INDIVIDUAL TAKE HOME TEST I

KONVENSI HUKUM PERDATA INTERNASIONAL:

COMPARATIVE STUDY ON ARBITRATION

Country Analysis: Saudi Arabia

Writer:

Grace Gabriella Binowo

NPM. 0906519596

FAKULTAS HUKUM UNIVERSITAS INDONESIA

INTRODUCTION

Since the very beginning of the human history, there has always been dispute

within the society. It is our nature to disagree with one another, and often, it causes

disputes. As human relations growing more complex, so do the disputes that arise in

society. These disputes may be solved in a friendly manner without any neutral party

involves, or, to the extent that they need an external party to assist in deciding the

issues arose.

Before states were developed and legal systems were created as an option to

solve conflicts, humans would try to solve their disputes among themselves. Usually

this would cause a lot of discussion and the possibility that the stronger party would

be able to impose his or her will.

Arbitration was an improvement of a dispute resolution method. Through this

method, the parties had a procedure and a final decision that would be imposed upon

them. This way, there was a better chance to have a fair and impartial decision,

instead of having the strongest party impose his or her will. Arbitration has been used

throughout the history as an alternative dispute resolution method that brings success.

Basically, the idea of arbitration is to have a neutral third party to decide a dispute.

The origin of the word ‘arbitration’ comes from the Latin ‘arbitraer’, which means

evaluator judge. As what René David (1985) defines it:

“Arbitration is a device whereby the settlement of a question, which is of

interest for two or more persons, is entrusted to one or more other persons – the

arbitrator or arbitrators –who derive their powers from a private agreement, not from

the authorities of a State, and who are to proceed and decide the case on the basis of

such an agreement.”

In the arbitration procedure, the parties can be located in different countries. It

may also happen when although the parties are in the same country, the arbitration

procedure is being commenced in another state. Or it is possible that all parties and

the arbitrators are in the same country, however, the object of the dispute is located

outside of the state. When those occasions happen, the arbitration is considered

international.

Knowing the importance and the capacity of arbitration to solve disputes,

specifically to international disputes, United Nations and many countries perceive this

through the establishment of international agreements about arbitration. Arbitration

was growing more complex as it has had international elements in it, thus there had to

be international rules that govern all the differences occurred. There are several

documents that regulate international arbitration today. To date, there are two major

treaties relating to international arbitration, they are: New York Convention of 1958

and the United Nations Commission on International Trade Law (UNCITRAL)

Model Law as revised in 2010. Both of these international agreements codified the

international customary law that has existed for a long time. However, similar to any

international agreements, countries are free to participate in them or not. The

codification of these agreements is necessary as states are more developed and they

are the only entities that have the power to enforce arbitration awards. With the

further development of states and the greater amount of power held by these

institutions, they are the only ones that can use physical power to enforce the awards.

Given the facts, nonetheless, it is recognized that states do not give up their

sovereignty by recognizing these foreign awards, unless they chose to be part of these

certain international covenants. On the other hand, the fact that there is a large

number of countries signing these international treaties makes all parties be equally

treated, since no matter where they are the award will have to be equally enforced.

In conclusion, the success of international arbitration today requires that most

nations in the world participate in the international agreements that recognize and

enforce arbitration equally around the world. This is necessary due to the large

amount of power held by states and the fact that they are the only institutions that can

use coercive power to enforce the awards. Even though nations recognize these

covenants, they remain sovereign since they only sign them because it is in their

interest to do so. A good reputation is a highly persuasive point to encourage states to

sign these international treaties, but no state is obligated to sign them.

EXPLICANDA

I. UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE

LAW (UNCITRAL)

UNCITRAL Model Law on International Commercial Arbitration was

approved on June 21, 1985, in Vienna, Austria. UNCITRAL aims to diminish

disparity in international regulations. Initially, there were thirty-six countries signed

this treaty and in 2006 this document was updated and revised so it can better serve

the needs of arbitrators nowadays.

UNCITRAL is a model law that is used by countries as an example of

legislation. In the first article of the model law, it is stated that this document applies

to any international arbitration case. In an attempt to make it clear, this article defines

arbitration, and the terms ‘commercial’ and ‘international’. The definition of these

terms is important, since these terms can be interpreted in a wide range of service. By

defining these terms, the UNCITRAL Model Law narrows the deliberation of the use

of arbitration since there is a definition of arbitration in its text. Hence, if the

procedure that has been used were not exactly according to the definition found in the

treaty, the procedure would not be considered as arbitration.

