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Centre of Islamic and Middle Eastern Law

Commercial Law in the Middle East Introduction

by Hilary Lewis Ruttley and Chibli Mallat

The papers in this collection, written by lawyers in private practice, government and academia give a multi-faceted insight into commercial law and practice in the Middle East, including the evolution of its current state over the last 25 years (the "post-independence period") and its likely pattern of development during the next decade.

To refer either to the Middle East or to commercial law as if they were pre-given unities is, of course, a misnomer on both counts. Certainly the region exhibits a number of common features in relation to legal, political, economic and socio-cultural patterns but there are important differences between the jurisdictions belonging to this geographical grouping which do not conform to conventional divides.

Country studies and groupings included here range geographically from Egypt in the north and west of the region; through countries of the Near East; the Gulf states; and further to the east of the region to include Iraq, Iran and Pakistan. This book does not attempt to provide an exhaustive coverage of states within the region but rather to examine, within a broad definition of the area, a selection of jurisdictions which have affected and are affected by those legal developments which have come to be recognised as commercial law in the Middle East.

Within the legal sphere itself, as these chapters illustrate, generalisation is usually relevant only to certain countries in certain contexts - which themselves overlap. Generalisation across the region tends therefore to highlight the differences rather than the similarities between the various jurisdictions in their legal makeup and outlook.

It is, however, commercial law which provides the central focus of this book. From the myriad of business topics which are inferred under this title, the thematic coverage chosen here is as follows.

I. Synopsis

The early chapters examine certain individual jurisdictions where major re-structuring of commercial legislation is taking place or is anticipated (Section 1: chapters by Vogel; Mahmassani, Lau), including in the field of company and labour law (Section 2: chapters by Saleh, Baharna, Hill). A subsequent set of papers addresses three key areas of international and business transaction: banking (Section 3: chapters by Safa, Ansari-Pour and Ballantyne), the maritime sector (Section 4: chapters by Browne and Michel) and the construction industry (Section 5: chapters by Rooke, Bunni, Sarie-Eldin) where the interaction between national and international factors strongly influences commercial law and practice. The final group of chapters is concerned with dispute procedures and remedies in a private international law context (Section 6: chapters by Nader, Ahdab, Hoyle) and in the public international context of claims against Iraq through the United Nations Compensation Commission (Section 7: chapters by Rawding, Walton, Mallat).

As a publication written by and for practising lawyers, the various contributions have been grouped in this way so that they broadly reflect areas of specialisation within the profession. It is on a functional, legal level therefore that common themes, country groupings and comparisons emerge.

The text commences with a consideration of recent developments in commercial legislation in the Middle East. The three first chapters examine how in very different ways, each is seeking to accommodate fundamental change within their domestic legal regimes. Taking a specific example from among the Gulf States, Vogel's chapter analyses the long and recently intensified debate over codification of commercial and contract law in the Kingdom of Saudi Arabia. Among the Gulf States and throughout the Islamic world, Saudi Arabia is the most vigorous adherent to traditional Islamic legal and constitutional norms. In contrast to other Arab States, the positive (Western inspired and secular) laws of the commercial field are subordinate and supplemental to classical Islamic law (fiqh). To the limited extent that company and commercial law have been codified in Saudi Arabia, the legislation is not systematic or up-to-date, and neither do the religious courts (which possess general jurisdiction) necessarily apply those codes which do exist.

Since on their face value, the counter-arguments appear following the adoption in March 1992 of a new "Basic Law" and a new "Law of the Consultative Council", many Western observers have predicted extensive new civil and commercial codification. Vogel comments that these hopes turn out to be premature at best and the chapter is devoted to examining the complexities surrounding codification in the Saudi context. While there is a consensus that neither complete codification on the one hand, nor continuation of the status quo on the other, are acceptable as a way forward, there is as yet no clearly preferred alternative. Vogel analyses the given variables of Saudi Arabia's legal systems and culture and the possible solutions that might be arrived at by working across them.

Major legal developments occurring in a quite different set of circumstances are described by Mahmassani in relation to Lebanon, where the classical tradition has long been displaced by a Western-oriented system of commercial laws and regulations. The Lebanese war has had two primary effects on the Lebanese legal system and its immediate future. First, destruction on a large scale (physical, economic and financial) created a need for special legislation to cater for the repair and reconstruction of individual properties, large scale town planning and development and reconstruction of Beirut's commercial city centre. This was promulgated in three phases between 1975 and 1990. Secondly, because of the war, for 17 years Lebanon was isolated from contemporary economic developments elsewhere in the world and the ordinary process of legal evolution was paralysed. Mahmassani's chapter describes a wide range of corporate, financial, commercial, investment and arbitration law reforms which will be part of a programme of legislative modernisation intended to take place over the course of the next decade. In this chapter, as for the studies made of legislative reform in Saudi Arabia by Vogel and Egypt by Hill, Mahmassani's discussion of Lebanon's circumstances takes into account the vital human factor. He makes explicit the profound impact on the process of reconstruction which public attitudes, the conduct of relations between the State and the public and the urgent need for reform among official, administrative and judicial personnel, together impose.

Martin Lau's chapter shows the conflict between old and new in a lively Pakistani context and a booming economy. Here, the influence of English contract law and English traditions is clear from the wording and general structure of the statutes in force. Here also, however, there is a special weight of the tradition of Islamic law, which is vying through a programme of Islamization which started in the mid 1970s to overhaul the entire financial system; but the search by the courts and the legislator of a larger place for the shari'a has not affected the general dominance of the common law in commercial transactions yet.

Company law follows the more general first section with an analysis of developments in various countries. In relation to the Gulf States, Saleh describes how the civil French/Egyptian model was used as a basis by each of these jurisdictions to enact corporate legislation around the time of their independence, the first among them being Kuwait (Law 15/1960) and the latest, the United Arab Emirates (Law 8/1984 put into effect by Law 13/1988). Having the same origin, corporate legislation in the Gulf States retains many common features but there are two areas - being the subjects of this chapter - where material changes have and will continue to take place and which are of the utmost importance for foreign investment. These are first, changes in the conditions for acceptance of foreign investment through the medium of participation in local companies; and second, situations in which certain categories of business are exempted from some or all of the provisions of company legislation. The chapter concludes with an assessment of the effects of the 1991 Gulf war and the ensuing Western military presence on the Arab people and their relations with foreign partners, particularly the USA.

