Abdel-Razzaq Al-Sanhouri had reason to be pleased. He had just traveled
to The Hague, to participate in what was billed as the First International
Conference for Comparative Law. After deliberations, those comparative
lawyers decided to give greater attention to Islamic law in their future
comparative studies. Two broad themes seem reflected in that decision
and, perhaps more importantly, in Dr. Al-Sanhouri's own philosophy:
revitalization of Islamic law, and globalization of our societies.
Those two themes are constant features of the Arab legal landscape today
-- which is remarkable given that Dr. Al-Sanhouri's trip to The Hague
occurred almost seventy years ago, in 1932. In retrospect, that conference
was a defining moment for Western awareness of law in the Arab world.
As international trade has expanded in recent decades, the twin themes
of revitalization and globalization have become even more relevant in
assessing Arab commercial law.
Revitalization of Islamic Law
As a species, lawyers are not considered dynamic public speakers, but
experience suggests that the number of glazed eyes and drooping heads
at a business conference increases geometrically when a speech turns
to matters of Islamic law. There seems to be a myth that Islamic law
just doesn't apply to modern commercial transactions, often accompanied
by a grudging recognition that payment of interest runs afoul of some
relatively obscure Islamic rule. Although lawyers may not always be
inspiring speakers, the fact remains that Islamic law is relevant to
modern-day business throughout the Arab Middle East, and its importance
Marriage of Laws
In some countries, Islamic law principles dominate a country's legal
system -- as is the case in Saudi Arabia, the region's commercial powerhouse.
There is no Saudi Arabian "law" other than Islamic law; supplemental
Saudi laws are formally called "regulations". Although applicable,
with the binding force of law, to various aspects of modern life, these
regulations are intended to remain consistent with, and subservient
to, Islamic principles. Under Islamic law principles, the ruler is acknowledged
to have authority to enact regulations for the best interests and welfare
of the people.
In many other Arab countries, the Islamic law influence is more subtle,
and often best revealed in civil codes. These civil codes contain the
basic building blocks for commercial law, addressing a wide range of
contract rules: the elements and formation of contract (including offer
and acceptance); contractual defects such as duress, mistake and misrepresentation;
interpretive rules for contracts; discharge, excuse (forcemajeure and
changed circumstances) and breach; and contractual damages.
Dr. Al-Sanhouri, who was Egypt's foremost modern jurist, played a central
role in drafting the 1948 Egyptian Civil Code, which directly influenced
the development of similar codes in Syria, Iraq, Libya, Kuwait and Qatar.
To some observers, the most attractive feature of these codes is the
blending of continental civil law rules with Islamic law principles,
indigenous customs and commercial practice, which Dr. Al-Sanhouri thought
would best conform with local culture and society.
Commercial lawyers generally prefer evolution to revolution, and consequently
should be comforted by the incremental manner in which Islamic law has
continued to be revitalized in the Arab world -- notably in the civil
codes of Jordan (1976), the United Arab Emirates (1985), and Yemen (1992).
Kuwait has also recently revised a number of provisions in its existing
civil code, to more closely reflect specific Islamic law rules. This
type of "fine tuning" is likely to become more common in the
future throughout the Arab world, and both in civil codes and other
The myth of Islamic law's irrelevance has a sister myth, that Islamic
law is inherently unsuitable for modern commercial transactions. Over
the centuries, Islamic law has generally provided a stable foundation
for nearly all types of business transactions. The exceptions are a
few things that are absolutely repugnant to Islamic law, notably riba
(types of unearned advantage, a common example of which is interest
on monies lent), and gharar (types of risk or uncertainty, such as impermissible
contracts of insurance).
Of course, the Islamic precepts of riba and gharar are not easily swept
under the carpet. Most significantly, in the face of a world banking
system essentially based on interest, and a divine immutable Islamic
law rule against riba, the potential for impasse is obvious. Elsewhere
in the Islamic world, for example, Pakistani laws seem destined for
significant change following a Supreme Court ruling (in December 1999)
that interest-based banking is contrary to Islamic law, and consequently
that provisions relating to interest in twenty-two Pakistani statutes
Twenty years ago, Professor William Ballantyne (School of Oriental and
African Studies, London) described this impasse as the classical situation
of an irresistible force meeting an irremovable object:
The problem is that the Arabs have, to greater or less degree, in wishing
to adopt the existing international world of commerce, come face to
face with the classic situation: an irresistible force against an irremovable
object. As is not uncommon in these circumstances (not by any means
only in the Arab world) the question has been begged on all sides. It
will be, to say the least, interesting to see for how long and to what
extent this apparent anomaly can continue.
