developing the legal environment for business in the

© Torki A. Alshubaiki, 2013 DOI: 10.1163/15730255-12341268

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Developing the Legal Environment for Business in the Kingdom of Saudi Arabia: Comments and Suggestions

Torki A. Alshubaiki*Assistant Professor of Business Law and Private International Law, Prince Sultan University,

Riyadh, Saudi Arabia

AbstractClosing the door of ijtihād or independent reasoning in the 10th century resulted in a legal system that was often at odds with the modern world, especially in the area of contracts. Although it is considered to be a big breakthrough at the present time that some of the religious figures or ulama in Saudi Arabia have finally expressed their interest in the codifi-cation of laws, the issue has to be dealt with from a different, not only religious, perspective. The importance of comparative law must be expressed when dealing with all commercial matters. Promoting and encouraging intellectual curiosity in different legal areas through academic institutions and research centres will drive the scholars to study the commercial law subjects from a number of different perspectives. In that process, they will develop a better understanding of their own system and know the way of developing it.

Keywordsmarine ordinance of Louis XIV; Lord Mansfield; Commercial Court Law 1931; French Code Commercial of 1807; international law of arbitration; Saudi Arabia

* Dr. Torki A. Alshubaiki worked with the Riyadh Chamber of Commerce and Industry from 1994 to 1997. His job included the provision of legal advice, mediation, and working as a Secretary of the Arbitration Board. He has also been involved with several Chamber of Commerce Committees on the drafting and amendments of various Saudi commercial regulations, such as the Commercial Agency law, and the regulations for the prevention of bankruptcy. In 1996 he obtained his license to practice as a Saudi lawyer. He received an LL.M. from the American University Washington College of Law (Washington, DC) in 1993, and a PhD from the London School of Economics (LSE) in 2003. E-mail: [email protected].

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372 T.A. Alshubaiki / Arab Law Quarterly 27 (2013) 371-391

1. General Information

Trade is believed to have taken place throughout much of recorded human history. Writers on commercial law tend to divide its history into three dif-ferent eras, because it could be difficult to trace its mysterious beginning and developments. The Babylonians,1 the Greeks and the Romans2 were among the greatest merchants and explorers of all time. They established many principles in maritime law over a long period of time, because they were noted sea traders travelling across the Mediterranean.3

Moreover, in the Middle Ages, commercial courts determined disputes according to the ‘Law Merchant’ based on mercantile codes and customs.4 These laws reflected maritime and commercial practices, and foreign trad-ers would go to major European commercial centres to have their disputes resolved by specialized tribunals. The laws of Oleron,5 the judgments of Damme6 and the laws of Westkapelle7 are among the examples that can be put forward in this regard.8

The tribunals were familiar with foreign mercantile usages, and the con-cepts of civil law and common law.9 The most important characteristics of these commercial courts, however, were the speed in deciding disputes (which is an important requirement for traders), the reliance by merchants on a legal system developed and administered by them, the freedom from the rigid technical rules of evidence and procedure and, finally, the

1 See, e.g., J. Dyneley Prince, “The Code of Hammurabi”, Am. J. Theology (July 1904): 601-609 <http://www.jstor.org/stable/3153895> (accessed: 1 April 2011).

2 See Roy Goode, Herbert Kronke & Ewan McKendrick, Transnational Commercial Law (Oxford: Oxford University Press, 2007) 12.

3 Ibid., p. 13.4 See Clive M. Schmitthoff, The English Conflict of Laws (London: Stevens & Sons,

1954) 25.5 Oleron is an island in the west of France and was for some time in the ownership of

the English Crown.6 In the 13th century, Damme was the port of Bruges, to which it was linked by the

river Reie. The river has now been canalized into the long, straight, tree-lined and pictur-esque Damse Vaart, which continues across the Dutch Border to Sluis.

7 Westkapelle is a small city in the municipality of Veere on the island of Walcheren, in the province of Zeeland of The Netherlands.

8 See Filip De Ly, International Business Law and Lex Mercatoria (Amsterdam: North Holland, 1992) 15.

9 See Roy Goode, Commercial Law (London: Penguin Group, 2004) 3-4.


T.A. Alshubaiki / Arab Law Quarterly 27 (2013) 371-391 373

acceptance of the customs of merchants which require international recognition.10

Before the 17th century, there were no conflicting rules relating to trans-national transactions. However, in the early part of the 17th century, the situation became different as local authorities took the duty of legislating local commercial laws, since this was linked with the rise of the modern nation state.11 The nationalization of the Law Merchant, however, did not neglect or ignore the practices of merchants or their trans-border trade. Laws began to change to deal with commerce, both internationally and locally, within individual countries.

In France, for example, the grande ordonnance de la marine (Marine Code) of Louis XIV was published under the auspices of Colbert12 in 1691, and was the first complete code of maritime and commercial law.13 Then there was the French Commercial Code of 1807, where the Law Merchant rules were preserved to govern the formation, performance and termination of contracts, and the principles of lex mercatoria were recon-stituted to fit in their own legal image.14 By contrast, the common law courts in England, under the direction of Chief Justice Sir Edward Coke,15 replaced the merchant courts in the early part of the 17th century. These courts mainly applied the principles of common law with which they were familiar, but borrowed some of the rules of lex mercatoria.16 In addition,

10 See Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradi-tion (Cambridge: Harvard University Press, 1983) 341, 343.

11 See Reinhard Zimmermann, “Civil Code and Civil Law: The ‘Europeanization’ of Private Law Within the European Community and the Re-emergence of a European Legal Science”, J. Eur. L., 1 Colum (1994): 63-65.

