The tremendous growth in economic development rates has led to increasingly complex commercial and economic relations and conflicting interests. As a result, numerous disputes have arisen from such relations, creating a need for new mechanisms to resolve disputes in line with this rapid development. (1). Arbitration is considered one of the most important means by which parties dispense with ordinary courts. It is a process in which the parties agree to submit their dispute to one or more persons whom they select, or determine the method of their selection, to adjudicate and resolve the dispute (2).
The Kingdom of Saudi Arabia has kept pace with developments witnessed by the contemporary world, which increasingly relies on arbitration to settle many disputes. The Kingdom issued its first Arbitration Law in 1403 AH (1983) (3), followed by a new Arbitration Law in 1433 AH (2012) (4), which replaced the earlier statute (5).
The Meaning of the Law Applicable to Arbitration
The law applicable to the subject matter of a dispute before arbitration refers to the set of legal rules that the arbitrator, for one reason or another, deems appropriate for application to the dispute whether their source is a national legal system, a combination of national laws, or rules commonly recognized in the field of international commerce, independent of national laws (6).
Criteria for Determining the Law Applicable to the Arbitration Agreement
Article Two of the Arbitration Law sets out the criteria for the law applicable to the arbitration agreement, stipulating that:
“Without prejudice to the provisions of Islamic Sharia and the provisions of international conventions to which the Kingdom is a party, the provisions of this Law shall apply to any arbitration, regardless of the legal nature of the relationship around which the dispute revolves, if the arbitration is conducted in the Kingdom, or if it is an international commercial arbitration conducted abroad and the parties agree to subject it to the provisions of this Law. The provisions of this Law shall not apply to disputes related to personal status matters or matters that are not subject to settlement.”
From the above text, it is clear that the Arbitration Law relies on two criteria for determining the applicable law: the law of the seat of arbitration and the law of the parties’ will. These two criteria will be examined in the following discussion.
(1) First Standard: The Law of the Seat of Arbitration
Article V (1)(a) of the 1958 New York Convention, which the Kingdom acceded to on 19 April 1994, provides that:
“1. Recognition and enforcement of the arbitral award may be refused, at the request of the party against whom it is invoked, only if that party furnishes proof to the competent authority that:
The parties to the agreement referred to in article (2) were, under the law applicable to them, under some incapacity, or that the said agreement is not valid under the law to which the parties have subjected it, or, failing any indication thereon, under the law of the country where the award was made.”
From this provision, it is inferred that the New York Convention determines, in the field of international arbitration, the law applicable to the arbitration agreement as being, in the first place, the law chosen by the parties. In the absence of such an agreement, the law of the country in which the arbitral award is rendered shall apply, i.e., the law of the seat of arbitration. The Saudi Arbitration Law has adopted this territorial criterion, as Article 2 thereof provides that the Law applies to all arbitration conducted within the Kingdom, and it also applies to arbitration conducted abroad if the parties have agreed to subject it to this Law.
(2) Second Standard: The Law of the Parties’ Will (Party Autonomy)
According to Article V(1)(a) of the 1958 New York Convention, the validity, formation, and interpretation of the arbitration agreement, as well as the effects arising from it, are to be determined by the rules of law chosen by the parties. The parties thus enjoy freedom of choice in determining the law governing the arbitration agreement. Accordingly, the law of the parties’ will is the applicable law (7) .
Since the Kingdom acceded to the New York Convention on 19 April 1994, it follows that the law of party autonomy must be primarily relied upon. The only limitation to this freedom is compliance with the provisions of Islamic Sharia. This limitation is expressly confirmed by the Law, which stipulates: “Without prejudice to the provisions of Islamic Sharia and international conventions to which the Kingdom is a party…” meaning that the sole restriction is non-contradiction with Islamic Sharia.
The Saudi Arbitration Law has reinforced the principle of party autonomy in Article 5, which provides:
“If the parties to arbitration agree to subject their relationship to the provisions of any document (such as a model contract, international convention, or otherwise), the provisions of that document, including those relating to arbitration, shall apply, provided that they do not contravene the provisions of Islamic Sharia.”
The Governing Legal Rules Applicable to the Subject Matter of the Dispute
Article (38) of the Arbitration Law sets out the governing legal rules applicable to the subject matter of the dispute in cases where the parties agree, where they disagree, and where they agree to authorize the arbitral tribunal to settle amicably. It provides:
“1. Without prejudice to the provisions of Islamic Sharia and public policy in the Kingdom, the arbitral tribunal, while considering the dispute, shall observe the following:
- Apply the rules agreed upon by the parties to the arbitration with respect to the subject matter of the dispute. If they agree on applying the law of a specific state, then the substantive rules of that law shall be applied, excluding its rules relating to conflict of laws, unless otherwise agreed.
- If the parties to the arbitration do not agree on the governing legal rules applicable to the subject matter of the dispute, the arbitral tribunal shall apply the substantive rules of the law it deems most closely connected to the subject matter of the dispute.