The UNCITRAL Model Law regulates the arbitral process thoroughly. As a

matter of fact, several countries even copied articles and subparts from this UN

document straight into their national legislation. This document also defines

international arbitration as one in which the parties have business in a different

country or the procedure happens in another country.

Furthermore, instead of just mentioning that the opponent party must be

notified that the procedure began, the UNCITRAL states that it is important to have

equity and that the defendant should have a complete opportunity to defend his or her

case. The UNCITRAL convention also regulates about the arbitration agreement

itself. It is stated that, this important document must be in written form, regardless of

how it is sent. It is crucial that not only the arbitration agreement is sent in a written

format to all the interested parties, but also every document produced concerning the

case. This would not be a burden nowadays because of electronic files and e-mails.

Therefore, UNCITRAL Model Law on International Commercial Arbitration

is a very useful document to international arbitration. Its update made it more reliable

and more appropriate for the resolution of modern international commerce disputes

since it reflects the current practices of international arbitration.

II. NEW YORK CONVENTION 1958

This convention entered into force on 7 June 1959. As of July 2011, 146

nations had signed and ratified this convention. The International Chamber of

Commerce (ICC) in Paris first drafted the New York Convention in 1953. The United

Nations, through the UN Economic Social Council (ECOSOC) voted and approved it

on 10 June 1958.

Despite being nearly fifty-four years old, the New York (NY) Convention of

1958 is still regarded as the most important legal document of international arbitration

on the use and enforcement of arbitral awards. This UN treaty urges the contracting

states to recognize and enforce international arbitral awards, even if the procedure

took place in another country.

The NY Convention has two requirements for its application. First, with

regards to the reciprocity and is in the subpart 3 of Article I:

“When signing, ratifying or acceding to this Convention, or notifying

extension under article X hereof, any State may on the basis of reciprocity declare

that it will apply the Convention to the recognition and enforcement of awards made

only in the territory of another Contracting State.”1

By this, states that ratified the NY Convention of 1958 have to enforce it only when

the award was held in another state that ratified the same Convention. Therefore, if

country A did not ratify the NY Convention, country B, which ratified the

                                                                                                               1 http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html, accessed on 23 March 2012

Convention, does not have to enforce an award that was completed in country A

(reciprocity reservation). Second, the other requirement is with regards to legal

commercial relationships. According to the Convention, it should only be applied to

legal relationships that are considered to be commercial. The second part of Article I,

subpart 3, states:

“It may also declare that it will apply the Convention only to differences

arising out of legal relationships, whether contractual or not, which are considered as

commercial under the national law of the state making such declaration.”2

Unlike public jurisdiction, the arbitration process is simple. This is reflected in

Article IV of NY Convention that requires simple formalities to enforce the foreign

arbitral awards. It only needs the original award and the original arbitration

agreement. A certified copy is also accepted. According to Article V of the

Convention, there are 7 reasons why the arbitral award may not be recognized and

enforced, given that the opposing party clearly proves that:

1. The parties who signed the arbitration agreement were considered to be

incapable, according to the law applicable to them;

2. The losing party was not properly notified about the beginning of the

arbitration procedure;

3. The award included aspects that were beyond the ones submitted to

arbitration;

4. The private jurisdiction procedure did not happen according to what was

agreed by the parties;

5. The award is not binding among the parties;

6. The subject discussed in that arbitration case is not allowed to be submitted to

arbitration according to the law of that country;

7. The recognition of that award would be contrary to the public policy of that

country.

Having known the causes of not recognizing the award, before the private

jurisdiction commences, it is better to know whether the case being submitted to

arbitration is possible to be solved by the arbitral tribunal. Concerning the last point

                                                                                                               2 http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html, accessed on 23 March 2012

(no.7), there has been a debate of what is against the public policy of a country. In

German Federal Supreme Court, it affirmed that the award could only be considered

against the country’s public policy if it is completely against the foundations of the

state. As Redfern (2004) sustains:

“From the viewpoint of German procedural public policy, the recognition of

a foreign arbitral award can therefore only be denied if the arbitral procedure suffers

from a grave defect that touches the foundation of the State and economic functions”

In other words, only if an award has violates the ethic of the country, and then there

would be a reason not to enforce it.

Thus, it is clear that NY Convention of 1958 is still the most important

document at stake that contains general rules about the recognition and execution of

foreign arbitral awards.