The chapter by Husain al-Baharna follows on to argue that adaptation of commercial law in Bahrain was always perceived to be a necessity, and describes the efforts of the legislator to be on the look out to preserve the special place of Bahrain in the history of international trade. Two recent laws and their impact are analysed in particular: Law 28 of 1975 and its subsequent amendments, which organised the field of commercial companies in a comprehensive manner; and the Law of Commerce of 1987, which departed from the hitherto dominant English common law tradition to follow the Egyptian system, itself inspired by French law.

Hill brings a political science perspective to her study of three major pieces of legislation central to Egypt's commercial activities; she provides a richly textured picture of tensions compelling and constraining reform in the country whose legal system and education continues to be influential in legal developments beyond its borders. Focusing on the issues of investment, privatisation and labour, Hill examines Law 230 of 1989, Law 203 of 1991 (the centre-piece of legislation for economic development in Egypt) and Law 95 of 1992. Together, these laws are intended to play a major role in moves to transform Egypt from a relatively closed socialist economy into an open capitalist one. Important catalysts behind this reform come essentially from outside the system, notably the IMF and World Bank. Notwithstanding the technical quality of the present legislative structure in the areas of investment, privatisation and labour, Hill finds that inevitably the interests of some individuals and groups are supported more than others. With hindsight, Hill suggests that many of the problems encountered can be seen to have flown logically from regulations incompatible with social and political conditions. For the future, however, it remains unclear which features of present socio-economic and political conditions are going to interact with the provisions of (in particular) Law 203 and whose advantage the new legal provisions will actually most serve.

The next group of chapters in the collection discuss commercial law and its development in relation to three prominent areas of Middle East business: banking, the maritime sector and the construction industry.

Safa's chapter gives a Middle East perspective on events in the financial markets over the last twenty-five years and from this basis, draws out the determinative factors likely to be influential in banking law and practice for the decade to come. Safa describes the post-independence period as having been a painful one in Middle East banking. Firstly, the 1970's and 1980's, witnessed a phase of enormous oil money deposits and high interest rates followed by one of chronic customer default and the international debt crisis. At the time when this turbulent period took place, banking regulation in the Middle East was extremely lax. While bank failures - the focus of Safa's chapter - are rarely heard of in the Middle East, this has been due not to an absence of liquidity crises but to the large number of state-owned banking institutions which have made government bail-outs possible, relying on large cash resources from oil wealth. Secondly, the experience of many Middle Eastern shareholders investing in the Islamic banking system and in banking institutions abroad has not been unproblematic. Safa comments on their loss of confidence in Islamic banking caused by a period in the 1980's when several instances of dubious investments and fraudulent management occurred; Safa goes on to observe also their disillusionment with Western banking practice which has followed from the failures of the Al-Saud Bank and BCCI.

In response to these events, Government intervention has and will continue to act as a corrective in controlling banking practice in the Middle East and to restore public confidence in Middle East banking institutions. Safa predicts however that the BCCI failure will create in the minds of Middle Eastern investors, a much longer term caution of financial involvement abroad.

Contributions by Ansari-Pour and Ballantyne give two more detailed angles on the wider picture of banking law and practice in the region.

A central issue in the "incompatibility" debate is that of riba or interest, described by Ansari-Pour as one of the most important and notorious elements of illegality in transactions governed by Islamic law. Although there is no disagreement among Muslim jurists on this point, Ansari-Pour's chapter focuses on a difference of opinion which has arisen in relation to the interpretation of riba in new commercial transactions, especially banking transactions. Different jurisdictions within the Middle East region have arrived at different conclusions; the present paper concentrates on an important question for the commercial sector which is how, under an Islamic, interest-free banking system (such as exists in Iran), practice and theory have been merging in the past decade.

In a related discussion, Ballantyne brings his experience as a practitioner to challenge the disinterest among many Western lawyers in the current and potential role of the shari'a in international banking practice; this is done through an examination of the syndicated loan market which, during the 1970's and 1980's, operated as a major vehicle for the re-cycling of petrodollars. The chapter predicts the reassertion of the shari'a and argues that the pressures for co-operation and adaptation between conflicting elements in Islamic and conventional banking are mutually re-inforcing. Using specific examples, Ballantyne poses the question that it is not only whether and how far can restructuring of the shari'ah be taken to fit Western economic concepts but conversely, what capacity exists for Western concepts to meet the shari'a.

Contemporary maritime issues relating to the Middle East reflect public concern on a world-wide scale about the causes and consequences of environmental damage. The increasing numbers of disputes over maritime boundaries, recorded by the International Court of Justice, reveal a less publicised but equally far reaching problem of direct effect on commercial shipping activity and implying the need for fundamental change in present legal arrangements for ordering maritime boundaries.

Liability for oil pollution is the key topic in the chapters given by Browne and Michel. Browne describes the four major compensation schemes; two created by international convention: the International Convention on Civil Liability for Oil Pollution Damage 1975 and the International Oil Pollution Compensation Fund 1978 and two in the form of administered voluntary schemes: the Tanker Owners' Voluntary Agreement concerning Liability for Oil Pollution (TOVOLOP) and Contract Regarding a Supplement to Tanker Liability for Oil Pollution (CRISTAL) all of which have developed over the last 25 years. The Civil Liability Convention (CLC) now has 79 contracting States including 11 Middle East countries; the International Oil Pollution Compensation Fund (IOPC Fund) has 56 contracting States of which 8 belong to the Middle East; a further 8 Middle Eastern countries have neither ratified nor acceded to either of these Conventions. The paper gives a detailed explanation of what the four compensation regimes aim to achieve, how they interact and how claims made in relation to them are assessed and quantified.