- The arbitral tribunal must, when deciding the subject matter of the dispute, observe the conditions of the contract in dispute, and take into consideration the applicable trade usages, prevailing customs, and the established practices between the parties.
- If the parties to the arbitration expressly agree to authorize the arbitral tribunal to settle the dispute amicably (conciliation), the tribunal may issue its award in accordance with the principles of equity and fairness.”
How is the “law applicable to the subject matter of a dispute” defined, and what potential sources of legal rules might an arbitrator consider?
The law applicable to the subject matter of a dispute is defined as the set of legal rules that an arbitrator deems appropriate to apply to the dispute for various reasons. These rules govern the actual substance of the conflict being adjudicated.
When determining which legal rules to apply, an arbitrator may consider several potential sources:
National Legal Systems: This includes the law of a specific state or a combination of different national laws. If the parties agree to the law of a specific state, the arbitrator applies the substantive rules of that law (typically excluding its conflict of laws rules).
International Commerce Rules: These are rules commonly recognized in the field of international commerce that exist independently of any specific national laws.
Agreed-upon Documents: The parties may choose to subject their relationship to the provisions of specific documents, such as model contracts or international conventions.
Contractual and Customary Factors: The arbitrator must observe the conditions of the contract in dispute and take into account applicable trade usages, prevailing customs, and the established practices between the parties.
Principles of Equity and Fairness: If the parties explicitly authorize the tribunal to settle the dispute amicably (conciliation), the arbitrator may base the award on these broad principles rather than strict legal rules.
Regardless of the source chosen, the application of these rules in Saudi Arabia is subject to a mandatory framework. All rules must comply with Islamic Sharia, public policy in the Kingdom, and the provisions of international conventions to which the Kingdom is a party of.
To what extent do parties have the freedom to choose the law governing their arbitration agreement, and what is the primary restriction on this choice in Saudi Arabia?
Parties involved in commercial arbitration in Saudi Arabia enjoy a significant degree of freedom of choice in determining the law governing their arbitration agreement, a principle commonly referred to as party autonomy. This freedom allows parties to determine the validity, formation, interpretation, and effects of their agreement based on the rules of law they select.
The extent of this freedom includes several options:
National or International Rules: Parties can choose a specific national legal system, a combination of national laws, or rules widely recognized in international commerce that exist independently of any state’s laws.
Specific Documents: According to Article 5 of the Saudi Arbitration Law, parties may subject their relationship to the provisions of specific documents, such as model contracts or international conventions.
Substantive Law: If parties agree to apply the law of a specific state, the substantive rules of that law are applied, typically excluding its conflict of laws rules unless the parties specify otherwise.
The primary and most critical restriction on this freedom is the mandatory requirement for compliance with Islamic Sharia. The Saudi Arbitration Law explicitly states that the freedom to choose governing rules or documents is granted provided they do not contravene the provisions of Islamic Sharia. Additionally, the arbitral tribunal must ensure that the governing legal rules do not violate public policy in the Kingdom. This means that while parties have broad autonomy, any choice that conflicts with the fundamental principles of Sharia or Saudi public policy will not be upheld.
Overview of The Law Applicable to Commercial Arbitration in Kingdom of Saudi Arabia
The text examines the legal framework of commercial arbitration in Saudi Arabia, highlighting how the nation modernized its regulations to support rapid economic expansion. It emphasizes that party autonomy is the primary factor in determining governing rules, allowing litigants to select the specific laws or international standards that apply to their case. When participants fail to choose a governing law, the seat of arbitration or the legal system most linked to the dispute serves as the fallback authority. Central to this system is the requirement that all proceedings and outcomes remain compliant with Islamic Sharia and international treaties like the New York Convention. Ultimately, the Saudi Arbitration Law provides a flexible yet structured environment that balances the will of the parties with established domestic and global legal principles.
Sources:
- Dr. Mahmoud Mostafa Younes: Al-Marji‘ fi Usul al-Tahkim (Reference in the Fundamentals of Arbitration), Dar Al-Nahda Al-Arabiya, 2009 Edition, p. 11.
- Dr. Fathi Wali: Arbitration in National and International Commercial Disputes: Theory and Practice*, Monshaat Al-Maaref, 2014 Edition, p. 12.
- Arbitration Law issued by Royal Decree No. (M/46) dated 12/7/1403 AH.
- Arbitration Law issued by Royal Decree No. (M/34) dated 24/5/1433 AH.
- Abdullah bin Abdulrahman Al-Fayez: The Old and New Saudi Arbitration Laws: A Comparative Study, p. 3. [[https://bit.ly/4buK2XV](https://bit.ly/4buK2XV)] (Accessed on 3/3/2025 at 1:56 PM).
- Dr. Osama Abdulaziz Abdelwahab Mohamed: The Governing Law Applicable to the Subject Matter of the Dispute in International Commercial Arbitration, PhD Thesis, Faculty of Law, Ain Shams University, 2020, p. 1.
- Dr. Fathi Wali: Arbitration in National and International Commercial Disputes: Theory and Practice, previously cited reference, p. 122.