In most cases, practical minds have developed expedients to overcome
the difficulties. Despite the prohibition against riba, most Arab legal
systems draw a distinction which permits interest charges in commercial
(but not civil) transactions, at least under specified ceilings. Despite
the prohibition against gharar, which Abu Dhabi courts have cited in
nullifying derivatives contracts, the Abu Dhabi government is establishing
Saadiyat Island Free Zone as a center for financial futures and options
trading, albeit "off-shore" that emirate.
An expedient might be viewed as a practical solution or an unprincipled
short-cut, depending upon one's opinion of the underlying impasse. As
such, expedients might not offer permanent solutions. The future is
likely to bring these issues more frequently into view in the Arab Middle
Globalization and Law
In the legal context, globalization is pushy, intrusive, and demands
an active re-examination of one's own laws and regulations. Arab countries
are being driven by pressures from a variety of sources, such as Gulf
Cooperation Council ("GCC") initiatives and the World Trade
Organization ("WTO") accession process, to review and revise
laws governing a wide range of economic activity. The issues are numerous,
many of which were exposed to the spotlight in 1999, including:
· differential treatment of local and foreign businesses,
· direct investment and management in local companies,
· portfolio investment and stock market participation,
· use of intellectual property and protection thereof, and
· taxation of income arising from these endeavors.
In trying to assess the over-all impact of globalization on so many
different laws, the palm grove is quickly hidden by all the trees. However,
some of the more significant legal issues can be placed under three
general headings: transparency, open markets, and the legal process.
Many of the leading businesses in the region are closely-held (often
family-run) enterprises, and there is considerable reluctance to disclose
publicly the type of financial and commercial information customarily
required under Western securities laws. UAE Minister of Planning Shaikh
Humaid Bin Ahmed Al-Mualla recently called for UAE companies to "commit
themselves to issuing regular financial reports to ensure transparency,
and these should be per the highest international accounting standards".
As Middle Eastern markets open to greater foreign participation, the
demands for greater transparency increase. Nonetheless, many financial
experts believe that more energy has been expended liberalizing Middle
East capital markets than in ensuring their integrity -- although new
securities regulations have been enacted recently in Bahrain, Egypt
and Jordan, and are being finalized in Kuwait, to combat insider trading
and other activities harmful to market integrity. In the short term,
however, the effectiveness of these regulations is open to question,
particularly given deeply entrenched prior practices.
Over the years, foreign contractors have also expressed concern about
the lack of transparency in some Middle Eastern government tenders and
contract negotiations. Mistrust is inevitable where government procurement
involves mixed signals, changing policies, and unwritten conditions.
For example, in the context of the new Egyptian government's wholesale
re-evaluation (some might say "second guessing) of projects already
launched under the former government of Kamal El-Ganzouri, one lawyer
was prompted to advise: "Anyone who isn't confused, doesn't understand
Arab countries might achieve greater transparency through reduction
in the broad discretionary authority customarily held by government
officials, whether in awarding contracts, issuing licenses, or approving
foreign investment. In other cases, the lack of transparency springs
from political and government practices that are currently beyond any
likely attempt at legal reform.
Various obstacles may prevent a market from opening to the global economy.
One such obstacle that has drawn the ire of Western businessmen for
many years is the multitude of rules in the Middle East requiring local
sales agents, distributors and sponsors. In many Arab countries, for
example, government procurement laws require foreign contractors to
have local agents before participating in tenders -- this requirement,
taken together with the lack of transparency in some such procurement,
can create an incentive for influence-peddling that is difficult to
resist. With enactment of the OECD Convention to Prevent Bribery, European
businessmen must now grapple with some of the same legal strictures
that have long faced their U.S. counterparts, under domestic Foreign
Corrupt Practices Act rules.
Trading is at the core of the Arab world's commercial heritage, and
consequently every Arab country has special laws and practices encouraging
foreign suppliers to use local sales agents and distributors. Most of
these laws contain so-called "dealer protections", notably
entitling the local sales agent to claim compensation if the foreign
party fails to provide adequate justification for termination or non-renewal
of the relationship.
