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SAUDI-ARABIAN CONTRACT LAW: A COMPARATIVE PERSPECTIVE

CAROL LEE CHILDRESS*

TABLE OF CONTENTS

I. INTRODUCTION ......................................... 70 II. ISLAM .................................................. 71

III. ISLAMIC LAW: AN OVERVIEW .......................... 72 A. Primary Sources: The Koran and the Sunnah ........ 72 B. Secondary Sources .................................. 72

1. Ijm a ........................................... 73 2. Qiyas ........................................... 73 3. Itihad .......................................... 74

IV. THE SECTS AND SCHOOLS OF ISLAMIC LAW ............. 74 V. SAUDI ARABIA: ITS HISTORY AND LEGAL SYSTEM ...... 76

VI. CONTRACTUAL OBLIGATIONS UNDER SAUDI LAW AS

COMPARED TO AMERICAN LAW ......................... 78 A. Introduction ........................................ 78 B. Formation of Contracts .............................. 80 C. Types of Contracts .................................. 82 D. Breach and Termination of Contracts ................ 85

VII. SPECIAL FEATURES OF ISLAMIC CONTRACT LAW ........ 86 A . Riba ............................................... .86

1. Basic Tenets .................................... 86 2. Weights and Measurements ...................... 87

a. Same Like and Kind ......................... 87 b. Sarf (Money-Changing) ...................... 88 c. Ijara (Hire) and Ujra (Lease) ................ 88

3. A Public Policy Exception - Muzabana ......... 89 4. Gharar ......................................... 89

B. Financing Mechanisms .............................. 90 1. Islamic Banking ................................. 90 2. M udaraba ...................................... 91 3. Pre-Payment Agreements ........................ 91 4. M ortgages ...................................... 92

J.D. Candidate, St. Thomas University School of Law.

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VIII. SUBSTANTIVE EXPANSION OF THE KORAN AND SUNNAH LAW ................................................... 92

IX. CONCLUSION ........................................... 94

X . GLOSSARY .............................................. 95

I. INTRODUCTION

In the late twentieth century, Saudi Arabia has become one of the most affluent countries in the world. As a world leader in oil production, its global impact, both economically and politically, will continue to in- crease. Saudi Arabia is faced with the problem of adjusting its tradi- tional legal system, which is based on the Koran' and' on ancient Islamic precepts, to the modem business world. Although the focus of Islamic law is primarily on areas such as family, inheritance, and criminal law, commercial law also rests on a foundation of religious prescriptions. The promulgation of commercial legislation, all of which falls outside the di- rect scope of application of Islamic law, or the Shari'a, is closely scruti- nized by religious leaders who subscribe to different and often conflicting schools of legal-theological interpretation. The Traditionalists view the Koran as immutable, believing it should be literally interpreted, minimiz- ing the human factor in legal decision-making, while the Modernists be- lieve the Koran to be a more flexible document that may be adapted to modem needs. It is this divergence of beliefs regarding the adaptability of the Shari'a to modem business needs that has come to be the source of extensive commentary regarding the development of Saudi Arabian busi- ness laws.

This paper will focus on a core component of Saudi Arabian busi- ness law - the law of contracts - and will look at its development from a U.S. lawyer's perspective. A brief history of Islam and the basic tenets of Islamic law along with a brief description of the Saudi Arabian gov- ernmental structure will provide the necessary background information. This paper will go on to highlight the roots of Saudi Arabian contract law in the teachings of Islam, including the conflicts over the interpreta- tion of the Shari'a, and point out aspects of Islamic law that are quite foreign to the Western world. The similarities and differences between Saudi Arabian and United States contract law will be examined along the way. Finally, the problems created by a strict application of traditional

1. Since there is no standard form of transliteration from the Arabic to English, there are many different spellings for the same word, e.g., Koran, Ku'ran, Quran, Qur'an, and Coran; Sunna or Sunnah; Kaliph, Kalif or Caliph; and Moslem or Muslim. Cf T.E. LAWRENCE, SEVEN PILLARS OF WISDOM 4 (1935).

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Saudi legal doctrine to the present reality of international commerce will be described and the adjustments made will be critically evaluated.

II. ISLAM

Islam literally translates into "full submission to God." It is the religion and way of life established by the prophet Mohammed 2 in the late sixth and early seventh centuries. Prior to Mohammed's teachings, the various Arabic tribes followed many different customs and laws, if there were any consistent patterns at all. Some of the tribes followed Christian theology, others Judaism, while others practiced various pagan beliefs or no religion at all. As a result, in the interest of survival, many of the tribes lacking a code of justice reacted with brutality to those they encountered. 3 Mohammed, recognizing a need for a coherent and uni- fied social order, gave to these tribes a system of rules tailored to, and compatible with, their way of life. This was a goal that many, including the Christian and Judaic sects of the region, tried, but failed to achieve.

The Koran, which translates to mean "recitation," is recognized by all the Islamic schools as the verbal expression of Allah's will to man. While many Christians and Jews believe that the Bible, written by man, was influenced by its human writers, Islam subscribes to the doctrine of the infallible word as an article of faith. This belief does not allow for a Moslem to question the possibility of a human element in the creation of the Koran.4 The Koran is not only accepted as the final arbiter of social interactions in most Islamic countries, it is the basis of all law. To the Moslem, law is God-given, not man-made; therefore, the purpose of the judicial system is exclusively to determine the true meaning of the Shari'a. 5 No recognized distinction exists between the religious and the secular.6 Hence, the commands of the faith and those of the law cannot be separated. 7 The primary differences among the legal systems of the

2. It is generally believed that Mohammed was born in approximately 570 A.D. (some schol- ars contend the correct year was 574). His father died before his birth as did his mother when he was six, leaving him in the care of his grandfather who was poor. When he was 25, he overcame his monetary problems by marrying a wealthy widow fifteen years his senior. It was not until he was forty that he claimed he received revelations from God through the angel Gabriel. He managed to convert his family and slaves but the village in which he lived persecuted him when he began to attack the local religion. Islam began to flower when the city of Medina sought Mohammed's help, through his religious doctrines, to help put down a dispute between two leading tribes. Mohammed died in 632. A. GUILLAUME, ISLAM 23-40 (1954).

3. M. KHADDURI. THE ISLAMIC CONCEPTION OF JUSTICE 9 (1984). 4. A. GUILLAUN,.u, supra note 2, at 55. 5. N. COULSON, COMMERCIAL LAW IN THE GULF STATES 9 (1984). 6. Rahman, Towards Reformulating the Methodology of Islamic Law: Sheikh Yamani on

"Public Interest" in Islamic Law, 12 N.Y.U. J. INT'L L. & POL. 219 (1979). 7. H. LiEBESNY, THE LAW OF THE NEAR AND MIDDLE EAsr 4 (1975).

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various Islamic countries, as shall be seen, are in the acceptance of sources of law outside of the Koran.

III. ISLAMIC LAW: AN OVERVIEW

A. Primary Sources: The Koran and the Sunnah

The basis of Islamic Law is called the Shari'a, literally, "the path to follow." The Shari'a is considered infallible and inviolable. 8 Its primary source is the Koran, the Islamic holy book. The Koran is accepted in all Islamic countries - unlike the Sunnah which, as a complementary and corollary primary source, is accepted only in a majority of Moslem coun- tries. The Sunnah consists of the writings, teachings, and deeds, or "tra- ditions" (hadith) of the Prophet Mohammed. 9 All of Mohammed's anecdotes, acts, and sayings were gathered after his death, and several biographies were written. These writings served as guidance in clarifying the meaning of vague passages of the Koran and elaborating or explain- ing others.1 0 Six of these biographies are considered authentic and com- pose the core of the Sunnah.I The authority of the Sunnah is based on a passage in the Koran which reads, "Accept what the Apostle gives you, and refrain from what he forbids."

1 2

B. Secondary Sources

The use of secondary sources has produced the greatest amount of controversy among the legal scholars within the Islamic world. These secondary sources consist of: personal reasoning (iftihad), infallible con- sensus of the judges and religious scholars of a community (Urn'a), and reasoning by analogy (qiyas). Some scholars feel that ijtihad, #m%'a, and qiyas are three distinct secondary sources of the Shari'a.13 Other sources view ijm'a and qiyas as merely two types of itihad.1 4 Not only do the

8. M. KHADDURI, supra note 3, at 3. 9. The concept of "Sunnah" actually predates Islam. Prior to Mohammed, the pagan Arabs

practiced the sunnah, or rules, which were old ancestral customs and manners, or traditions, of the Arab world. Now, of course, Sunnah refers solely to the traditions of Mohammed. H. LIEBESNY, supra note 7, at 13.

10. The idea of the Sunnah being found in the hadith (traditions) of Mohammed was intro- duced by al 'Imam al-Shafi'i (d. 820 A.D.) a religious and legal scholar after whom the Shafi'i school of the Sunni sect was named. Yamani, The Eternal Shari'a, 12 N.Y.U. J. INT'L L. & POL. 205, 207 (1979).

