Contract law in Saudi Arabia is governed by the conservative Hanbali school of Sharia law, which adopts a fundamentalist and literal interpretation of the Quran. Any contract that is not specifically prohibited under Sharia law is legally binding, with no discrimination against foreigners or non-Muslims.
The Hanbali school is the most liberal among the four Sunni schools with respect to the freedom of persons to contract. However, the degree of freedom of contract is governed by the prohibitions in the Quran, and two distinctive doctrines in Sharia law: riba (usury) and gharar (speculation).
Unlike other Sharia law jurisdictions, Sharia law remains uncodified in Saudi Arabia due to the strong literalist view of the Hanbali school. There is also no established case reporting in the courts. This has led to much uncertainty and variation in court decisions. Despite being the world's 11th easiest economy to do business in, Saudi Arabia ranks 140th out of 183 economies in terms of enforcement of contracts. (see below: Appendix)
In 2007, King Abdullah initiated legal reforms to modernise the courts and codify Sharia law in Saudi Arabia. The ulama, the religious body, approved a codification of Sharia law in 2010, and a sourcebook of legal principles and precedents was published on January 3, 2018. (see below: Legal Reform)
Sources of law in Saudi Arabia
Saudi Arabia is principally governed by Sharia Law, with royal decrees playing a complementary role.
Four sources of Sharia law
The Hanbali school of law acknowledges the following sources of law:
The Quran is a sacred book which contains the divine revelations made to the Prophet by God (Allah), and is the foundation for Sharia law. Much of the Quran does deal with legal matters, but instead, sets out the goals and aspirations of Muslims, and the general accepted conduct and way of living. The Sunna (meaning "habitual practice" or "trodden path") is the other primary source of law. It contains the explanations of the Quran and records the sayings, deeds, and approved practices by the Prophet Muhammad. Ijma (consensus) is a secondary source of law. There are however, conflicting interpretations as to the meaning of consensus. The conservative Hanbali school prevailing in Saudi Arabia asserts that a legally binding consensus only arises from agreement of the Prophet and his Companions, and not the universal agreement of Muslim authorities today. Qiyas (reasoning by analogy) is another secondary source of law. Forms of analytical reasoning are categorised as law. Both ijmas and qiyas constitute fiqh, Islamic jurisprudence based upon scholar opinions amassed over the years.
Regulations (lai'hah) and ordinances (nizma) Ordinances (nizam), consisting of royal decrees which address modern legal issues and bureaucratic matters, is another source of law. These royal decrees by the King supplement fiqh. Royal decrees are considered subordinate to Sharia law as only religious law is considered "law" under Sharia law. The courts will apply fiqh over nizam if the legal issue is already considered in Sharia law, or if nizam conflicts with Sharia law.
Other forms of regulations (lai'hah) including Royal Orders, Council of Ministers Resolutions, Ministerial Resolutions and, Ministerial Circulars, are likewise subordinate to Sharia law. While contract law is generally governed under Sharia law, many areas of modern business and commercial activities are not considered under Sharia law and are hence governed by the applicable regulations.
Saudi Arabia also abides by international treaties, which are approved by royal decree. One such example is Royal Decree No.11, dated 16 Rajab 1414, corresponding to 30 December 1993, which declared Saudi Arabia's ascension to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Formation of contract
A contract of sale (bay’) can be concluded for the exchange of anything regarded as a commodity or property (mal). However, there are certain things that are not included as mal under Sharia and therefore cannot be the subject of a sale. These include: pigs, alcohol, and animals not ritually slaughtered. In accordance to the Quran, there are two exceptions to contract formation: the taking of interest (riba), and the use of speculative contracts.
The rules on conclusion of the contract of sale are stricter than the rules in most modern legal systems. Conclusion of the contract must take place at the same transaction as offer and acceptance. Furthermore, there is a right of withdrawal of the offer even after acceptance.