12 Jean-Baptiste Colbert served as the French Minister of Finance from 1665 to 1683 under the rule of King Louis XIV. His relentless hard work and thrift made him an esteemed minister. He achieved a reputation for his work of improving the state of French manufac-turing and bringing the economy back from the brink of bankruptcy. See http://www.bri-tannica.com/ebchecked/topic/124928/jean baptiste-colbert (accessed: 1 April 2011).

13 See Alister Cole, French Politics and Society (California: Pearson Longman, 2005) 5.14 See Chia-Jui Cheng (Ed.), Clive M. Schmitthoff ’s Select Essays on International Trade

Law (Martinus Nijhoff Publishers/Graham & Trotman, 1988) 25.15 Sir Coke was a jurist and member of Parliament. Later in his career, he was unwilling

to compromise in the face of challenges to the supremacy of the common law. This made him increasingly unpopular with James I, and he was eventually removed as Chief Justice in 1616.

16 See supra note 9, at 6. See also L.S. Sealy & R.J.A. Hooley, Commercial Law (New York: Oxford University Press, 2009) 15.


http://www.britannica.com/ebchecked/topic/124928/jean baptiste-colbert

http://www.britannica.com/ebchecked/topic/124928/jean baptiste-colbert


Lord Mansfield,17 who is said to be the father of English commercial law,18 kept the tradition, and precepts of the Law Merchant were kept alive through equity and admiralty courts in maritime cases.19

2. The Situation in the Arab World

Most of the Arab world at this time was under the Ottoman Empire, which lasted from 1299 to 1923. The Ottomans spanned three continents in the 16th and 17th centuries, controlling much of South-eastern Europe, the Middle East, and North Africa. Unlike the civil law and the common law systems, the Ottoman legal system was based upon Islamic law, and there had been three court systems: one for Muslims, one for non-Muslims, and one for commercial cases. These three courts, however, were not wholly exclusive in nature, and the Islamic courts were used to settle a commercial case between litigants of different religions. Jews and Christians often went there in the Middle Ages to obtain a more forceful ruling on an issue.20

In later periods, however, several Islamic legal writers have noted that the Ottomans went far in their expansion of the definition of Islamic reli-gious tolerance. They allowed the ‘consular’ courts to decide disputes aris-ing between foreigners, or between foreigners and Muslims, and applied foreign laws instead of Islamic laws.21 This probably led to not developing Islamic law in muʿāmalāt,22 which includes business and financial transac-tions, the way other local commercial laws were developed, and where the

17 Lord Mansfield was a barrister, politician and judge noted for his reform of English Law.

18 He earned this title because of his work in Carter v. Boehm (1766) 3 Burr 1905, in which he established the duty of utmost good faith in insurance contracts, and for his opinion in Pillans & Rose v. Van Mierop & Hopkins (1765) 3 Burr 1663, in which he tenta-tively expressed a view that the doctrine of consideration was redundant.

19 See Harold J. Berman & Colin Kaufman, “The Law of International Commercial Transactions”, Lex Mercatoria, Harv. Int’l L.J., 19 (1978): 221-226.

20 See Lauren Benton, Law and Colonial Cultures: Legal Regimes in World History 1400-1900 (Cambridge: Cambridge University Press, 2005) 109-110.

21 See Hamed Abu Taleb, Al-Tandīm al-Qadī al-Islāmī: The Organization of Islamic Jus-tice, (Egypt: Al-Saadah Publishers, 1982) 39.

22 This would include sales (bayʿ); hire and leasing (ijārah); loan (qird); gift (hiba); pledge (rahn); suretyship and guarantee (damān) and (kafala); transfer of debt (hawala); and agency (wakala); borrowing and gratuitous use of a thing (ariya); duress and interdiction (hajr) and (ikrāh); preemption (shuf ʾah); amicable settlement and quittance (sulh) and (ibrah); and partnership (sharikah).



judges became more familiar with the commercial practices and improved their ability to adjudicate cases involving merchants. This could have been the situation in the Ottoman Empire had the judges been more able to examine the general principles of the Law Merchant, and apply it as a cus-tom or ʿurf in a way that does not conflict with the general principles of Islamic Shariʿah. In talking about custom or ʿurf, the early customary development of Islamic commercial law should be explained, so we can understand how we should develop it.

3. Basic Understanding

It is well understood that Islam did not come to establish new commercial laws and practices when it first appeared, but that it came to re-evaluate the existing practices in the pre-Islamic era.23 The people in Mecca,24 more-over, were already involved in trade long before Islam, and the customary commercial laws were enforced by the traders themselves just like the way the Law Merchant was enforced in Europe.25 Because of the ties and inter-action of the people of Mecca with the other nations like the Romans, South Arabia, Byzantine Syria, Sassanian Iraq and others, they learned many techniques in trade and diplomacy. In addition, there was the need to keep all their treaties and agreements in archives at an official body called dār an-nadwa, or the Ground Consul. This body was also involved in planning, studying and advising the merchant community in their trade relations.26 People at that time lived on credit and loans, and the partner-ship named al-mudhārabah27 was widely practised, where even the poor were involved, but the line share of the profits would always belong to the

23 The Prophet said “I was sent to compliment good morals”. A Hadīth narrated by Abū Huraira, related by Al-Byhaqi.

24 Mecca is a city situated in the Hejaz region in Saudi Arabia, 73 km from Jeddah in a narrow valley at a height of 277 m above sea level. Every year millions of Muslims perform the Hajj pilgrimage to Mecca and at least 13 million visit it annually.

25 See Joseph Schacht, An Introduction to Islamic Law (Oxford: Oxford Univ. Press, 1964) 6-7.

26 See Abullah Alwi Haji Hassan, Sales and Contracts in Early Islamic Commercial Law (New Delhi, Kitab Bhavan 1997) 1-10.

