Responses to the Three Questions

International Arbitration with Shari'ah Reference: Foundations, Interoperability, and Future Standards

Round One: From Classical Arbitration to Modern Shari'ah-Referenced Arbitration

Objective: To understand how different jurisdictions have evolved from classical arbitration frameworks to contemporary arbitration structures.

Central Theme: To demonstrate that diversity is not an anomaly, but rather an inherent feature of modern Shari'ah-referenced arbitration.

Question

Saudi Arabia has witnessed significant legal and arbitral reforms in recent years. In your view, how has the Kingdom balanced its commitment to Shari'ah principles with the requirements of modern international arbitration practice?

Summary Answer

Saudi Arabia has struck a balance between adherence to Shari'ah principles and the requirements of international arbitration through a process focused on modernizing arbitral means, procedures, and institutions—while retaining Shari'ah and public policy as substantive limits that no arbitral award may transgress. The Saudi reform trajectory was not aimed at excluding Shari'ah or reducing it to a general reference. Rather, it involved codifying rules governing civil transactions, modernizing evidentiary standards, and developing the rules of the Saudi Center for Commercial Arbitration (S.C.C.A), so that Shari'ah becomes more precise and operationally applicable in commercial, construction, technology, finance, and other disputes.

Detailed Answer

First: Constraining Arbitral Freedom by Shari'ah and Public Policy Without Paralyzing Modern Arbitration

The fundamental premise of the Saudi experience is that arbitration is accepted and recognized, and that parties enjoy broad latitude in selecting procedures, institutions, seats, and governing rules. However, this freedom is not absolute: it ends where an award conflicts with Shari'ah or Saudi public policy.

By way of example, the Saudi Arbitration Law sets out specific and exhaustive grounds for annulment and prohibits courts from re-examining the merits of a dispute—consistent with modern international arbitration's requirement of narrow judicial review. At the same time, the Law preserves violation of Islamic Shari'ah rules and public policy as an independent ground for annulment, which the court may invoke ex officio. This is reflected in Article 50 of the Saudi Arbitration Law, issued by Royal Decree No. (M/34) dated 24/05/1433 ah:

Article 50. Text:

1. An action to annul an arbitral award shall not be entertained except in the following cases:

(a) If there was no arbitration agreement, or the agreement was void, voidable, or had lapsed by expiry of its term.

(b) If one of the parties to the arbitration agreement lacked legal capacity or was of diminished capacity at the time of its conclusion, pursuant to the law governing such party's capacity.

(c) If a party to the arbitration was unable to present its defense due to improper notification of the appointment of an arbitrator or of the arbitration proceedings, or for any other reason beyond its control.

(d) If the arbitral award excluded the application of any mandatory rules that the parties had agreed to apply to the subject matter of the dispute.

(e) If the arbitral tribunal was constituted or the arbitrators were appointed in a manner contrary to this Law or to the parties' agreement.

(f) If the arbitral award addressed matters not covered by the arbitration agreement; provided that, if the parts of the award relating to matters submitted to arbitration can be severed from the parts relating to matters not so submitted, annulment shall affect only the latter parts.

(g) If the arbitral tribunal failed to observe the conditions required for the award in a manner that affected its substance, or if the award was based on void arbitration proceedings that affected it.

2. The competent court hearing an annulment action shall, on its own motion, annul the arbitral award if it contains anything that violates the provisions of Islamic Shari'ah or public policy in the Kingdom, or what the parties have agreed upon, or if it finds that the subject matter of the dispute is non-arbitrable under this Law.

3. The arbitration agreement shall not be extinguished by a court judgment annulling the arbitral award, unless the parties have agreed otherwise or the judgment expressly annuls the arbitration agreement.

4. The competent court shall hear an annulment action in the cases referred to in this Article without being entitled to examine the facts and merits of the dispute.

Second: Codification of Shari'ah Transaction Rules for Greater Clarity and Arbitral Applicability

One of the most prominent features of the Saudi balancing approach is that the Kingdom did not settle for leaving substantive rules to general scholarly interpretations. Instead, it enacted the Civil Transactions Law by Royal Decree No. (M/191) dated 29/11/1444 ah, codifying numerous rules governing civil transactions in a modern statutory form. This serves arbitration in two respects: it raises the level of foreseeability and clarity, and it brings the application of Shari'ah in commercial, construction, technology, and financial disputes closer to systematic regulatory precision.