11. Makdisi, Islamic Law Bibliography, 78 L.L.J. 103, 103 (1986). 12. AL-QURAN, Surah 59:7 (Ahmed All trans.) [hereinafter KORAN]. 13. Shakir, Saudi Arabia, CONSTrrUTIONS OF THE COUNTRIES OF THE WORLD 1 (1976). 14. Khadduri, The Maslaha (Public Interest) and 'lia (Cause) in Islamic Law, 12 N.Y.U. J.

INT'L L. & POL. 213 (1979) who includes qiyas and jm'a under the subheading of itihad. C. WEER- AMANTRY, ISLAMIC JURISPRUDENCE 40-45 (1988), who includes qiyas, but not imla under the subheading of iftihad. See also Kourides, The Influence of Islamic Law on Contemporary Middle

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various Islamic countries differ on this point, but legal scholars within these countries themselves often disagree on the legitimacy of these sec- ondary sources and their appropriateness in the twentieth century. -

1. Ijmrna

When the Koran or the Sunnah, as the primary sources, do not di- rectly address an issue, the judges and religious scholars may use irm'a (consensus). The basis of the Um 'a law is Mohammed's comment, "My community will never agree in error." 15 Thus, when the muftis (judges) and ulamas (the religious scholars and Moslem jurists), consulting the Koran and Sunnah, are in complete agreement about a conclusion, it is believed to be so as a result of the Divine Will. Traditionally, it is Urm'a which determines the method by which the Koran and the Sunnah are interpreted, what they mean, and how they are to be applied. This is one way that the law both preserves the foundation of the Koran and Sunnah and allows for necessary change. jm'a is not available for use in ad- dressing potential problems, but only for those that have already arisen. 16 Presently, Um'a is not a major source of law.

1 7

2. Qiyas

Whereas the use of the other methods involves a form of "divine inspiration," qiyas, deriving a law through analogy, does not. Qiyas in- volves the use of analogical reasoning applied to the entire body of pre- scriptions assembled in the Koran and the Sunnah. If a conclusion cannot be reached based on a single principle, then one would look to the entire law, applying the closest and most appropriate rule. Interestingly, qiyas, as with most of the different forms of Islamic legal reasoning, is derived from Judaic rabbinical law.18 This method presented problems when strictly applied since it sometimes resulted in judgments that were unjust or against the public interest. The muftis in Saudi Arabia there- fore decided to employ istihsan, i.e. the process of interpreting the Koran

Eastern Legal Systems: The Formation and Binding Force of Contracts, 9 COLUM. J. TRANSNAT'L L. 391 (1970).

15. N. ANDERSON, LAW REFORM IN THE MUSLIM WORLD 6 (1976). 16. H. LIEBESNY, supra note 7, at 17. 17. F. HASSAN, THE CONCEPT OF STATE AND LAW IN ISLAM 38 (1981). 18. J. SCHACHT, AN INTRODUCTION TO ISLAMIC LAW 21 (1964). Rabbinical law has a long

and rich history. The law of Moses (Mosaic law) was analyzed and annotated in the Pentateuch (the first five books of the Bible). The Torah and the Pentateuch are very much alike except the Torah includes all 39 books of the Old Testament and some later writings. The Misnah - a multi-volume analysis of unwritten rabbinical law - was written by leading Jewish scholars around 200 A.D. This was followed in approximately 500 A.D. with the Gemarra, which expanded and commented on the Misnah. The Misnah and Gemarra form the Talmud. The Code of Jewish Law, which was written in the 1600's, is the final codification of rabbinical law and is composed of 613 laws.

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and Sunnah according to public interest rather than by analogy.19

3. ljtihad

The last method, itihad (personal reasoning), unlike the first two, is banned in Saudi Arabia and in most Sunni sect 20 countries. Ijtihad was used when there were no legal principles at all upon which to base a decision. In this case, the mufti (judge) would use his own best reasoning based upon the spirit of the law. Ijtihad was allowed traditionally by the Sunnah but was banned21 by the Sunni in the tenth century.

Beginning in the ninth century, the famous schools of jurists of that time began codifying Islamic law, but tenth-century Islamic society had begun to break down and, according to the maliks (kings), 22 had failed to produce imams 23 (religious leaders) with the ability to correctly interpret divine law. The leading scholars of the time decided that the existing scholars neither met the quality or standards of the original codifiers nor were wise enough to be entrusted with the continuing development of the law. Accordingly, itihad was banned. The majority of Sunnis continue to this day to reject the doctrine of itihad (personal reasoning) although some Sunni scholars, as shall be seen later, argue vigorously for its reintroduction.

IV. THE SECTS AND SCHOOLS OF ISLAMIC LAW

The acceptance of secondary sources (jm'la, qiyas, and itihad) of Islamic law was controversial throughout Islamic history. The early ula- mas differed in their interpretations of the Koran and the Sunnah, and at one point there were 50 different doctrines or schools of Islamic law. There are now two distinct sects of Islamic law, the Sunni and the Shi'ite, 24 each further divided into four distinct schools of law. The schools differ as to their interpretation and application of obscure verses

19. Id. at 37. 20. The two Moslem sects, of which the Sunni sect is the most prevalent, will be discussed later. 21. The term for the banning of ijtihad in the tenth century is kafl bab el-itihad, the closing of

the door to itihad. The Laws and Courts of Saudi Arabia, 5 MODERN LEGAL SYSTEMS CYCLOPEDIA 492 (K. Redden 3d ed. 1988).

22. A king (malik) is also referred to as the imam, and the shaykh. Jeanne Asherman concisely distinguishes these three titles held by the same person as follows: "As imam, the monarch is respon- sible for upholding the Shari'a, as shaykh, he commands tribal allegiance, and as malik, he is ex- pected to act as would a Western king." Asherman, Doing Business in Saudi Arabia: The Contemporary Application of Islamic Law, 5 MODERN LEGAL SYSTEMS CYCLOPEDIA 520 (K. Red- den 3d ed. 1988).

23. An imam differs from an ulama in that an imam is a religious leader, such as a king or ayatollah.

24. Interestingly enough, the Koran specifically denounces splitting Islam into sects. Surahs 30:32, and 43:64-65.

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of the Koran and as to which hadith (traditions) of the Sunnah are valid and how they are to be applied.25 They also disagree on which ijm'a and qiyas are acceptable. 26 Despite their differences, all the schools within a sect accept each other as orthodox.

Each school is named after a different religious scholar who lived within the first few centuries after Mohammed's death. The four Shi'ite schools are the Ibadi, Zaydi, Ithna Ashari, and Imami.2 8 The four Sunni schools are the Hanafi, Shafi'i, Maliki, and Hanbali.2 9 The Hanbali school, which is named after the Traditionalist Ibn Hanbal (d.855), and is considered the most rigid and fanatical of the Sunni sect schools, 30 was officially recognized and mandated in Saudi Arabia by a 1928 royal decree.

The main difference in Sunni and Shi'ite doctrine is that Sunnis be- lieve that their imams (religious leaders) are men who are inspired by Allah and are periodically given superhuman knowledge from Allah.

25. N. ANDERSON, supra note 15, at 9. 26. For example, the Hanafi school employs the use ofistihsan, whereas the Maliki school uses

a very similar method, masalih, which is deriving a benefit or legal result with regard for the public interest when neither the Koran nor the Sunnah provides for the remedy. Yamani, supra note 10, at 207.

27. A. GUILLAUME, supra note 2, at 102. Although all of the schools within each sect recog- nize each other and a Moslem may join any school he wishes, the fine differences among the schools have affected business law today. This has resulted in contracts being written with the various schools in mind so that the desired result will be obtained no matter which court is used and/or which school the presiding judge ascribes to. For example, in a contract for lease where no condi- tions are specifically attached, the Maliki and Hanafi schools hold that property passes to the trans- feree during the lease. This would allow for the transferee to sublet the property. In the Shafi'i and the Hanbali schools, the property does not pass, only the personal right to enjoy the property; there- fore, a transferee may not sublet. N. CouLsoN, supra note 5, at 24-25.

28. Makdisi, Legal Logic and Equity in Islamic Law, 33 AM. J. COMp. L. 63, 65 (1985). 29. The Hanefite school is recognized in Iraq, Egypt, Sudan, and Libya. The Malikite school is

recognized in Kuwait, and North and West Africa. Shafi'ite is prevalent in Southern Arabia, East Africa, Indonesia, and Malaya. The Hanbali school, besides being officially recognized in Saudi Ara- bia, is prevalent in Qatar, Pakistan and Syria. H. LIEBESNY, supra note 7, at 22.

30. Although the Hanbali school is considered and often referred to as the most fanatical of the Sunni sect, this only refers to its fundamentalist interpretation of the Koran, and of the Koran as the first source of law. The Saudi Arabian government adheres to the desire for peace originally de- manded by the Koran.

This is shown in the 1975 "Policy Statement of the Kingdom of Saudi Arabia," which stated, in part, its "belief in world peace and our desire to strengthen it.... [W]e strongly believe in disarma- ment, self-determination for all countries and the solution of disputes through peaceful means. We do not aim at bad intentions towards others or to be a source of danger, aggression or instability for others." Shakir, supra note 13, at 13-14.