27 It is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called rabb ul-mal, while the management and work is an exclusive responsibility of the other, who is called mudarib.



big and well-known investors.28 Madinah,29 on the other hand, was an important city for agriculture with a Jewish population, and Taif30 was another centre for long-distance trade.31

With the arrival of the new religion, there were injustices in the social, political and commercial practices in Mecca and Madinah, and one of the duties of the Prophet was to deal with these sophisticated commercial and financial societies in order to reform many things, including the economic and commercial systems. Any reader in Islamic legal history would have come across the fact that Islam encouraged trade of whatever sort, but prohibited some practices in the pre-Islamic era. This can be seen in the many verses of the Holy Qurʾān and the traditions Sunnah of the Prophet. Among the examples that can be mentioned in this regard are:

يا أيها الذين آمنوا لا تأكلوا أموالكم بينكم بالباطل إلا أن تكون تجارة عن تراض منكم(You who believe do not use up your wealth idly, (squandering) it on one another, unless it is for some business based on mutual consent among you).32

Another example encouraging trade and forbidding interest:

وأحل الله البيع وحرم الربا(Yet God had permitted trading and forbidding taking interest).33

Also the Qurʾān encouraged loans and stated the benefits of them:

من ذا الذي يقرض الله قرضا حسنا فيضاعفه له أضعافا كثيرة والله يقبض ويبسط وإليه ترجعون(Who is there to offer God a handsome loan, he may compound it many times over for him? God both withholds and bestows: To Him will you return).34

28 Ziaul Haq, “Inter-Regional and International Trade in Pre-Islamic Arabia”, Islamic Stud. 7(3) (1968): 227-229.

29 Madinah is a city in the Hejaz region of Saudi Arabia, considered to be the second holiest city in Islam and the burial place of Prophet Muhammad.

30 Taif is a city in the Mecca province of Saudi Arabia at an elevation of 1,879 m on the slopes of the Sarawat Mountains. The city was the centre of an agricultural area known for many things, including grapes and honey.

31 Supra note 26, at 6-7. 32 Sūrat an-Nisāʾ (Women), Q4:29.33 Sūrah al-Baqarah (Cow), Q2:275.34 Ibid., Q2:245.



The Qurʾān asked for allowing the debtor a chance to repay in case of hard-ship. It states:

وإن كان ذو عسرة فنظرة إلى ميسرة وإن تصدقوا خير لكم إن كنتم تعلمون(If any debtor suffers hardship, then postpone (repaying) it until conditions become easier (for him) while if treat it as an act of charity, it would be better for you, if you only knew).35

It also asked for debts to be in writing:

يا أيها الذين آمنوا اذا تداينتم بدين إلى أجل مسمى فاكتبوه وليكتب بينكم كاتب بالعدل ولايأب كاتبأن يكتب كما علمه الله فليكتب وليملل الذي عليه الحق وليتق الله ربه ولا يبخس منه شيئا

(You who believe, whenever you contract a debt for a stated period, write it down. Let some literature person write (what goes on) just as God has taught him. So let him write down, and let the borrower dictate. May he need God and not omit any part of it).36

The Sunnah on the other hand, which is what was expressed and practised by the Prophet, had left good manners and ethics in trade. It encouraged trustworthiness or truthfulness in business. In this regard, the Prophet stated: “The truthful merchant (is rewarded by being ranked) on the Day of Resurrection together with the Prophet, the truthful ones, the martyrs and the pious people”.37 Also He called for generosity in bargaining and modesty in claiming debts. In that he stated: “May God’s mercy be on him who is lenient in his buying, selling, and in demanding back his money (or debts)”.38 The Prophet also considered giving time to the poor debtor to pay his debt. It has been reported that the Prophet said:

God will put a servant on Him, under His shade, on the day when there is no shade except His shade, the one who grants time to the one who is in straitened condition (muʾsir) or leaves (forgives) the debtor (without paying his debt).39

35 Ibid., Q2:280.36 Ibid., Q2:282.37 For an explanation in the English language, see e.g., supra note 26, at 16.38 Ibid.39 Ibid.



He also prohibited some practices in business such as lies and hiding facts in sales. In this regard it has been reported that He said:

And if both parties (the buyer and the seller) spoke the truth and described the defects and qualities (of the goods), then they would be blessed in their transactions, and if they told lies and hid something, then the blessing of their transaction would be lost.40

Also the Prophet disapproved false swearing while selling. In this matter He stated:

False swearing (by the seller) is beneficial to the trade, i.e., it may persuade the buyer to purchase the goods, but in that way he will be deprived of God’s blessing to the earnings.41

All those rules either from the Qurʾān or the Sunnah have been stated to eliminate some of the business practices that were prevailing at that time. After the death of the Prophet, the Islamic scholars had to deal with the many novel issues facing the Islamic societies, and provide legal solutions based on their ijtihād or independent reasoning. They even started con-templating matters that had not occurred, and exerted their best jurispru-dential efforts in the rulings on such assumptions.42 Since those scholars had different opinions and findings, four Islamic Schools of Jurisprudence were established: i.e., the Hanafī, Mālikī, Shāfiʿī and Hanbalī appeared.43 Their outcomes however, still had to be based on the original sources of the Qurʾān and the Sunnah and, for this reason, other subsidiary sources of Shariʿah evolved, including ijmaʿ which means consensus, and qisās which means analogy. As a result, the Islamic scholars had succeeded in building an expansive body of rules similar to the jurisconsults’ contribution to ancient Roman law or the judges’ role in the formative period of the com-mon law.44

40 Ibid.41 Ibid.42 Supra note 21 at 32-41.43 For a historical background about the schools, see, e.g., Mohammed H. Kamali,

Principles of Islamic Jurisprudence (Cambridge: The Islamic Text Society, 2003) 1-16.44 For further explanation, see George N. Sfeir, “The Saudi Approach to Law Reform”,

Am. J. Comp. L. 36 (Autumn 1988): 730.