At the time when the CLC and IOPC Fund Conventions first came into force over 20 years ago, they contained some novel concepts: Browne cites in particular, strict liability and the right of claimants to take direct action against insurers. To date, the Conventions have operated in the manner intended but they are beginning to appear limited in their scope and Browne discusses the principal constraints to be overcome and the changes likely to take place in the foreseeable future. An unwelcome development in the law on liability for damage due to oil spillage from tankers, to which both Browne and Michel refer, is the Oil Pollution Act 1990 recently brought into force in the USA. The Act, which applies to US and foreign flag tank vessels while operating in US waters and up to 200 miles offshore, represents a fundamental change to the body of maritime law. Both Browne and Michel criticise the expensive burden which this piece of legislation creates by placing what Browne describes as effectively unlimited strict liability upon an unpredictable range of persons involved in the tanker industry. Certainly it has a major impact on ship owners and operators but, as Michel describes, the wide sweep and uncertainty of many of its provisions hold implications not only for additional insurance payments but also for the very structure of ship finance and the ship building industry.

Other pollution control measures discussed by Michel are those to encourage the commercial salvage industry to salvage ships where there is a risk of pollution (but where, in practice, salvage would have been unlikely to take place because there would be insufficient residual value to justify entering a salvage contract on a traditional Lloyd's form). Another important area in which the industry is also taking an initiative is that of ship safety. The measures being adopted aim to improve the calibre of ship management on board and ashore, since human failure has been shown to be strongly influential in the chain of events leading up to a disaster. The chapter concludes with a report on the attempt under English Law to overcome problems of transmission of title of property in cargoes (a particular issue for international oil transport contracts) through legislative reform designed to bring the law more into line with modern trading practices. The legislation referred to is the new Carriage of Goods by Sea Act 1992 which, although a piece of UK legislation, is relevant to the international market and is anticipated to have a significant impact due to the substantial number of contracts for carriage of goods by sea which continue to be expressly governed by English law and provide for dispute resolution by arbitration or through the courts in England - even though the ships, cargoes and ports involved have no connection with the UK.

These contributions illustrate the quintessentially international rather than specifically Middle Eastern character of the region's maritime sector. They present a picture of dynamic change taking place currently and in the foreseeable future through pressures generated by multi-lateral consensus among governments, the industries involved (shipping, marine insurance etc.) and, notably with regard to environmental impact, by public opinion.

International norms are also prominent in Rooke's discussion of oil and gas construction contracts in the Middle East. Although resources are now largely in the control of the region's national oil companies, most oil and gas construction projects are undertaken by a small number of multi-national oil companies which have developed the expertise the industry requires. These international companies, including the oil majors who developed the Middle East oil and gas industry in the 1920's, have been responsible for setting industry standards on a world-wide basis and these have, in turn, been adopted by the independent and national oil companies. Written from the point of view of the international legal negotiator advising a participant in an oil or gas construction project, Rooke describes first the Middle Eastern context and then examines in more detail, certain aspects of the contractual process including minimisation of risk; choice of contractual approach; tender or negotiation of the contractual package; general and specific conditions of contract; quality guarantees; technology transfer issues; performance details including security for performance; sub-contracting and forms of arbitration clause. While many of the contractual features highlighted in this chapter would broadly apply to construction contracts in other sectors and other parts of the world, Rooke illustrates throughout how, in practice, the negotiated draft must reflect both the geographical context of the Middle East and the relevant sector of the industry. The advising lawyer must know not only the international norms which apply to the industry but also the relevant domestic law which applies directly to tendering, contracting and the settlement of related disputes and may also be relevant to many other aspects including commercial registration and licensing, immigration and labour law, customs regulations, import duties and corporate and personal taxation.

Contractor's liability in relation to construction contracts (discussed by Bunni) is an issue which illustrates how domestic law and local conditions interact with the international elements of this type of contract. Construction contracts in the Middle East are typically structured upon the two internationally recognised FIDIC Forms of Contract (for civil engineering works; and for electrical and mechanical works respectively). In the majority of countries in the region, the law applicable to contractor's liability is likely to be based on a number of sources including - in order of priority - relevant legislation or, if no applicable rule is found, by reference to the principles of shari'a, the courts may also consider the prevailing custom and practice (unless it is contrary to law, public policy or public morality) and lastly, if the preceding sources are insufficient, reliance may be placed upon natural justice, equity and fairness. The contract for work ('aqd muqawala) itself has its origin in Islamic law. Bunni takes these general features and discusses particular liability issues such as ad measurement contract or lump sums; the contractor's duty to warn; performance guarantees; liability for delay; and the theory of exceptional circumstances. Also highlighted is the importance of concepts developed from French/ Egyptian inspired Civil Codes, such as the key distinction between public and private law and the principle of decennial liability.

The contrast between French and English traditions is nowhere more apparent than in the large international construction contracts which have characterised the Middle East boom in the 1970's and 1980's, and which have left most countries to rely heavily on the 4th edition of the F.I.D.I.C. Conditions. The application of these Conditions in the case of Egypt, which offers the model to many Arab jurisdictions, is discussed in detail in this chapter.

In the following section, the resolution of commercial disputes arising from contracts connected to the Middle East is considered from two perspectives: that of courts in the Middle East asked to enforce foreign judgements and foreign arbitral awards and conversely, that of the English courts required to decide a question of foreign law.

Enforcement of foreign judgements is discussed by Nader in relation to Saudi Arabia. Applications for enforcement should be made to the Grievances Board (Diwan al-Mazalem) and to succeed, must satisfy two essential conditions, namely: (i) reciprocity or mutual treatment and (ii) non-violation of the shari'a, including public order and morals. Nader's contribution centres however on an appeal procedure allowed by the Grievances Board but which is unfamiliar to Western trained lawyers because it is capable of becoming a double appeal procedure. Nader cites an example of a case in point where a judgement for enforcement went up to the Scrutiny Committee (i.e. the Appeal Court) on appeal. The Committee, accepting the appeal, returned the judgement to the same judge with their observations. Exercising his right of choice under this system to refuse or adopt the Committee's observations, the first judge accepted the observations and passed a further judgement two years later reversing the first judgement and refusing enforcement. (In theory, this may in turn set up a new cycle of appeal from the opposing party). Nader considers the example given to be an anomaly rather than illustrating a general rule; he also considers that the potential for such a situation recurring should be removed by legal reform in the near future. In the meantime, the chapter usefully concludes with an indication of possible solutions which might be pursued while the current system prevails.

