Contract law in Saudi Arabia is governed by the conservative Wahhabi movement of Sharia law, which adopts a fundamentalist and literal interpretation of the Quran.Otto, Jan Michiel (2010). Sharia Incorporated: A Comparative Overview of the Legal Systems of Twelve Muslim Countries in Past and Present. p. 167. . Any contract that is not specifically prohibited under Sharia law is legally binding, with no discrimination against foreigners or non-Muslims.
The Wahhabis are the most liberal among the Sunnis with respect to the freedom of persons to contract. However, the degree of freedom of contract is governed by the prohibitions in the Quran, and two distinctive doctrines in Sharia law: riba (usury) and gharar (speculation).
Unlike other Sharia law jurisdictions, Sharia law remains uncodified in Saudi Arabia due to the strong literalist view of Wahhabism. There is also no established case reporting in the courts. This has led to much uncertainty and variation in court decisions. Despite being the world's 11th easiest economy to do business in, Saudi Arabia ranks 140th out of 183 economies in terms of enforcement of contracts. (see below: Appendix)
In 2007, King Abdullah initiated legal reforms to modernise the courts and codify Sharia law in Saudi Arabia. The ulama, the religious body, approved a codification of Sharia law in 2010, and a sourcebook of legal principles and precedents was published on January 3, 2018. (see below: Legal Reform)
Sources of law in Saudi Arabia Saudi Arabia is principally governed by Sharia Law, with royal decrees playing a complementary role.
Four sources of Sharia law The Wahhabis acknowledges the following sources of law:
The Quran is a sacred book which contains the divine revelations made to Muhammad by God and is the foundation for Sharia law. Much of the Quran does deal with legal matters, but instead, sets out the goals and aspirations of Muslims, and the general accepted conduct and way of living. The Sunna (meaning "habitual practice" or "trodden path") is the other primary source of law. It contains the explanations of the Quran and records the sayings, deeds, and approved practices of Muhammad. Ijma (consensus) is a secondary source of law. There are however, conflicting interpretations as to the meaning of consensus. The Wahhabis prevailing in Saudi Arabia asserts that a legally binding consensus only arises from agreement of Muhammad and his Companions, and not the universal agreement of Muslim authorities today. Qiyas (reasoning by analogy) is another secondary source of law. Forms of analytical reasoning are categorised as law. Both ijmas and qiyas constitute fiqh, Islamic jurisprudence based upon scholar opinions amassed over the years.
Regulations (lai'hah) and ordinances (nizma) Ordinances (nizam), consisting of royal decrees which address modern legal issues and bureaucratic matters, is another source of law. These royal decrees by the King supplement fiqh. Royal decrees are considered subordinate to Sharia law as only religious law is considered "law" under Sharia law.. The courts will apply fiqh over nizam if the legal issue is already considered in Sharia law, or if nizam conflicts with Sharia law.
Other forms of regulations (lai'hah) including Royal Orders, Council of Ministers Resolutions, Ministerial Resolutions and, Ministerial Circulars, are likewise subordinate to Sharia law. While contract law is generally governed under Sharia law, many areas of modern business and commercial activities are not considered under Sharia law and are hence governed by the applicable regulations..
Saudi Arabia also abides by international treaties, which are approved by royal decree. One such example is Royal Decree No.11, dated 16 Rajab 1414, corresponding to 30 December 1993, which declared Saudi Arabia's ascension to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Formation of contract
A contract of sale (bay’) can be concluded for the exchange of anything regarded as a commodity or property (mal). Marriage and employment agreements are also concluded by contract. However, there are certain things that are not included as mal under Sharia and therefore cannot be the subject of a sale.Gibb and Kramer, p. 57. These include: pigs, alcohol, and animals not ritually slaughtered. In accordance to the Quran, there are two exceptions to contract formation: the taking of interest (riba), and the use of speculative contracts.Gibb and Kramer, p. 56. The Quran also prohibits games of chance (maisir)
The rules on conclusion of the contract of sale are stricter than the rules in most modern legal systems. Conclusion of the contract must take place at the same transaction as offer and acceptance. Furthermore, there is a right of withdrawal of the offer even after acceptance.
At common law, auctions, advertisements, displays of goods on shelves, tenders and the like are treated as mere invitations to create an offer. In contrast, Sharia law recognises these as valid offers (Ijab) which, upon being accepted (Qabul), will become binding by law upon the parties involved in the transaction.
Generally, a statement with the description and price of goods constitutes an offer, and a display of goods with the price similarly is an offer.Billah, p. 11 and 19. . However, advertisers can specify that the advertisement is only an invitation to treat.Billah, p. 10.
Offer and acceptance
Like the common law, offer and acceptance are among the vital ingredients of a contract in Islamic law. An offer is a proposal, which leads to an agreement when there is an acceptance of the offer. If there is an acceptance, the offeror is bound by law to perform his promise. The offeror has no right to revoke his offer after its acceptance and he must be prepared to complete his promised accordingly.