4. The End of Developments

In the 10th century AD, which was three centuries after the emergence of Islam, the door of ijtihād mentioned above was closed. This resulted in freezing the developments of Islamic jurisprudence, and the judges would only apply the law as it was set down by the early writers. Closing the door of ijtihād, moreover, resulted in having a legal system that was often at odds with the modern world. That is why in later periods, when the Otto-mans ruled the Islamic world, they had difficulties applying Islamic law in business transactions whenever foreign merchants were involved. This was not because of the lack of principles in Shariʿah law, or Islamic jurispru-dence fiqh, but because answering such legal questions requires legal research in the Arabic language, rather than looking directly for the appli-cable statute or relevant case as can be done in the civil and common law systems.

That is why in the mid-19th century, a number of Islamic thinkers and scholars attempted to codify the rulings mentioned in the Islamic schools’ fiqh to prove their adequacy, clarity and applicability. In Egypt, for exam-ple, the Hanafī creed was codified in the Judicial Regulation Magazine or Majallat al-Ahkām al-ʿAdliyyah, popularly known as the Majallah. It was only applied in several countries that were subordinate to the Ottoman Empire, but was customarily considered in commercial cases by the Saudi courts. Mohammad Qadri Pasha,45 moreover, who was an Egyptian Islamic thinker, codified the endowment regulations waqf according to the Hanafī creed, and also codified the marriage regulations in a book called Ahkām al-Ahwāl al-Shaksiyyah. Furthermore, in Saudi Arabia Sheikh Mohammed Alqary Almaky,46 who codified the Hanbalī creed in a book called Majallat al-Ahkām ash-Shariʿah to prove the flexibility in muʿāmalāt47 according to the Hanbalī School.

5. Modern Developments

After the collapse of the Ottoman Empire and in the mid-20th century, modern international commercial cases started taking place involving

45 An Islamic thinker who had worked in his career as a judge and a minister. He was also well-educated in the best schools and spoke English, French, and Italian fluently.

46 He was the supreme Judge of the Shariʿah courts and an Islamic thinker.47 See supra note 22 for Arabic terminology.



some of the Gulf States after the discovery of oil. Islamic law was avoided due to the lack of clarity, inadequacy or the unsuitability for international business even though it was the applicable law under the contract. The award made in the case of Saudi Arabia v. Arabian American Oil Co. (ARAMCO) is an example in this regard. In that case, the arbitral tribunal held that:

In view of the insufficiency of Muslim law as interpreted by the school of Imām Ahmad bin Hanbal and as the law in force in Saudi Arabia contains no determined rule concerning oil exploitation, it is necessary to resort to the general principles of law.48

Similarly, in the arbitration involving the Sheikh of Abu Dhabi v Petroleum Development Corp, Lord Asquith held that:

If there exists a national law to be applied, it is that of Abū Dhabi. But no such law can reasonably be said to exist. The Sheikh administers a purely discretionary justice with the assistance of the Qurʾān, and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construc-tion of modern commercial arbitration.49

The same situation had taken place when Sir Alfred Bucknill stated in the case of The Governor of Qatar v. The International Marine Oil Co. Ltd:

I need not set out the evidence before me about the origin, history, and development of Islamic law as applied in Qatar or as to the legal procedure in this country. I have no reason to suppose that Islamic law is not administered there strictly, but I am con-vinced that this law does not contain any principles which would be sufficient to interpret these particular contracts.50

These cases led to some strong negative reactions and a general distrust of international arbitration in the Arab Gulf countries.51 Furthermore, these cases caused the Saudi Arabian government to pass a resolution prohibit-ing its bodies to resort to arbitration before obtaining an approval from the

48 (1963) 27 ILR 117.49 (1952) 1 ICLQ 247. 50 (1953) 20 ILR 534.51 See Abdul Hamid el-Ahdab, “General Introduction on Arbitration in Arab Coun-

tries”, in: Pieter Sanders & Albert Jan van den Berg (Eds.), International Handbook on Commerical. Arbitration. (Dordecht: Kluwer Law, 1998) 17-19.



Council of Ministers.52 It is important at this point to ask a question as to how commercial laws then exist and operate in Saudi Arabia as a classic Islamic law country, and what their sources are, so we can understand what is lacking and how any legal developments can take place in its business community.

It is a well-known fact that Islamic Shariʿah law does not make any dis-tinction between civil and commercial activities. The rules of Shariʿah law apply regardless of the nature of the transaction or the profession of the person who is involved in such a matter. However, there is nothing in Shariʿah law that would prohibit an Islamic ruler (hākim) from passing or adopting laws especially enacted for the merchants, provided that they do not conflict with the general principles of Shariʿah. This authority is based on the doctrine of as-siyasa al-sharʿiyyah, known in Islamic jurisprudence, which gives the ruler in any Islamic society the authority to do whatever is needed for the public good or maslahat al-ummah, including the tanzim or legislation for the merchants in the local business community.53 Perhaps this is why the Saudi authorities have chosen to make a formal distinction between commercial and non-commercial activities when legislation or tanzimah first started in the early decades of the 20th century. The begin-ning, moreover, was in 1926 (1345 H) when the commercial council in Jeddah proposed a special commercial law of four chapters, which was then known as the Regulation of the Commercial Council or Nizām al-Majlis al-Tijārī. This law was submitted to the consultative Shūrā Council for revision and amendments, but there is no proof whatsoever that it ever received approval from the King at that time or that it was ever enacted.54

The real beginning, therefore, was 5 years later, when the Commercial Court Law, Nizām al-Mahkamat al-Tijāriyyah, was passed in 1931 (1350 H). It was taken from the Ottoman Law and relied heavily on the