As commercial and investment activity in connection with the Middle East has grown, there has been a related increase in arbitral proceedings and consequently, demands on the courts for leave to enforce awards. The legal rules governing enforcement vary from country to country but the chapter by El-Ahdab shows two important poles of reference: Islamic law on the one hand and international conventions on the other. El-Ahdab examines the character of an arbitral award under Islamic law including the principles of form; interpretation and correction of material errors; and parties' means of recourse against an award. The chapter also details the different views held on the circumstances in which an arbitration (and its award) would be considered governed by Islamic law or alternatively as foreign, taking into account whether the parties involved are Muslim or non-Muslim and whether or not the arbitration took place in an Islamic country.

The chapter refers to the operation of the New York and regional conventions and concludes with a description of enforcement procedure in a range of countries belonging to the Middle East which are not signatories to the New York Convention.

The rules and practice of the English courts when dealing with foreign (in this case, Arab) laws are clearly defined but, as Hoyle discusses, they are often not expedited efficiently nor in the best interests of the parties, mainly due to inadequate preparation on the part of the legal advisor in the case. The English courts regard foreign law as a matter of fact - a principle which requires a party first to plead foreign law as a fact (with full particulars) and secondly, to prove it to the satisfaction of the judge. Hoyle discusses several of the practical issues and problems which commonly arise in the process of proving foreign law including the need to obtain advice during the pre-litigation stage; difficulties in acquiring appropriate documentation from abroad; use of expert witnesses in relation to oral and documentary evidence; the English courts' approach to interpretation of foreign statutes; and the burden of proof. An almost inevitable part of the process will involve the use of interpreters and translators. As a general rule, proceedings in English courts must be in English and Hoyle discusses the rules and case law governing both court procedure and important ancillary matters such as the need to attest by affidavit or notarisation, translations to be put before the court and responsibilities for remuneration of interpreters.

The final chapters in this collection by Walton, Rawding, and Mallat look at the machinery set up to handle claims against Iraq following that country's invasion of Kuwait in 1991. The establishment of the United Nations Compensation Commission (UNCC) in Geneva in 1991 to carry out this function, represents an interesting and innovative change in the manner in which international claims of this type have been administered to date. However, both Walton and Rawding have critical comments to make about the realistic prospects of claimants receiving any or any adequate compensation due to the insufficiency of funds available. The Fund is intended to be financed by a levy on Iraqi oil exports. However, no payments from Iraq have yet been received and the Fund currently consists of a small sum derived from Iraqi assets and loans sequestered by other states (Walton).

The features making the UNCC unique are described by Walton as its multi-lateral structure (in contrast to the conventional form of bi-lateral arrangements) and that it derives its legitimacy not from the consent of Iraq as a pre-condition to implementation, but from the binding nature of the Chapter VII Security Council Resolution which established it. A further unusual feature is that the defendant in this procedure (i.e. Iraq) has no locus standi; Iraq is not a party to the proceedings and in the majority of cases neither appears before the Commissioners nor specifically defends individual claims. The issue of the extent to which Iraq should be allowed to take part in the proceedings - the problem of "due process" and how it should be defined under the Commission's Rules of Procedure - is described by Walton as perhaps the most difficult decision which its Governing Council (comprising 15 members of the UN Security Council) had to make in establishing the Commission. The result has been that while not a party to the proceedings, Iraq is provided with information about all the claims received; is given the opportunity to present additional information to the Commissioners; and may also address the Security Council.

Rawding's chapter is a very pragmatic discussion of the UNCC claims procedure. He notes that the value of claims approved by the Commission will at any given time "far exceed" the resources of the Fund. No provision is made for the unsatisfied proportion of claims and he reports that various indications have been given to the effect that claims by individuals forced to flee Kuwait will be given priority over claims in respect of pure business losses. Despite the poor prospects faced by claimants, the UNCC is operational and Rawding examines how losses eligible for compensation are defined; categories in which claims are placed; the administrative rather than judicial procedures (similar to claims adjustment) used by the Commissioners to determine claims; and the criteria for assessing levels of compensation (based on the UN Security Council's Resolutions, the UNCC Governing Council's decisions and other relevant rules of international law). Looking ahead, beyond what at present seems to be a highly speculative exercise, Rawding suggests that the records being made of losses and their supporting evidence may nevertheless be useful in the event that it may be possible to pursue claims in another forum. For governments (through whom claims must be presented on a consolidated basis representing individual or corporate claimants domiciled within the country concerned), the record of losses being compiled may prove to be a bargaining tool more effective in future bi-lateral negotiations with Iraq than in achieving any very substantial compensation for claimants under the UNCC process.

How the future of Iraqi compensation will develop is evidently dependent on the situation in that volatile country, but Mallat concludes the discussion by suggesting an altogether different approach, whereby Iraqi citizens are considered to be also victims of their government's behaviour - perhaps even the foremost victims. On the basis of a trend in international law which is documented in a series of Security Council Resolutions, it is argued that a typology of claimants could be drawn to include Iraqi victims, thus alleviating the abnormalities inherent in an otherwise cumbersome and impractical understanding of international liability.


Before presenting the papers themselves, it is perhaps useful to put studies on contemporary commercial law in the Middle East against the deeper historical perspective.

II. Islam and Business Law: the Historical Relevance

A "Middle Eastern style" may be identified in civil law as a patchwork of European and local traditions with a language and a terminology derived from classical Islamic law, fiqh. This is not the case in commercial law. Whether from an institutional and technical perspective, or whether in the language proper, Middle Eastern commercial law as found in the legislation which the courts apply in each jurisdiction, reads for the practitioner and the scholar alike as a direct transposition of European law. A long-standing tradition of a civilization closely associated with trade seems irrelevant in the present commercial law of the area.

Commercial codes are modelled after the civil law tradition in most countries, or, more rarely as in Jordan and Pakistan, occasionally follow the common law tradition. The following recent decisions of higher courts in the Middle East offer an illustration to this large-scale borrowing.

Jordan: arbitration award.