An illustrative example is the regulation of compensation and remediation of harm. The Law establishes the principle of full compensation, specifying that harm encompasses actual loss and loss of expected profit, provided the latter is a natural consequence of the injurious act. This formulation reconciles the requirements of modern commercial dealings with Shari'ah controls over gharar (uncertainty) and contingency, as reflected in Articles 136 and 137 of the Civil Transactions Law:

Article 136: "Compensation shall be such as to make the injured party whole, by restoring the aggrieved party to the position it was in or could have been in but for the occurrence of the harm."

Article 137: "The harm for which the responsible party is obligated to compensate shall be determined by the extent of the actual loss suffered and the profit forgone by the injured party, provided this was a natural consequence of the injurious act. It shall be deemed as such if the injured party could not have avoided it by exercising the reasonable effort required by the circumstances from an ordinary person."

A further example is the recognition of modern contractual instruments while preventing them from crossing into Shari'ah violations. The balancing approach also encompasses the Kingdom's acceptance of certain contractual tools indispensable to modern commerce—such as penalty clauses or liquidated damages—while subjecting them to controls that prevent their transformation into usurious interest or an oppressive penalty. This is significant for arbitration generally, since penalty clauses appear in construction, supply, operations, technology, and concession contracts—not solely in financing disputes.

Article 178 of the Civil Transactions Law permits the parties to pre-determine the amount of compensation, but excludes cases where the subject of the obligation is a monetary sum—since compensation for delay in the performance of a monetary debt may effectively constitute a time-based increment, which is a form of riba (usury):

Article 178: "The contracting parties may pre-determine the amount of compensation by stipulating it in the contract or in a subsequent agreement, provided that the subject of the obligation is not a monetary sum. Notice to perform shall not be a prerequisite for the right to such compensation."

Article 179 further regulates this agreed compensation: it does not arise automatically from the mere existence of the clause if no harm has occurred; the court may reduce it if it is exorbitant or the obligation was partially performed; and it may be increased if the loss exceeded the agreed amount due to gross fault or fraud:

Article 179:

1. Agreed compensation shall not be due if the debtor proves that the creditor suffered no harm.

2. The court may, upon the debtor's request, reduce the compensation if it is proved that it was exorbitant or that the principal obligation was partially performed.

3. The court may, upon the creditor's request, increase the compensation to the amount of the actual loss if it is proved that the loss exceeded the agreed compensation as a result of the debtor's fraud or gross fault.

4. Any agreement contrary to the provisions of this Article shall be void.

Third: Incorporating General Jurisprudential Maxims into the Civil Law Framework

A further dimension of the Saudi balancing approach is that the Civil Transactions Law was not limited to specific substantive provisions. Article 720 sets out a body of general jurisprudential maxims (qawa'id fiqhiyyah kulliyyah), demonstrating that the Saudi codification has not severed itself from its Shari'ah origins but has instead made these maxims operative tools for interpreting statutory texts and applying them to facts.

The significance of Article 720 in arbitration lies in the fact that an arbitrator may encounter circumstances where a literal application of the contract is insufficient—such as an unforeseen loss, an unusual hardship, a settled trade custom, or a conflict between interests and detriments—in which case these maxims serve as a statutory mechanism for applying Shari'ah principles to modern facts.

Article 720 of the Civil Transactions Law provides that: "Without prejudice to the provisions of Article One of this Law, the rules set forth in this Article shall apply to the extent they do not conflict with statutory provisions, having regard to their nature and the conditions and exceptions peculiar to each, namely:" The Article then lists the general maxims, including: "Acts are judged by their objectives"; "In contracts, effect shall be given to intention and meaning rather than to words and form"; "Custom is authoritative"; "What is known by custom is as if it were stipulated"; "Certainty is not displaced by doubt"; "The presumption is the continuance of the existing state of affairs"; "The presumption is freedom from obligation"; "The presumption in contracts and conditions is validity and binding force."