Although jihad, or Holy War, traditionally meant the peaceful spreading of the word of Mo- hammed, the Shi'ite terrorists have adopted the term to give validity to their terrorist activities. The Shi'ites justify the use of violence on the events surrounding the death of the fourth Caliph, Ali, who was married to Mohammed's daughter, Fatima. Caliph Ali died a martyr while singlehandedly tak- ing up the sword in defense of Mohammed's name, and the Islamic faith, thus establishing the tradition of a "holy war" involving physical force.

ST. THOMAS LAW FORUM

The Sunnis believe their imams are "Allah's mouthpieces. '3 1 The Shi'ites believe that the imams are descended from superhuman forbear- ers and are not only divinely and inherently infallible and sinless, but that they also possess a secret knowledge by which they know everything that will happen in the world until its end. The Shi'ites believe that their imams are the sole authority in the interpretation of the Koran. All doc- trine must have their approval. Thus, the Shi'ites, contrary to the Sun- nis, reject the use of im'a and apply the doctrine of ijtihad.

V. SAUDI ARABIA: ITS HISTORY AND LEGAL SYSTEM

Saudi Arabia is a monarchy 33 which was officially created by King Abdul Aziz ibn Saud in 1932. King Saud ruled until 1953 when he was succeeded by his son, Prince Saud ibn Abdul Aziz. Prince Saud ibn Ab- dul Aziz ruled until 1964 when he was peacefully ousted. His brother, Prince Feisal ibn Abdul Aziz, succeeded to the throne and was later as- sassinated by a nephew in 1975. The third son, King Khalid, succeeded to the throne in 1975 and reigned until 1982 when the fourth son and present ruler, King Fahd, took over. The ibn Saud family traces its his- tory back to the fifteenth century when its ancestors settled in the Nejad region. 34 In the eighteenth century, the family became devoted followers of Mohammed Wahhib, a leading imam who, in 1725, preached the puri- fication of Mohammedism.3 5 The Saud family, through the centuries, ex- tended their territories and in 1803 Abdul Aziz succeeded Wahhib as imam. The family gained and lost territory throughout the nineteenth century, but ultimately attained control of Saudi Arabia as it is con- figured today under Abdul Aziz ibn Saud in 1925. The family never lost their religious ties to Wahhibism, which is based on the Hanbali school of law.36 It is for this reason that the Hanbali school is the officially recognized school of law of Saudi Arabia.

31. A. GUILLAUME, supra note 2, at 119-120. 32. Id. at 103. 33. The Koran states that sovereignty belongs to God which prevents Saudi Arabia from ever

becoming an absolute monarchy. Since an absolute monarchy goes against the principles of the Ko- ran, Saudi Arabia may be described, at best, as a limited monarchy although some have described it as a limited theocracy since the Koran is often referred to as the Saudi "Constitution". Shakir, supra note 13, at 1,5. Saudi Arabia has also been referred to in an arbitral award as a "theocratic monar- chy." Saudi Arabia v. Arabian American Oil Company (ARAMCO), 27 I.L.R. 203 (1963). None- theless, the Hejaz section (western coastal region) of Saudi Arabia was declared to be a constitutional monarchy by royal decree on August 13, 1927. Shakir, supra note 13, at 4.

34. The Nejad region is the central area of Saudi Arabia. 35. Mohammed Wahhib's teachings were the source of the strand of Islam which became

known as Wahhibism. 36. The Legal System of Saudi Arabia, 5 MODERN LEGAL SYSTEMS CYCLOPEDIA 543-44 (K.

Redden 3d ed. 1988).

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Although Saudi Arabia, like most Moslem countries, bases its law on the Shari'a, Saudi Arabia differs from most other Moslem countries in its application and interpretation of the Shari'a. 37 This is due largely to its social and religious history, and to a smaller degree on its enviable position in the global marketplace. Besides being one of approximately ten countries worldwide that do not have a written constitution, Saudi Arabia has neither a commercial nor a civil code. The institution of such a code would be considered a debasement of the Shari'a

3 8

Although there have been numerous discussions throughout the Is- lamic world about the writing of a Constitution based solely on the Ko- ran, no Moslem country has yet enacted such a document. 39 Those Islamic countries that do have a constitution have based them not only on the Koran, but also on American or French constitutional traditions. 4o

As the propagator of Islam, the Saudi King takes an oath to govern by the Shari'a; if he fails to do so, he may be ousted. Therefore, even though the King has the final decision in the promulgation of the laws, his power is limited. Further, the King rules only with the approval of the other royal family members, the shaykhs 4 1 (tribal chiefs), and ulamas (religious scholars and Moslem jurists).42 If their approval is lost, the King may be ousted as was peacefully done to King Saud ibn Abdul Aziz in 1964. Knowing this limitation exists ultimately affects the King's actions.

Whereas the only 'law' properly so-called is the Shari'a, Saudi Ara- bia nonetheless does recognize the legal relevance of royal decrees and circulars.4 3 The King may - and does regularly - promulgate royal decrees, and the Council of Ministers proposes circulars to the King. These enactments may not technically be called law44 even though they may have, in substance, the force of law.4 5 Under the Shari'a, only the

37. Yemen, similar to Saudi Arabia and unlike most other Moslem countries, relies predomi- nantly on the Shari'a as the law of the land, as did Afghanistan before the Revolution. H. LIEBESNY, supra note 7, at 107.

38. Sloane, Status of Islamic Law in the Modern Commercial World, 22 INT'L LAW. 743, 755 (1988).

39. Iran adopted an "Islamic Constitution" in 1979 which was not a mere reflection of the Koran. Its Commercial Code enacted in 1983 exhibited few, if any, changes from its 1969 Commer- cial Code which was largely based on French concepts. Amin, Iran, 5 LEGAL ASPECTS OF DOING BUSINESS IN THE MIDDLE EAST 51, 65-66 (D. Campbell ed. 1986).

40. F. HASSAN, supra note 17, at 60. 41. The King is considered to be the shaykh of the shaykhs. Shakir, supra note 13, at 3. 42. Asherman, supra note 22, at 324. 43. The Legal System of Saudi Arabia - The Laws and Courts of Saudi Arabia, 5 MODERN

LEGAL SYSTEMS ENCYCLOPEDIA 494 (K. Redden 3d ed. 1988). 44. Asherman, supra note 22, at 521. 45. J. SCHACHT, supra note 18, at 87.

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religious or "canon" law may properly be called law; decrees, treaties, circulars and other legislation are referred to as merely regulations (lai'hah) or ordinances (nizam)" "in order to avoid the appearance of secular legislation." 47 This is based upon the limited authority given by Islam to legislation.48 If Islam considers an area to be "legally indiffer- ent," i.e., a situation not considered in any of the Shari'a sources, then legislation is allowed. 49 However, if the legislation (al-maslahah) is de- termined to violate the Shari'a, it is rendered void.50 The primary source of legislation is the Council of Ministers.

In 1958, the Council of Ministers was transformed from a purely advisory council to the King into an official policy-making body.51

Although the King presides over the Council of Ministers and selects its members, the Council holds legislative and executive powers and con- trols the national budget, defense, and the social and economic pro- gress.5 2 Even then, these powers are derived from the King, who retains a veto power; the Council has no independent authority.

5 3

Most of the new legislation promulgated by the Council of Ministers and the King involves commercial regulations outside of the Shari'a.

54 If legislation conflicts with the Koran, the Koran prevails; otherwise, busi- ness practice is dictated by the applicable legislation. Against this back- ground, Islamic business law and, in particular, contract law, will be analyzed in detail.

VI. CONTRACTUAL OBLIGATIONS UNDER SAUDI LAW As COMPARED TO AMERICAN LAW

A. Introduction

Although there are many similarities between the contract laws of Saudi Arabia and the United States, there are also some basic differences caused by their fundamentally different roots and terminology. First, American law is secular in nature and is based on the fundamental American principle of separation of church and state. Saudi Arabian

46. Asherman, supra note 22, at 521. 47. J. SCHACHT, supra note 18, at 87. 48. Asherman, supra note 22, at 521. 49. Id. 50. W. BALLANTYNE, COMMERCIAL LAW IN THE ARAB MIDDLE EAST: THE GULF STATES

49 (1986). 51. Shakir, supra note 13, at 5. 52. Asherman, supra note 22, at 544. 53. MODERN LEGAL SYSTEMS CYCLOPEDIA, supra note 36, at 496. 54. See, eg., Royal Decree No. M/2 (February 1981) which concerns the "relationship be-

tween a foreign contractor and its Saudi agent."

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Law, as already seen, is governed by the Koran. 55 Additionally, the common law follows the principle of "stare decisis. ' '56 In contrast, Saudi Arabian contract law does not allow for the binding force of precedent since only the Koran formulates the law. Lastly, American contract law is, to a large extent, codified in the Uniform Commercial Code and influ- enced by the first and second Restatement of Contracts.5 7 Saudi contract law58 remains uncodified since, as noted, the institution of such a code would be considered a debasement of the Shari'a.