A decision of the Jordanian Court of Cassation confirmed the Court of Appeal's decision to reverse the Court of first instance in a case of arbitration between the municipality of Basira and a public works company. The company had undertaken the building of a road which was not deemed conform to the specifications of the original contract. When the conflict arose in 1981 on the fulfilment of contractual specifications, the two parties concluded an arbitration agreement, which resulted in 1986 in an award in favour of the municipality. The award was attacked before the court of first instance on several grounds, notably for lack of competence of the head of the municipality in entering into an arbitration process, and, subsidiarily, because the arbitrators had overstepped the role given to them in the arbitration agreement. The Court of Cassation refused to be drawn into matters of fact which it considered to be for the lower judges solely competent to look into and upheld the Court of Appeal's decision. By a majority of two (of three), it held on the second argument that "the court of appeal as court of fact, and following its competence in assessing evidence according to Articles 1/33 and 1/34 of the law of evidence, had concluded that the Council of the city of Basira had agreed on arbitration." It further held that the Arbitration law of 1953 prevents the court from undermining an arbitral award except in specific and narrow cases, as when "the award had been issued on the basis of a void arbitral agreement, or if the award had overstepped the time limit specified in the agreement, or if the award had fallen outside the limits of the agreement". This, the majority concluded, was a prerogative of the court of appeal as court of fact.1 The dissenting judge approved this last conclusion, but considered that the head of the Basira municipality did not have the right, in view of the Jordanian civil law and the law of municipalities, to enter into an arbitration agreement without an express authorisation from the municipality's Council.2

Bahrain: duty of care.

A case arose in Bahrain over goods transported in a container which had been seriously damaged. The Court of Cassation upheld the decisions of the lower courts (first al-mahkama al-sughra, because of the small amount involved, ca 600 dinars, then al-mahkama al-kubra), which had awarded the money to the plaintiff - an insurance company which had paid the insured merchant who had received the damaged goods, and substituted itself for his claim against the defendant (a maritime carrier). The defendant appealed twice, but the courts were in agreement that the Bahraini Maritime code does not absolve the carrier from his duty arising from fault or negligence to look after the merchandise carried, notwithstanding any clause to the contrary in the contract of transportation. The Court of Cassation noted that "the carton boxes had been seen inside the container in the normal and usual way in the commercial field", and that the argument of the carrier that the merchandise had delivered the container in good shape did not suffice to curtail his liability.3

Syria and Bahrain: quality of merchant.

The Court of Cassation in Syria upheld a decision of the Bar of Lattaquie (North-West Syria) to debar a lawyer who was carrying on commercial activities whilst registered as a lawyer in contradiction with the Bar Association regulations. It held that the excuse of continuing his father's commercial practice was not relevant and that his registration in the commercial registry was evidence which he did not rebut, and which, following previous decisions by the same Court of Cassation, established him as merchant before the law.4

The quality of merchant, and hence the possibility of declaring bankruptcy, was conferred by the Bahraini Higher Court of Appeal to an Indian resident of Bahrain, who was not entitled as foreigner to register in the register of commerce, but who was considered nonetheless a merchant in view of his trading activities. The Court reversed a court of appeal decision which considered that the person in question was a pr�te-nom for other companies, and was as such not entitled to benefit from the regime accorded to merchants. The higher court of appeal stated: "The fact that the appellant [the Indian resident] was not of Bahraini citizenship and thus forbidden from practising commerce in Bahrain, and that subsequently he was not able to register in the commercial register does not prevent his being considered a merchant if the elements necessary for the law are present. Article 9 of the Bahraini Code of Commerce considers a merchant any person having the capacity of merchant and taking as a matter of trade a commercial operation in his name and for his won benefit." Even if he operated in some cases for the actual benefit of others, "this does not affect his quality as merchant, which he acquired by effectively engaging in commerce in his name.. According to Art.18/2 of the Code of Commerce, the quality of merchant is established for whomever practises trade under a pr�te-nom or hidden behind another person, in addition to its establishment on a personal basis."5

Jordan: Port Authority liability.

A finely argued decision of the Jordanian Court of Cassation held that the liability of a port authority for the loss of merchandise was part of its duties as carrier of this merchandise within the precinct of the port and could not be removed by an argument of force majeure derived from the possibility of loss because of theft. An Iraqi cargo had unloaded six containers into the port of 'Aqaba. Two containers went missing, and a criminal inquiry was in progress. The Port Authority was asked to compensate the cargo liner in full by the first instance Court and the Court of Appeal. The Port Authority appealed before the Court of Cassation on the ground that the transport of the goods in the containers into the silos of the Port was not part of the operation of transport. The Court demurred on the basis of the unity of the operation. The appellant argued also the necessity to wait for the result of the enquiry as penal law ties civil and commercial law. The Court rejected the argument as the inquest's objective was to look for possible thieves, and that its result was irrelevant to the liability of the Port Authority. Indeed, either the thieves were employees of the port and the Port Authority was responsible for them following Art. 288 of the Civil Code, or they were foreign to both parties, and liability for the safety of the merchandise was entirely incumbent on the Port Authority.6

United Arab Emirates: documentary letter of credit.

In a procedurally complex decision,7 the Supreme Federal Court of the United Arab Emirates established the joint responsibility for a documentary letter of credit opened at a bank in solidum, even though one of the parties may have established a different relationship with the other debtor through the contract of partnership. "The bank was not party to the contract between the partners. Its knowledge of the contents and conditions of the partnership contract or the contract leading to its dissolution does not affect the obligation of the appellant in solidum with the other appellee since the opening of the documentary credit took place after the contract establishing the partnership". The court rebutted the appellant's claim further as there was no obligation on the part of the bank "so long as the bank did not accept the absolving of the joint debtor from the obligation contracted in solidum with his partner. The silence of the bank towards these letters is in reality a rejection of these arguments, especially since the appellant did not ask the bank for a remittance of the debt and the full discharging of the liability for the documentary credit to remain with [his partner]."8


There is little in these examples which a commercial lawyer trained in the West will not comprehend. Variations occur in matters of detail, but the language is one which reads as a straight translation from a Western commercial code, whether for maritime liability or for the objective quality of merchant.

This direct bearing of foreign models may have not been necessary to the comprehensive extent that it occurred. It is possible to detect in the misprepared and impoverished genesis of Middle Eastern commercial law, the signs of unease whereby the forgotten tradition tries, sometimes in a deliberately provocative manner, to take revenge for this disregard. This phenomenon is most apparent in what is known as "Islamic banking" and the prohibition of interest at large, which however remains the exception rather than the rule in the Middle East.