III. INDONESIAN ARBITRATION ACT

Arbitration has also been recognized as one of the form of Alternative Dispute

Resolution (ADR) in Indonesia. Indonesia initiated regulations on arbitration through

an arbitration act of Undang-Undang Nomor 30 Tahun 1999 Tentang Arbitrase dan

Alternatif Penyelesaian Sengketa, which entered into force in 12 August 1999. Like

any other international agreements on arbitration, this national act also defines the

term ‘arbitration’. Pursuant to Article 1, ‘arbitration’ is a method of private dispute

resolution outside litigation, which is based on a written arbitration agreement made

by the conflicting parties.

The Act regulates the jurisdiction of the arbitral tribunal as well as the

substantive matters, which are conflicted between the parties. Upon the jurisdiction,

the Act rules the procedure of arbitration, the selection of arbitrators, and also the

rights to refuse the arbitral tribunal. Article 3 stipulates that Pengadilan Negeri

(District Court) is not competent to entertain the parties on dispute resolution if the

parties had beforehand bound to an arbitration agreement. The party who wish to

settle the dispute by arbitration (the claimant) has to notify the other party (the

respondent) of its intention to commence arbitration in written form, such as: letter,

telegram, telex, facsimile, e-mail or by an expedition book to the respondent that their

arbitration agreement is activated.

If the parties had not yet established an arbitration agreement, the agreement

could be made after the conflict arose. In this matter, Article 9 of the Act applies. The

parties have to make a written arbitration agreement signed by both of them. Yet, if

they could not, the written agreement could be made in a form of notary’s certificate.

Upon the substantive issue, pursuant to Article 5 of the Act, the matter of

dispute that can be settled by arbitration is limited only to commercial disputes and

legal rights owned comprehensively by the conflicting parties. Arbitration cannot be

commenced upon a dispute that cannot be resolved amicably, for instance, criminal

matters.

With regards to the enforcement of foreign arbitral award, the award shall be

proposed to the Head of Jakarta Pusat District Court (Ketua Pengadilan Negeri

Jakarta Pusat) in order to be executed. According to Article 60, the award is final and

binding to the parties. Nevertheless, Article 62 stipulates the causes of not

recognizing a foreign arbitral award. In paragraph (2) of such article, the Head of

District Court may not execute the award if it violates the national ethics and public

policy. The Court has two actions concerning this, which are: cancellation

(pembatalan) or refusal (penolakan).

If the award is cancelled, the legal consequence will be that the respective

award is deemed to have never existed, the disputes between the parties may arise

again thus they may re-arbitrate upon the dispute. The competent authority for this

cancellation is the primary jurisdiction, the seat where the arbitration was commenced

and the award was produced. The procedure of this cancellation is a plenary meeting

of the judges.

On the other hand, if the award is refused, the legal consequence will be that

the award will not be executed in the territorial jurisdiction where it shall be enforced.

The competent authority for this refusal is the secondary jurisdiction, the seat where

the award is to be executed. The procedure of this refusal is an examination by the

Head of Jakarta Pusat District Court.

IV. SAUDI ARABIAN ARBITRATION ACT

From the early days of oil exploration until the 1950s, arbitration was the

primary method of resolving disputes between Saudi and foreign companies.

However, the Saudi government's attitude toward arbitration changed dramatically

after the famous ARAMCO (Arabian American Oil Co) arbitration of 1958.3

In 1983, the Arbitration Act 1403 was finally issued by the Royal Decree No.

M/46 dated 12 Rajab 1403, corresponding to 26 April 1983, while the Implementation

Rules was issued by Council of Ministers Decree No. 7/2021/m dated 8 Ramadan

1405, corresponding to 28 May 1985. Both of these regulations govern arbitration

proceedings in Saudi Arabia. The Arbitration Act is written in Arabic.

Saudi Arabia ratified the New York Convention on 29 December 1993 under a

reciprocity reservation. Upon the ratification, Saudi Arabia became the ninety-fourth

party to the Convention4 and aimed to increase its role in the modern international

community. The Arbitration Act is applicable to both domestic and international

arbitration proceedings, yet parties are allowed to select another arbitration law.

However, if the parties are Saudi nationals, Saudi courts may refuse to refer them to

non-Saudi law arbitration, and insist on applying the Arbitration Act (i.e. Board of

Grievances, Judgment No. 143/t/4 for 1412).

