Entrepreneurs willing to conduct hassle-free business transactions in the Middle East need to be aware of the basic principles of the Islamic contract law. Below, we provide a brief overview of those principles and, more particularly, the principles applying to concluding and terminating contracts.
Concluding a contract
There are six main types of Islamic contracts, namely:
- Sale contracts requiring immediate transfers of ownership and immediate deliveries of goods/services (Ar. Bay’);
- Sale contracts in which prices are paid in installments over fixed periods of time (Ar. Bay ’al wafa);
- Sale contracts which are concluded prior to manufacturing the goods to which they relate (Ar. Istisna);
- Contracts for renting property and employing people (Ar. Ijara);
- Gift contracts requiring absolute and unconditional transfers of ownership (Ar. Hiba); and
- Loan contracts (Ar. Ariyya).
All types of contracts concluded under Islamic law must contain five main elements, which are briefly discussed below.
- Offer and acceptance. A contract requires an offer and an acceptance. They can be expressed either in writing or orally. If the offer is sent to the other party in writing, the other party should promptly accept it after receiving it. Otherwise, no contract will be concluded.
- Similarly to common law contracts, parties to Islamic contracts must receive consideration. It may be in the form of money, services, and goods, with the exception of goods/services that are forbidden by Sharia law (e.g., drugs and alcohol).
- Contractual parties must be legally competent. People who lack legal competence (e.g., minors and intoxicated persons) are not allowed to conclude contracts.
- The purpose for which a contract is concluded must be permitted by Islam. Therefore, contracts aiming to achieve unlawful purposes (e.g., alcohol production) cannot be enforced.
- Absence of duress. Contracts concluded by parties under duress are considered to be invalid.
Ending a contract
A contract may be terminated if all parties mutually agree to do so. A contract may also be ended in certain other cases, e.g., one of the parties commits fraudulent acts or contractual breaches.
Moreover, Islamic law allows each party to a contract to withdraw from it by using one of the following three options:
- Sale contracts concluded in face-to-face meetings can be withdrawn by each of the parties prior to the end of the meetings;
- If the parties have agreed on a period during which each of them can rescind their contract, each party may rescind the contract during the agreed period.
- Each party may withdraw from a sales contract if the purchased goods are not as described in the contract.
Remedies for contractual breaches include, but are not limited to, damages, specific performance, and civil imprisonment.
Any private disputes arising out of commercial or property transactions may be resolved through Islamic arbitration.
Read more on Dubai’s Legal System here.