The Islamic Law texts do not set out an all-embracing theory of contract law which applies to all types of contracts. Rather, the texts deal with certain contracts, such as sales, hire, loans, agency and guarantees, in individual chapters. Accordingly, certain rules which apply, for example, to contracts of sale do not necessarily apply to guarantees, and vice versa. Nevertheless, under the law of the Hanbali school the overriding principle contained in the maxim “The Contract is the Law of the Parties” (Al Aqd Shari’at Al Muta’aqdin) has become accepted, meaning that, in general, the parties to a contract are free to agree to the terms of their choosing, provided that these terms are not at odds with established Islamic Law principles. The most important of these principles are as follows:
There are numerous Qur’anic condemnations of “riba”, which, literally translated, means “increase”. This can either be taken to refer to “usury” or to “interest”. The teachings of the Hanbali school of Islamic Law as interpreted in the Kingdom of Saudi Arabia leave no room for doubt that agreements for the receipt or payment of interest are void and forbidden to believers. In this context, it is irrelevant whether interest is referred to as such, or by some synonym, such as “commission” or “service charge”.
Notwithstanding the invalidity of agreements for the receipt or payment of interest under Saudi Arabian law, and that such agreements are unenforceable through the Saudi Arabian courts, Saudi Arabian banks pay and charge interest. Usually, in such transactions interest is referred to as “commission”, “service charge” or another synonym, even though it is obvious that interest is meant by such terms. All Saudi Arabian banks are subject to strict the supervision of the Saudi Arabian Monetary Agency, and there cannot be any suggestion that such interest-related transactions are conducted clandestinely. Interest-related transactions are not, therefore, illegal in Saudi Arabia. Rather, they are void and unenforceable. The Saudi Arabian courts and judicial tribunals, including the Board of Grievances, do not award interest in any manner or form. However, interest provisions in an agreement are severable, and a contract will not, therefore, be ruled invalid solely because it includes interest related provisions.
It is a fundamental rule of Islamic Law that contracts must be free from uncertainty, which is known as “the rule against gharar”. This topic has been dealt with by Mr. Nabil Saleh in his book “Unlawful Gain and Legitimate Profit in Islamic Law” (Cambridge, 1986), which states, inter alia: “... any transaction should be devoid of uncertainty and speculation, and this ... [can] only be secured by the contracting parties’ having perfect knowledge of the countervalues intended to be exchanged as a result of their transaction ...”. In essence, for a contractual obligation to be enforceable in Saudi Arabia, it must be clearly defined. For example, an agreement to negotiate in good faith parts of a contract on which agreement was not reached at the time of its conclusion is not enforceable under Islamic Law.
The rule against gharar also affects the damages which are awarded by the Saudi Arabian courts. Thus damages for loss of anticipated future profits, loss of business reputation and loss of goodwill are not ordinarily recoverable through the Saudi Arabian courts, because claims of this nature are considered speculative. Conversely, because liquidated damages agreements import certainty into a contract by defining the contracting parties’ rights and obligations, liquidated damages agreements are valid and enforceable under Islamic Law. This also extends to penalty clauses and limitation of liability provisions in contracts, both of which are ordinarily valid and enforceable under Saudi Arabian law.
*This Saudi Arabian Law Overview is not intended to be legal advice, and cannot be relied on as a substitute for legal advice. We make no representation that the contents of this Saudi Arabian Law Overview are or will remain accurate or current.
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