Fourth: Adoption of Modern Evidentiary Methods Subject to Clear Statutory Controls

Another dimension of Saudi Arabia's balancing between Shari'ah reference and the requirements of modern arbitration is the adoption of structured modern evidentiary tools—in particular, the regulation of document production requests, the consequences of non-compliance, and the ability of a party in commercial proceedings to request relevant documents, and even to request documents from third parties or public authorities.

This is significant in arbitration because modern disputes rarely rest on bare oral testimony—they turn on correspondence, contracts, technical documents, digital records, reports, and internal or regulatory decisions.

The Evidence Law, issued by Royal Decree No. (M/43) dated 26/05/1443 ah, regulates these matters in Articles 34 through 37:

Article 34: 1. A party may apply to the court to compel its adversary to produce any instrument that is in the adversary's possession in the following cases: (a) where the law entitles the applicant to demand its production or delivery; (b) where the instrument is held jointly for the benefit of both parties, or is evidence of their mutual obligations and reciprocal rights; (c) where the adversary has relied upon it at any stage of the proceedings. 2. An application under paragraph (1) of this Article shall not be entertained unless it specifies: (a) the description of the instrument and its contents, to the greatest extent of detail possible; (b) the circumstances and indications supporting the assertion that the instrument is in the adversary's possession; (c) the fact sought to be proved by the instrument and the basis for requiring the adversary to produce it.

Article 35: 1. If the adversary admits that the instrument is in its possession, or remains silent, or if the applicant proves the validity of its request, the court shall order production of the instrument. 2. If the adversary fails to produce the instrument after being given a single opportunity to do so, and the applicant has submitted a copy thereof, that copy shall be deemed a true and faithful reproduction of the original; if no copy exists, the court may accept the applicant's assertion as to the form and content of the instrument. 3. If the adversary denies the existence of the instrument and the applicant has not adduced sufficient proof, the applicant may request the court to administer an oath to the adversary regarding the instrument, in accordance with the provisions of Chapter Eight of this Law; if the adversary refuses to swear and does not refer the oath to the applicant, or if the oath is referred to the applicant and the applicant swears it, the copy submitted by the applicant shall be deemed a true and faithful reproduction of the original; if no copy exists, the court may accept the applicant's assertion as to the form and content of the instrument.

Article 36: 1. In commercial disputes, a party may request its adversary to produce, or to grant access to, any instrument related to the case, and the court shall so order subject to the following conditions: (a) the instrument must be specifically identified by description or type; (b) the instrument must have a connection to the commercial transaction in dispute or be capable of revealing the truth therein; (c) the instrument must not be subject to a specific confidentiality provision or agreement between the parties, and disclosure must not violate any trade secret or related rights. 2. If the adversary fails to produce what the court has ordered it to produce for its opponent, the court may treat such failure as a presumption [against the non-producing party].

Article 37: Subject to the provisions set out in the preceding Articles, the court may, on its own motion or upon the application of any of the parties at any stage of the proceedings, order: (1) the joinder of a third party to compel it to produce an instrument in its possession; (2) the production of an instrument from a public authority, or a certified copy thereof, if the

party is unable to obtain it, and the court may request the public authority to submit—in writing or orally—any information related to the case, without prejudice to applicable laws.

Fifth: Developing S.C.C.A Rules to Enhance Expertise, Reasoning, and Institutional Competence

The development of the Saudi Center for Commercial Arbitration (S.C.C.A) Rules of 2023, effective from 01/05/2023, is a further illustration of the balancing approach—rendering Saudi arbitration more institutionalized and aligned with international practice, without negating the effect of Shari'ah or public policy when the dispute is connected to the Kingdom or enforcement is sought before its courts.

One example is the structured regulation of expert evidence in a manner that prevents the expert from usurping the decision-making role of the tribunal, while enabling parties to object to the expert, examine the expert's qualifications, and review the documents upon which the expert relies. This is reflected in Article 31 of the S.C.C.A Rules 2023:

Article 31: 1. The arbitral tribunal may, after consulting with the parties, appoint one or more independent experts to report to it in writing on specific issues determined by the tribunal. The tribunal shall notify the parties of this appointment. 2. The expert shall, prior to accepting the appointment, submit to the arbitral tribunal and to all parties a description of the expert's qualifications and a declaration of independence and impartiality. The arbitral tribunal shall notify the parties, within the time limit it sets, of any objections to the expert's qualifications, impartiality, or independence. The tribunal shall promptly decide whether to accept any such objection.