There are three basic tenets of Islamic contract law: the freedom to contract;59 the binding nature of a contract; 6° and the prohibition of riba.6 1 The freedom to contract and the binding nature of a contract are also basic tenets of United States contract law. 62 The Islamic prohibition of riba is distinct from American law, although it may be considered vaguely similar to the American ceiling on interest rates and the concept of unjust enrichment.

Freedom of contract as a basic right conflicts, to a limited degree, with prohibitions in the Koran. The extent to which parties may exercise

55. Both systems have similarities to the Judaic rabbinical law. For example, the belief in inno- cence until proven guilty is a tenet of criminal law in all three systems.

Islamic law was influenced by rabbinical law through Mohammed's familiarity with Jewish doctrine. J. SCHACHT, supra note 18, at 13. An interesting difference between rabbinical, Islamic, and American law is the method of interpretation of their traditional sources. Generally, rabbinical law is a decree given by the Rabbis and the appropriate biblical verse is by some scholars considered as merely its support. A. STEINsALTZ, THE TALMUD: A REFERENCE GUIDE 149 (1989) (hereinaf- ter Talmud Reference Guide). In contrast, as stated earlier, Islam regards the law as God-given through the Koran and man merely its interpreter. Further, where rabbinical law views the church and state as separate entities, like American law, Islamic law does not. J. SCHACHT, supra note 18, at 2.

When reading the Koran, the influence of rabbinical law on Islamic law becomes obvious for some of the laws either remain substantially the same (e.g., virtually the same dietary laws), or there is merely a simple extension of the law (e.g., the laws regarding interest rates, to be discussed in detail herein).

56. Applying case precedent as a principle of law to all subsequent cases whose facts are sub- stantially the same.

57. The Uniform Commercial Code is a statutory codification, whereas the Restatement, pub- lished by the American Law Institute as a judicial guide, has persuasive authority but does not have the force of law. Cf J. CALAMARI & J. PERILLO, CONTRACTS 13 (3d ed. 1987); U.C.C. (1989); RESTATEMENT OF CONTRACTS (1932); RESTATEMENT (SECOND) OF Contracts (1981).

58. Kourides, supra note 14, at 385. 59. The policy behind the freedom to contract is to allow the contracting parties to enter into

all non-prohibited transactions that they wish. Id., at 433. 60. Asherman, supra note 22, at 527. 61. The scope of riba has never been conclusively defined. C. MALLAT, ISLAMIC LAW AND

FINANCE 2 (1988). At least one authority in the field, Professor Jeanne Asherman, refers to the prohibition of speculative contracts as separate and apart from riba. Asherman, supra note 22, at 528. In contrast, another commentator includes speculative transactions in the definition of riba. Sloane, Status of Islamic Law in the Modern Commercial World, 22 INT'L LAW. 745 (1988).

62. And of rabbinical law.

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freedom of contract varies among the Islamic schools and is most expan- sive within the Saudi Arabian Hanbali school63 due to its fundamentalist and, hehce, literal, interpretation of the Koran.64 In the Hanbali school, a person may contract for anything he requires provided it is not prohib- ited by the Koran. 65 Yet, with new legislation affecting business, free- dom of contract in Saudi Arabia, just as in the United States, cannot be considered totally unrestricted. For example, legislative limitations are often placed on the terms of employment contracts and other business contracts. 6

B. Formation of Contracts

The rules surrounding the formation of a contract are similar. 67

While a contract in Islamic law consists of an offer and acceptance and is binding once it has been accepted, 68 Islamic law, unlike American law, does not require consideration. 69 Certain terms must be stated for a Saudi Arabian contract to be enforceable. These include: the items in- volved, quantity, price, parties, and how payment will be made. 70 This differs from the more fluid requirements of the U.C.C.71 in which mate- rial terms may vary from agreement to agreement 72 provided that a

63. Kourides, supra note 14, at 429. 64. The Koran, as interpreted by the Hanbali school, grants an absolute freedom to contract

provided that the contract does not contravene Shari'a provisions. 65. Ibn Taymiya (d. 728), one of the leading Hanbali scholars, stated that, "men shall be per-

mitted to make all the transactions they need, unless these transactions are forbidden by the Book or Sunna." ARAMCO, supra note 33, at 163. This contrasts with the other Sunni schools of law in that, while speculative contracts are generally prohibited in the Hanafi, Shafi, and Malaki schools, they are allowed to a limited degree (where necessary for commerce) in the Hanbali school. Kou- rides, supra note 14, at 429.

66. See, eg., the Saudi publication, "Labor and Workmen Law and Attached Procedures," which covers employment contracts and such regulated items as overtime pay, the number of days leave a workman may legally take, holidays, maximum work hours, obligations of workmen, obliga- tions of employers, etc.

67. The Restatement of Contracts 2d states that "the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration." RESTATE- MENT (SECOND) OF CoNTRACrs § 17(1) (1981).

68. J. SCHACHT, supra note 18, at 22. 69. Since a contract in Saudi Arabia is a bond between the parties and God, requiring the

element of consideration is seen as superfluous. This is similar to the traditional American business community standards of "doing business on a handshake" and "his word is his bond."

70. J. SCHACHT, supra note 18, at 147. Further, in contracts that involve hire and lease, the period of time must be definite. Id. at 118.

71. In United States law, "the parties can generally make their own law... [Tlhey do so ex- pressly through contract, implicitly through a course of dealing, collectively through custom and resultant business understanding. By their own agreement, then the parties to a commercial deal can vary most of the provisions of the [Uniform Commercial] Code." R. SPEIDEL, R. SUMMERS, & J. WHITE, SALES 15 (1987).

72. J. CALAMARI & J. PERILLO, supra note 57, at 53-54. Under the common law, basic mate- rial terms must be expressed: i.e., price, quantity, and identity of the parties and the item to be sold.

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quantity is always specified. The Hanbali school is more liberal than the other Islamic schools of law in that it permits the inclusion of any condi- tion the parties agree to, provided that the condition does not combine two transactions in one (which raises the specter of usury) or is not con- trary to the purpose and nature of the contract. 73 Both countries allow an offer to be made either orally 74 or in writing,75 or to be implied by conduct. 76 Further, since Saudi contracts are recognized as bilateral transactions, the offeror is allowed to withdraw the offer before accept- ance has been made.77 Saudi laws concerning the completion of a con- tract are strictly construed. As is the case under American law,78 an offer is effective when received. Likewise, an acceptance may be oral, written, or implied by conduct. 79 In rare cases, silence may also be con- sidered as assent.8 0 A primary difference in the two countries arises in reference to the timing of acceptance. Saudi Arabian law requires that acceptance be made before the parties attempting to contract physically part.8 1 This contrasts with the United States standard, which requires that the acceptance must, if the duration of the offer is not specified, be made within a reasonable amount of time of the offer.8 2 Further, for the standard contract involving the sale of goods, Saudi law requires that the transfer of the goods must occur upon the conclusion of the contract for the contract to be valid.8 3 Contracts under Saudi law, just as under American law, will not be considered binding if there are material defects

Other material terms may vary. Under the U.C.C., the only necessary term is quantity, and the court may fill in the missing terms of the contract according to previous dealings, usage of trade, or course of performance. U.C.C. §§ 2-202, 2-204(3).

73. Kourides, supra note 14, at 429. 74. In Arabic, since verb forms are limited, for the Saudi contract to be enforceable, the offer

and acceptance must be stated in the past tense otherwise it is merely looked upon as an inquiry. Forte, Islamic Law in American Courts, MODERN LEGAL 5YSTEMS CYCLOPEDIA 702 (K. Redden 3d ed. 1988).

75. Under American law, the Statute of Frauds requires a writing for certain contracts includ- ing the conveyance of real property or the sale of goods over $500.00, etc.

76. Kourides, supra note 14, at 430. 77. Id. at 402. 78. J. CALAMARI & J. PERILLO, supra note 57, at 96. 79. Id. at 430. The Restatement of Contracts 2d addresses manifestation of assent in § 19(1),

(2) and (3). Cf supra note 67, at 55. 80. For example, when a woman, upon a proposal of marriage, remains silent, or laughs, or

cries, consent is considered to be given. J. ScHAcHT, supra note 18, at 117. 81. Kourides, supra note 14, at 430. 82. A reasonable amount of time under American law is a question of fact and involves the

following factors: whether the offeree acts in good faith; the purpose of the offeror; and whether the transaction is speculative. J. CALAMARI & J. PERILLO, supra note 57, at 93. The Restatement of Contracts 2d states the reasonable time limit is that amount of time that a reasonable man would think satisfactory to the offeror. Supra note 67, at § 41 comment b.

