Introduction
In the rapidly evolving landscape of international commercial arbitration, Saudi Arabia has emerged as a pivotal jurisdiction—one whose approach to public policy has significant implications for cross-border contracts, dispute resolution, and legal certainty throughout the Gulf region. For UAE businesses, executives, HR managers, and legal practitioners, understanding the intricate relationship between public policy (“ordre public”) and arbitration in Saudi Arabia is not merely theoretical. It is crucial for risk management, effective contract drafting, and ensuring enforceability of awards, especially in light of the increasing interconnectivity of Saudi and UAE markets, recent regulatory changes, and the growing prominence of the Saudi Center for Commercial Arbitration (SCCA). This article presents a comprehensive, consultancy-led analysis of how public policy impacts arbitration in Saudi Arabia, offering practical guidance to UAE stakeholders.
With new legislative updates across the GCC, including the UAE’s Federal Decree-Law No. 6 of 2018 on Arbitration and ongoing reforms within Saudi Arabia’s legal framework, it is essential for in-house counsel and external advisors to master the nuances of these systems. This analysis will help UAE entities proactively manage legal exposure and create arbitration strategies that withstand public policy scrutiny in KSA, while aligning with best practices for compliance and dispute resolution efficiency.
Table of Contents
- Context of Public Policy in Arbitration
- Overview of the Saudi Arbitration Law
- Defining Public Policy in the KSA Legal System
- The Interplay Between Public Policy and Arbitration
- Enforcement of Arbitral Awards and Public Policy Defenses
- Comparative Table: Old vs. New Approaches
- Case Studies and Practical Scenarios
- Risks of Non-Compliance and Legal Consequences
- Strategic Guidance for Legal Compliance
- Practical Considerations for UAE Businesses
- Conclusion and Forward-Looking Recommendations
Context of Public Policy in Arbitration
The concept of public policy holds a central place in the arbitration regimes of both the UAE and Saudi Arabia. It functions as both a steppingstone and a potential stumbling block in cross-border dispute resolution. Regional and international arbitration rules—such as those in the UNCITRAL Model Law—acknowledge public policy’s importance, but the interpretation in KSA, with its foundation in Sharia principles, can diverge from what practitioners are used to in the UAE or other civil law jurisdictions.
In the UAE, the recent Federal Decree-Law No. 6 of 2018 on Arbitration reinforced the role of public policy, aligning more closely with international standards and providing clearer enforcement mechanisms. This harmonization is critical for businesses operating in both countries. However, the evolution of Saudi Arabia’s domestic legal system, especially since 2012’s Arbitration Law (Royal Decree No. M/34), presents unique challenges and opportunities for UAE firms engaging in Saudi-related contracts or proceedings.
Overview of the Saudi Arbitration Law
Key Features of the Saudi Arbitration Law (Royal Decree No. M/34 of 2012)
The modern Saudi Arbitration Law draws heavily from the UNCITRAL Model Law while embedding Sharia as a fundamental source of legal authority. Notable features include:
- Party Autonomy: Parties are generally free to agree on procedural rules, seat, language, and arbitrators, provided such choices do not conflict with Sharia or public policy.
- Limited Judicial Intervention: Courts may intervene primarily to support arbitration or review awards in cases of procedural irregularity or public policy breaches.
- Strong Emphasis on Award Enforceability: Unless clear public policy or Sharia contraventions are identified, courts are expected to enforce arbitral awards.
- Role of the SCCA: The Saudi Center for Commercial Arbitration has gained prominence, offering modern rules and institutional support that reflect best international practices—making it increasingly attractive for GCC businesses.
Official Sources and Materials
For practitioners, direct reference to authoritative texts, including the Saudi Arbitration Law (2012), the Implementing Regulations (2017), and procedural guidance from the SCCA, is indispensable. These are available on websites such as the Saudi Ministry of Justice and the SCCA.
Defining Public Policy in the KSA Legal System
Legal Foundations of Public Policy
In the context of Saudi Arabian law, public policy is inseparably linked to the overriding tenets of Sharia. This stands in contrast to the UAE, where public policy encompasses more secular and statutory principles in addition to Sharia. In Saudi courts, public policy arguments may include:
- Contradictions with mandatory provisions of Sharia;
- Acts viewed as illegal, immoral, or contrary to the national interest;
- Procedural violations undermining the legitimacy of proceedings.
