issues.
When the case is ripe for decision, the arbitrators are to hold their deliberations in private. A party is not permitted to submit oral explanations except in the presence of the opposing party, nor may the arbitrators receive memorials or documents from a party unless shown to the other party. Interim settlements or other agreed-on statements of the parties may also be issued in the form of an award at any stage of the proceedings.
1. Formal requirements
The award is required to be reasoned, in writing, and in Arabic. Article XVII of the Regulations provides that "the award document shall include in particular the arbitration document, a summary of the oral statements and documents of the parties, the reasons and text of the award, the date of its issuance, and the signatures of the arbitrators. If one or more of them refuse to sign the award, that shall be stated in the award document."
The arbitrators are permitted to correct technical errors on the face of the award. Parties may request the arbitrators to clarify ambiguities in the original award by means of a supplementary explanatory award.
2. Deposition and notification
Article XVIII provides that “all awards issued by the arbitrators even if issued in an investigation procedure shall be deposited within five days with the authority originally having jurisdiction over the dispute and copies thereof shall be transmitted to the parties.” This provision applies both to final awards and to interim awards or decisions, such as the appointment of experts by the arbitrators and the like.
3. Objections and appeals and Limitation period
Article XVIII of the Regulations permits the parties to submit their objections to the award to the authority with which the award was deposited within fifteen days from the date of their notification of the award. This rule also applies to explanatory awards and to appeals from an award correcting the original award on the grounds that the arbitrators exceeded their authority. Failing timely objection, the award becomes final.
4. Judicial decision
Article XIX of the Regulations provides that " if one or more of the parties submit (s) an objection to the arbitrators’ award within the period provided in the preceding article, the authority originally having jurisdiction over the dispute shall hear the objection and decide either to reject it and issue an order for execution of the award or to accept the objection and make a decision thereon.
Neither the Regulations nor the Implementing Rules provide general grounds for objection. In addition to the grounds of illegality or violation of public policy, which would permit the judicial authority to refuse to enforce an award under article 20, the parties are not barred from raising objections based on lack of a valid arbitration clause or agreement, procedural defects or the arbitrators’ jack of impartiality, abuse of their authority or exceeding their authority as stated in the judicially approved arbitration document.
Arbitral awards become “final” and enforceable by the executive arm on issuance of an enforcement order by the appropriate judicial authority. Article XX of the Regulations provides that “the arbitrators award shall be enforceable when it becomes final by means of an order from the authority originally having jurisdiction over the dispute. Such order shall be issued upon the request of an interested party after ascertaining the absence of any legal bar to its execution.” In order to be enforceable, all awards are subject to the process of judicial review in order to ascertain whether the award is fully consistent with Saudi law and public policy. Upon issuance of the judicial enforcement order, the award is deemed to have the force of a judicial decision issued by the authority which issued the enforcement order. Consequently, an award, although “final” under article XX, will be appealable to the extent that the decisions of the judicial authority issuing the enforcement order may be appealed.
1.1-ARAB LEAGUE ARBITRAL AWARDS
Saudi Arabia is a party to the Agreement on the Reciprocal Enforcement of Judgments among the Members of the League of Arab States. Article III of the Agreement applies to the enforcement of arbitral awards rendered within the territories of member States in the other States parties to the Agreement. Under article III, courts of the State where enforcement is sought are required to enforce such awards and are generally barred from reexamining the subject matter of the controversy underlying such awards.
However, article III of the Agreement also provides certain exceptions permitting refusal to enforce an Arab League award, namely:
(a) If the laws of the State requested to enforce the award do not permit the settlement of the subject-matter of the dispute by way of arbitration
(b) If the arbitral award was not given pursuant to a valid stipulation or agreement for arbitration.
(c) If the arbitrators had no jurisdiction in accordance with the agreement or stipulation for arbitration or in accordance with the provisions of the law under which the arbitral award was made.
(d) If the parties were not properly notified.