83. N. COULSON, supra note 5, at 20.

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in their formation.84 Such defects, in both countries, include duress, 85

misrepresentation, mistake, incapacity, and undue influence. 86 This en- sures that no party suffers unjustly at the hands of another. Although the freedom to contract is a basic and sacrosanct right in Saudi Arabia and the United States,8 7 public policy will, s 8 in both countries, often de- termine what items would render a contract invalid or unenforceable. 89

Further, United States law, while secular, may render a contract invalid for purposes of upholding the public morals,90 which contrasts with the Islamic non-secular standard of not condoning that which is forbidden by the Koran. 91

C. Types of Contracts

Just as there are distinguishable types of contracts in American law92, such categories exist in Saudi Arabian law. Although similar, these classifications do not entirely parallel each other. Joseph Schacht classifies these categories in Saudi Arabian law as batil (invalid, null and void), fasid (defective or voidable), makruh (disapproved), and sahih (valid).9 3 The determinative factors in classifying contracts in Saudi con- tract law are the essential elements (asl - literally, "nature") and condi-

84. Kourides, supra note 14, at 430. 85. But, in Saudi Arabian law, unlike U.S. law, the ruler may force a party to sell its home in

order to satisfy a debt. Id. at 431. 86. Id. at 430. 87. "The principle of freedom of contract is itself rooted in the notion that it is in the public

interest to recognize that individuals have broad powers to order their own affairs by making legally enforceable promises." RESTATEMENT, supra note 67, ch. 8, Introductory Note 2-3.

88. Public policy plays a larger role in the Hanbali school than in the other Sunni sect schools. This contrasts with the American view stated in McQuade v. Stoneham, 189 N.E. 234, 263 N.Y. 323 (1934): "Public policy is a dangerous guide in determining the validity of a contract and courts should not interfere lightly with the freedom of competent parties to make their own contracts."

89. "A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms." RESTATEMENT, supra note 67, at § 178(1).

90. While Islam has a set moral standard to follow (that established in the Koran), the United States, a cultural melting pot, does not. Instead, American law relies upon a more flexible standard of the lowest common denominator of what is considered ethically acceptable behavior within the community.

91. Although public policy may dictate an action, such as the importation of beef and lamb into Saudi Arabia, this action still may not violate Koranic law. For example, since the Koran forbids eating meat from a female animal slaughtered while she is in her menstrual cycle (and thus consid- ered to be "unclean"), and it is impossible to determine once the animal has been slaughtered if such was the case, only meat from male animals is allowed to enter the country. SAUDI INFORMATION OFFICE, DOING BUSINESS IN SAUDI ARABIA, No. 009-004, 22 (1988).

92. These are valid (or enforceable), void, voidable, unenforceable, and unconscionable con- tracts. J. CALAMARI & J. PERILLO, supra note 57, at 18-19.

93. J. SCHACHT, supra note 18, at 121.

SA UDI-ARABIAN CONTRACT LAW

tions (wasf - literally, "circumstances") of the contract.94 Batil contracts are not legally valid, whilefasid contracts may or may not be valid de- pending upon circumstances. Sahih and makruh contracts are enforceable.

A contract involving the sale of a forbidden object is invalid (batil). Essentially, within the limitations described above, a contract may be formed for the sale of anything, provided the object of transfer is not strictly forbidden by the Shari'a. To allow otherwise would be sacrilege. Examples of forbidden objects are: carrion, pork, an animal that has not been slaughtered in the prescribed manner,9 6 alcohol, 97 and items not owned by the seller. Batil finds a parallel in American law, which ren- ders void on grounds of public policy 9 8 any contract for an illegal ob- ject.99 Yet, while the Saudi system has definite "forbidden" objects based on the Koran, the American system tends to be more fluid, as it is based on a secular public policy of minimum, not optimum, moral precepts. ic0 For example, while the Shari'a absolutely forbids alcohol and there is no debate over its use or trade, the American system generally forbids pros- titution or the use of drugs, yet some jurisdictions allow these activities within specific limitations. 10 1 Although the flexibility of American law allows for change within societal expectations, in this classification, the immutability of the Saudi Shari'a law provides for greater predictability and certainty in legal outcome.

Afasid contract may be invalid if the conditions of the contract are illegal even though it is formed for the sale of a legal object. A contract that involves riba, usury and the taking of interest,102 or is speculative in nature (gharar), fits within this category. °3 Although the courts will not enforce a contract that involves riba, they will, to ensure fairness, use the

94. Id. 95. Id. 96. KORAN, Surah 5:3. 97. KORAN, Surah 5:90-91. 98. This principle of United States law is based upon two policies: 1) deterrence, i.e., the belief

that the refusal to uphold an illegal contract will deter future illegal activity, and 2) to maintain respectability within the court system. J. CALAMARI & J. PERILLO, supra note 57, at 888.

99. Formerly referred to as an illegal bargain in the first Restatement of Contracts. 100. The United States, as a multicultural community, has many privately practiced moral

precepts. Our legislation recognizes this and bases its laws on a basic minimum of these standards. Saudi Arabia, with its legal system determined by the Shari'a, has a comprehensive system of moral- ity upon which to base their public policy. In effect, morality and the law are synonymous.

101. Cf. Nevada's legalization and regulation of prostitution, NEv. Rnv. STAT. §§ 201.300- 201.440 (1985) and the legalization of the use of marijuana for medicinal purposes (e.g., COL. REv. STAT. § 18-18-106(10) (1990)).

102. "But trade has been sanctioned and usury forbidden by God." KORAN, Surah 2:275. 103. As stated previously, some speculation in contracts (i.e., maritime and automobile insur-

ance contracts) is permitted in the Hanbali school, though not in the other Sunni sect schools.

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concept of equitable remedies to restore the parties to the positions they were in before they entered into the contract.104 Further, if a contract involves the inequitable exchange of two commodities, the exchange for the smaller quantity would stand, but the inequitable excess would need to be returned. 10 5 This is similar to the principle of an unenforceable contract in the United States, based upon the concept of severability.

10 6

Still, where American law would render invalid only that portion of the contract that violated law, 10 7 the entire contract may, in some circum- stances, be found invalid under Saudi law.10 8

The third category, makruh, entails contracts that are valid despite problems with respect to their formation. 0 9 An example of such a con- tract would be one that was completed during prayers. 01 Although it is prohibited to carry on business during prayers, and the parties have sinned by doing so, the contract would still be considered legally bind- ing 1 ' although the parties may, in some cases, be found liable for a tort. "1

Further, as stated earlier, public policy may play a role in determin- ing the validity of a contract. Under Saudi law, a contract may be valid or void because of an unacceptable result. An example would be the sell- ing of arms to enemies. There is a difference of opinion among the ula- mas depending upon how the jurist interprets the Koran. Some strictly follow Surah 5:1 of the Koran which reads, in part, "0 you who believe, fulfill your obligations," taking this to mean that the importance of the commitment made outweighs any negative result of its fulfillment. Other jurists assume that the public interest takes precedence over the freedom to contract. As under American law, contracts which are against the public interest are deemed unconscionable and unenforceable. Also, under Islamic law, the intelligence and/or intent to form a contract is deemed to be lacking under these circumstances.'

1 3

104. Sloane, supra note 38, at 746.

105. J. SCHACHT, supra note 18, at 146.

106. The Restatement (2d), in § 178, illustration 3, gives the example of party A promising to pay interest on a loan to party B at a rate greater than the state statutes allow. The promise to pay the interest would be unenforceable as against public policy.

107. Subject only to the restoration of the status quo.

108. J. SCHACHT, supra note 18, at 121, 152.

109. Id. at 121.

110. "When the call to prayer is made,.. .hasten to remember God, putting aside your business." KoRAN, Surah 62:9.

111. Afchar, The Muslim Conception of Law, 2 INT'L ENC. CoMP. L. 96-97 (1975). 112. J. SCHACrr, supra note 18, at 122.

113. Makdisi, supra note 11, at 336.

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D. Breach and Termination of Contracts

The Koranic basis of Islamic law means that the binding nature of a contract is considered a sacred obligation, as a "law" 11 4 between the par- ties, the breach or disregard of which is considered a sin'1 5 since God is a witness.' 1 6 This is similar to the traditional rabbinical and canon law concept of promises as binding since "failure to perform a promise made by a free act of the will was an offense against the Deity." 117 If a party to the contract has not fulfilled his obligations, the complying party is none- theless expected to fulfill the agreement unless it presents an undue hardship.""

Although Saudi contract law is strictly construed, the right of rescis- sion is allowed under specific circumstances. Examples of when a Saudi contract, like an American contract, may be rescinded include the fol- lowing: if the seller fails to perform; if the merchandise is defective or the quantity is incorrect; if the quality of the service is inferior; or if unforeseen circumstances prevent the completion of the contract. 19 Im- portant differences arise in the two systems with regard to futures con- tracts. In Saudi Arabia, contracts that are for ongoing services may be unilaterally rescinded by either party without the rescinding party being responsible for consequential damages since to allow such damages would violate the Shari'a ban against speculation. For example, con- tracts may be formed for goods that have not yet been manufactured (istisna' - a manufacturing contract),' 20 but they may also be revoked before the completion of the manufacturing process. 12 1 This rule may cause problems for American manufacturers doing business in Saudi Arabia.

