Sharia and Arbitration in the Kingdom of Saudi Arabia: A Successful Alliance?


[This article has been authored by Ishita Agrawal and Paritoshika Singh, third-year law students from JGLS, Sonipat]


Keywords: Arbitration, Sharia, Saudi Arabia, New Arbitration Law, Foreign Awards.


Introduction

The rapid expansion of commercial activities and the burgeoning web of global trade necessitates a uniform framework for arbitration to resolve disputes without tardiness and with efficiency. The advantages of instantaneous resolution of disputes are beneficial for everyone involved in it by saving time and costs of litigation, reinforcing trust in the legal systems, and, more importantly, safeguarding a country’s resources. Recognising this, the Kingdom of Saudi Arabia (“KSA”) enacted a New Arbitration Law in 2012 that was laid out in consonance with the framework of the UNCITRAL Model Law. This was done, in part, to promote the country as a seat for arbitration. However, it remains to be seen whether such reforms have truly aided the alignment of Saudi Arabian laws with Western Arbitration models and international conventions for commercial arbitration. In this article, the authors examine the pre-2012 and the post-2012 reforms to arbitration laws in Saudi Arabia, with particular emphasis on the procedure for enforcing arbitral awards in the country. The article first highlights the major conflicts between Sharia and arbitration and its interplay with the domestic arbitration procedures within KSA. It then brings to the foreground the inefficacy of the New Arbitration Law in recognising and enforcing foreign arbitral awards while also emphasising the implications it can possess for KSA’s commerce and economy with regard to the rights of foreign investors in the country.


The Enforcement of Domestic Arbitral Awards in KSA vis-à-vis Sharia

The Sharia is an assortment of laws that encapsulates spiritual and everyday aspects of Muslim life. Sharia deems Allah as the highest authority. In Islamic nations such as Saudi Arabia, Sharia is the provenance of all laws and orders. So, it merits no explanation that even arbitral awards are bound by the tenets of Sharia law. Unlike the West, where parties can choose the law that will govern their dispute in arbitration as per Article 28 of the UNCITRAL Model Law, Sharia does not offer this option. Arbitral awards subjected to international laws must pass muster when appraised through the prism of Sharia law in Saudi Arabia. In the same vein, the decisions of arbitrators are also not absolutely binding on the parties. The rigmarole around the non-binding nature of arbitral awards in Islamic jurisprudence stems from the divergence in opinions among the four schools of Islam. While the Hanafi and Shafi’i schools postulate that arbitral awards must not be regarded as anything more than conciliation, the Maliki and Hanbali schools hold that an arbitrator’s judgment is binding and final unless there is flagrant unfairness on the arbitrator’s part. The Saudi Arbitration Regulations have purportedly adopted a pro-arbitration stance under the Hanbali school.


However, in modern arbitration proceedings, the supportive role of courts in endorsing arbitration is crucial to ensure the sanctity of the arbitration process. The scope of interference by courts in arbitration proceedings has also engendered contentious debates. The courts in Saudi Arabia can interfere in arbitration proceedings at three stages: 1. At the beginning of arbitration proceedings; 2. During the arbitration proceedings; 3. Once the Arbitral Award has been passed, in this article, the authors will deal with the court’s role in arbitration when an arbitral award has been passed since the award, even if binding, could be rescinded if it does not meet the merits of Sharia law in KSA.


As per the law that was in force in Saudi Arabia till 2010, parties could challenge arbitral awards before the Board of Grievances (“Board”) if there were issues pertaining to jurisdiction, procedure or capacity. However, unlike in the West, objections could also be raised if the award is inconsistent with Sharia and public order. This could create multiple challenges because the Saudi Arbitration Law failed to lay down the grounds on which challenges could be sustained with respect to Sharia. Moreover, questions of public policy have always puzzled lawyers due to the uncertainty of enforcement of awards. In Saudi Arabia, public policy originates from three sources: (1) Sharia, (2) Royal power, and (3) public morals. The country may come up with new royal orders that are promulgated as laws or policies in the kingdom in order to keep up with modern needs without violating Sharia principles. Therefore, public policy in Saudi Arabia is not similar to that of many modern states, and thus, the scope of interference by the courts is more due to the limited role of the arbitrator and the indomitable powers of the Royals. This makes enforcement of arbitral awards challenging and cumbersome if the award is challenged before the Board.


Such an ambiguity-riddled atmosphere for the enforcement of domestic arbitral awards not only posits a bleak future for arbitration in the country but also raises relevant questions pertaining to International commercial arbitration. While the 2012 New Enforcement Law (“NEL”) in Saudi Arabia has provided an alternative pathway for international parties to enforce commercial awards, it begets an assessment of this framework of enforcing awards in harmony with Sharia and several International Conventions.