52 Resolution No. 196 of 1963.53 At the present time, the legislative authority in Saudi Arabia is shared by the King, the

Council of Ministers and the Consultative Council (Majlis al-Shūrā). The King is the final resort (marjaʿ ) of these authorities. See the Basic Law of Governance, passed by Royal Order No. A/91 27 Shaʾban 1412 H/1 March 1992 Arts. 44 & 67-70, published in Umm al-Qura Gazette, No. 3397, 5 March 1992. Also see the Shura Council Law passed by Royal Order No. A/91 27 Shaʾban 1412/1 March 1992. Art. 18, published in Umm al-Qura Gazette, No. 3397, 5 March 1992. Finally, see the Council of Ministers Law passed by Royal Order No A/13 27 Rabi Iʾ 1414/20 August 1993, Art. 22, published in Umm al-Qura Gazette, No. 3468, 27 August 1993.

54 See Mohammed Al-Jaber, Saudi Commercial Law (Al-Qanūn al-Tijārī al-Saudi) (Riyadh: Al-Dār al-Wataniah Publishers, 1987) 18.



above-mentioned French Commercial Code of 1807. Despite the poor wording of this old law, it was considered by some Saudi academics55 as a complete source, because it dealt with different commercial law subjects. It was divided into four chapters dealing with land and maritime trading, commercial papers and bankruptcy, companies and agencies, and some arbitration rules. But then, so many different independent commercial laws or anzimah were passed in the 1960s and 1970s that the Commercial Court Law of 1931 could be compared to a glacier that was melting gradu-ally, with its articles slowly being replaced by the more modern and inde-pendent commercial regulations.56 The many Saudi commercial laws or anzimah passed during the booming years of the 1960s and 1970s played an important role in reducing the uncertainty in commercial transactions, gave effect to the free will of the parties and promoted the social and eco-nomic policies of the country. Apart from these legislations or anzimah, there are local customs that were considered as a source of law and explana-tory to the contents of all commercial contracts. They are illustrated by the many Islamic legal maxims, of which the following may be quoted:

Custom is authoritative.57

العادة المحكمةPublic usage is conclusive and action may be taken in accordance therewith.58

استعمال الناس حجة يجب العمل بهاWhat is customary is deemed as if stipulated by agreement.59

المعروف عرفا كالمشروط شرطاWhat is customary amongst merchants is deemed as if agreed upon betweenThem.60

المعروف بين التجار كالمشروط بينهم

55 Ibid., 18-20.56 For example, the Commercial Papers Law passed by Royal Decree No. M/37 dated

1962 (1383 H), the Saudi Company Law passed by Royal Decree No. M/6 dated 1963 (1385 H), and the Saudi Commercial Agency Law passed by Royal Decree No. M/11 dated 1962 (20/1/1383 H) (and its implementation rules dated 1981 (27/5/1401 H)).

57 Ottoman Majallah Code, Art. 36.58 Ibid., Art 37.59 Ibid., Art 43.60 Ibid., Art 44.



A matter established by custom is like a matter established by law.61

التعيين بالعرف كالتعيين بالنص

But there has also been also the need to recognize many international com-mercial customs and usages in Saudi Arabia since the mid-20th century. These customs and usages have found their way into the sources of Saudi commercial law by national and international trade associations such as the local chambers of commerce,62 the Saudi Monetary Agency (SAMA),63 and the International Chamber of Commerce (ICC).64 The most long-standing and successful of the various ICC formulations applied in Saudi Arabia are the Uniform Customs and Practice for Documentary Credits (UCP)65 and the Incoterms.66

6. The Need for Further Developments

Despite the many useful commercial regulations or anzimah passed and the commercial customs adopted in Saudi Arabia to cope with the many economic changes during the booming years, what is still a major subject of concern in the business community is that basic business contracts can

61 Ibid., Art 45.62 The first Chamber of Commerce was established in Jeddah in 1949, and because the

activities of the Chamber of Commerce expanded during the years, it became necessary to formulate a new law organizing its activities in the major cities. Therefore, the Law of the Chambers of Commerce, Royal Decree No. M/6 was passed in 1980.

63 SAMA was established in 1952 to serve as the Saudi Central Bank. It seeks to main-tain the stability of currency and control the exchange rate of the Riyal. It also supervises and monitors the banking system of the Kingdom, laying down bank regulations, granting licenses to banks and money exchanges and maintaining banks registers. In addition to these functions, it has a commission, which acts as a judicial body for resolving banking disputes.

64 The ICC was founded in 1919 to serve world business by promoting trade and investment, open markets for goods and services, and the free flow of capital.

65 The UCP was promulgated by the ICC in 1933 to be used in documentary credit transactions. The ICC has developed and moulded the UCP by regular revisions, with the current version being the UCP600.

66 Incoterms are a series of international sales terms, published by the ICC and widely used in international commercial transactions. These are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. As of 1 January 2011, the 8th edition of Incoterms 2010 will take effect.



still be subjected to fiqh, or Islamic jurisprudence, which stopped develop-ing in the 10th century AD, as stated above. This situation presents some fear for foreign investors, and especially international traders, when they find out that much of Saudi Arabia’s everyday basic contracts, including commercial contracts, can still be subjected to a law that is wholly uncodi-fied and does not contain new commercial principles.67 In this regard, the Islamic scholars or ulama would argue that Islamic jurisprudence fiqh has proved its applicability as a rich heritage throughout the history of Islam without codification.68 They believe that the parties are the best legislatures of their own interests or al-ʿaqd shariʿat al-mutāqidīn,69 and that they should be free to make contracts on any terms they choose. Once their choices are made, the job of the courts is simply to act as a filter to set aside what is in conflict with the general principles of Shariʿah.

