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When is an arbitration clause rendered invalid?

It should be noted that the Saudi legislator has adopted a balanced approach with respect to the determination of nullity, striking a balance between the requirements of justice, including preventing parties to a dispute from resorting to dilatory tactics, and ensuring that formal defects do not extend to the point of prejudicing substantive rights. This approach is reflected in the legislator’s careful distinction between the invalidity of an arbitration clause incorporated into a contract, the invalidity of the arbitration agreement itself, the invalidity of the arbitration proceedings, the invalidity of the arbitral proceedings as a whole, and the nullity of the arbitral award itself. This is further reflected in the wording of Article 50(a) of the Arbitration Law, which provides: “If such agreement is invalid or voidable …”.

When is an arbitration clause rendered invalid?

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Clarification of the Subject Matter of the Dispute

The constitution of the arbitral tribunal differs from the appointment of arbitrators. Where the tribunal is constituted by selection, this is carried out by agreement between the parties to the arbitration, whereas the appointment is made by the competent court where the parties fail to reach an agreement.

The Question

The question arises as to whether such an agreement is contrary to public policy and, consequently, falls within the scope of Article 50(e), which provides: “If the arbitral tribunal was constituted or the arbitrators were appointed in a manner contrary to this Law …”; or whether it should not be regarded as contrary to public policy on the basis that the existence of general conditions does not preclude the parties from agreeing to additional specific conditions, without prejudice to the general conditions, pursuant to Article 15(3).

This leads us to the opposing position, namely that a violation of such specifically agreed conditions would result in nullity. This may be addressed by reference to the view expressed by arbitration expert Dr. Fathi Wal, who stated that: “The matter concerns the exclusion of statutory rules and not otherwise; it does not refer to the conditions set out in the contract, but rather to statutory rules whose source is public policy.” See Arbitration in National, Commercial and International Disputes, p. 739.

Judicial Applications

In one judicial application, the court rejected the claimant’s request to compel the respondent to constitute a three-member arbitral tribunal, reasoning that it is established that arbitration may be conducted by a sole arbitrator, with one arbitrator being the minimum, and that had the parties intended to appoint three arbitrators, they would have expressly provided for this in the contract.

This supports the validity of an agreement where the parties have agreed upon a specific arrangement that does not contravene public policy. See Case No. 3096/2/S of 1436 AH, Collection of Commercial Judgments and Principles, Volume One.

In another judicial application, the court rejected an action seeking the annulment of an arbitral award on the basis that the agreed arbitration period had been exceeded. The court held that the parties’ failure to object, and their continued acquiescence to the tribunal proceeding with the consideration of the dispute after expiry of the stipulated arbitration period, constituted an implied authorization for the tribunal to continue adjudicating the dispute and render its award. The court further held that the stipulated period did not constitute a matter of public policy and that the parties were entitled to agree otherwise. See Case No. 5190/2/S of 1436 AH, Collection of Commercial Judgments and Principles, Volume One.

Further Support for the Validity of the Agreement

The foregoing is further supported by the principle of argumentum e contrary (the inference from the contrary). This may be inferred from the Saudi legislator’s express recognition of the parties’ right to agree upon procedures for challenging or seeking the recusal of an arbitrator, as provided under Article 17(1). Accordingly, by way of argumentum e contrary, the parties may likewise agree upon the procedures for selecting or appointing an arbitrator, provided that such agreement does not contravene the applicable mandatory rules.

Procedural Fairness, Equality and Impartiality

It should be emphasized that ensuring the proper conduct of the proceedings is not intended to impose formalities for their own sake. Rather, the purpose of such procedural requirements is to achieve the requisite justice and fairness between the parties to the dispute. A violation of these procedural rules may affect the validity of the resulting award where such violation undermines the principle of equality between the parties.

Accordingly, the relevant consideration is whether the agreed condition undermines the principle of equality between the parties or renders the arbitration merely nominal in a manner that compromises the tribunal’s independence and impartiality or disregards the conditions and safeguards required to ensure a fair arbitral process.

Opinion

In our view, there is no inherent conflict between the two matters, as they are legally distinct. The fact that the First Party has the right to select the arbitrator does not, in itself, negate the arbitrator’s independence or impartiality. The Second Party may challenge or seek the recusal of the arbitrator if circumstances establishing a lack of independence or impartiality arise.

Accordingly, there is no necessary connection between the selection procedure and the arbitrator’s impartiality, as the two matters are legally separate.

Without Prejudice – Partial Invalidity

Even assuming, for the sake of argument, that the agreed condition contravenes public policy, the arbitration agreement itself would remain valid, since a violation of the particular condition would not necessarily invalidate the agreement to arbitrate as a whole. This constitutes what is commonly referred to as partial invalidity, whereby the arbitration agreement remains valid between the parties notwithstanding the invalidity of the particular condition.

For example, a failure to comply with a prescribed numerical requirement would not, in itself, invalidate the parties’ agreement to submit their dispute to arbitration. The parties may remedy the defect by completing the required number of arbitrators in accordance with the applicable requirements and proceed with the arbitral proceedings.

Conclusion

Based on the foregoing, it is our view that the clause is valid and permissible and that it should not be regarded as contrary to the public policy contemplated under Article 50 of the Arbitration Law. Rather, it constitutes a specific contractual condition that the parties are entitled to agree upon.

This is subject, however, to the requirement that such condition does not become a means of rendering the arbitration merely nominal or undermine the principles of equality and impartiality, or otherwise frustrate the fundamental purpose of arbitration, namely the fair and just resolution of the dispute.

Even if, arguendo, the condition was found to contravene public policy, the appropriate consequence would be the partial invalidity of the disputed condition only, without necessarily affecting the validity of the arbitration agreement itself.

 

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