Zamakhchary & Co provides an overview of the main commercial terms that may face the risk of unenforceability before a commercial court in Saudi Arabia
When commercial contract disputes come before a Saudi court, judges are required to determine the case in line with Shari’ah principles. This means that, when entering into a contract governed by Saudi law, contracting parties must ensure they are familiar with the principles of Shari’ah that may result in certain provisions being deemed unenforceable before a Saudi court, to limit the risk of a judgment being issued that contradicts the original intention of the contracting parties.
The fundamental rule of Shari’ah contract law as interpreted in KSA can be summed up as, ‘the contract is the law of the parties’, which means that the parties to a contract are free to agree to the terms of their choosing, provided that these terms do not conflict with established Shari’ah principles.
Judges refer to statements of established scholars of Islamic theology to ascertain and apply the true intentions of the sacred texts. Islamic theology can be divided into four main schools of thought: Hanafi, Maliki, Shafai and Hanbali, with judges in KSA tending to apply the opinions of scholars who subscribe to the Hanbali school of thought. However, many of the judges in KSA are influenced by the views of the scholar, Ibn Taymeyya, who is known to balance and choose between different schools based on the supporting evidence for each view. This compromises the degree of certainty by which one can predict the outcome of how a judge will interpret the law.
In this article, we provide an overview of the main commercial terms that may face the risk of unenforceability before a commercial court in Saudi Arabia. Arbitrators tend to be less likely to determine that a commercially agreed provision is unenforceable on Shari’ah grounds, but the risk still remains.
Interest
Charging of interest on money is prohibited under Shari’ah, and neither the commercial courts nor an arbitration panel hearing a dispute under Saudi law would award a sum that includes an interest element. It is unlikely that re-characterising such amounts to avoid the term ‘interest’ (for example by referring to late payment penalties) will lead to them being enforced by the courts.1
Uncertainty
Contracts must generally be devoid of uncertainty and speculation. This is a potentially very wide prohibition which may affect numerous forms of transaction, including insurance contracts and certain financial instruments. There is difference of opinion in Islamic jurisprudence as to the extent of uncertainty in a transaction that is required for the prohibition to apply, meaning that application of the rule is very much in the court’s discretion.
The fundamental rule of Shari’ah contract law as interpreted in KSA can be summed up as, “the contract is the law of the parties”.
In appropriate circumstances the risks associated with the rule against uncertainty may be mitigated (but not avoided completely) by careful contractual drafting or by reference to custom. For example, if it can be demonstrated that long-term international sale and purchase contracts for certain types of commodities are universally concluded by reference to spot prices prevailing at the time of delivery, the tribunal may uphold the transaction because it is sanctioned by custom. In general, however, one should ensure that a contract leaves as little room as possible for uncertainty regarding the parties’ intention.
Limitation of liability
There are differences of opinion among scholars of Shari’ah to the extent to which losses may be limited. Some view such limitations as unenforceable, particularly because, at the time of entering into the contract, the parties are unaware as to what future loss may arise, meaning that the limitation of liability clause could be deemed unenforceable due to uncertainty. The contrary view is that parties are entitled to agree contractual terms that exclude or limit certain losses under the general Shari’ah principle that ‘if a person imposes an obligation on himself, with his own free will and without duress, so he must abide by it.’
An exclusion or limitation of liability that protects a breaching party even in the event of willful misconduct or gross negligence is likely to be deemed unenforceable.
Buyer beware
Sellers of goods are entitled to include a provision in their contracts that the sale is made with no guarantee or warranty in respect of defects (with the buyer typically benefiting from a lower-priced purchase as a result of bearing such risk). However, the seller would not be freed from liability in respect of defects of which it is actually aware prior to the sale, as Shari’ah principles impose an obligation on sellers to notify purchasers of defects known to them.
Provisions that contradict the nature of the contract
Contractual terms that are deemed entirely contradictory to the nature of the contract could be deemed unenforceable. Examples may include a lease agreement in which the landlord is entitled to relocate the tenant at will, or a sale contract that seeks to restrict the buyer in its ability to sell the goods on in the future.
Future promises
Commercial agreements often include obligations that are triggered only if a future event occurs, such as an obligation on a party to take a lease of a building once constructed; or a put option requiring other shareholders to purchase an investor’s shares at a specified future time.
Shari’ah principles typically consider such provisions to be non-binding ‘promises’ rather than contractually binding commitments, although there is one school of thought that considers such promises to be binding in certain circumstances, primarily where the beneficiary of the promise has acted in reliance on it. Whilst we have seen Saudi judges accommodating this view, it remains at the discretion of the court, creating significant uncertainty for the contracting parties.
This risk may be somewhat minimised, albeit not completely risk-free, if the future obligation is sufficiently detailed, clear, and made as a fundamental term of the contract (ie, that the benefiting party is entering into the contract in reliance on such term), so that the enforceability of the promise is not undermined by the uncertainty of the terms being agreed.
Sarah Gonem (pictured left); Yazid Almasoud (pictured centre); and Martin Creek (pictured right) are all partners at Zamakhchary & Co.
Zamakhchary & Co
Unit No 13, Ground Floor Business Gate
2362 Qurtubah Road
Riyadh 13244-7440
Kingdom of Saudi Arabia
www.zamakhchary.com
Tel: +966 (0) 11 218 2900
- Banking and financing disputes are heard by specialist disputes committees, under the auspices of the Saudi Central Bank, and do enforce interest on financing contracts