As a result, many international traders and foreign investors have diffi-culty assessing in advance the types of liabilities and damages that can be claimed under a commercial contract governed by fiqh or Islamic jurispru-dence. Although King Abdulaziz proposed codification in the early days of the Kingdom,70 and his sons, the later kings, repeated that proposal in 1962 and 1981, it was only recently that codification became a major sub-ject of concern, not only among lawyers and business people but also among leading Saudi Islamic figures who try to prove the efficiency of applying Islamic law in commercial and financial matters. The subject, moreover, was strongly discussed by Sheikh Abdul Mohsen al-Obeikan,71 and in his discussions it was quoted:

Why would this be religiously prohibited? What is the difference between the books of jurisprudence and the codification of the rules? We know that the books of jurispru-dence contain rules directly or indirectly taken from the Qurʾān and the Sunnah to

67 See Frank E. Vogel, “Prospects for a Restatement, The Codification of Commercial and Contract Law in Saudi Arabia”, in: Hilary L. Ruttley & Chibli Mallat (Eds.), Com-mercial Law in the Middle East, (London: Graham & Trotman, 1995) 31.

68 See Ayoub M. al-Jarbou, Judicial Review of Administrative Actions Under the Saudi Law (Riyadh: King Fahad National Library Cataloging-in-Publication Data, 2011) 41-47.

69 The Arabic word for contract is ʿaqd (Plural: ʿuqūd). It is derived from the root verb ʾaqada, which means ‘to tie’ or ‘to bind’.

70 This was announced in the Official Gazette of the Kingdom, Umm al- Qura, No. 141, 26 August 1927.

71 Sheikh Abdul Mohsen al-Obeikan is a former judge, a member of the Saudi Arabian Shūrā Council, and a judiciary consultant for the Saudi Ministry of Justice.



make it easier to teach students and to facilitate legislation. Codification and the books of jurisprudence are the same.72

He even went further by stating that:

The human mind is limited, which may cause conflict between opinions. It is for this reason codification is necessary. It would contribute to establishing justice. It will facilitate a judge’s work and relieve him of conducting difficult research in the books of jurisprudence. We are living in times that require rapid verdicts in accumulating cases. This process will be speeded up by codification. Codification would also be use-ful to end the serious matter of conflicting judgments that sometimes occur within the same case and in the same city, perhaps even in the same court or that are passed by the same judge.73

With expressing this strong statement, it was finally realized by the Shariʿah scholars or ulama that lack of codification may result in lack of efficiency in many business relationships. Along with the Saudi Arabian govern-ment’s efforts to promote international trade and foreign investment, they realized, like the legal experts in many other jurisdictions, that some inter-national contracts are judged by the laws of the host state, and in some situations, the international standards have very limited application. This is usually seen in domestic contracts, local supply, distribution agreements, insurance, and financing arrangements with domestic institutions.74

Commercial agencies and distribution agreements, for example, are the most international commercial contracts that can be looked into by Saudi judges. Furthermore, because of the fact that the Saudi Commercial Agency Law75 did not deal with issues related to termination, the liabilities and damages are usually governed by the general rules found in Islamic jurisprudence fiqh. This resulted in having some differences in the judg-ments passed in this area, since all the legal findings depend on the inde-pendent reasoning or ijtihād of each judge. Many international companies represented in Saudi Arabia had expressed their concerns in the early 1990s

72 See the following newspaper article by Sheikh Abdul Mohsen al-Obeikan, “The Codi-fication of Islamic Shariʿah”, Asharq al-ʾAwsat (28 April 2006) 36.

73 Ibid.74 See Alfred Escher, “Legal Issues for National Policy Makers”, in: Daniel D. Bradlow

& Alfred Escher, (Eds.), Legal Aspects of Foreign Direct Investment, (The Haque: Kluwer Law International, 1999) 39.

75 See Royal Decree No. M/11 dated 1962 (20/1/1383 H) and its implementation rules dated 1981 (27/5/1401 H).



through the local chambers of commerce, and therefore the Saudi Minis-try of Commerce passed a resolution in 199276 allowing international arbi-tration abroad and the application of any law other than the Saudi applicable laws which includes the basic contractual rules found in Islamic jurisprudence fiqh.77

Even in modern contracts like the contract of insurance, which was under-regulated in Saudi Arabia for a long period of time until the exis-tence of takāful, which is the Islamic system of mutual insurance built on principles of Shariʿah, it soon became realized by the Islamic scholar’s ulama that the lack of codification made it difficult to observe the modern common doctrines and principles that exist in its field.78 In fact, some of its principles are not un-Islamic at all, like the concept related to utmost good faith in conventional insurance, which imposes a duty on both par-ties to act honestly towards each other without any deception or under-handedness.79 The observation was easy in other jurisdictions because insurance is basically governed by the codified general rules of contracts allowing its principles to be easily adopted or incorporated in many juris-dictions that it has now became proper to speak of an international law of insurance.80

That is not to say that nothing was done to bridge the gaps resulting from lack of codification in Saudi Arabia. The problem has been partly dealt with to serve the banking and finance sector, because the Kingdom did not have any special legislation or statutes dealing with pledges and collateral other than the rules found in Islamic jurisprudence fiqh. The problem here is that it was always difficult for the concerned parties in loan agreements to know in advance what the right opinion or the relevant rule was. There can be different views on matters of importance, each of which

76 No. 1374/221. 77 This was 2 years before Saudi Arabia signed the New York Convention on the Rec-

ognition and Enforcement of Foreign Arbitral Awards 1958. The Saudi ratification was by Royal Decree No. M11/1994, issued in Umm al-Qura Gazette, 21 January 1994.

