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Unidroit Contract Law and Islamic Law

In 1994, UNIDROIT published the first set of principles aimed at harmonizing private international law. An updated version of the principles was published in the year 2004. In this article, a comparison will be made between UNIDROIT 2004 principles and Islamic law (Sharia). This is especially Al-Majalla Al Ahkam Al Adaliyyah [Al-Majalla] (23). This is a version of Islamic law. This paper will look at 13 articles of the UNIDROIT principles. The articles will be 2.1.15 to 2.2.5.

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Article 2.1.15- Negotiations in Bad Faith

This article has 3 clauses. The first clause recognizes the fact that parties have the freedom to decide when to enter into negotiations and also the freedom of selecting the person they want to negotiate with (International Institute for the Unification of Private Law [UNIDROIT] 59). This is related to Article 1.7 of the principles.

The second clause addresses the issue of negotiating in bad faith. An individual who conducts themselves in bad faith is “…..liable for the losses caused to the other party” (UNIDROIT 59). The third clause defines a person as having entered into negotiations in bad faith if they have no intention of concluding the negotiations.

Before looking at whether Islamic law recognizes these principles or not, it is important to note that there is a lack of an all-inclusive theory of contract law in Sharia. This means that there is no single theory of contract law that applies to all forms of contracts. Instead, Islamic law texts concern themselves with particular forms of contracts such as agency, guarantees, and such others in separate chapters.

According to Trans-Lex Law Research [Trans-Lex] (4), Sharia does not encourage the rolling of 2 contracts into one, a phenomenon that is referred to in Islam law texts as Safaqat-fi-Safaqat. This is the reason why one has to look at individual chapters in Islamic law (for example the different books in Al-Majalla) to see whether the UNIDROIT principles in this article are recognized.

Islamic law recognizes the freedom of the individual to enter into contracts with a party of their choice. For example in Book 1 of Al-Majalla dealing with the sale, the law recognizes an offer as “……a statement made in the first place with a view of making a disposition of property and such disposition is proved thereby” (Al-Majalla 101). This recognizes the fact that an individual cannot enter into a sale contract if they do to have anything to offer the other party. In other words, Islamic law recognizes (albeit in different words) the aspect of negotiating in bad faith.

United Arab Emirates labor laws recognize the fact that a party who breaks off negotiations in bad faith should be held accountable for losses incurred by the other party. For example, if an employer terminates the employment contract prematurely, he is liable to compensate the employee with a three-month salary.

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Article 2.2.16: Duty of Confidentiality

This article deals with the aspect of information that is disclosed during negotiations. It is noted that the other party is legally bound to maintain confidentiality. This means that such information cannot be disclosed by the other party or be used improperly by the other party for their own selfish need (UNIDROIT 62).

It is noted that Sharia recognizes the contract’s confidentiality clause as provided for in UNIDROIT principles. For example, UAE employment contracts contain confidentiality clauses even though they may be loosely worded and concentrate more on the information that is disclosed by the employer to the employee. It is noted that the employee should not disclose business information that is disclosed to them in the process of negotiating for employment.

However, it is important to note that what is considered confidential by one employer or by one party may not be considered confidential by the other. This being the case, it is noted that many employers take into consideration the future of the business when determining what is confidential or not. This means that commercially sensitive information should not be disclosed to third parties by the employee.

If the employee happens to disclose the information to third parties, the law provides that they are liable for the losses that the employer may incur. These are enough grounds to terminate the employment contract if the contract was already in effect. If the employment negotiations were still undergoing, the potential employee can be prosecuted. This recognizes the provisions of article 2.1.16 of the UNIDROIT principles.

Article 2.1.17: Merger Clauses

This article notes that a prior agreement or statements cannot be used in voiding a written contract between two parties. This is especially so if the contract has a clause providing that the written contract addresses all the terms on which the parties to the contract have agreed. However, the article notes that a prior agreement or statement can be used to interpret the written contract between the two parties (Trans-Lex 3).

Islamic law recognizes these merger clauses as provided for in article 2.1.17 of the UNIDROIT principles. For example, Al-Majalla (439) provides that “…..if fresh negotiations are commenced after the conclusion of the contract about any change (about increase or decrease in rent), the second contract takes the place of the first” (Al-Majalla 439). This means that a written contract cannot be revoked based on a previous agreement or statement. The new contract supersedes the first one. Also, the new contract cannot be contradicted by a first agreement made. The Al-Majalla clause cited above addresses itself to a hire contract, but it is obvious that it contains elements of a merger clause.