This disregard brings unease to commercial law and affects the stability of transactions. It may be time to examine this absence more seriously in the light of the importance of commerce in the region since at least the advent of Islam in the sixth century. An Orientalist noted a hundred years ago how the domination of proper commercial terms-of-the-art operates in the Qur'an, following what one would expect in a Meccan society whose Prophet was a trader by profession.9


Although an understudied field, what we know of classical commercial law allows a provisional synthesis of a long history of Islamic law into certain characteristics which afford a perspective on the present-day relationship between Islam and business.

The relevance of the common law of Islam can be approached with the historical framework that Fernand Braudel introduced in his study of trade patterns in the Mediterranean world. This, the French historian calls long wave or the long structure (longue dur'e), which is helpful in understanding how fourteen centuries have come to bear on the world of business in Islam. For this purpose, the Islamic law of trade is a useful indicator.

The long list of specifications that one finds in the Qur€an --with regard to contracts, the necessity of certainty, the central importance of ethics, the strict requirements of honouring one's obligations, of putting them in writing, the permissibility of trade and its importance, and that famous sentence in the second sura (chapter) about how trade has been allowed by God, but riba (interest, usury) forbidden - is familiar.

Except for the riba question (and even then there is nothing essentially different from the other Biblical religions), the general ethical system cannot be labelled as exclusively Islamic. Most Qur€anic features are shared by world religions with regard to business and the necessity of ethics in the transactional relations of human beings. These are important just for the survival of the business sanctity of contracts and of morality in any society. In contrast, what is needed is the deriving, to the extent that it is possible in the documents borne by Islamic law, of the specificity of business in Islam.

Taking a long wave perspective, a number of points, which can be illustrated in some of the classical texts, are revealed as specifically Islamic products.

III. Trade at the Heart of the Economic System

The first element is the centrality of trade, the universal respect it carries in Muslim civilization, and the importance of commerce as the nerve of the city and of regional exchange. The free movement of goods is a key element in the structure of original Islam through to the present period. The fact that the Prophet Muhammed started his career as a caravan merchant is unique to the Islamic Prophecy. The tradition relating to the other great monotheistic epigones in the figures of Abraham and Jesus does not acknowledge the centrality of trade and commerce in any similar way. In the case of Jesus, the episode of the Temple merchants points rather in the opposite direction, with the mercantile pursuit of wealth depicted in a derogatory manner.10 In contrast, the original textual tradition of Islam and of Islamic law acknowledges the importance of commerce, including the securing of long-distance trade, market sanctity and security, both on the ethical and the practical level. Whatever the reality of trade in the early Islamic Hijaz, the tradition of an Islamic Prophet-merchant is firmly received and developed across the centuries. In addition to the already mentioned centrality of trade terms in the Qur€an, it does not seem that either classical Christianity or Judaism have extolled "the virtues of commerce" in such detailed and 'supportive' argument as did Dimashqi (11th century AD) in his Mahasin al-tijara.11

Indeed, ten centuries after Dimashqi, the relevance of trade as the key economic concept of an Islamic theory of "economics" can be found again in the works of Muhammad Baqer al-Sadr (died 1980). The concept of "distribution" informs both the pre- and post-production patterns which he adopts as the central division line of his important book on the Islamic economic system, Iqtisaduna.12

IV. Sale as Paragon Transaction

The second point, and one which emerges from the centrality of trade to the world of Islam, is the contract of sale as the paragon of contracts in Islamic law, along the lines of which are constructed any other contracts. There is no theory of contract in classical Islamic law, nor any general theory of obligations such as one would find in Roman law or in French law. What we find however, is an elaborate structure of Islamic law texts around the book of sales:

The basis of sale is the exchange of a desired commodity against another desired commodity. This can be done by word or by deed. As for word, this is known as offer and acceptance in the tradition ('urf) of the jurists (fuqaha). Treatment of offer and acceptance is twofold: first the mode (sighat) of the offer and acceptance and second the nature (sifat) of the offer and acceptance. First the mode: offer and acceptance, we say - and God help us to success - could be made in the present or in the past mode. If in the past mode, then the seller would say 'I have sold' and the buyer 'I have bought'. The basis is then complete since this mode, albeit formulated in the past, constitutes an immediate offer in the language of lexicologists and jurists (fi 'urf ahl al-lugha wal-shar'). 'Urf is decisive: al-'urf qadin 'alal-wad'.13

Kasani, who offers this elaborate definition of sale in the 12th century, then explains other formulas of sale proferred in the past tense, and notes the conclusion of the contract since each of these formulas "gives the meaning of sale, which is exchange: importance is in the meaning not in the expression (al-'ibra lil-ma'na la lil-sura)."14

This is followed by the second mode: formulation in the present tense. Here the contract is also concluded, on the basis of an intention to sell and buy. Kasani considers both the intention and the general use. In contrast, he continues, an offer made in the form of a question, or in the mode of order is not accepted, even though it may be so for the earlier jurist Shafi'i, who had used the contract of marriage as analogy. For Kasani, the rejection of the analogy with marriage is based on the specificity of the marriage contract, "in which bargaining is unusual". Kasani explains that one could follow in the contract of sale the possibility of accepting the conclusion of marriage if the formula is, for the guardian of a woman, in the imperative (future) form, "as when someone tells the other, 'marry my daughter' and the addressee says 'I have', or if one says 'marry your daughter to me' and the addressee says 'I have'."15 For Shafi'i, this would be the same for a formula in the imperative in the case of a sale, on the basis of analogy. For Kasani, the reason why "analogy has been abandoned", despite the fact that there is no text to support such departure, is based on the process of bargaining which is inherent to sale, whereas it would cause embarrassment (shayn) in the case of marriage, where an acceptance could be issued in the future imperative form, or in the form of an acquiescence to a question. That the element of bargaining is inherent in the case of sale offers enough of a contrast not to allow such imprecision to force the conclusion of a contract, and presumably constrain the important room for bargaining which is of the essence in commerce.16

Then, following the announced outline, Kasani addresses the nature of the offer and acceptance. The nature is determined by the complementarity of the two constitutive parts in the sale contract - the offer and acceptance - and the necessity for them to be simultaneous. Hence the corollary of the majlis al-'aqd concept (the 'unity of the meeting' is suggested but not spelled out by Kasani here), which introduces the possibility of a change of mind (or an option of sale) before the meeting is over, apud various hadiths.

