Mgt315- legal environment of business

INTELLECTUAL PROPERTY &ANTITRUST LAWS
INTRODUCTION TO INTELLECTUAL
PROPERTY
Describes property that is developed through an
intellectual and creative process like inventions,
writings, trademarks that are a business’s most valuable
asset.
 Intellectual Property Rights
A right that is had by a person or by a company to have
exclusive rights to use its own plans, ideas, or other
intangible assets without the worry of competition, at
least for a specific period of time. These rights can
include copyrights, patents, trademarks, and trade
secrets
COPY RIGHT
 A legal right that gives the author, composer of
qualifying subject matter, and who meets other
requirements established by copyright law, the
exclusive right to publish, produce, sell, license,
and distribute the work. Work include literary,
artistic, musical, films, sound recordings,
broadcasts.
COPYRIGHT LAW IN SAUDI ARABIA
 Royal Decree No. M/11, 19 Jumada I 1410
[December 17, 1989]
 It is taken care of by Ministry of Culture and
Information
PROTECTION OF WORKS UNDER SAUDI
COPYRIGHT LAW
This Law shall protect the works created in the fields of literature,
art and sciences, irrespective of their type, means of expression,
importance or purpose of authorship, such as:





Written materials like books, booklets and others.
Works which are verbally delivered like lectures, speeches,
poetry, songs and the like.
Dramatic works, plays, shows and similar presentations which
involve motion, sound or both.
Works which are especially prepared for broadcasting or are
presented through broadcasting.
Drawings, works of plastic arts, architecture, decorative art and
artistic embroidery and the like.

Sound and audio-visual works.

Applied art works, whether handcrafted or manufactured.

Photographic works and the like.
PROTECTION OF WORKS UNDER SAUDI
COPYRIGHT LAW
 Illustrations, geographical maps, designs, plans,
sketches and sculptured works related to
geography, topography, architecture and science.
 Three dimensional works of geography,
topography, architecture or science.
 Computer programs.
Protection shall include the title of a work, if it is of
creative nature, and not a common expression
indicating the subject matter of the work.
PROTECTION OF WORKS UNDER SAUDI
COPYRIGHT LAW
Derivative works: Work based on a pre-existing work
This Law shall also protect:






Works of translation.
Works of abridgement [summary], modification, illustration, editing or any
other forms of alteration.
Encyclopedias[a book or set of books giving information on many subjects or
on many aspects of one subject and typically arranged alphabetically] and
anthologies [a published collection of poems or other pieces of writing] which
are deemed creative with respect to the selection of their content or
arrangement, whether they are literary, artistic or scientific works.
Compilations of folkloric works and expressions and selections therefrom, if
such compilations are creative as to selection or arrangement of their
contents.
Databases, whether they are mechanically readable or can be read in any
other manner, if they are creative as to selection or arrangement of their
contents.
Copyright protection enjoyed by the authors of the works mentioned in the
above paragraphs shall in no way jeopardize the protection enjoyed by the
authors of the original works.
WORKS EXCLUDED FROM PROTECTION
 Protection prescribed by this Law shall not cover
the following:
 Laws and Judicial judgments, decisions of
administrative bodies, international agreements
and all official documents, as well as the official
translations thereof, subject to the provisions
concerning the circulation of these documents.
 What is published in newspapers, magazines and
periodicals, or broadcasted in daily news or newslike events.
 Ideas, procedures, work methods, concepts of
mathematical sciences, axioms and abstract
facts.
EXEMPTION OF COPYRIGHTED WORK FROM SAUDI COPYRIGHT LAW
The following uses of the copyrighted work, in its original language
or in translation, are lawful without obtaining the permission of the
copyright owner. These forms of use are:



Copying the work for personal use, excluding computer software,
audio and audio-visual works.
Quoting passages from the work in another work, provided that
such quotation be consistent with the conventional practice and
within the limits justified by the intended objective, and provided
that the source and name of author shall be mentioned in the
work where the quotation is cited. This shall also apply to
journalistic summaries abstracted from newspapers and
periodicals.
Using the work by way of clarification for educational purposes,
within the limits justified by the intended objective, or making a
copy or two for public libraries or non-commercial documentation
centers on the following conditions:

Shall not be commercial or for profit.

Copying shall be restricted to the requirements of activities.

Shall not impair the material benefit of the work.