78 The insurance sector in Saudi was under-regulated prior to passing the Cooperative Insurance Companies Law, which came into force on 20 November 2003 along with its implementing regulations passed on 23 April 2004. Prior to this, the only options for indi-viduals or businesses operating in Saudi Arabia seeking insurance were taking out conven-tional insurance either overseas or with an unlicensed provider operating under the umbrella of an agency agreement registered at the Ministry of Commerce.

79 A duty established by Lord Mansfield in Carter v. Boehm (1766) 3 Burr 1905.80 See John Birds, Birds’ Modern Insurance Law (7th edn., Sweet & Maxwell Ltd, 2007)

1-11.



remain equally valid, which lead some parties to engage in opinion shop-ping, in the hope of finding scholars whose interpretations meet their needs in financing transactions.81 But with the movement of privatization that took place in the mid-1990s, and the need for finance in the private sector, it was realized by the Saudi government that there was a need for some codification to serve the borrowers and lenders in the private sector.

The recent codification of the mortgages contract rules (rahan) found in Islamic jurisprudence for movables in a law called nizām al-rahan al-tijārī or the Commercial Mortgages Law82 solved part of the problem for banks and financial institutions, because it resulted in efficiency and clarity for the concerned parties. When reading the provisions of this law, someone who is an expert in Islamic jurisprudence or fiqh will realize that the rules were not based on only one Islamic school, but rather on all the Sunnah schools, which resulted in adopting the most practical and common solu-tions that can be seen in many Middle Eastern laws, including the Egyp-tian Civil Code Law.83 This development made the general public and the business community look forward to the passing of the new real estate mortgages law so that it will add efficiency and clarity to the real estate finance business, which was traditionally avoided by many financial insti-tutions due to the lack of clarity issue.84

Although it is considered to be a big breakthrough that some of the religious figures or ulama have finally expressed their interest in codifica-tion as mentioned above, the issue has to be dealt with from a different perspective and not only from a religious one. The importance of com-parative law will have to be expressed when dealing with a commercial matter. Promoting and encouraging intellectual curiosity in different legal areas through academic institutions and research centres will drive the

81 See Mustafa Hussain, “A General Introduction to Islamic Finance”, in: Rahail Ali (Ed.), Islamic Finance, (London: Globe Law and Business, 2008) 7-14.

82 Issued by Royal Decree No. M/75 dated 13 January 2004 (21/11/1424 H). The Implementing Regulations pertaining to the Commercial Mortgage Law were originally issued by Resolution of the Minister of Commerce and Industry No. 6320 dated 4 August 2004 (18/6/1425 H), and were recently reissued in amended form by Resolution of the Minister of Commerce and Industry No. 267/8/1812 dated 3 February 2010 (19/2/1431 H).

83 See Bahasson Omar, The Saudi Commercial Mortgages Law (Nizām al-Rahan al-Tijārī) (Saudi Arabia: Dār Tweeq Publishers, 2006) 20-95.

84 In fact, some experts say that if the law is finally put into place, it could result in a new boom period for mortgage financing in Saudi Arabia. See Naveed Siddiqui, “Saudi Mortgage Law to Usher in new Financing Boom”, Arab News (21 February 2010), http://arabnews.com/economy/islamicfinance/article20604.ece. (accessed: 1 April 2011).


http://arabnews.com/economy/islamicfinance/article20604.ece.

http://arabnews.com/economy/islamicfinance/article20604.ece.


scholars to have a subject studied from a number of different perspectives, and in that process they will develop a better understanding of their own system, and know the way of developing it.85

In the field of international contracts, there is nothing that would pre-vent us from studying and examining the UNIDROIT Principles on International Commercial Contracts, and consider it as a model for our national legislation, because it contains customary contractual rules affect-ing the interests of international trade. It is important in this era that our researchers and scholars do not stop at the developments made in the tenth century and depend only on the rulings covering all the contractual events by qiyās or analogy. They must establish, however, the understanding that in Islam any contract can exist between the parties, and then comes the role of the scholars’ ulama to see what is so non-Islamic about it and set it aside, instead of creating a different legal framework in any legal subject.

It is very important to understand that there have been major develop-ments in the Saudi conflict of law rules relating to the jurisdiction of the Saudi courts in international cases resulting in the application of Saudi law. Historically speaking, Saudi courts did not apply any conflict of law rules other than the rules found in Islamic jurisprudence fiqh, interna-tional customs and the rules found in the Riyadh Convention on Judicial Cooperation of 1983.86 In 2000, however, the Law of Procedure before Shariʿah courts was passed87 to include clearly all the connecting factors that determine when a Saudi court will have jurisdiction over a case with a foreign element. Moreover, the law clarified that a Saudi court will have jurisdiction if the lawsuit involves an obligation which is considered to originate or be enforceable in the Kingdom.88 Saudi courts will also have jurisdiction in an international case if the lawsuit is against more than one person and one of them has a place of residence or domicile in the King-dom.89 Finally, the principles of party autonomy were also considered in this Law, allowing the parties in international cases to choose the Saudi

85 See, e.g., Konrad Zwigert & Hein Kotz, An Introduction to Comparative Law. Tony Weir (tr) (3rd edn, USA: Clarendon Parker Press, 1998) 15.

86 See Arts 25-37 of the Convention which is related to Member States of the Arab League only, and it came into force in October 1985.

87 By Royal Decree No. M/2, published in Umm al-Qura Gazette, No. 3811, 16 Sep-tember 2000.

88 Law of Procedure before Shariʿah Courts, Art. 26(a).89 Ibid., Art 26(c).



courts even if the subject matter does not fall within its jurisdiction.90 The question therefore presents itself as to whether the local contractual rules based on Islamic jurisprudence fiqh are suitable to govern an international case where the parties come from different legal and cultural backgrounds. Another consideration is whether the applicable contractual rules can be explained in any language other than Arabic. If the answers to the those questions are negative, and indeed they are, then it has to be taken into consideration that there is no practical use of foreign law by the Saudi courts in civil and commercial matters as can be seen in other jurisdictions. If the principle of party autonomy is clearly considered in the above-mentioned law, then what has to be understood is that it relates to jurisdiction only and not to the choice of law. The application of foreign law in general has not been dealt with by academic writers or the legal practitioners even in arbitration, and therefore the best way for legal development in Saudi Ara-bia is to consider comparative law in developing this area of contracts.

