Arbitration in Islamic Middle East and the Saudi Arabia's new arbitration law

32 Pages·2014·0.55 MB·English

“Arbitration in Islamic Middle East and the Saudi Arabia’s
new arbitration law ”

LLM THESIS
Maria Karagianni

Supervisor Professor: Pr. Athanasios Kaissis

Thessaloniki
January 2014
Introduction
Since the beginning of the civilized world when human beings first gathered in small
communities, arbitration was a method employed to solve disputes. In ancient
societies, the elders acted as arbitrators commonly settled disputes. The simple
procedure of arbitration, in which one person acted as the judge, has evolved over
time to become a far more complicated system with various advanced rules. 1
The ability to resolve international commercial dispute due to its flexibility, is the
reason that arbitration has become an alternative to the court system. However, as
arbitration continues to develop, complex problems have arisen whilst easy questions
have remained unanswered.
The Middle East is a very important region for international commerce, primarily due
to the major deposits of oil and gas that are located in this region as well as the fact
that its large population cannot be ignored by investors who would intelligently view
this as a valuable market to invest in. However, political, legal and religious
limitations arising from Islamic values can create difficulties in commercial relations.2
In the first part of this thesis, we will look at the international arbitration and its
advantages and disadvantages, as well. We will then explore, the arbitration in Middle
East in general, trying to understand the culture of Islam by having a look at its
history and its sources. Finally, we will examine the new arbitration law of Saudi
Arabia that demonstrates the Saudi government’s endorsement of and embracing of a
legal framework that brings certainty to the legal marketplace and to foreign
investments.

1 Babak Hendizadeh, International commercial arbitration: The effect of culture and
religion on enforcement of award
2 Babak Hendizadeh, International commercial arbitration: The effect of culture and
religion on enforcement of award

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I . Arbitration in general, advantages and disadvantages

1.1. Arbitration and other ADR methods
We could define international arbitration as a specially established mechanism for the
final and bidding determination of disputes, concerning a contractual or other
relationship with an international element, by independent arbitrators, in accordance
with procedures, structures and substantive legal or non legal standards chosen
directly or indirectly by the parties.3
Today, the cost of litigation seriously threatens the viability and productiveness of
companies, and the individuals involved in the litigation process- for example, civil
litigation in the U.S. costs over 400 billion annually. These costs reflect not only the
expenses of lawyers and courts but also damage to the goodwill of businesses and the
time that a company or an individual has to spend in order to prepare for and
participate in legal actions. Some cases may even take from four to five years to get
before the courts 4
Moreover, the judgment of the court will most certainly affect the business
relationship of the parties, because many of judgments are not confidential, which in
turn may jeopardize future business relationships with other companies who become
aware of the decision. On the other hand, arbitration processes are confidential and
seldom published in law journals, therefore the outcome of the tribunal will not affect
the goodwill of the losing company. 5

3 comparative international commercial arbitration. What is arbitration?
4 Todd ., Carver – ADR – A competitive Imperative of Business)
5 Babak Hendizadeh, International commercial arbitration: The effect of culture and
religion on enforcement of award)

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Another widely used ADR method is mediation, in which a trained neutral third party
is chosen by the parties to assist them to resolve their disputes.6
Furthermore, there is another option called neutral evaluation, where an experienced
evaluator will assess the issues in dispute and give a non binding opinion about the
likely outcome of the case if it goes to arbitration or to court 7
There is also the option of med-arbitration, a process where the parties agree that if
mediation does not produce a negotiated agreement, the mediator will change identity
and act as an arbitrator to decide the dispute. 8
Finally, there is the so-called expert-determination, a process in which an independent
expert in the subject matter of the dispute, is appointed by the parties to resolve the
matter. The expert’s decision is - by prior agreement of the parties - legally binding on
the parties. 9
1.2. Advantages of Arbitration
There are numerous advantages to arbitration as a way to resolve a case. First, the
parties to the dispute usually agree on the arbitrator, so the arbitrator will be someone
that both sides have confidence will be impartial and fair.10
Second, the parties can choose the seat of their arbitral tribunal and solve their
disputes in a chosen country instead of going to national courts of two or more
countries. 11
Third, the dispute will normally be resolved much sooner, as a date for the arbitration
can usually be obtained a lot faster than a court date.