Critical to note is that Saudi courts have broad discretion in invoking public policy—even where parties have expressly chosen foreign law or international rules.
The Interplay Between Public Policy and Arbitration
Mechanisms for Invoking Public Policy
Under Article 50 of the Saudi Arbitration Law, enforcement of an arbitral award can be refused if it” conflicts with the provisions of Sharia or public policy in the Kingdom.” This clause serves as the primary gateway for public policy challenges.
Practical Implications
While the Law encourages upholding parties’ agreements, the judiciary retains substantial authority. This has tangible effects:
- Foreign arbitral awards—even those rendered under internationally recognized rules—may be set aside if the award or substantive contract is inconsistent with Saudi conceptions of public policy.
- Enforcement can be particularly problematic in sectors such as finance (notably interest-bearing contracts), insurance, or entertainment, where business practices routinely diverge from Sharia prohibitions.
- There is growing recognition of the need for practical guidance and circumspect drafting to minimize exposure to public policy objections.
Key Official References
Refer to Article 50 of the Saudi Arbitration Law, the Implementing Regulations, and explanatory rulings published by the Ministry of Justice and SCCA for authoritative interpretations.
Enforcement of Arbitral Awards and Public Policy Defenses
The enforcement process for arbitral awards rendered in KSA or abroad involves multiple scrutiny levels. Historically, the overlap between public policy and Sharia resulted in unpredictable results for GCC businesses. However, recent reforms and increasing SCCA utilization have improved certainty, although critical risks remain.
Recognition Procedure
The competent court reviews whether the award contravenes local public policy or Sharia. The grounds for refusing enforcement are tightly circumscribed in law but broad in application, including:
- Lack of proper notification of parties;
- Lack of arbitrability (i.e., dispute types not suitable for arbitration under Saudi law);
- Procedural or substantive violations of public policy, including interest-based or speculative transactions.
Impact for UAE Entities
UAE investors and companies must recognize that even awards already confirmed in other jurisdictions, such as under UAE’s Federal Decree-Law No. 6 of 2018, may still face resistance in KSA. This risk is heightened where the commercial arrangement involves regulatory or ethical sensitivities.
Comparative Table: Old vs. New Approaches to Public Policy and Arbitration in Saudi Arabia
| Aspect | Pre-2012 (Old Law / Approach) | Post-2012 (Current Law) |
|---|---|---|
| Source of Public Policy | Uncodified, broad reliance on Sharia | Statutory references, clearer linkage to Arbitration Law |
| Judicial Intervention | Frequent, expansive authority to review awards | Limited; focused on procedural irregularities and public policy breaches |
| International Awards | Low enforcement rate, high unpredictability | Improved recognition, subject to public policy/Sharia exceptions |
| Party Autonomy | Limited, subject to overriding Saudi law | Enhanced; foreign law accepted unless contrary to public policy |
| Institutional Rules (e.g. SCCA) | Not available/applicable | Fully implemented, harmonized with global standards |
Suggested Visual: Penalty and Enforcement Comparison Chart—highlighting old and new risk areas for business decisions.
Case Studies and Practical Scenarios
Case Study 1: Cross-Border Construction Dispute
Scenario: A UAE construction company participates in a joint venture with a Saudi counterpart. The contract includes an ICC arbitration clause seated in Riyadh, governed by English law. Following a payment dispute, the tribunal awards damages to the UAE party, including contractual interest and costs. When seeking enforcement in Saudi Arabia, the award is challenged on public policy grounds (due to awarded interest).
Analysis: The Saudi enforcement court may refuse recognition of the interest component as usurious, in breach of Sharia. However, the principal damages typically remain enforceable. Proactive contract drafting is required—such as segregating interest and principal claims in pleadings, or contemplating alternative damages structures that comply with Saudi law.
Case Study 2: Corporate Shareholder Dispute under SCCA
Scenario: A UAE-listed conglomerate triggers arbitration under the SCCA against its Saudi shareholder, alleging minority oppression. The award grants share buyout at a fair-market value (including lost profit elements). Enforcement is challenged by the respondent as speculative, hence breaching Sharia and public policy.