Article 2.1.18: Modification in a Particular Form

This article provides that a contract entered into by two parties and which has a clause necessitating any form of alteration (or termination) may not be terminated or modified in another way apart from that which is provided for. However, the article provides that a party in the contract may be precluded by its conduct under special conditions (UNIDROIT 64).

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This is also recognized in Islamic law. This is evidenced in Al-Majalla clause 440. This clause provides that a contract of hire which has been scheduled to come to effect at a later date is irrevocable. This is even though one of the parties may wish to alter the contract or withdraw from the contract just because it has not come into force. This is unacceptable in Sharia law. Given the fact that the parties had not agreed to terminate the contract that way, such an application from a party is inadmissible.

Article 2.1.19: Contracting Under Standard Terms

The first clause of this article provides that the general rules of formation apply if either or both parties in a contract opt for standard terms (UNIDROIT 65). The second clause of the article defines standard terms as “provisions that are prepared in advance for general and repeated use by one party and which are used without negotiation with the other party” (UNIDROIT 65).

This aspect of UNIDROIT principles is also recognized in Islamic contract law. The provisions in Al-Majalla’s sale and hire contract indicate that the provisions of this UNIDROIT principle are recognized (Al-Majalla 289).

Article 2.1.20: Surprising Terms

Clause 1 of this article provides that a standard term that may not have been expected by the other party in a contract is invalid and ineffective (UNIDROIT 67). This is unless the other party had expressly accepted it. The second clause provides that the content, language, and presentation of the term are some of the factors that should be taken into consideration when determining whether a standard term is a surprising term or not.

For example, a standard term that may be used in an Islamic sale contract may refer to an object that is to be exchanged. The purchasing party expects the object to be delivered upon the conclusion of the sale contract (Al-Majalla 23). It is surprising if the seller is unable to deliver the object to the buyer upon the conclusion of the contract.

Article 2.1.21: Conflict between Standard Terms and Non-Standard Terms

This article tries to resolve the conflict that may arise between a standard term and a non-standard term in a contract. The article provides that should such a conflict occur, the non-standard term takes precedence (UNIDROIT 70).

This term is recognized in Islamic contract laws. This is the reason why Islamic contract law requires a party to disclose those terms that may be unexpected by the other party. Should the other party agree to such unexpected or non-standard terms, then they cannot revert to the standard terms. For example, a seller in a hire contract is allowed to inform the buyer that the object can only be availed to them at a later date after the signing of the contract.

Article 2.1.22: Battle of Forms

This article addresses the issue of using standard terms in reaching an agreement by both parties in a contract. The article provides that if the parties come to an agreement except on those terms, then the contract can be concluded: “… based on the agreed terms and any standard terms which are common in substance….” (UNIDROIT 71). If a party to the contract wishes not to be bound by the same, they should inform the other party in advance or later and without any delays.

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This aspect of UNIDROIT principles is also recognized by Islamic contract laws. For example, in a sale of hire contract, either party is allowed to inform the other party that they do not wish to be bound by the contract. This notification should be done in advance.

Authority of Agents

Article 2.2.1- Scope of the Section

The scope of this section is captured in three clauses. The first clause informs that the section on the authority of agents will address the authority of agents when they are carrying out legal relations on behalf of another party (UNIDROIT 74). The person on behalf of which the agent acts is referred to as the principal. Clause 2 of the article sets out the limits of this section. It provides that the section limits itself to two parties made up of the principal and the agent, on one hand, a third party on the other side (UNIDROIT 72). The third clause states that the section does not address the agent’s authority that has been bestowed on them by the laws of the land.

Sharia contract law also recognizes the agent, the principal, and the third party. For example in Book 11 of the Al-Majalla, the issue of the agency is addressed. Al-Majalla defines agency as the situation where a party (read the principal) empowers another party (read the agent) to carry out some acts for them (Al-Majalla 1449). The Al-Majalla also makes a distinction between a messenger and an agent.

Article 2.2.2: Establishment and Scope of the Authority of the Agent

Clause one of this article states that the authority “….(conferred) on the agent by the principal may be express or implied (UNIDROIT 77). Clause two states that the agent is legally allowed to carry out the acts that are required to attain the objectives for which the principal granted them authority.