The problem that we are experiencing, however, is that comparative law is not of any interest, and most Islamic scholars will try to detach them-selves from comparative law before looking at its aims or purposes. What we are experiencing in our researchers and scholars, moreover, is that instead of figuring out whatever is non-Islamic in comparative national laws, international conventions and model laws, they aim to set a separate system and lodge it with an Islamic name, even though Islam came to re-evaluate the existing commercial practices that were prevailing in the pre-Islamic era and not to rewrite new ones.

In the field of international arbitration, for example, and as the impor-tance of arbitration has increased in all the Arab countries since the mid-1990s, many researchers, through their doctoral theses and research projects, have suggested setting a separate Islamic system of international arbitration. However, in that process, they did not look closely at the inter-national legal framework designed for arbitration, and that is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958,91 and the UNCITRAL92 Model Law on Arbitration, which was designed to help all the countries to be friendlier to the New

90 Ibid., Art 29.91 Signed by the Saudi Arabian Government by Royal Decree No. M11/1994, issued in

Umm al-Qura Gazette, 21 January 1994. 92 The United Nations Commission on International Trade Law (UNCITRAL)

was established by the United Nations General Assembly by its Resolution 2205 (XXI) of 17 December 1966 “to promote the progressive harmonization and unification of


http://en.wikipedia.org/wiki/United_Nations_General_Assembly


York Convention.93 There is nothing in this legal framework that deserves to be called non-Islamic or in conflict with the Islamic general principles. The only Islamic issues that can be raised relate to the qualification of arbi-trators and whether to allow non-Muslims and female arbitrators to arbi-trate in international cases where the seat of arbitration chosen is in an Islamic country, a matter upon which there are many different jurispru-dential opinions, none of them final.

It is understandable that a great deal of sensitivity had been created by the Ottoman Empire as a result of their extreme religious tolerance allow-ing foreign laws to be applied, instead of borrowing from a number of foreign commercial principles and incorporating them within the Islamic acceptable commercial practices. It is also understandable that the return to Islamic law was associated with the so-called Islamic awakening that took place in the early decades of the 20th century. However, this does not mean refusing the internationally accepted commercial practices where nothing seems to be un-Islamic. What proves this is that no country that went through the so-called Islamic revolution like Iran or Sudan have abol-ished or revised all or even most of their Western adopted laws and legal institutions.94

7. Conclusion

In this article, we have no intention of making any religious legal com-ments about the position of any of the leading Islamic jurists. Any researcher in Islamic law will always have to benefit from their deep knowledge and

international trade law”. See http://www.uncitral.org/uncitral/en/about_us.html (accessed: 1 April 2011).

93 The Model Law owes its origins to a request in 1977 by the Asian–African Legal Consultative Committee (AALCC) for a review of the operation of the New York Conven-tion, in relation to an apparent lack of uniformity in the approach of national courts to the enforcement of awards. The AALCC suggested changes to the New York Convention to deal with certain issues, such as judicial review of fairness and due process and the implied waiver of state immunity. These proposals led to a Report of the Secretary General of UNCITRAL which concluded that harmonization of the enforcement practices of states, and the judicial control of arbitral procedure, could be achieved more effectively by the promulgation of a model or uniform law, rather than by any attempt to revise the New York Convention. See UN Doc. A/CN.9/168.

94 F.E. Vogel & S.L. Hayes III, Islamic Law and Finance: Religion, Risk, and Return, (Dordrecht: Kluwer Law, 1998) 21.


http://en.wikipedia.org/wiki/International_trade_law

http://www.uncitral.org/uncitral/en/about_us.html


experience. However, what many modern Islamic thinkers are calling for is not to confuse the terms Islamic Shariʿah and the term Islamic fiqh or jurisprudence95 since the early jurists’ solutions and findings differed in regard to the same issue as a result of the ʿurf, or custom, which differed from one time to another, and from one place to another. Great Imām scholars in general did not encourage the imitation of other scholars. They pointed out that their statements and findings were no more than opin-ions, and, if other scholars produced ones that were more suitable for a specific matter and time, then that would have to be followed. Customs that do no conflict with Islamic Shariʿah should always be considered an important tool for developing commercial laws in any country that considers Islamic law to have supremacy over its legislation, instead of attaching a holy logo to every single legal subject that needs further development.

At the present time, it is clear that promoting such customs can start at the educational level. For example, Saudi universities can establish aca-demic institutions and research centres specializing in comparative legal studies, with the mission of developing a body of knowledge and skills in different legal subjects under the umbrella of private law. Also calling for this move is the Saudi government’s recent requirement of the judicial system to train and educate the judges of the Board of Grievances or Dīwān al-Mazālim to become more knowledgeable in their analysing and decid-ing of local and international commercial cases. The government, more-over, is willing to establish commercial courts throughout the Kingdom and hire the same judges of the Board of Grievances who only have Shariʿah law background. Accordingly, comparative law centres could offer an excel-lent service to the Saudi Arabian government by allowing those judges to receive more education regarding different commercial subjects.

95 See Omar Alqadi, Al-Ijithād fī l-Fiqh al-Islāmī (Interpretation of Islamic Jurisprudence) (Egypt: Dār al-Nadha, 1993) 43-45.


developing the legal environment for business in the

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