Analysis: Saudi courts have shown willingness to engage with international valuation methods, provided they do not rely on prohibited gharar (excessive uncertainty). Parties should structure their claims and evidence to avoid elements seen as overly speculative and ensure that awards remain compatible with core Sharia principles.
Risks of Non-Compliance and Legal Consequences
Major Pitfalls for UAE Stakeholders
- Drafting arbitration clauses that ignore Saudi-specific public policy may result in unenforceable awards or costly annulment litigation.
- Failure to anticipate public policy objections—especially in finance, insurance, and labor—jeopardizes dispute resolution predictability.
- Outsourcing complex contracts to generic template providers or foreign counsel unfamiliar with KSA legal sensitivities.
Penalties for Non-Compliance
| Risk Area | Legal Consequence |
|---|---|
| Enforcing an award contrary to KSA public policy | Annulment or partial refusal of enforcement |
| Improper notification or procedural breaches | Nullification of arbitral proceedings |
| Lack of local KSA legal representation | Delays, increased litigation risk, potential dismissal |
Suggested Visual: Compliance Checklist—detailing pre-arbitration, during-proceedings, and enforcement-phase requirements for UAE businesses operating in KSA.
Strategic Guidance for Legal Compliance
Recommendations for Drafting and Dispute Resolution
- Carefully draft arbitration clauses: Specify rules, seat, and governing law with explicit acknowledgment of KSA public policy constraints. Utilize SCCA model clauses where appropriate.
- Engage local legal counsel: Ensure all dispute documentation and proceedings anticipate potential public policy objections.
- Structure damages claims and contractual remedies to avoid elements suspect under Sharia (e.g., conventional interest, certain types of consequential damages).
- Adopt multi-tier dispute resolution clauses: Consider negotiation or mediation as pre-arbitral steps, maximizing flexibility for amicable settlement.
- Maintain robust corporate governance and HR policies to mitigate claims likely to trigger public policy scrutiny (e.g., labor disputes, shareholder issues).
Visual Suggestion: Process Flow Diagram
A process flow diagram may be placed here, mapping the stages from contract negotiation, arbitration, to enforcement in KSA courts—highlighting critical compliance points for each stage.
Practical Considerations for UAE Businesses
Integrating Saudi Public Policy Awareness into Corporate Strategy
UAE companies operating in or contracting with Saudi partners must address these public policy nuances across functions:
- Legal Departments: Should ensure contract templates and dispute protocols are reviewed by counsel qualified in both UAE and KSA law, reflecting the interplay of both legal systems.
- HR and Compliance Teams: Must understand which employment and compensation practices could potentially collide with Saudi public policy, especially regarding expatriate claims and benefits structures.
- Executive Leadership: Should evaluate risk appetite before agreeing to Saudi-seated arbitration, and regularly monitor regulatory updates via official Saudi and UAE government channels.
Engaging with the UAE Ministry of Justice and Related Authorities
For matters where award enforcement crosses UAE-Saudi boundaries, it is prudent to maintain liaison with the UAE Ministry of Justice, reference the Federal Legal Gazette, and seek updates from the UAE Government Portal for the latest guidance on recognition and enforcement obligations.
Conclusion and Forward-Looking Recommendations
Public policy’s influence on arbitration in Saudi Arabia is both profound and nuanced. The current KSA legal framework, though more internationalized than a decade ago, is still grounded in Sharia—but offers opportunities for well-prepared UAE businesses. Legal counsel must approach contract drafting, dispute resolution, and risk management with foresight, leveraging expert advice and robust compliance procedures to pre-empt public policy objections.
Looking forward, ongoing judicial training, SCCA’s growing influence, and GCC-wide harmonization initiatives will likely increase predictability and enforceability of arbitral outcomes. However, the unique parameters of KSA public policy—especially as interpreted by domestic courts—demand continued vigilance and legal strategy updates by UAE entities.
Best practices for UAE businesses in navigating Saudi arbitration include:
- Regular training and compliance audits to stay current on GCC legal developments, including “Federal Decree UAE” and “UAE Law 2025 updates”.
- Utilizing multidisciplinary legal teams for cross-border matters, integrating both UAE and Saudi law expertise.
- Active monitoring of official government sources to anticipate regulatory shifts impacting dispute resolution.
By integrating these strategic elements, UAE companies and their legal advisors can confidently manage risks, ensure enforceability, and drive business growth amid complex regional legal dynamics.