                                                                                                               3 The dispute resulted from a 1954 agreement between Saudi Arabia and Greek shipping magnate Aristotle Onassis, under which Onassis was granted a quasi-monopoly to transport oil out of Saudi Arabia. ARAMCO refused to comply with the Onassis agreement, asserting that it had an absolute right under its 1933 concession agreement with Saudi Arabia to choose the means for transportation of oil. ARAMCO's position was upheld by an arbitral tribunal meeting in Geneva, which applied both Saudi and international law. The Saudi government's dissatisfaction with the award cannot be adequately explained merely by the fact that it lost, since the Onassis agreement was not really very advantageous for Saudi Arabia. The dissatisfaction can perhaps be better explained by more general Saudi concerns over the ability and willingness of foreign arbitrators to apply Saudi law to disputes involving Saudi Arabia's most important natural resource. In any event, Saudi law since the ARAMCO award has been hostile to arbitration outside of Saudi Arabia or under non-Saudi law. See: State of Saudi Arabia v. Arabian Am. Oil Co. 4 New York Convention, supra note

Regarding the enforcement of foreign arbitral award, the party seeking to

enforce it must file a request before the Board of Grievance, which will treat it

according to the applicable convention or agreement. The Board of Grievance takes

into consideration the consistency with Shari’a rules and public policy, in addition to

the reciprocity issue. The Board may request the parties to appear and make oral

submission and in general the Board will review the award to ensure that it does not

contravene the mandatory principles of Shari’a. If the award is enforceable in Saudi,

the Board of Grievances will issue an order of enforceability.

COMPARATIVE ANALYSIS OF THE SAUDI ARABIAN

ARBITRATION ACT

The Arbitration Act serves two important objectives of the Saudi government.

First, it provides a comprehensive and uniform set of rules accessible to foreign

businesspersons and their legal counsels. The Act is designed to alleviate their fears

over the previous lack of judicial and legislative support for commercial arbitration.5

Second, it establishes governmental control not only over arbitration procedure in

general, but over the actual arbitration proceedings by providing supervision by

governmental agencies, courts, or perhaps the Chamber of Commerce and Industry.

Article 1 of the Arbitration Act validates arbitration generally. However, this

article does not impose any requirements on the formulation of the arbitration

agreement. Accordingly, an arbitration agreement may be enforced in Saudi Arabia if

it is contained within a written agreement. An oral arbitration agreement will be

enforceable before a Saudi court provided the party can prove the existence of the

agreement, its affirmed scope and that it was intended that the Arbitration Act was to

apply.

                                                                                                               5 A 1963 Council of Ministers resolution forbade government agencies from (1) designating any foreign law to govern their relations with contracting parties; (2) accepting arbitration (anywhere) as a method of settling disputes; or (3) accepting the jurisdiction of any foreign court or other judicial body to the exclusion of the Saudi Grievance Board. Council of Ministers Resolution No. 58 of June 25, 1963

Regarding the enforceability of an arbitration agreement, the Arbitration Act

does not require any specific wording written, but the arbitration agreement must be

registered at and approved by the relevant judicial authority. The arbitration

agreement should confirm that the parties wish to refer any disputes to arbitration, the

scope and seat of arbitration, the names of the agreed Arbitral Tribunal and the

governing law. However, for the arbitration itself, an arbitration instrument

(Watheeqat At Tahkeem) must be prepared and signed by the parties or their

representatives and the arbitrators.

Saudi judges have a broad discretion to decide what constitutes an arbitration

agreement. Usually, if the intention to refer a dispute to arbitration is proved, this will

be enough for a judge to enforce an arbitration agreement. However, if parties agreed

to apply Saudi arbitration law to their dispute, when they want to proceed with the

arbitration they are requested to sign an arbitration instrument (Watheeqat At

Tahkeem). This document is one of the procedural steps of arbitration.

Arbitration is prohibited in matters where conciliation is not permitted (Article

2 Arbitration Act and Article 1 Implementing Regulations). Although those matters

are not clearly specified, but the common examples are: (a) family cases, such as

inheritance matters and custody issues; (b) criminal cases; (c) sovereignty matters;

and (d) matters relating to public law. The general approach used to determine

whether or not a dispute can be submitted to arbitration is to refer to the Shari’a

provisions and rules, Saudi regulations and finally the reasonable view of the judge.

In international arbitration issue, Saudi Arabia's adoption of the New York

Convention indicates an easing of its historical resistance to international commercial

arbitration. Saudi Arabia deems that by adopting the New York Convention, non-

Saudi Arabian investors may be more confident that the courts of Saudi Arabia will

honor a dispute adjudicated by a non-Saudi Arabian tribunal. Nevertheless, Article V

(2) (b) of the New York Convention indicates that Saudi Arabia is not required to

recognize non-domestic arbitral awards that are contrary to its public policy.

I. UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE

LAW (UNCITRAL)

The Arbitration Act is not based on the UNCITRAL Model Law, and there are

significant differences between them, for example, under the Arbitration Act,

arbitration is commenced by way of an arbitration instrument (Watheeqat At

Tahkeem). This document defines the scope of the dispute, and it will be ratified and

recognized by the court. This means the court will decide at the outset the scope of the

jurisdiction of the arbitrator(s). If new issues, not addressed in the arbitration

instrument (Watheeqat At Tahkeem), arise during the course of the arbitration, the

arbitral tribunal shall refer such issues to the competent court or authority to rule on

them, and it may stay the proceeding until the issues are determined.

Yet, in the UNCITRAL Model Law, the respondent in the proceeding may

challenge the jurisdiction of the arbitrator(s) without prior decision from any

institution regarding the jurisdiction of the tribunal. Furthermore, in Article 3 of the

Arbitration Act, it restricts the government’s use of arbitration; while in UNCITRAL

Model Law, it does not restrict the use of arbitration by the government. Nowadays,

Saudi legislator is formulating a new Arbitration Act to be more consistent with the

domestic, regional and international arbitration developments.

II. NEW YORK CONVENTION 1958

Originally, the New York Convention requires signatories to enforce the

arbitral awards issued by other member nations. The Convention contains a public

policy defense, which allows a signatory to refuse to enforce a non-domestic arbitral

award if the award is contrary to its public policy. The Saudi Arabian legal system is

based on the religion of Islam, which focuses on the enforcement of Islamic culture

and values. This focus is contrary to contemporary Western law, which generally

emphasizes economics.

As what has been stated before, the government’s use of arbitration is

prohibited. Therefore, until Saudi Arabia's adoption of the New York Convention,

arbitration did not provide a viable option for the resolution of governmental disputes

arising out of international commercial contracts. On the other hand, private Saudi

Arabian corporations are not restricted to international arbitration process.

However, until its adoption of the NY Convention, Saudi Arabian policy

required non-domestic contractors submitting to arbitration within Saudi Arabia to

follow the laws of Saudi Arabia. Here, a problem arises for non-Saudi Arabian

investors and contractors. The adoption of the NY Convention is purposed to give the

international community security in commercial contracts with Saudi Arabia and that

disputes will be adjudicated fairly. Additionally, the NY Convention is meant to

assure non-Saudi Arabian investors and contractors that an arbitration award issued in

any signatory’s jurisdiction will be enforced in Saudi Arabia. In contrast, article V (2)

(b) of the NY Convention seems to nullify this assurance by permitting Saudi Arabia

to reject all arbitral awards that are against its public policy, which does not adhere to

the principles of Shari'a law. It becomes more problematic since the respective law

and policy is diametrically opposed to the rules and laws of many member nations

and therefore Saudi Arabian courts may find it easy to reject foreign arbitral awards

pursuant to NY Convention Article V (2) (b). Although such provision of the

Convention allows Saudi Arabia to achieve its goals of gaining acceptance from

international community as well as maintaining the enforcement of its law and

religion, this particular provision defeats the purpose of the NY Convention itself as a

whole.

III. INDONESIAN ARBITRATION ACT 1999

Comparing Saudi Arabian Arbitration Act of 1983 to Indonesian Arbitration

Act of 1999, there are some differences and also similarities between both acts. In

Saudi Arabian Arbitration Act, government is prohibited on the use of arbitration;

while in Indonesian Arbitration Act, there is no such prohibition article that hinders

the use of arbitration by the government. Moreover, Indonesian Arbitration Act does

not enforce Shari’a law although this country has the largest number of Muslims in

the world. On the other hand, the Saudi Arabian Arbitration Act imposes Shari’a law

to its legislations and requires a specialized body (Board of Grievance) before the

court to request for an execution of the foreign arbitral award. While in Indonesian

Arbitration Act, it only needs a letter for execution produced by the Head of Jakarta

Pusat District Court in order to execute the award.

Of all similarities, the most tangible similar issue between both of those acts is

upon the enforcement of foreign arbitral award. Both courts are likely to refuse (or

also cancel, in Indonesia) the enforcement of a foreign arbitral award due to its public

policy. In Saudi Arabia, the public policy is measured by Shari’a law; while in

Indonesia, it is measured by the moral value and ethics of the respective judges who

consider whether such award is contrary to Indonesia’s fundamental norms, which are

stipulated in its constitution of Undang-Undang Dasar 1945 and its ideology of

Pancasila. This likelihood of refusing the enforcement of foreign arbitral award in

both countries can impede the international business transactions among countries

that relate to them. The scope of public policy mentioned in Article V (2) (b) is too

wide and should be defined in a more specific way on how far is public policy reason

may be invoked to refuse the recognition of foreign arbitral award.