The Enforcement of Foreign Arbitral Awards within KSA’s Arbitral Framework

As can be inferred from the domestic viewpoint, the Saudi legal system is heavily based upon the principles of Sharia Law, with Judges being obliged to apply the Holy Quran and the Sunnah when adjudicating cases, as given in Article 46 of the Basic Law of Governance. Further, it is noteworthy to mention that Islamic jurisprudence does not explicitly preclude international commercial arbitration procedures. However, the procedures could only be followed so long as they do not contradict the basic principles of Islam. Thus, before the 2012 pro-arbitration amendments in KSA, the enforcement of a foreign award was subject to the scrutiny of the Board of Grievances. The review involved a consideration of whether the Award conflicted with the Saudi public policy, Sharia principles or any previous decisions of the Saudi judicial authorities. Such wide discretionary powers and resistance to recognising foreign procedural laws typically prevented the enforcement of most awards citing public policy reasons. An infamous illustration of the same is the 2008 case of Jadawel International v. Emaar Property EJSC, where the Board was required to assess an award issued by the ICC ordering Jadawel to pay legal costs to Emaar. In a seemingly absurd turn of events, the Board not only refused to enforce the award but also overturned the decision itself, ordering Emaar instead to pay over $250 million as damages to Jadawel.

In the backdrop of such a potential anti-arbitration ethos, the 2012 New Arbitration Law and Enforcement Law in KSA, prima facie, emerged as a beacon of hope. With Saudi Arabia’s ratification of international treaties like the 1983 Riyadh Convention and the New York Convention of 1958, it seems to have willingly bound itself to the obligation of recognising and enforcing foreign awards. The power to scrutinise awards has now shifted to the Enforcement Circuits according to Articles 2-7 of the Enforcement Law. However, the parameters of assessment continue to remain inter alia contradictions with Sharia law or Saudi’s public policy. Thus, this move can be interpreted as a mere semblance of reform solely effectuating a switch between players while a clear resistance to foreign awards persists. Moreover, such vesting of exclusive jurisdiction with the Enforcement Courts simply reinforces the potentiality of judicial interference in awards, which the New Law sought to minimise. This is all the more problematic since Saudi Courts have historically undertaken a strict interpretation of Sharia to justify the non-recognition of awards issued outside Saudi Arabia. Consequently, it might create impediments for international contracting parties who do not have any clear legal criteria or guidance with respect to what constitutes a breach of Sharia principles or of public policy. Thus, while the Saudi Legislative System appears to have been unsuccessful in reconciling Sharia with international instruments within the arbitration framework, it is even more imperative to consider its potential implications on the commerce and economy of KSA.


Implication for Foreign Commercial and Investor Parties in KSA

The framework of enforcing arbitral awards within KSA also bears considerable repercussions for the Saudi government’s treaty obligations and investment agreements that are intrinsically interwoven with commercial arbitration. While foreign parties are readily investing in Saudi Arabia, the commercial mindset is accompanied by a pursuit of high immediate gains as well as stability in such expectations. Such assurance can only be secured through the non-discriminatory application of unambiguous predictable laws. Thus, it is imperative for such parties to be aware of their rights and obligations under the law of the enforcing state to protect their commercial interests effectively. Considering the Saudi government’s rigid adherence to Sharia, a laborious endeavour needs to be shouldered to harmonise the national laws with international practices to protect foreign investor rights. This is particularly relevant to counter the growing concerns of treaty shopping by foreign investors where they seek jurisdiction of such courts/domestic laws, which are likely to protect their economic interests best. Such unsolicited interference by third-party countries not only breaches the reciprocity of the treaty but also hampers the quid pro quo envisaged through the treaty.


Notwithstanding the aforementioned concerns, it is also important to highlight a few measures undertaken by Saudi Arabia in this regard, including accession to international treaties with contracting states. The Saudi Arabian General Investment Authority (SAGIA) has provided general financial and commercial information for investors through the Foreign Investment Act while also playing an integral role in strengthening their rights over their assets. Such liberalising reforms offer an optimistic perspective to bolster macroeconomic growth in KSA while also highlighting the willingness of the government to enact laws that can protect the rights of international parties.


Conclusion

Thus, an examination of the recognition and treatment of both domestic and international awards clearly indicates Saudi Arabia’s evolving attitudes towards the rights of private parties. While KSA seems to have attempted to reform the judicial process in the country through the New Arbitration Law, it still seems to be knee-deep in the quicksand of balancing Sharia with international principles. Although such strict adherence to Sharia can be considered ill-suited to deal with modern commercial realities, it is also undeniable that such principles constitute a core position in the lives of modern Muslims in KSA. Additionally, while international arbitration continues gaining traction as a flexible and faster dispute resolution mechanism, it solely depends on the continued efforts of the KSA government to modernise the arbitral award enforcement procedures to finally render the alliance between Sharia and Arbitration a truly successful one.

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