The United States applies its laws to all citizens equally, political leaders and common citizens alike. This differs from the Saudi law in that the rulers and imams are held to a higher and stricter standard. In Saudi Arabia, a breach of contract by a leader is considered to be espe- cially serious since the country would be discredited in the eyes of the

114. In terms of the essence of legal obligation, there is no distinction between a contract, a commercial agreement, and a treaty since a contract is viewed as the law, or "Shari'a," of the parties. Asherman, supra note 22, at 527.

115. Id. at 526. 116. "Fulfill your covenant with God, having made the covenant, and do not break your oaths

once you have sworn them, as you have made God a witness over you." KORAN, Surah 16:91. 117. 3. CALAMARI & J. PERILLO, supra note 57, at 8. 118. Kourides, supra note 14, at 396. 119. N. COULSON, supra note 5, at 65-69. J. SCHACHT, supra note 18, at 152-3. 120. Generally, an istisna' contract is used in connection with the salam contract. A salam

contract involves the prepayment for goods to be manufactured. 121. N. COULSON, supra note 5, at 21.

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world, adversely affecting future treaties, truces, or other agreements. 122

VII. SPECIAL FEATURES OF ISLAMIC CONTRACT LAW

A. Riba

1. Basic Tenets

The prohibition of riba is probably the Islamic legal feature most alien to American law. Basically, riba means unjustified enrichment and encompasses a total ban against the charging of interest. The laws against the charging of interest have a common ancestry in Islamic and rabbinical law.1 23 Mohammed, in developing the Islamic prohibition against usury, borrowed from the existing rabbinical law, 124 which re- suited in extensive similarities between the two.12 5 Both Islamic and rabbinical law have a set of well-developed rules prohibiting the charging of interest. This restriction is based upon the principle that a party gain- ing an unearned or unjustified profit at the sacrifice of another is oppres- sive and exploitative, and therefore acts in an immoral way.1 26 Islam also argues that riba creates an idle rich class, claiming that interest transfers money from the poor to the rich.127 The prohibition against riba pervades all Islamic law, but is most often encountered in the law of contracts.

Although Islamic law attaches great importance to the charging of

122. Kourides, supra note 14, at 432. 123. The taking of interest was considered a sin in rabbinical law and is expressly forbidden in

the Bible, the Pentateuch commentaries, and the Talmud. It appears, however, that the Pentateuch commentaries limit this ban to charging interest to the poor. The Pentateuch commentaries further explain that this ban does not apply to present-day commercial enterprise provided that the interest rate is "reasonable." Deuteronomy 23:20 states: "Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of anything that is lent upon interest." Leviticus 25:37 states: "Thou shalt not give him upon interest, nor lend thy victuals for increase." Thus, the taking of interest is considered to be unlawful gain. S. GANZFRIED & H. GOLDIN, CODE OF JEWISH LAW XIV n.62 (1987) (hereinafter JEWISH CODE). The Pentateuch states in part: "All interest is forbid- den on loans to the poor.... To take interest on money thus lent was felt to be making gain out of a neighbour's need." THE SONCINO EDITION OF THE PENTATEUCH AND HAFTORAHS 314 (J. Hertz 2d ed. 1961) (hereinafter PENTATEUCH). The notes to the Talmud expand on this even further by explaining that interest is prohibited on the loan of money, land, fruit, or any other commodity. But where there is an outright prohibition against interest in Islamic law, the Talmud does explain that interest is forbidden only on loans, and not on a bona fide sale. 1 THE TALMUD: THE STEINSALTZ EDITION, TRACTATE BAVA METZIA Part 1, 15A (1989), at 174 (hereinafter TALMUD). The one who lends on interest violates six rabbinical prohibitory laws while the borrower violates three and anyone else who was instrumental in the loan violates one prohibitory law. JEWISH CODE supra, at 41.

124. Webster's dictionary defines usury as "the lending of money with an interest charge for its use." WEsTER's NEW COLLEGIATE DICTIONARY 1289 (1976).

125. J. SCHACTrr, supra note 18, at 13. 126. C. WEERAMANTRY, supra note 14, at 67. 127. Ibid

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interest, the Koran addresses it in only four surahs. 128 Those who prac- tice it, according to the Koran, will be condemned to Hell 129 and suffer a painful punishment. 130 While there has been no codification of Koranic law, the development of these few verses into the extensive present law on the subject is based upon the interpretations of the leading ninth- and tenth-century Islamic jurists and the Sunnah. One aspect of iba, the prohibition of usury, has been magnified into a total ban against the charging of interest. Nonetheless, in modem days, Moslems have cir- cumvented the ban against interest rates by both parties pretending that a greater amount was lent or that the difference between loan and debt is actually a commission rate. 13 1 If the former fiction is used, the contract will reflect the greater amount. 132 For example, if a party were to borrow $10.00, he would sign a paper saying he borrowed $12.00, the excess $2.00 reflecting the interest rate. 133 In the second method, the extra two dollars are looked upon as a commission. The second method appears to be more common. 134 Where a Moslem may not charge anyone interest, Moslem or non-Moslem, rabbinical law generally forbade a Jew from charging another Jew interest but a Jew could charge interest of a non- Jew. 135 In contrast, in the United States, there are merely statutory ceil- ings on interest rates. These statutes, which vary from state to state, are based on the similar principle of unfair advantage.

2. Weights and Measurements

a. Same Like and Kind

The laws against riba are particularly strict on those items which

128. KORAN, Surah 2:275 (". . .trade has been sanctioned and usury forbidden by God") Surah 3:130; ("O you who believe, do not practice usury.. ."); Surah 4:161 C". . .and because they practiced usury although it had been forbidden them. . ."); Surah 30:39 ("What you give on interest to increase [your capital] through others' wealth, does not find increase with God").

129. Surah 2:275. 130. Surah 4:161. 131. N. ANDERSON, supra note 15, at 100. Asherman, supra note 23, at 528. Interestingly, the

Hanafi and Shafi schools allowed the fiction of a double sale. In a double sale, party A would sell the item to B for $10.00 and A would rebuy it a year later for $12.00. The double sale is prohibited in the Hanbali and Maliki schools. C. WEERAMANTRY, supra note 14, at 42.

132. Asherman, supra note 22, at 528. 133. Id. at 528. 134. Interestingly, Noor Mohammed, Professor of Law at the University of Baltimore, argues

for the modernization (as opposed to Westernization) of Islamic law in relation to riba. He feels that the laws against interest rates should be relaxed in those Moslem countries that are resource-poor (e.g., Malaysia, India, and Nigeria) since the failure to modernize Islamic law is not allowing the Shari'a to be used to its full potential and is therefore resulting in the stagnation and political insig- nificance of many Moslem countries. Mohammed, An Introduction to Islamic Law, MODERN LEGAL SYSTEMS CYCLOPEDIA 688-90 (K. Redden 3d ed. 1988).

135. PENTATEUCH supra, at 848.

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can be measured or weighed. 136 In Islamic law, when trading items of the same like and kind, an excess in quantity is forbidden (e.g., trading a pound of dates for two pounds of dates). This is because, in Islamic law, a seller must add value or do something to the product before he resells it at a higher price otherwise the excess is considered to be interest.

137

Also, before an item may be resold, the party must take possession of the item and measure and weigh it before reselling it so that the buyer will be ensured of receiving the amount for which he paid. If there is an ex- change of unequal quantities of the same item, the excess quantity must be returned. 138 Yet, if the item is of a different species, an excess is al- lowed (e.g. trading a horse for two camels). 139 Tied in with this is the prohibition of delayed performance. An exchange of goods of like kind must be performed at the time of the agreement so that both parties are aware of what they are receiving. 14° This requirement is also based on the Islamic prohibition of gharar.

b. Sarf (Money-Changing)

The restriction of riba in the realm of weights and measurements is also strictly applied in the exchange of precious metals. Thus, one may exchange gold for gold or silver for silver only in equal quantities. For example, gold jewelry may only be traded for the same quantity of gold, whether or not that gold has been made into an equally desirable object. Hence, one may purchase a bracelet weighing one ounce with gold coins weighing one ounce, but an additional price may not be paid for the workmanship of the bracelet. Yet, one may pay the asked price for the gold bracelet in silver allowing, therefore, for the extra cost of the workmanship.

14 1

c. Ijara (Hire) and Ujra (Lease)

The exchange of services is allowed in Islamic law only if they are dissimilar. 42 For example, a wet nurse may be hired for her food and clothing, but equal services, such as an agreement to tend another's camel in exchange for one's own camel being tended would be invalid since one party may profit. The riba prohibition also applies to the leas- ing of agricultural property. The leasing of one property in exchange for

136. J. SCHACHT, supra note 18, at 145. 137. Sloane, supra note 38, at 745. 138. J. SCHACHT, supra note 18, at 146. 139. Id. at 145-6. 140. Id. at 145. 141. . SCHACHT, supra note 18, at 145-6. 142. Id. at 146.

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another is forbidden since, again, one party may be receiving a better property. Yet, the providing of agricultural property to a partner in ex- change for a percentage of the produce is allowed.