6 Ruth D. Raisfeld, “How mediation works: a guide to effective use of ADR
7 financial services of Ontario
8 Alen Redfern, Law and Practice of International Commercial Arbitration
9http://www.academy-experts.org/alternative-dispute-resolution/what-expert-determination
10 Arbitration: advantages and disadvantages, R. Clayton Allen
11 Babak Hendizadeh, International commercial arbitration: The effect of culture and religion on
enforcement of award

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Fourth, arbitration is usually a lot less expensive. Partly that is because the fee paid
the arbitrator is a lot less than the expense of paying expert witnesses to come and
testify at trial. (Most of the time the parties to arbitration split the arbitrator's fee
equally). There are also lower costs in preparing for the arbitration than there are in
for preparing for a trial. Partly this is due to the fact that the rules of evidence are
often more relaxed than in a trial, so that documents can be submitted in lieu of
having a witness come to trial and testify.
Fifth, unlike a trial, arbitration is essentially a private procedure, so that if the parties
desire privacy then the dispute and the resolution can be kept confidential.
Furthermore, if arbitration is binding, there are very limited opportunities for either
side to appeal, so the arbitration will be the end of the dispute. That gives finality to
the arbitration award that is not often present with a trial decision. 12
Another very important advantage is the use of experts in arbitral tribunals, a feature
that gains special significance in certain commercial cases such as intellectual
property disputes, since many different and complicated technical issues are involved
in this type of dispute. 13
1.3. Disadvantages of Arbitration
There are, however, also some disadvantages to arbitration as a method of resolving a
dispute. First, if arbitration is binding, both sides give up their right to an appeal. That
means there is no real opportunity to correct what one party may feel is an erroneous
arbitration decision.
Second, if the matter is complicated but the amount of money involved is modest,
then the arbitrator's fee may make arbitration uneconomical.
Third, rules of evidence may prevent some evidence from being considered by a judge
or a jury, but an arbitrator may consider that evidence. Thus, an arbitrator's decision
may be based on information that a judge or jury would not consider at trial.

12 Arbitration: advantages and disadvantages, R. Clayton Allen
13 (Babak Hendizadeh, International commercial arbitration: The effect of culture and religion on
enforcement of award)

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Fourth, discovery may be more limited with arbitration. In litigation, discovery is the
process of requiring the opposing party -- or even a person or business entity who is
not a party to the case - to provide certain information or documents. As a result,
many times arbitration is not agreed to until after the parties are already in litigation
and discovery is completed. By that time, the opportunity to avoid costs by using
arbitration may be diminished. Fifth, if arbitration is mandatory or required by a
contract, then the parties do not have the flexibility to choose arbitration only when
both parties agree.
Sixth, the standards used by an arbitrator are not clear, although generally the
arbitrator is required to follow the law. However, sometimes arbitrators may consider
the "apparent fairness" of the respective parties' positions instead of strictly following
the law, which would result in a less favorable outcome for the party who is favored
by a strict reading of the law. 14
2. Arbitration in Middle East
Parties from outside the Gulf region have historically faced difficult choices in
agreeing to dispute resolution provisions with parties from the Gulf. Litigation often
has significant drawbacks, including difficulty in enforcing foreign judgments, but it
is not often clear that international arbitration agreements will be respected or that
arbitral awards will be enforced. 15
The same applies for the other side. Arab states may in the distant past have felt that
they would be disadvantaged as participants in the international arbitral process. They
frequently saw the arbitral process as entailing the imposition of rules formulated by
developed states. However, they gradually realized that arbitration is an indispensable
tool, especially since it is one deeply embedded in their own legal traditions, as it
would be explained thoroughly below. Hence, they have taken a number of steps over
the years to strengthen the role that arbitration can play in their international
commercial and investment relations. These include the adoption of liberal laws on
arbitration, accession to international conventions on arbitration and the establishment

