When Does an Arbitration Clause Lose Its Practical Effect in a Dispute?
A Legal Article from CounselO Legal
As a general rule, the existence of an arbitration clause in a contract means that the parties have chosen arbitration as the means of resolving the disputes covered by their agreement. The Saudi Arbitration Law requires an arbitration agreement to be in writing and also regulates the constitution of the arbitral tribunal and the selection of arbitrators.
However, the inclusion of a clause in the contract does not always mean that the arbitral process will commence or continue in practice without obstacles.
Having an Arbitration Clause and Activating It Are Two Different Things:
An arbitration clause may be valid in principle, yet problems may arise when a dispute occurs regarding its activation, including the status of the parties, the capacity of the person who entered into the arbitration agreement, the validity of the tribunal’s constitution, the appointment of arbitrators, or the scope of the disputes covered by the clause.
The 2025 amendment under Royal Decree M/21 restates Article 10(1)’s capacity requirement for natural and legal persons. Identify both the party’s capacity and the signatory’s authority; a company name on the agreement does not answer both questions.
Accordingly, reviewing an arbitration clause should not stop at the question:
Does the contract contain an arbitration clause?
It must extend to the more important question:
Can this clause be properly activated in the existing dispute?
When Does the Problem Arise in Practice?
The arbitral process may encounter difficulties where, for example, it becomes clear that the dispute does not fall within the scope of the clause at all, that there is a defect in the constitution of the tribunal or the procedures for appointing arbitrators, or that the person who initiated a material proceeding lacked the necessary authority.
This requires a precise distinction between the invalidity of the arbitration clause itself and the procedural impossibility or failure to activate it in a particular dispute.
The two outcomes are not the same.
What Happens When Arbitration Is Not Possible?
This is the stage at which the importance of legal strategy becomes clear.
Rather than treating a stalled arbitration as the end of the dispute, its effect on the underlying right should be examined, including whether the claim can be redirected to the competent courts or whether the defect can be addressed and the arbitration continued, depending on the nature of the problem and the stage reached by the dispute.
The primary objective remains:
To ensure that a disagreement over the method of resolving the dispute does not itself result in the loss of the underlying right.
Conclusion:
An arbitration clause is not merely wording added to the end of a contract.
It is an agreement with important legal and procedural effects. Therefore, when a dispute arises, its validity, scope, parties, activation mechanism, and the validity of the arbitral tribunal’s constitution should be analyzed before determining the appropriate course.
The professional question is therefore not only:
Does the contract contain an arbitration clause?
It is also:
Can this clause be properly activated in the current dispute, and what is the alternative strategy if the arbitral process cannot proceed?
CounselO Legal
We analyze the arbitration clause before determining the course of the dispute.
Official source: The Saudi Arbitration Law and its amendments published in the Official Gazette Umm Al-Qura. (UQN)
This article is based on research and findings that can be reviewed among our work at CounselO Legal.
Under the supervision of Attorney and Legal Consultant
Omar Riyad Baghdadi
Founder of CounselO Legal