Thirdly, Kasani deals with the conclusion of the contract by deed (in contrast to the contract by verbal commitment). Sale is "an exchange in fact, which is a deal (ta'ati), and is called sale by murawada." Again, he notes a difference with Shafi'i, who rejects the validity of such a contract, as 'urf al-shar' (literally the custom of law) does not know non-verbal sale. The Hanafi Quduri makes a distinction between precious and ordinary commodities, and rejects non-verbal sale only in the former. Kasani, using elaborate parallels from Qur€anic verses, concludes that there is nothing which should prevent the conclusion of a sale in this way: "Validity is in principle free from such distinction, al-jawaz fil-asl mutlaq min hadha al-tafsil."17

This is clearly an elaborate juristic argument and shows a well-structured mature legal mind. The rest of the book of sale is consistent, and a close examination of each division shows the effort of a systematic exposition following a determined outline.

The whole book of sale can be followed through six main subdivisions, starting with the basis of sale through the treatment of the "effectiveness of a sale".18 Much of the latter chapter, which constitutes the fifth subdivision in the book, is devoted to the dissolution of the contract (faskh). In the sixth and last chapter, which is devoted to the suspension of the effectiveness of a sale (bayan ma yarfa' hukm al-bay'),19 Kasani explains that there are two ways to terminate the contract (or remove its effectiveness): by dissolution, and by "renovation," iqala. Having just discussed dissolution, he proceeds with the analysis of the second type, the iqala. Termination of the contract under faskh is distinguished from its termination under iqala in that faskh affects invalid or imperfect contracts, whereas iqala terminates the perfectly valid contract by mutual agreement of the parties.

This last chapter of the Book of sale is subdivided into four sections. The first section explains the basis (rukn) of iqala, and the various verbal tenses to be used in order to ascertain the meeting of minds between the offer of one party and the acceptance of the other party. As in the case of marriage, present tense is acceptable in the absence of the bargaining process which is typical of sale. The second section discusses the differences between various Hanafi jurists over the nature of renovation, with some considering it a variation on sale, while others look at it more as a sui generis contract, as riba does not really affect it. The third section explains the conditions of validity of the renovation, which include agreement between the parties, the majlis, the transfer of whatever compensation may have been agreed, and, for some Hanafis, the continued existence of the original object of sale. This is discussed at length by Kasani.20 He concludes with a fourth section about the effectiveness of iqala, with various examples flowing from the original buyer and seller's possession of the original object of sale and renovation.21

Certainty, flexibility and pragmatism are the three characteristics of a contract of sale. Through certainty is consecrated the fulfilment of the exact intention of the parties as manifested in the meeting of minds in the bargaining session. Flexibility is offered through an elaborate system of options, perhaps one of the most complex areas of Islamic law, which is dominant and crucial for the study of the sale contract. Pragmatism is the third element. We have seen its importance in the definition of Kasani. He is no exception in that respect, and one can indeed use pragmatism as a key component of the Islamic law merchant through the importance accorded by the jurists to custom as a central source and element in the system.

V. The Importance of Custom

The third point is custom, which plays a vital and controversial role, in that it is not generally associated with Islamic law, despite its importance for the understanding of the long-term structure of Islamic business. According to the received basic structure of "the sources of Islamic law", custom does not figure among the usual sources. However, whenever one touches upon the great scholars of Islamic law - people like Sarakhsi (d. ca 1095), who has written a 30-volume book in the eleventh century, or Kasani a century later - the importance of custom is there for all to see:

If a vendor buys a cloth, he is authorised to include in the price, what was spent for sewing and transport, but he must say, 'This is what it cost me' and not 'I have bought it at such a price', because the latter formula would be wrong. The murabaha (profit) in that partnership contract, the 'urf, the custom of the merchants is taken into account. What customary practice authorises in addition to the buying price can be added on by the merchant. What practice excludes must be excluded.22

Here the centrality of customary law is clear with regard to the law of merchants, and one will find in Sarakhsi's Mabsut and most other texts that deal with the book of sales and with other contracts in Islamic law a recurrence of the idea of custom, of the idea of 'adat al-tujjar, the use of the merchants, the practice of merchants, ta'amul al-nas, i.e. the way people deal amongst themselves. Ta'aruf bayn al-nas, the interaction between people, and the interesting notion of wajh al-tijara or the direction of commerce, are all concepts which provide important elements to which Islamic law subjects the legality of transactions in the city to practice.23

Sometimes a contradiction arises over the clash between the necessity of certainty in the contract, and usage. In one instance of such a clash, Sarakhsi explicitly says that the law ultimately falls for what is done to facilitate people's lives (taysiran 'alal-nas).24 In another example which shows how the law merchant relies on custom in Islam, the departing point is that if one is selling something that does not yet exist, it is obvious that the element of certainty in the contract may be undermined. In a long text by Sarakhsi, he explains that this may be the theory, but that in practice when you order someone to sew a cloth or to build a house for you, then it is not possible to know exactly how it will turn out. Would that render the contract void? The answer in strict, classical Islamic law, should be yes. In fact, the opposite practice was and remains widely used:

But we say that we have abandoned qiyas (analogy) because of the use of the people, [as] they have been dealing in this fashion from the time of the Prophet to this day without contradictor (nakir munkir). The use (ta'amul) of the people without contradictor is one of the fundamental principles, asl min al-usul kabir.25

In another rendering which reads like an aphorism, Sarakhsi sums up this principle by quoting Abu Yusuf in a typical formula: "What matters in all things is the 'urf".26

VI. "This is What it Cost Me"

From custom, a fourth element can also be determined; it is more delicate to articulate, but ties in directly with today's practice: the question of protection. In a text mentioned earlier, this appears in the important notion "this is what it cost me": in other words, the "overheads" that come into the price of a commodity are extremely important as they imply an opening up of the law merchant to a number of elements that are not strictly legal but are vital in the practice of trade.

