Arbitrary decision

Firms and sets may look at Saudi as a golden ticket, but the country is still wrestling with the creation of a credible legal system that will satisfy international business.

News that Outer Temple Chambers has singled out the Kingdom of Saudi ­Arabia as the next string to its Middle East bow is reflective not just of the importance of the Saudi economy, but of the slow but steady pace of legal change in the jurisdiction (The Lawyer, 20 July).

It comes on the back of a number of firms opening in the region in recent months, including Clyde & Co, Eversheds and DLA Piper, the latter having recently relaunched in the country.

Now, following on from the 2007 full-scale reform of the judiciary, which saw the establishment of a new Supreme Court, a Supreme Administrative Court and a Court of Appeal, the Saudi Ministry of Justice has set up a committee to overhaul the current arbitration law and is discussing establishing an international arbitration centre.

“I definitely expect significant changes in the next year to 18 months,” says Amgad Hussein, who runs Denton Wilde Sapte’s Riyadh office. “In the past nine years the amount of change has been unbelievable. The government has had a windfall of cash and Saudi has entered the World Trade Organisation – a lot of new rules deal with that accession and the liberalisation of the economy to attract foreign investment. The government knows that if it wants foreign investment then having a smooth and ­efficient judicial system is essential.”

Others are more sceptical, saying that these issues have been on the cards for some years without any substantial change. But why is there a perceived need for judicial reform?

The arbitration process, which is rooted in law dating back to 1983, is seen as both lengthy and costly. Although arbitration is mandated by law to take up to 90 days only, in practice it takes much longer. Also, the final award is non-binding, which reduces its usefulness. In contrast, filing a dispute in the courts is free, leading to cases clogging up the courts, which are already handicapped by a lack of experienced judges.

Salah Deeb, a senior litigator at Al Tamimi & Company’s Riyadh office, is adamant that the system needs urgent reform. “Businesses in Saudi don’t trust arbitration as a way of resolving disputes – they prefer to go to court. When foreign investors look at any ­jurisdiction they look at the judicial system [in general] and the arbitration system in particular. Foreign investors don’t like to go to court to resolve disputes – that’s why ­establishing a good arbitration centre in Saudi can attract more investors.

“The first thing to promote arbitration is public awareness. Business should be aware of the advantages. Second, arbitration centres should be established and promoted to Saudi and foreign investors. Third, the judicial ­system needs to be improved. Arbitration awards must be final and the right to appeal should be deleted.”

To date a number of international ­arbitration centres have been set up in Saudi, such as the one launched in Mecca earlier this year. However, these are seen as ad hoc arrangements rather than anything permanent and stable.

The Dubai model

Another reason why the Saudis may want to put an arbitration centre at the top of their shopping list is the (relative) success of the Dubai International Arbitration Centre (DIAC), which is located at the heart of the Dubai International Financial Centre (DIFC). If the kingdom does not move fast, the DIAC may steal its thunder.

“Across the Middle East the perception is that Dubai has done the right thing. Before you know it Dubai might become the centre [for arbitration] in the Middle East,” says Stephen Jagusch, an international litigation partner at Allen & Overy (A&O) with ­arbitration experience in the Middle East.

It is clear, however, that the Dubai ­scenario could not be emulated in Saudi, where the possibility of a common law ­jurisdiction would be too radical a change. But Deeb believes that the Saudis can ­nevertheless learn from the experience of Dubai and apply best practice at home.

“Saudi doesn’t need to apply foreign laws to have an arbitration centre – it can have one with Saudi expertise and laws, but which uses an English structure,” ­emphasises Deeb. “It needs to look at other jurisdictions, bring in good ideas and ­’Sauditise’ them. Saudi can still apply its culture and regulations.”

Look here

Some international companies operating in Saudi, especially those operating in ­particularly sensitive areas such as defence, choose to settle disputes by arbitrating abroad. But Deeb believes that Saudi has a long tradition of arbitration and should be considered as a first port of call.

Another lawyer adds that, despite the drawbacks of the Saudi system, the judicial process is predictable and arbitrators will enforce the terms of the contract that parties have agreed to, “unless you’re trading in pork bellies and alcohol”.

It is not just the Saudis that are looking to establish a new international arbitration centre in the region. One partner is ­currently being consulted on setting up such a system in another regional jurisdiction. And it seems that this project could also learn lessons from Dubai.

“DIFC is a big experiment – we’ll get to see how it will operate in practice,” says Paul Stothard, a dispute resolution partner at Dentons in Dubai. “The court only has ­jurisdiction within a small area. The arbitral chamber can be international, but without a court capable of supporting that it’s a clear limitation.

“There’s a lot of uncertainty in the ­promotion of some of these innovative structures. It’s very difficult for a lawyer in my position to advise clients to insert ­arbitration clauses in contracts. Nobody wants their client to be a guinea pig – when the claim’s for a large amount of money they don’t want to take the risk.”

However, overall he describes these as “teething problems”, commenting that the DIFC was “set up by people who knew what they were doing, but that there are inherent difficulties in transplanting a foreign system to a Middle East setting”.

Jagusch at A&O is also optimistic about the DIAC experience. “Like any other ­prudent lawyer, I’d want to be confident that I’m not submitting my client to a process without any value. And where the arbitration is carried out I want a process leading to an enforceable outcome,” he stresses. “Most cases between reputable parties don’t lead to difficulty, because they’re organisations ­wanting speedy, cost-effective resolution.”

But there may be another setback to a potential international arbitration centre in Saudi. “You’re not going to sit yourself in Saudi when there’s no guarantee you can get a visa,” says one regional partner. “There are a lot of additional hurdles there.”

Still, even if arbitration centres applying internationally recognised norms might help businesses feel more confident about investing in Saudi, there is no guarantee that the centres would have that much work to do.

“The problem with several institutions cropping up across the Middle East is that the patronage is spread,” says Jagusch.

“It takes a while until [these individual ­institutions] build up a CV of cases, and many institutions dilutes the talent.”

But with the global economic downturn hitting the region and a number of ­construction contracts to unravel, would new centres not have plenty of work to deal with? Jagusch thinks not.

“It’s fashionable to talk of the growth in arbitration in the Middle East,” he says. “Law firms see skylines of cranes in the Middle East and see fee-generating opportunities. I don’t think Dubai’s quite like that. ­Construction outfits are unlikely to go to battle with a client with whom they’re ­looking to do more business. It’s a difficult landscape because of where the power base lies and where the money lies, and people are reluctant to tweak the nose of the ruler.”

Some would argue that this paradigm of intertwined economic and political power is just as acute, if not more so, than in Saudi. In which case the arbitrators could find themselves twiddling their own thumbs.

The Dubai International Financial Centre: the facts

  • The DIFC was established in September 2004 as an onshore international ­financial centre, occupying a 110-acre site in the centre of Dubai’s financial district.
  • It has its own jurisdiction, separate from the civil and commercial laws of Dubai and the United Arab Emirates.
  • It is established as a judicial entity attached to the ­government of Dubai and has its own independent regulatory authority, the Dubai Financial Services Authority, and ­judiciary, the DIFC Judicial ­Authority.
  • The DIFC courts are led by Chief Justice Sir Anthony Evans and Michael Hwang, senior counsel of the Supreme Court of Singapore as Deputy Chief Justice.