Following the expert's appointment, any party may object to the expert's qualifications, impartiality, or independence only if the grounds for such objection become known to that party after the appointment. The tribunal shall promptly determine the procedure to be followed in respect of the objection, if necessary. 3. The parties shall promptly provide the expert with all relevant information and shall grant access to any documents or goods the expert requests for inspection, pursuant to the arbitral tribunal's order. 4. The arbitral tribunal shall send a copy of the expert's report to the parties upon receipt, and the parties shall have an opportunity to comment on the report in writing. Any party shall be entitled to examine any document upon which the expert has relied. 5. The arbitral tribunal shall, upon the request of any party, provide the parties with an opportunity to examine the expert at a hearing. The parties may present expert witnesses to give testimony on the issues in dispute during such hearing. Article 29 shall apply to these proceedings. 6. The arbitral tribunal shall not delegate its authority to make decisions to the expert or to any other person.

A further example is the mandatory requirement of reasoned written awards—an essential feature in awards with Shari'ah reference, since the reasoning demonstrates how the tribunal applied the law, observed public policy, and characterized compensation, penalty clauses, or related matters. This is reflected in Article 36(1) of the S.C.C.A Rules:

Article 36(1):"Awards shall be reasoned and in writing; the arbitral tribunal shall make every possible effort to deliberate and prepare the award without delay. An arbitral award shall be signed by the arbitrators, shall state the date on which it was made and shall refer to the seat of arbitration. Unless the parties agree otherwise or the law applicable to the arbitration requires otherwise, all arbitral awards shall be signed electronically. If there is more than one arbitrator and one of them has not signed the award, the reason for the absence of that signature shall be stated in the award."

A further example is the affirmation of the parties' freedom to choose the applicable law while retaining mandatory rules, Shari'ah, and public policy as overriding constraints when the dispute is connected to the Kingdom. This is reflected in Article 37 of the S.C.C.A Rules:

Article 37: 1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute; if the parties have made no such designation, the tribunal shall apply the law it considers most appropriate. 2. Where the parties have expressly authorized the arbitral tribunal to decide the dispute ex aequo et bono, the tribunal may do so. 3. In all cases, the tribunal shall decide the dispute in accordance with the terms of the contract, if any, and shall take into account any trade usages applicable to the transaction.

Round Two: Mutual Operational Interoperability in Practice

Objective: To examine the practical challenges affecting mutual interoperability in cross-border Shari'ah-referenced arbitration.

Central Theme: To demonstrate that operational interoperability extends beyond the domain of jurisprudence to encompass institutions, governance, procedure, and trust.

Question

In your experience, what is the single greatest obstacle to the recognition, acceptance, and enforcement of Shari'ah-referenced arbitral awards across different jurisdictions?

Summary Answer

The principal obstacle is the absence of a shared operational language among legal systems, arbitral centers, and courts. An award may be valid at its seat, yet remain incomprehensible or unenforceable in another jurisdiction if it fails to explain its Shari'ah and normative reference, the nature of the amounts awarded, the limits of the experts' authority, and the effect of that jurisdiction's public policy. The problem is not merely doctrinal divergence between legal systems; it is the absence of practical instruments that render such divergence manageable at the recognition and enforcement stage.

Detailed Answer

First: Divergent Conceptions of Shari'ah Public Policy Render a Valid Award in One Jurisdiction Vulnerable to Refusal in Another

Public policy—whether Shari'ah-based or statutory—is not understood uniformly across jurisdictions. One jurisdiction may adopt a strict approach to interest; another may distinguish between prohibited riba and permissible compensation; a third may tie the issue to rulings of a national Shari'ah board or bespoke standards. It is therefore not sufficient for an arbitral award to comply with the law at the seat; the award must also be comprehensible to the enforcement court.

By way of example: if the tribunal awards compensation or a penalty clause without explaining its nature and legal basis, the enforcement court may characterize it as prohibited interest or an unlawful penalty contrary to public policy—even if the arbitrator intended it as lawful and Shari'ah-compliant compensation.

A concrete illustration: if the award uses the term "interest" or calculates compensation as a time-based percentage of a monetary debt, enforcement in Shari'ah-referenced jurisdictions may result in total or partial refusal or annulment of the award.