Here we have few examples, which are nonetheless significant, in studies on sixteenth and seventeenth century Iraqi trade in Basra. Merchants had to allow for charges in what may be termed as protection costs, that is, "the price merchants had to pay in taxes, tolls, fees, and bribes, to ensure the flow of their commodities."27 This was part and parcel of the cost of trade. The protection cost, it is acknowledged, "was just as important as a camel."28 This is naturally a delicate issue implying the legality of bribery as part of protection overheads. We find this notion introduced, contrary to the received idea of Islamic law, as an element of overhead. Protection costs play a significant role in the determination of the ultimate price of the commodity. This is a common usage, and a practice one naturally finds in dealing with the Islamic world. "Protection" understood from a positive side is extremely important in whatever business is being undertaken in Middle Eastern countries, and the concept of sponsorship in Saudi Arabia is obviously the most eloquent example of how vital it is to secure financially the attention and the participation of the local important people who would facilitate this trade. This overhead will inevitably come into the price of not how much one buys the commodity for, nor at what manufacturing cost it is produced, but how much it will ultimately cost in order for the trader to make a profit.

Indeed, as in the realistic opening lines of Sarakhsi's book of sales, the benefit of a sale contract should be appreciated in its wider perspective: "God has made money the reason (sabab) for people benefiting from, and enjoying the world."29


The chasm between law in the contemporary codes and the classical system is significant. Nor would can the Islamic law merchant be readily transposed into the modern world of commerce. In part, and notwithstanding the possible emergence of commercial papers in the Middle East where the suftaja seems to have been a long-established model of a letter of credit, the complexities of commercial papers developed decisively only in the twentieth century. More significantly, and because their importance is decisive practically, there is little doubt that the classical commercial law of Islam has not known those forms of partnership without which the present capitalist world cannot be understood: the limited company. On this latter question of the limited company, one needs to dwell further.

In terms of law, one is faced with a problem, which derives from the long-term structure which the Islamic law of contract has imposed; that of the strict individuality of the transaction. But for arguable exceptions (waqf, or trusts, and the bayt al-mal, the public treasury) partnerships in Islamic law were never recognised as corporate entities which were separate from the partners undertaking the trade. Personality here is a crucial element. This is the negative side of the importance of certainty which comes from dealing with an individual. The word of a person is essential. The corporate entity, in contrast, is more diffuse, and since the attempts began in the 1850s for commercial codes to be introduced in the Middle East, the field of company law has been torn between the necessity of a faceless legal dimension which is represented by the independent moral personality of a company, and the recognition of known and fully liable individuals in the effective running of the trade.

Here, borrowing from the West occurred on a large scale across the area. The first Commercial Code in the area offers a model one finds across the Middle East notwithstanding its shortcomings, and a skeletal form comprising a chapter of 10 articles on the soci't' anonyme. Since that Commercial Code was introduced into the Ottoman Empire in 1850, all the region's codes have been attentive to the detailed treatment of such matters as bankruptcy, commercial papers and the qualifications of the profession of trader, in a relatively straightforward translation of the Western models. This has been achieved through the wholesale introduction of comprehensive codes, or through separate laws on commercial business, offshore companies, and commercial procedure. To this legislation one must add international and regional conventions in fields such as maritime and air law, or commercial arbitration.

Let us turn to these subjects as they are treated, with a view to practice, by the authors of the contributions in this book on the contemporary Middle East.


Footnotes
  1. Al-Mamlaka al-urduniyya al-hashimiyya, Mahkamat al-tamyiz, qarar 623/89, 8/3/ 1990, al-Majalla al-'Arabiyya lil-Fiqh wal-Qada€ (hereinafter MAFQ), 12, Oct. 1992, 197, at p. 199.
  2. Ibid., at p.200.
  3. Dawlat al-Bahrein, Mahkamat al-tamyiz, ta'n raqm 8 li-sanat 1990, 10/6/1990. MAFQ, 12, Oct, 1992, 202 at pp. 203, 204.
  4. Al-Jumhuriyya al-'arabiyya al-suriyya, Mahkamat al-naqd, qadiyya raqm 16/615, dated 6/6/1985. MAFQ, 12, Oct,1992, p.205.
  5. Dawlat al-Bahrain, Mahkamat al-isti€naf al-'ulya, raqm 1020/1987, 3/1/1987. MAFQ, 11, April 1992, 334, at p. 336.
  6. Al-Mamlaka al-urduniyya al-hashimiyya, raqm 62/1987, 19/1/1987, MAFQ, 11, Apr. 1992, p. 327.
  7. Dawlat al-imarat al-'arabiyya al-muttahida, raqm 64 lisanat 9, 9/12/1987, MAFQ, 11, Apr.1992, p. 331.
  8. Ibid., at p. 333.
  9. C.C. Torrey, The Commercial-Theological Terms in the Koran, Leiden, 1892.
  10. See generally J.D.M. Derrett, Law in the New Testament, London, 1970, p.xxiii, 278.
  11. Published Cairo 1318 AH, and discussed at length in S.D. Goitein, A Mediterranean Society, Vol. 1, Berkeley, 1967.
  12. See Iqtisaduna (Our economic system), Najaf and Beirut, 1959-61, passim.
  13. Kasani (d.1191), Bada€e' al-Sana€e', Beirut, n.d., V, p. 133.
  14. Ibid.
  15. Ibid., p. 133 bottom.
  16. Ibid., p. 134 top.
  17. Ibid., p. 134 middle.
  18. Ibid., pp. 133-306.
  19. Ibid., pp. 306-310.
  20. Ibid., p. 309.
  21. Ibid., pp. 309 bottom-310.
  22. Sarakhsi, al-Mabsut, XIII, p.80, quoted in A. Udovitch, "Les Echanges de March' dans l'Islam M'di'val: Th'orie du Droit et Savoir Local", Studia Islamica, LXV, 1987, pp. 5-30, at p. 17.
  23. Udovitch, "Echanges de March'", p.21.
  24. Sarakhsi, al-Mabsut, XIII, p. 115.
  25. Ibid., p. 138.
  26. Ibid., p. 142.
  27. Dina Rizk Khoury, "Merchants and Trade in Early Modern Iraq", New Perspectives on Turkey, 5-6, 1991, pp. 53-86, at p. 54.
  28. Ibid., quoting N. Steensgaard, Carracks, Caravans and Companies, Denmark, 1973, p. 111.
  29. Sarakhsi, Opening of book of sale, al-Mabsut, XII, p.108.