A statement of an offer has to be made in the past tense (Sighatul-Madhi) to be constituted as a valid offer in Sharia law.For example the seller saying, "I sold". Making the statement in past tense signifies the seller's intention of making a valid offer which is capable of being accepted by the buyer. Once the offer has been accepted, the seller has no right to revoke his offer. If he does revoke his offer, it will be considered a breach of promise on his behalf, which is a great sin in Islam as it encourages rivalry and mischief among the people.Al-Quran, Chapter 2:177, 61:3.
Unlike common law, Saudi Arabian law requires acceptance to be made before the parties attempting to contract physically part.Khadduri, The Maslaha (Public Interest) and 'Illa (Cause) in Islamic Law, 12 N.Y.U. J. Int'l. & Pol. 213 (1979), p. 430
Certain terms must also be stated for a Saudi Arabian contract to be enforceable. These include: the items involved, quantity, price, parties and how payment will be made. In contracts that involve hire and lease, the period of time must be definite.
Consideration The concept of consideration implies the bargain, or value given in return for value received. Islamic law, unlike common law, does not require consideration. A contract in Saudi Arabia is a bond between the parties and God, hence, the element of consideration is deemed superfluous.
Defects of consent and vitiating factors
Similar to common law, defects of consent will prevent the formation of a valid agreement.
Limitations on enforceability of contracts Not all contractual arrangements are condoned in Sharia law. Unless a term is positively allowed by revelation ("in the book of God"), it is invalid."Any stipulation not in the Writ of God is void [batil]." This is often termed the 'Barira' hadith.
Classical Sharia law rarely discusses the idea of contractual freedom outside the standard contract types.M.E. Hamid, "Islamic Law of Contract or Contracts," Journal of Islamic and Comparative Law 3:1-11. Instead, it provides for situation where standard contracts can be altered or combined. There are specific prohibitions raised by other hadiths, some important ones prohibiting a loan and a sale, two sales in one, and a sale of what one does not have."Illicit are a loan and a sale [salay wa-bay], or two stipulations in a sale, or sale of what you do not have.": Abu Dawud, Tirmidhi; "The Messenger of God forbade two sales in one [bay'atayn fi bay'a]": Ibn Hanbal, Nasa'i, Tirmidhi.
Stipulations are divided into three types:Sanhuri, 3:134-172. Condition (ta’liq)conditioning of contract on a future eventConcomitance (iqtiran)varying the terms of the contractExtension (idafa)delaying the beginning of a contract until a future time If the court finds stipulation a void, the contract itself may or may not be void- results vary casuistically.Vogel and Hayes, p. 100. In particular, concomitant stipulations that coincide with or contradict an entailment of the contract,Such as, for example, a buyer paying the price and the seller transferring full title. such as a stipulation that a buyer must never resell the object, are forbidden.Vogel and Hayes, p. 101.
Combinations of contracts conditioned on each other are open to many objections, because they confuse the price of the individual contracts and obstruct meting out fair remedies for breach, thereby opening a door to riba and gharar. There are two major types of contracts that are prohibited in Islamic law: contracts involving usury or uncertainty.
Usury (riba) The Quran forbids riba in the strongest terms."Devour not usury [riba], doubled and re-doubled..." [3:130]. See also the Quran at 2:275-79 and 4:161. Riba is an unjustified enrichment and the principle encompasses a total ban on the charging of interest.Childress, p. 85.
Usurious transactions were classified into three classes: ribaal-fadlunlawful excess in exchange of counter values in a contemporaneous transactionriba al-nasi'aunlawful gain by deferring the completion of exchange of counter values ribaal-jahilyaexemplified by the lender asking the borrower at maturity date if he will settle the debt or increase it by charging interest
Riba al-fadl and riba al-nasi'a apply to the exchange of two precious metals (gold or silver) and four commodities (wheat, barley, dates and salt), based on Muhammad's tradition. It was further extended by analogy to the products of these six articles if their present or future exchange could have the smell or taint of riba. Islamic law did not permit exchange of unequal values of these articles and by analogy to a variety of their products. These articles happened to be the basic necessities of life and were a convenient means of exploitation.Noor Mohammed, p. 119. Promises for future performance were forbidden if goods comprised these articles as the transactions were suspected to contain riba.N.A. Saleh, Unlawful Gain & Legitimate Profit in Islamic Law, 12-13 (1986), p.14-27.
The interpretation of riba has continued to be revised under the changing economic setting. By the turn of the century, the leading Islamic scholars Abduh and Rida held the view that riba al-Jahilya was forbidden but it could be deemed lawful under extreme necessity, and that riba al-fadl and riba al nasi'a are under a rebuttable presumption of prohibition.Saleh, p. 28.
The ban against interest rates has been circumvented by both parties pretending that a greater amount was lent or that the difference between loan and debt is actually a commission rate.N. Anderson, Law Reform in the Muslim World 6 (1976), p. 100. If the former fiction is used, the contract will reflect the greater amount, while the extra money in the second method will be looked upon as a commission.
Speculation (Gharar) Gambling is another type of transaction condemned in the Quran. Intoxicants, games of chance [maysir], [worship of] idols, and [divination by] arrows are but an abomination, Satan's handiwork...Quran, 5:90.