14 Arbitration: advantages and disadvantages, R. Clayton Allen
15 When International Arbitration meets Sharia, Steven Finizio and Christopher Howitt

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of regional arbitration centers.16 For instance, Lebannon in 1983 adopted arbitration
provisions inspired by similar French legislation of 1981. Algeria in 1993 adopted
legislation inspired by both the French arbitration law of 1981 and the Swiss
arbitration law of 1987. Bahrain adopted in 1994 the UNCITRAL MODEL LAW on
International Commercial Arbitration. Other Arab States, such as Egypt, Jordan,
Morocco, Oman, Syria and Tunisia, have adopted arbitration laws based on the
UNCITRAL MODEL LAW. The latest Arab State to follow this approach is Saudi
Arabia, which in 2012 issued a new arbitration law inspired by the UNCITRAL
MODEL LAW.
Furthermore, with the exceptions of Iraq, Libya, Sudan and Yemen all arab countries
are today parties to the 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards. 17
2.1. Historical background of arbitration in Middle East
It is tempting given the ubiquitous coverage given to the Middle East’s oil interests, to
fail to acknowledge that the Islamic Muslim world has a centuries’ long commercial
history.18 Arbitration, takhim as it is known, has a long history in the Middle East
stretching back to the pre-Islamic period.19 In the Pre- Islamic Arab Community, self-
helped tended to be the most relied upon method of dispute resolution.20 If the parties
through negotiations, failed to resolve their differences over matters such as property,
succession, or torts, an hakam (an arbitrator) was appointed. 21

16 Nassib G. Ziadé, 'The ‘Arab Spring’ and Arab Approaches to International
Arbitration' (2013) 30 Journal of International Arbitration, Issue 5, pp. 591–595).
17 Nassib G. Ziadé, 'The ‘Arab Spring’ and Arab Approaches to International
Arbitration' (2013) 30 Journal of International Arbitration, Issue 5, pp. 591–595)
18 Commercial Arbitration in the Islamic Middle East, Arthur J. Gemmel, Santa Clara
Journal of International Law Volume 5, Issue 1.
19 Abdul Hamid El- Ahdab, Arbitration with the Arab Countries 11 2nd ed., 1999
20 Joseph Schacht, An introduction to Islamic Law 7, 1964
21 (Commercial Arbitration in the Islamic Middle East, Arthur J. Gemmel, Santa Clara
Journal of International Law Volume 5, Issue 1.)

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The practice of arbitration was approved of in the Qur’ an, particularly in the
matrimonial context:
“If ye fear a breach between them twain (i.e. husband and wife) then appoint (two)
arbiters, one from his family, and the other from hers; if they wish for peace, God will
cause their conciliations; for God hath full knowledge and is acquainted with all
things”. 22
Another often cited example is the below one: “You should always refer disputes to
God and to His Prophet. And obey Allah and his Messenger; And fall into no
disputes, lest you lose heart and your power to depart ; and be patient and persevering:
for Allah is with those who patiently persevere.”
Islamic history also reveals that the Prophet accepted the decision of an arbitrator; he
advised others to arbitrate and in fact, his closest companions used it to resolve
disputes as well. 23
In fact, even the first treaty entered by the Muslim community, the Treaty of Medinah
signed in 211 A.D. between Muslims, Non-Muslim Arabs and Jews, called for
disputes to be resolved through arbitration. 24
Moreover the Prophet also resorted to tahkim in his dispute with the Banu Qurayza
tribe. 25
Not only is takhim approved of by the Qur’ an and evident in the Sunna of the Prophet
, the two main sources of Islamic Law, but the Ijima or consensus has also confirmed
its use as an Islamic dispute resolution tool.26

22 Abdul Hamid El- Ahdab, Arbitration with the Arab Countries 11 2nd ed., 1999
23 Abdul Hamid El- Ahdab, Arbitration with the Arab Countries 11 2nd ed., 1999
24 Abdul Hamid El- Ahdab, Arbitration with the Arab Countries 11 2nd ed., 1999
25 Libyan Am. Oil. Co v. Libyan Arab Republic 1977
26 (Abdul Hamid El- Ahdab, Arbitration with the Arab Countries 11 2nd ed., 1999).