Chapter 1 of Al-Majalla’s Book 11 recognizes the fact that the authority conferred on the agent may be expressed or implied. This being the case, it is obvious that Islamic contract law recognizes the provisions of this article in UNIDROIT 2004 principles. In clause 1451, the Al-Majalla states that the “basis of appointment of a person as an agent is offer and acceptance” (Al-Majalla 1451). The clause goes further to state that if the agent accepts the offer made by the principal, then contact of the agency can be said to have been successfully and legally concluded.

Al-Majalla goes further to state that permission and ratification of the offer on the part of the principal can be regarded as an authority on the part of the agent to act on behalf of the latter (Al-Majalla 1452). If subsequent ratifications are carried out on the initial permission and ratification, their effect as far as authority to act as an agent is concerned is the same (Al-Majalla 1453).

Al-Majalla gives the example of a person (A) who sells property owned by another person (B) and informs the latter thereof. If the seller informs the owner of the property and the owner ratifies the sale of their property, then the seller is considered to have conducted themselves as an agent to the owner of the property. Al-Majalla also makes a distinction between a messenger and an agent. Islamic law categorically states that the two are not in any way similar.

Article 2.2.3: Agency Disclosed

This article tries to address the relationship between an agent and a third party. Clause 1 of the article notes that if the third party knows or ought to have known that the agent was carrying out the duties of an agent, then the conduct of the agent will automatically alter the relationship between the principal and the third party (Trans-Lex 34). However, this does not make the agent and the third party be legally related. Clause two of the article states that the conduct of the agent affects the relationship between the principal and the third party only if the agent acted with the consent of the principal (Trans-Lex 34).

This aspect is recognized in Al-Majalla (1454) where Islamic law makes a distinction between an agent and a messenger. An example is given of a servant who is sent by his master to go and fetch money that a banker is going to lend the master. In this case, it is noted that the servant is acting as a messenger. This being the case, there is no legal relationship that is formed between the banker (the third party) and the servant. This is given the fact that the servant did not borrow money. On the contrary, the money was borrowed by his master.

Article 2.2.4: Agency Undisclosed

This article addresses a scenario where the third party was not aware of the fact that the agent was acting as an agent and not on his behalf. In clause 1, the article provides that if this happens and it is proved that there is no way the third party ought to have known that the agent was acting on behalf of another party, the conduct of the agent only affects the relationship between the agent and the third party and not between the agent and the principal (Trans-Lex 5). This is especially so if the agent had acted within the scope of the authority conferred on them by the principal. However, it is noted that if the agent acts outside the scope of its authority and represents itself to be the principal and this comes to the attention of the third party, the latter has the legal right to take the principal to task (Trans-Lex 45).

This aspect of UNIDROIT 2004 principles is recognized by Islamic law. In chapter 3 of Al-Majalla’s Book 11, the law provides that the agent needs to disclose their identity and make reference to their principal. If this reference is not made, the contract that the agent may have entered into with a third party becomes invalid (Al-Majalla 1560).

Article 2.2.5: Agency Acting Without or Exceeding its Authority

This article addresses itself to the acts that the agent may have carried out without the consent of the principal or outside the scope of the authority conferred on them by the principal. Clause one of the article states that if the agent acts without the authority of the principal or acts outside the scope of the authority conferred on them, then their actions cannot legally bind the principal and the third party (UNIDROIT 82). However, clause 2 of the act states that this scenario changes if the principal makes the third party believe that the agent is acting within the scope of their authority.

This UNIDROIT principle is recognized in Islamic law. For example, Al-Majalla states that if an agent purchases something that the principal has not authorized, the principal is not legally bound by this purchase (Al-Majalla 1470). This is despite the fact that the item purchased may be beneficial to the principal. When this happens, it is assumed that the agent purchased the item for their own use and not for the principal. As such, the principal is not legally bound to the third party or the seller of the item.

Works Cited

Al-Majalla Al Ahkam Al Adaliyyah, THE OTTOMAN COURTS MANUAL (HANAFI), 2011. Web.

International Institute for the Unification of Private Law, UNIDROIT PRINCIPLES 2004, Web.

Trans-Lex Law Research, UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS, 2011. Web.

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