14 3

3. A Public Policy Exception - Muzabana (A Contract in Barter for Dates)

There are rare instances in Islamic law when the prohibition against riba is contravened by public policy. One exception occurs in the muzabana contract. For example, a poor person who does not own a date palm may trade a limited quantity of dried dates for the same quan- tity of fresh dates (bay' al-'araya) for his immediate dietary needs in the interest of survival.144 This was made acceptable, although contravening the riba prohibition, by placing it under the traditions (hadith) of the prophet.145 This exception is presently limited to this situation. 146

4. Gharar

In Islamic law, gharar (risk or speculation) is related to riba since it involves the potential for one party to gain a windfall. Gharar is men- tioned at least twice in the Koran in the context of gambling. 147 Koranic interpreters have extended the meaning of the appropriate verses to in- clude speculative contracts. Speculative contracts include contracts cov- ering future crops, the stock market, and life insurance, to name a few. 148

The policy behind the banning of speculative contracts is that the con- tracting parties should know what they are bargaining for' 49 before they enter into the contract. It is this very prohibition against risk that re- quires that the parties to a contract state a definite object, price and terms.' 5 0 The obligations of the parties must be clearly stated, without uncertainty, risk, or speculation. 151 Thus, any contract that involves a condition would be rendered void since there is an element of risk. Still, delivery contracts, employment contracts, and agreements to manufac- ture goods are allowed since the item is known and its future existence is

143. Muzara'a - partnership involving fields; mugharasa - partnership involving fruit orchards. Id. at 155.

144. J. SCHACHT, supra note 18, at 40. 145. Ibda 146. Id. at 154. 147. Surahs 2:219 and 5:90-91. 148. Kourides, supra note 14, at 103. 149. C. MALLAT, supra note 61, at 19. 150. Asherman, supra note 22, at 528. 151. C. MALLAT, supra note 61, at 21; Asherman, supra note 22, at 528.

ST. THOMAS LAW FORUM

possible.152 For example, if a contract referred to the prevailing market rates, it would be rendered void since the future market rate is unknown and, therefore, one party may gain a windfall if there is a wild swing in price. Insurance contracts are also affected by this prohibition against gharar since they, too, are speculative in nature. Although this strict prohibition against gharar has been upheld unconditionally in the Hanafi, Shaft, and Malaki schools of Islam, the Hanbali school recog- nized the need for a certain degree of speculation for the progression of the economic life of their community. 153 For this reason, maritime con- tracts have been allowed in the twentieth century in Saudi Arabia and automobile insurance contracts have just recently been permitted since their public utility has been recognized. Life insurance contracts, how- ever, are still forbidden. 154 There has not yet developed a commonly accepted form of circumventing the ban against speculative contracts. 155 Just as the interest rate laws in the United States are determined by stat- ute from state to state, American law regarding gambling, insurance, and other forms of risk, are determined by state statute.

B. Financing Mechanisms

1. Islamic Banking

Modern Islamic banking is new to the Middle East and was first introduced in Egypt in 1963. With the reawakening religious fervor, Is- lamic banking has rapidly spread throughout the Islamic world. Besides the prohibition against interest, Islamic banking differs from Western banking in that when a loan is made, the risk of loss is entirely on the bank. Islamic commercial banking makes its monetary gains through the use of joint ventures, with the bank taking a predetermined percentage of the profits. 156 The success of the Islamic banking system is commensu- rate with that of the Western banking system.

1 57

152. C. MALLAT, supra note 61, at 20. Rescission is possible, however, see supra note 122. A salam contract which involves the prepayment of an item to be later delivered or manufactured is allowed under strict conditions. This type of contract is generally used for fungible goods and may not be used for gold or silver. J. SCHACHT, supra note 18, at 153.

153. Kourides, supra note 14, at 431.

154. N. ANDERSON, supra note 15, at 99-100. 155. Ibn Taymiya, a leading Hanbali jurist, recognized the problems that a strict interpretation

of the ban against gambling would impose in the field of contracts. For this reason, the Hanbali school tends to allow a limited degree of uncertainty in its contracts, e.g., in maritime and automo- bile insurance contracts, as mentioned previously. To ban all uncertainty would undermine the foundation of commercial transactions. Kourides, supra note 14, at 431.

156. C. WEERAMANTRY, supra note 14, at 67. 157. Ibid.

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2. Mudaraba

Although the strict rules of riba and gharar would seem to hold back the economic and industrial progress of Saudi Arabia, the Shari'a allows the use of several investment arrangements, one of which is mudaraba.15 8 Mudaraba, a partnership only in regard to the profit,15 9 is a method used for circumventing the prohibition against iba and gharar.16 In the start-up phase of a new business, it allows one party to provide the capital and the other party the skill and labor; while the prof- its are split evenly between the parties, the lender is solely responsible for losses. 1 61 An uneven distribution of the profits cannot be agreed upon as this could result in one partner gaining more of the profits. Even if a loss follows a profit, the lender is solely responsible for the losses and the earlier profits are considered to have been distributed before the losses occurred. This method, which is used extensively in project financing,1 62

avoids riba since neither party is gaining interest, only profits. For ongo- ing businesses, another variation of mudaraba is used. One party pro- vides capital used in the general operating costs of the business in exchange for a percentage of the profits.1 63 This method, as noted, would not be allowed for a business start-up.

3. Pre-Payment Agreements

Islamic public policy allows for the salam transaction, which in- volves prepayment for the delivery or manufacture of goods (e.g., paying for a pair of shoes to be made). At the time the contract is made, the merchandise must not be available for delivery or otherwise in exist- ence. 164 Further, the full price must be paid when the contract is formed, although, with the agreement of both parties, the payment may be delayed for up to three days.165 This type of transaction is strictly lim- ited to prevent the possibility of riba. Conversely, nasi'a, the delayed payment for the immediate delivery of goods, is permitted but rarely occurs. 166

158. N. COULSON, supra note 5, at 94-96.

159. J. SCHACHT, supra note 18, at 156.

160. J. SHAcHT, supra note 18, at 157.

161. N. COULSON, supra note 5, at 94-96.

162. Ibid

163. Sloane, supra note 38, at 748.

164. Sloane, supra note 38, at 749.

165. Ibid. 166. J. SCHACHT, supra note 18, at 153.

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4. Mortgages

Islamic law forbids mortgaging. A creditor, therefore, must take physical possession of a property in order to secure a debt by pledging the property.1 67

Although the Koran addresses the basics of business, it became ap- parent to the Saudis that with the development of their burgeoning oil industry, commercial business encountered special needs that were better handled outside of the traditional Shari'a courts. Because of the con- straints presented by the Shari'a, there is very little, if any, Western influ- ence in Saudi civil law. There is, however, given the extensive trade with Western Europe and North America, a strong influence of the West in commercial legislation.

VIII. SUBSTANTIVE ExPANSION OF THE KORAN AND SUNNAH LAW i

There is a tradition in Saudi Arabia of allowing communities of non- Moslems (dhimmis) to have their own laws. These laws apply only to interactions among themselves. The sanctioning of the dhimmis' laws is a tradition that goes back centuries before Mohammed and is based on the traditional concept of law serving primarily the public interest and welfare of the citizens. This concept has continued to influence the Is- lamic laws of Saudi Arabia and, in particular, the forward-thinking Mod- ernist ulamas and muftis.

The future direction of Saudi Arabian law is a matter of contention between Traditionalists (also called Fundamentalists) and Modernists. The Traditionalists are violently opposed to man-made laws, and con- tend the Koran should be applied to the letter. The Modernists, on the other hand, hold that the interpretations of the Koran and Sunnah may change with the necessities of the times.168 One of the present debates is over the issue whether Utihad (the judge using his own best reasoning based upon the spirit of the law) should be reinstituted, i.e., whether it is compatible with the principles of the Koran.

Some Modernists 169 feel that #itihad should be reinstituted, and that its ban in the tenth century was contrary to the teachings of Islam. They argue that in an Islamic state, all laws should be made in light of Koranic principles1 70 and that itihad does not violate this rule. They contend

167. Sloane, supra note 38, at 749. 168. Shakir, supra note 13, at 1-2. 169. Farooq Hussan, a leading Islamic scholar, puts forth this argument in his article, The Con-

cept of State and Law in Islam, supra note 17. 170. Hassan, supra note 17, at 35.

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that the Sunnah, in fact, encourages the exercise of one's judgment. 17 1

This argument implies that to not allow Utihad is in fact a violation of the Koran and the Sunnah.