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2.2.Sharia and its role
The maximum ubi societas ubi jus succinctly expresses a trite observation, namely
that to have a society, one must have rules. An appreciation of the sources, major
principle, depth and dynamism of the Shari’a is imperative to understand how it can
impact on international arbitration in the Middle East. 27
Hence, arbitration law under Arab systems cannot be fully understood without the
preliminary study of Sharia’s background. Behind the Statutes of most Arab Countries
and in the mind of an Arab party, counsel or arbitrator, lies a rich layer of Sharia.
Without a working knowledge of this, a western jurist cannot grasp the essence of
arbitration in Middle East. 28
The Shari’a differs from the western legal tradition in many respects including the
derivation of its legitimacy, sources, and methodology for evolution or reform.29But
there are also similarities, in particular, like most western legal systems it is a positive
system of law and they are both judge made law using the case law method in their
own peculiar ways. 30
The distinction must be made between Shari’a and many of the technical legal rules
derived from the Qur’ an and Sunnah through fiqh.31 A faqih or jurist derived these
rules and thus the decision is not eternal and it is open to re-interpretation in light of,
inter alia, new social, economic, educational and political circumstances. 32 So
important is the Sharia that is either a primary source or the primary source of law in

27 The Shari’ a Factor in International Commercial Arbitration, Faisal Kutty
28 Commercial Arbitration in the Arab Middle East: Shari'a, Syria, Lebanon, and
Egypt: Shari'a, Lebanon, Syria, and Egypt, Samir Saleh
29 . J. Schact “The origins of Muhammadan Jurisprudence, London: Oxford University
Press, 1959
30 Volume 34: 1: of the Cleveland State Law review, which published lectures from
the conference on Comparative Links between Islamic Law and the Common Law).
31 M.H. Kamali “ Source, Nature and Objectives of Shari’a”, Islamic Quartely 211 at
212, VoL XXXIII, 1989
32 The Shari’ a Factor in International Commercial Arbitration, Faisal Kutty)

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the constitutions of Syria, Egypt, Kuwait, Yemen, Bahrain, Qatar and the United Arab
Emirates. 33
Neither Saudi Arabia nor Oman has formal constitutions and each apply the Sharia as
the only Islamic Law.34 The Saudi Constitution was enacted as the Basic Law of
Government. 35
At Chapter 1 , Art. 1, the Saudi Basic Law states “the Kingdom of Saudi Arabia is a
sovereign Arab Islamic State with Islam as its religion; God’s Book and the Sunnah of
His Prophet, God’s prayers and peace be upon him, are its constitution…”
Supplemental Saudi laws (relating to various aspects of modern life) are called
“regulations” and enjoy the full effect of law, provided they are consistent with
Shariah law.
2.3. Islam and its importance
“Islam is a complete way of life: a religion, an ethic, and a legal system all in one.36
The word Islam means submission, specifically submission to the one eternally
existent God or Allah.37In this sense, Islam is the most extreme example of
monotheistic religions that emphasize the power, dominance and immanence of God.
It is derived from the word salaam, which means peace. The Shari’a is the path to
achieve this submission. 38
Islamic law is not a systematic code, but a living and growing organism; nevertheless
there is amongst its different schools a large measure of agreement because the
starting point and the basic principles are identical. The differences that exist are due

33 Samir Saleh, Commercial Arbitration in the Arab Middle East, 11-12 2nd edition).
34 The basic law of the Sultanate of Oman [Constitution art. 2 Oman Royal Sultani
Decree No 101/96
35 Basic Law of Government [constitution] art. 1 Saudi Arabia, Adopted by Royal
Decree of King Fahd, Mar 1992 Royal Order No A/90
36 All’ amah sayyid m.h. the Quran in Islam: its impact and influence on the life of
muslims” , 86 (1987)
37 Phillip K. Hitti, Islam a way of life
38 J.L. Esposito, Islam the straight path, New York : Oxford University Press, 1988

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