Arbitration clauses are often copied from an old contract or a ready-made template without much thought, only for it to emerge at the time of a dispute that the clause is vague, incomplete or inconsistent with other provisions. The result is a side dispute over the validity of the clause itself before the parties reach the substance of their disagreement, consuming time and cost that careful drafting from the outset could have avoided.
The arbitration clause and the submission agreement
An arbitration agreement takes one of two forms: an arbitration clause included in the contract before any dispute arises, or a submission agreement concluded by the parties after the dispute has arisen. In both cases, the Saudi Arbitration Law requires the agreement to be in writing, failing which it is void. An arbitration clause is also treated as independent of the rest of the contract, so it does not automatically fall away if the validity of the main contract is challenged.
The essential elements of a good clause
- A clear and comprehensive scope: use wording that covers every dispute arising out of or relating to the contract, its interpretation, performance or termination, so that no category of disagreement is left out.
- The type of arbitration: is it institutional arbitration before a specific centre, such as the Saudi Center for Commercial Arbitration, or ad hoc arbitration administered by the parties? If you choose a centre, state its name and rules precisely.
- The number of arbitrators and how they are appointed: a sole arbitrator or three. The law requires the number to be odd where there is more than one arbitrator.
- The seat of arbitration: this determines the procedural law and the court competent to hear an annulment action; it is not merely where hearings take place.
- The language of the arbitration: particularly in contracts with foreign parties, to avoid translation costs and disputes over translation.
- The law governing the substance of the dispute: preferably stated expressly in the contract.
Common mistakes we see in contracts
- Combining arbitration and the courts: for example, one clause provides for arbitration and another confers jurisdiction on the courts. This inconsistency opens the door to a lengthy dispute over which forum is competent.
- Referring to a non-existent centre or using an inaccurate name: which raises disputes over the applicable rules.
- Optional wording: such as "the parties may resort to arbitration", a phrase that may be read as binding no one.
- Vague preconditions: such as requiring amicable negotiation for an unspecified period before arbitration, without stating when that requirement ends.
- Overlooking related contracts: where a single project involves several contracts with differing arbitration clauses, it becomes difficult to bring the disputes together in one proceeding.
Situations that need particular care
If one of the contracting parties is a government entity, there are specific statutory approval requirements for arbitration that should be verified before signing. Certain matters also cannot be arbitrated at all, such as personal status matters and matters in which settlement is not permitted. In international contracts, it is wise to consider early on the country in which the award is most likely to be enforced.
A good clause is one that needs no interpretation when a dispute arises: each party knows from it where they will arbitrate, before whom, and under which rules.
Reviewing an arbitration clause before signing does not take long, but it can spare you months of procedural dispute. Our team can review your existing contracts and propose wording suited to the nature of each dealing.