Second: Inadequate Disclosure of Shari'ah and Technical References Creates Informational Asymmetry

Many disputes with a Shari'ah or technical dimension do not depend solely on the text of the contract; they are also shaped by fatwas, rulings of Shari'ah supervisory boards, regulatory instruments, professional standards, and internal documentation. If these references are not disclosed to the tribunal or to the opposing party, the award is rendered incomplete or susceptible to challenge at the enforcement stage.

Regulatory measures addressing this problem include the structured document production mechanisms in Articles 34 through 37 of the Saudi Evidence Law, which specify when a party is required to produce an instrument in its possession, the consequences of silence or refusal, how specific relevant documents may be requested in commercial proceedings, and how documents may be obtained from third parties or public authorities. These provisions illustrate that operational interoperability requires not only jurisprudential opinions, but also evidentiary disclosure mechanisms that reduce informational asymmetry.

The regulation of expert evidence in Article 31 of the S.C.C.A Rules 2023 is a further example: the expert is designated as an auxiliary resource for the tribunal, not a substitute decision-maker; parties may object to the expert, challenge the expert's qualifications, examine the expert's report, and inspect the documents relied upon; and Article 31(6) expressly provides that the tribunal may not delegate its decision-making authority to the expert or to any other person.

Third: Legal Fragmentation in Complex Contracts Produces Conflicting Outcomes at Enforcement

Many cross-border contracts distribute a single legal relationship across multiple instruments and multiple governing laws: a principal contract, a guarantee, an undertaking, an arbitration clause, a substantive governing law, a law of the seat, and a law of enforcement. If this fragmentation is not carefully managed, part of the relationship may be valid under one law yet raise a Shari'ah or regulatory problem under another.

It is therefore essential to include a clear clause specifying the substantive governing law, the Shari'ah reference, the law of the arbitration agreement, the law of the security interests, and the effect of the invalidity or unenforceability of any part of the contract on the remainder.

Fourth: Addressing the Obstacle Requires Interoperability Tools, Not Mere Calls for Harmonization

The practical remedy begins at the drafting stage, through a Shari'ah and regulatory tracking clause that identifies the governing reference for each component of the legal relationship and the consequences of any Shari'ah or public policy violation in any component.

This must be followed by an early enforcement mapping exercise: the selection of the arbitral seat should be accompanied by an assessment of the location of the debtor's assets and the enforcement jurisdiction's stance on interest, compensation, penalty clauses, and public policy.

A Shari'ah and technical expert protocol should then be established, identifying the expert's qualifications, sources, disclosures, and the parties' rights to examine the expert—without delegating decision-making authority, as expressly reaffirmed in Article 31(6) of the S.C.C.A Rules 2023.

Finally, a standardized reasoning model for Shari'ah-referenced awards should be adopted, stating the governing law, the Shari'ah reference, the characterization of the amounts awarded, the rationale for their compliance with Shari'ah (i.e., their freedom from riba, gharar, or public policy violations), and the severability of the amounts awarded in the event that partial enforcement is not feasible.

Round Three: Building the Future Framework

Objective: To explore future pathways toward greater operational integration, or a minimum threshold of unity, while preserving diversity and legitimacy.

Central Theme: The future does not require complete uniformity; what is required is sufficient common ground to enable diverse legal systems to operate together effectively.

Question

Do you foresee the possibility of developing minimum shared standards for Shari'ah-referenced arbitration across jurisdictions? If so, what should they contain? And what is your view on the pursuit of a unified cross-jurisdictional code?

Summary Answer

Yes, the development of minimum shared standards is both possible and necessary. However, the realistic path forward is not to begin with a comprehensive mandatory code imposed on all jurisdictions, but rather to begin with a substantive reference code on core issues, accompanied by interoperability protocols governing procedure, expertise, evidence, reasoning, and enforcement. The objective is not to eliminate jurisprudential and institutional diversity, but to transform it from a source of contradiction and enforcement refusal into a managed and administrable diversity.

Detailed Answer

First: The Minimum Shared Standards Should Begin by Distinguishing Substance from Procedure

The first principle to be established is that the substantive law of a Shari'ah-referenced dispute may not contradict Shari'ah, and that the parties' freedom to choose the governing law does not extend to the choice of a substantive rule that conflicts with a recognized Shari'ah ruling or mandatory public policy norm.