(e) If the arbitral award includes anything contrary to public policy or the general principles of morality in the State where enforcement is sought. Such State is competent to decide the issue and to refrain from enforcing anything in the award which may be contrary to public policy or the general principles of morality.
(f) If the arbitral award is not final in the State in which it was made.
The Board of Grievances is the authority in Saudi Arabia having jurisdiction to enforce foreign judgments, including judgments on arbitral awards.
2. INTERNATIONAL CENTER FOR THE SETTLEMENT OF INVESTMENT DISPUTES [“ICSID”]
Saudi Arabia is a party to the Washington Convention on the Settlement of Investment Disputes between States and Nationals o~ Other States (ICSID Convention),83 providing for conciliation and arbitration as a means of binding resolution of investment disputes between states who are parties to the Convention (“Contracting States”) or their constituent subdivisions or agencies on the one hand and nationals of other Contracting States. In its ratification instrument, the Kingdom “reserve[d] the right of not submitting all questions pertaining to oil and pertaining to acts of sovereignty to the International Center for the Settlement of Commercial Disputes whether by way of conciliation or arbitration." No official interpretation of the reservation has beer made. The phrase “acts of sovereignty” has been interpreted to refer to those discretionary executive actions which are not subject to judicial review, corresponding to the French concept of “actes de gouvernement.” In the absence of official guidance or an authoritative ruling on the issue, two constructions of the phrase ‘pertaining to oil’ have emerged within the Saudi legal community.
According to the majority view, questions pertaining to oil would relate solely to crude oil. Support for this view may be found in the Saudi tax law, which distinguishes for taxation purposes between companies engaged in the production of hydrocarbons and those engaged in all other activities. The tax distinction is, of course, not dispositive of the interpretation of the ICSID reservation. Under the second view, the reservation not only encompasses questions pertaining to crude oil but extends to petrochemicals and related industries as well. This theory holds that the domestic tax distinction will not be carried over into the context of international arbitration. Practically speaking, the exact scope of the reservation may not prove to be of extreme importance, in that ICSID has jurisdiction only over those legal disputes which the parties have consented in writing to submit to ICSID. Accordingly, it is unlikely that the Saudi party would agree to such an arbitration clause in a contract relating to petrochemicals. Furthermore, in order for ICSID to have jurisdiction over a dispute under the Convention the dispute must arise “directly” out of an investment.
With respect to jurisdiction rationac personae, article XXV of the Convention provides that ICSID’s jurisdiction extends to disputes between a Contracting State, or one of its duly designated constituent subdivisions or agencies, and a national of another Contracting State. With respect to juristic persons, a national is defined as " any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention.
The question whether a government party is a subdivision or agency of a Contracting State, in this case Saudi Arabia, should “normally not be difficult to determine”, since article XXV (a) requires that Contracting States designate their constituent subdivisions or agencies to ICSID. Such a notification will “presumably” be proof of their status as subdivision or agencyf7 With respect to the nationality of the private party, it has been suggested that the definition of article XXV (2) (b) is broad enough to extend to arbitration between the Saudi Government or one of its subdivisions or agencies and “the typical foreign investment arrangement in the Kingdom- the joint venture company with majority Saudi financial interest.” According to this view, a Saudi limited liability company having entered into an investment agreement with the Saudi Government would also qualify for ICSID arbitration if the company’s “management is substantially foreign-controlled." This view is not supported by Saudi legal thought. The Saudi interpretation of “foreign control” gives the term the meaning of equity participation. Practically speaking, even in cases involving majority foreign participation, it is improbable that the Saudi Government will agree to treat a Saudi juristic person as the national of another State. In contrast, a foreign investor entering into a partnership agreement with a Saudi government agency may include, subject to authorization under article III of the Arbitration Regulations, in the partnership agreement a clause providing for ICSID arbitration in resolution of any disputes which may arise between the partners. Such an arbitration clause is permissible whether or not the foreign partner has management control over the Saudi partnership.
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