Other Modernists, although agreeing with this argument, approach the issue in a different manner. They see the Shari'a as infinitely adapta- ble to changing circumstances. 172 The Shari'a has been defined in its broad scope as encompassing all of the secondary sources, Le., im'a, qiyas, and tihad; and in its narrow definition as covering only the im'a (consensus). 173 They claim the Shari'a, in its broad definition, would not constitute exclusive binding authority for two principal reasons. 174 First, since the Shari'a has been interpreted by so many different schools of thought, there exist many different and contradictory principles. Second, the circumstances to which the principles respond have changed over the centuries, and it was beyond human capacity for the ancient jurists to have adapted the Shari'a so adroitly to the future. Since the broad defini- tion would cause a denunciation of other schools, as this would involve selecting one school over another, it is felt the narrow definition would be better implemented by Islamic countries, provided jtihad was accepted with it. In the narrow definition, the Shari'a would have binding author- ity within its limited scope, but the various Islamic countries could also select (through jtihad) those principles from the different schools that would be most appropriate for their needs. 175

It is the primary objective of the Shari'a to serve the public interest and welfare, but it is when this principle conflicts with a specific provi- sion in the Shari'a that the ulamas disagree. 176 In their effort to show the adaptability of the Shari'a, some Modernists point out that there are ab- solutely no prohibitions against adapting the Shari'a to social changes. 177

171. This view is based on the following hadith (tradition): The new governor of Yemen was asked by Mohammed what law he would use. The governor replied he would use the Koran. Mo- hammed then asked him what he would do if the answer was not to be found in the Koran, to which the governor replied he would use the Sunnah. And if the answer is not in the Sunnah, Mohammed asked next. The governor replied he would then use his own personal judgment. To this, Moham- med praised Allah, showing his approval of the use of personal judgment (qitihad). Hassan, supra note 17, at 38. Cf. also N. ANDERSON, supra note 15, at 5.

172. Yamani, supra note 10, at 205.

173. Shaykh Ahmed Zaki Yamani, the former Saudi Minister of Petroleum and Mineral Re- sources, a lawyer and a prolific scholar of Islamic law, has written an interesting article on this topic entitled, The Eternal Shari a, supra note 10.

174. Id. at 206. 175. Ibid. 176. The Hanbali school maintains that public interest takes precedence over a Shari'a provision

while the Maliki school holds that public interest prevails only when the Shari'a provision is unclear. Id. at 208.

177. Id. at 211.

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In short, they advocate the reintroduction of itihad so that solutions may be found for modem problems not envisioned in the tenth century.

Some Moderates 17 believe that the application of public policy to the Shari'a by each country individually, as some Modernists advocate, is haphazard and would only cause confusion. 179 Instead, the Moderates would like to see the formation of a body of representatives from each of the Moslem countries during the ha# ] 1 8 0 to discuss legal matters and to give guidelines to each of the representative countries for implementation as they see fit.1" 1

The Moderates' view is similar to that of King Fahd, who proposed in 1983 that the Shari'a should be modernized by an international confer- ence of Islamic scholars. King Fahd feels that ijtihad should be reinsti- tuted so that the Shari'a may be reconciled with the needs of the modem commercial world. Although most scholars agree with King Fahd, no such conference has yet taken place.

1 82

A compromise would seem to be feasible provided it permitted the individual countries to maintain their own identity and standards through the retention of the basic principles of their respective schools. Since all of the schools recognize and respect each other, an annual or biannual conference to discuss and set policy on modem commercial law would begin to reconcile the most critical legal concepts of international business with Islamic law. Allowing the fine differences to be defined and addressed, possibly resulting in a comprehensive codification, would not only enhance predictability, but would also promote a greater under-. standing of the differences and similarities between Western and Saudi commercial law.

IX. CONCLUSION

Saudi Arabia's contract law is still anchored in the Shari'a. Yet, the realism and pragmatism of the Saudi people has allowed them to adapt their legal system with greater ease than most other Islamic countries to modem business demands. The resourceful interpretation and develop- ment of Islamic Law was one way of effectively responding to the needs of international trading partners. Another one was legislation in areas not touched by the Shari'a. There still remain basic differences between

178. Fazlur Rahman, a professor of Islamic thought at the University of Chicago, replied in this mode to Yamani in his article entitled, Towards Reformulating the Methodology of Islamic Law, supra note 6, at 219.

179. Id. at 223. 180. The haY is the yearly pilgrimage by Moslems to Mecca. 181. Rahman, supra note 6, at 224. 182. Sloane, supra note 38, at 763.

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the legal systems of the secular West and the non-codified Shari'a-based law of Saudi Arabia, yet there are many similarities as well. Both the American and the Saudi systems, for example, recognize the freedom to contract and the binding nature of a contractual obligation. The differ- ences with respect to the requirements to form a valid contract are minor and easily overcome. Both countries recognize the concept of defective contracts and the role that public policy plays in determining contract enforceability. The greatest differences involve the Shari'a ban on riba and gharar, relatively strict rules against the charging of interest and speculative agreements. Nonetheless, with the Saudi variations on joint ventures through the concept of mudaraba and similar innovative de- vices, these differences have proven to be no obstacle to trade, since they could be overcome by careful drafting. If the call for the reopening of the doors to ijtihad (the personal reasoning of judges) is answered, any difficulties that may presently be encountered should quickly subside.

In Saudi Arabia's future, we may actually see the reopening of the doors to itihad and its application to commercial law. Saudi's neighbor, the United Arab Emirates (which is also a Sunni country), recently insti- tuted a Civil Code based primarily on the Shari'a, with an added dose of Western commercial law. This code, if successful, may be adopted by other Islamic countries, thus providing the legal stability and predictabil- ity that appears to be sorely needed by the business community.

Although it seems to many Western scholars that the Islamic coun- tries will continue to adopt more of the Western legal tradition, there appears to be a renewed focus on the traditional teachings of Islam within these nations. Despite this reawakening of the Islamic dogma, touched off in Ayatollah Khomeini's Iran, the socio-economic upswing of the Middle East in global commercial partnership would be enhanced by the preferable, but by no means certain, decision that its countries adapt the Shari'a to modern society instead of attempting to mold mod- em society to Islamic law. Saudi Arabia plays a pivotal role in this process.

X. GLOSSARY

al-rnaslahah - New legislation the subject-matter of which is not addressed by any of the Shari'a sources.

asl - Nature of a contract. batil - A contract rendered void since its object is specifically

forbidden by the Koran. dhimmis - Communities of the tolerated religions who prefer to

hold onto their beliefs but must pay a poll tax to live by their own laws controlling actions amongst themselves.

fasid - Defective or voidable contract.

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gharar hadith

hay] Hanbali

iVara itihad

gm'a

imam istihsan

istisna'

kafl bab el-itihad

Koran

lai'hah makruh mal malik mudaraba

mufti mugharasa muzabana muzara'a nasi'a nizam qadi qiyas ra riba

sahih salam

- Speculation; risk. - Traditions: the writings, teachings and deeds of

Mohammed. Some scholars contend hadith refers only to those oral communications that are directly traceable to the prophet.

- The faithful's yearly pilgrimage to Mecca. - The Sunni school of law that is practiced in Saudi

Arabia. The Hanbali school claims the only legitimate sources of the Shari'a are the Koran and the Sunnah. The other Sunni schools are Hanafi, Maliki, and Shafi'i.

- Hire. - The process of finding Islamic law by personal

reasoning of the judge. A secondary source of Islamic law.

- Consensus; agreement of the legal scholars and learned men of the Moslem community on the interpretation of the Koran or the Sunnah.

- Religious leader. - Preference or approval; discretionary decision

employing custom, public welfare or benefit, and the elimination of hardship as guiding principles.

- Manufacturing contract. - The closing of the door to itihad. Tenth-century

doctrine declaring itihad no longer permissible. - The holy book of the Moslems believed to be divinely

revealed through Mohammed. - Regulations with the force of law. - Disapproved contracts. - All that has a commercial value. - King. - Financing mechanism whereby one party supplies the

capital, the other party the labor, and the profits are divided.

- Islamic judge. - Partnership involving fruit orchards. - Contract in barter for dates. - Partnership involving fields. - Delayed payment for the immediate delivery of goods. - Ordinances with the force of law. - The judge who only adjudicates cases within the system. - Reasoning by analogy. - Arbitrary opinion. - Unjustified enrichment and risk. A gain or advantage

accruing to a contracting party which is illicit because proper consideration for it has not been provided, ex.: usury; any element of risk or uncertainty which would upset the contemplated balance of the rights and duties of the parties under the contract, ex.: futures contracts.

- Valid contract. '

- Sale involving pre-payment and future delivery.

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sarf Shari'a

Shaykh Shi'i/Shi'ite

Sunnah

Sunni

Surah ujra ulama wasf

1990]

- Money-changing. - Literally, "The Path to Follow"; Islamic law derived

primarily from the Koran and the Sunnah. - Leader of tribe. - Moslem sect that follows the teachings of Caliph Ali,

the son-in-law of Mohammed. There are four Shi'i schools of law: Ibadi, Zaydi, Ithna'Ashari, and Imami. The Shi'i belief is practiced in Iran, southern Iraq, Oman, Yemen, North Africa, and India.

- The writings, teachings and deeds (traditions) of Mohammed.

- Moslem sect that follows the hadith of Mohammed. There are four Sunni schools of law: Hanbali, Hanafi, Maliki, and Shafi'i. The Sunni system of law is practiced in Saudi Arabia.

- Chapter of the Koran. - Rent/Lease. - Religious scholar and Moslem jurist. - Circumstances of a contract.