Procedure, by contrast, affords considerably greater latitude: institutional rules, electronic arbitration, early determination, expert evidence, and document management are all permissible, provided they do not compromise fairness or violate Shari'ah.

This distinction enables the construction of an arbitration framework that is modern in its means and Shari'ah-compliant in its substance, without conflating acceptance of modern procedural tools with acceptance of a substantive rule that conflicts with Shari'ah.

Second: Standards That Must Be Addressed

1. The Standard Governing Compensation, Riba, and Penalty Clauses Must Be Central to Any Shared Minimum

The greatest threat to the enforcement of cross-border awards is the ambiguity surrounding the nature of the amounts awarded. The minimum shared standard must therefore include a framework that distinguishes between compensatory damages for actual harm, proven loss of expected profit, a regulated liquidated damages clause, and usurious interest or a time-based increment on a monetary debt.

2. The Minimum Standard Must Regulate Expert Evidence and Reasoned Awards—Not Merely Identify the General Reference

Among the most important elements the minimum standard must contain is a protocol for Shari'ah and technical experts, specifying qualifications, independence, disclosure, the sources of expert opinions, the parties' rights to cross-examination, and the limits of the weight to be accorded to expert opinions. Disputes with a Shari'ah or technical dimension cannot be left to an unregulated battle of unverified opinions.

The minimum standard must also include a standard for award reasoning such that the award does not merely contain a boilerplate phrase such as "in accordance with Shari'ah", but rather identifies the governing law, the Shari'ah or statutory reference, the nature of the obligation, the characterization of the compensation, the rationale for its compliance with prohibitions on riba and gharar and public policy, and the tribunal's treatment of the expert evidence submitted.

Third: The Unified Code Should, in Its Initial Phase, Be a Substantive Reference—Not a Rigid Mandatory Instrument

The concept of a unified code is sound in principle; however, if it were to commence as a comprehensive mandatory instrument, it might collide with state sovereignty and with the divergence in jurisprudential schools, institutions, and conceptions of public policy across jurisdictions. The more appropriate course is to build a model law or reference code that parties may adopt by agreement in their contracts and that arbitral centers may incorporate incrementally—acquiring practical authority over time.

This code may be constructed from several principal sources, notably:

- The Saudi Civil Transactions Law, as a modern precedent for codifying civil transactions on a Shari'ah basis;

- Resolutions of the International Islamic Fiqh Academy of the Organisation of Islamic Cooperation;

• Resolutions of the Islamic Fiqh Academy of the Muslim World League;

• Resolutions of the Islamic Research Academy of Al-Azhar Al-Sharif;

ula;

• Resolutions of the European Council for Fatwa and Research;

• Standards of the Accounting and Auditing Organization for Islamic Financial Institutions (A.A.O.I.F.I), in the matters it regulates.

The operational mechanism of the code would function as follows:

- Where the recognized academies or standards reach a consensus on a matter, that consensus serves as a strong or binding reference, depending on the formulation of the code.

- Where they diverge, the qualified arbitrator exercises independent judgment (ijtihad) in selecting the opinion most consonant with the rules and objectives of Shari'ah, stating the reasons for that preference in the award.

Fourth: The Success of the Code Depends on a Supporting Ecosystem of Institutions, Data, and Training

A substantive code alone is insufficient if expert evidence, evidentiary procedures, award reasoning, and enforcement mechanisms remain unregulated. The code should therefore be accompanied by:

- An international Shari'ah arbitration committee, empowered to issue advisory opinions when standards diverge, with binding effect if the parties so stipulate.

- A global registry of arbitrators and experts in Shari'ah-referenced disputes, classified by specialization, language, and regulatory and sectoral experience.

- A database of awards and decisions on annulment and enforcement—subject to appropriate confidentiality safeguards—compiling summaries and trends on issues such as compensation, penalty clauses, riba, public policy, expert evidence, and enforceability.

The framework must also address emerging issues, including digital assets, smart contracts, green sukuk, third-party funding, artificial intelligence, and electronic platforms—since these areas will generate the next generation of disputes requiring both Shari'ah and procedural treatment.

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