The New Bahrain Arbitration Law and the Bahrain "Free Arbitration Zone"

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New arbitration legislation enacted by the Kingdom of Bahrain on July 2, 2009 makes it the first country in the world to create the equivalent of a free trade zone for arbitration. That legislation, Legislative Decree No. 30 (The Decree), gives parties to an agreement calling for international arbitration the option of holding the arbitration in Bahrain without concern that the courts of Bahrain might interfere with, or set aside, the resulting award, as long as the parties seek to enforce the award only in another country. The result is the creation of what this article will call the Bahrain "Free Arbitration Zone."

The new legislation also creates a new Bahrain Chamber for Dispute Resolution (BCDR), which is intended to become both a Bahraini national and a Middle Eastern regional arbitration center that will be run with the help of the American Arbitration Association (AAA). Creating an international arbitration center from scratch is not an easy proposition, especially in a part of the world in which users of arbitration have been critical of the judicial structure within which arbitration has up to now had to be conducted. In spite of the convenience of having regional arbitration centers in the Middle East, many corporations have remained cautious about siting arbitrations there out of concerns that local courts are inexperienced in dealing with arbitration and that awards against influential local parties (especially those connected with or favored by governments) might simply be set aside.

The Problem: Lack of Confidence in the Local Courts

The primary objective of users of arbitration in designating the site for an arbitration in a dispute resolution clause is to select a location from which a fair and enforceable arbitration award may be expected to emerge. Convenience is important, as is the availability of qualified arbitrators and counsel. There are those who believe that the quality of the local cuisine also plays a part. But overriding all other considerations is finding a neutral forum in which neither party feels at a disadvantage, and where the courts will support the arbitration process and not second-guess the arbitrators.

Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), the treaty that governs the enforcement of arbitration agreements and awards around the world, the courts of the country where the arbitration takes place have jurisdiction to set aside any arbitration award made in that country.1 Selection of the site of the arbitration has therefore, up until the new Bahraini law, carried with it the selection of which courts will have a primary role in reviewing any award.

Most parties will decline to locate an arbitration in the other party's home country, especially if the other party is considered influential there. Rather, they will look for a neutral site, reasonably convenient to both parties, with a friendly arbitration law, in which the courts have acquired a reputation for respecting arbitration awards. Every drafter of dispute resolution agreements has his or her preferred list of sites in various parts of the world. But very few, at least from outside the region, would include a location in the Middle East on that list.

Users of arbitration have been reluctant to conduct arbitrations in the Middle East for two principal reasons. The first is that the courts there have little or no track record showing an understanding of international arbitration, or of respecting and enforcing arbitration awards. Indeed, the information available tends to create anxiety about the fate of an arbitration award when it reaches the courts.

The second concern is how courts in the Middle East are likely to treat awards that may be seen as inconsistent with Shari'a law, which in many Middle Eastern countries has the force of public policy. For example, Shari'a law forbids the charging or payment of interest. …