This statutory right parallels, and in fact is derived from, European
laws. However, in other respects, the protections available in many
Middle Eastern countries exceed those available in Europe. In some Middle
Eastern laws, for example, a sales agent is given the exclusive right
to import the relevant product, to receive compensation for any parallel
import of the product by others, and even to block the foreign supplier's
direct import of the product into the sales agent's territory. (Many
of these Middle Eastern dealer protection laws grant exclusive jurisdiction
to local courts, i.e., in the place where the commercial agent conducts
its activity, to hear all disputes arising from the commercial agency
Arab government officials are becoming increasingly sensitive to the
disadvantages of these more extreme protections, which impede the free
market, in essence allowing a sales agent to hold the supplier and consumers
hostage, even in minor commercial disputes. In recent years, both Oman
and Bahrain amended their laws to abolish the statutory requirement
of exclusivity for local sales agents. Other Middle Eastern countries
are likely to follow suit. Interestingly, the UAE (with its strong reputation
for free trade) currently has the most onerous dealer protection law
in the region.
"The antithesis of good rules is not bad rules, but rather no rules,"
a businessman once told his lawyer. While ideas exchanged between businessmen
and lawyers often amount to the proverbial ships passing in the night,
the lawyer in this case thought he understood what the businessman meant:
financial calculations can be made for known risks, and prices can then
be adjusted accordingly. Among the necessary elements of the equation,
however, is a reliable legal system.
One important component of a legal system is reliable law-making. In
this regard, shortcomings abound in the Middle East. Even in Egypt,
which has otherwise basked in much recent success, there have been set-backs:
for example, ill-timed policies on duty?free stores soon after their
privatization, and ill-conceived regulations for certificates of origin
on imported goods. (The latter regulations were widely viewed as a crude
technique for controlling the rise of imports into Egypt.)
The new Egyptian Commercial Code contains another troubling example
-- technology transfer requirements that seem like a heavy-handed throw-back
to Egypt's command-economy days. The more onerous of these technology
transfer rules have been described as "regressive", "disturbing",
and "in direct contradiction with" the WTO's TRIPS (Trade
Related Aspects of Intellectual Property Rights Agreement).
Some legal observers believe that such legislative and administrative
mis-steps are inevitable, given the insular fashion in which regulations
are usually prepared in the Middle East. As one commentator in Egypt
noted: "The idea the problems will go away if they aren't spoken
about still appears to have a wide following in certain branches of
Another important component of a legal system is reliable dispute resolution.
In this regard, some Middle Eastern countries fall short in even basic
measurements, such as the publication of court decisions. Less frequently,
a country's entire court system has been subject to criticism. For example,
the chairman of the Yemeni Judicial Inspection Board described as "deplorable"
the condition of the local judiciary, including disorganized administration,
lack of due process, and corruption.
More frequently, complaints are heard -- as Moody's Investor Services
warned in the context of Arabian Gulf lawsuits to collect bad loans
-- that "Major political figures are often effectively above the
law". Some improvements are being made. In late 1999, for example,
the Omani judicial system underwent significant restructuring, integrating
the sharia, criminal and commercial courts, and establishing an administrative
court for cases in which the government is a party. Similarly, the Saudi
Arabian government in recent years has strengthened the authority and
operation of the Board of Grievances. Nonetheless, the courts in many
Arab countries remain works in progress.
Into the Future
Like most things, commercial laws are influenced by environment. The
economic environment in many Arab countries has been changing: governments
are no longer trying to protect their economies from the rest of the
world, but rather seeking the advantages of participation in the global
economy. As a result, Arab legal systems are facing new challenges,
and at an ever-increasing pace.
Will the Arab world be able to match that pace? As Middle East commercial
lawyers caution in their legal opinions, the outcome "is not entirely
free from doubt". Most Arab governments have expressed strong support
for membership in the WTO, although some Arab members benefit from lengthy
grace periods before domestic preferences and protections must be lifted.
The future will tell whether the Arab world's commitment to globalization
is sound, or mere sound.
It seems, however, that Arab and Western nations increasingly recognize
that their best interests are served through mutual understanding, accommodating
each other's peculiarities, and continuing to expand their interaction
-- objectives that build upon the legacy of Dr. Al-Sanhouri's trip to
The Hague many years ago.