The work is out of print or is lost or damaged.
PATENT
 It
refers to the right granted to anyone who
invents any new useful and non obvious process,
machine, article of manufacture or composition of
matter and is industrially applicable.
 Its an exclusive right or monopoly granted by
government of an inventor over his invention for
a limited period of time.
 Patent can be applied for a product or a process.
 Priority date- first to file
LAW
OF PATENTS, LAYOUT DESIGN OF INTEGRATED
CIRCUITS, PLANT VARIETIES AND INDUSTRIAL DESIGN IN
SAUDI ARABIA




Invention: An idea developed by the inventor that results in a solution
of a certain problem in the field of technology.
Integrated circuit: A product in its final or intermediate form in
which the elements, at least one of which is active, and some or all of
the interconnections are integrally formed in or on a piece of material,
and the purpose of this is to perform an electronic function.
Layout design: Three dimensional disposition of the elements – at
least one of which is active – and of some or all of the interconnections
of an integrated circuit, or such a three dimensional disposition
prepared for an integrated circuit intended for manufacture. ٣
Plant variety: A plant grouping within a single botanical taxon of the
lowest known rank which, irrespective of whether the conditions for
the grant of a breeders right are fully met, can be defined by the
expression of the characteristics resulting from a given genotype or a
combination of genotypes distinguished from any other plant
grouping, by the expression of at least one of the said characteristics,
and considered as units with regard to its suitability for being
propagated without change.
LAW OF PATENTS, LAYOUT DESIGN OF
INTEGRATED CIRCUITS, PLANT VARIETIES AND
INDUSTRIAL DESIGN
 Plant
breeder: The person who breeds, discovers or
develops a new plant variety.
 Industrial design: A composition of two-dimensional lines
or colors, or any three dimensional shape that gives an
industrial product, or a product of traditional crafts, a
special appearance provided that this is not only for
functional or technical purpose including textile designs.
SOME PROVISIONS OF THE LAW
The protection document shall not be granted if:
 Its commercial exploitation violates the Shari’ah.

The protection document shall not be granted if its
commercial exploitation is harmful to life, to
human, animal or plant health, or is substantially
harmful to the environment.
SOME PROVISIONS OF THE LAW
(a) The protection document shall be a personal right of the person in
whose name it was issued. This right may be transferred by
inheritance, as well as with or without consideration.
(b) If the subject matter of protection is a joint work of several persons,
they shall be equally entitled to the right, unless they have agreed
otherwise.
(c) No one shall be deemed a partner unless he contributes to the
subject matter of protection, and his efforts are only confined to
assistance in its execution.
(d) If more than one person have independently developed the same
subject matter of protection, the protection document shall be granted
to the first applicant.
(e) The person who develops the subject matter of protection shall have
the right to state his name in that capacity in the protection
document.
SOME PROVISIONS OF THE LAW
 The patent protection period shall be twenty years from the
date of filing the application.
 The layout design certificate protection period shall be ten
years from the date of filing the application or ten years
from the date of start of its commercial exploitation
anywhere in the world. In any case, the protection period
may not exceed fifteen years from the date of creation of
the design.
 The plant patent protection period shall be twenty years
from the date of filing the application. However, the
protection period for trees shall be twenty five years.
 The industrial design certificate protection period shall be
ten years from the date of filing the application.
TRADEMARK
 Any
trade name, symbol, word, logo, design, brand,
letter, numeral, device or any combination used to
identify and distinguish goods of a manufacturer or
seller or services of a provider from those of other
manufacturers, sellers, or providers and does not
include sound or smell.
TRADEMARK LAW IN SAUDI ARABIA
 Under Saudi trademark law, a trademark can be
anything that takes a distinctive shape, such as
names, words, signatures, letters, symbols,
numbers, titles, stamps, drawings, pictures,
inscriptions, packaging, figurative elements,
shapes or colours, groups of colours or
combinations thereof; or any sign or group of
signs used or intended to be used to distinguish
the goods or services of one undertaking from
those of others, or intended to identify a service,
or used as a certification mark in respect of goods
or services.
REGISTRATION OF TRADEMARK IN SAUDI
ARABIA




In Saudi Arabia, trademark ownership is established by
registration with the Saudi Trademark Office. It is difficult to
enforce unregistered trademark rights in Saudi Arabia, unless the
mark is well known in accordance with the requirements of Saudi
law.
The Ministry of Commerce and Investment currently controls the
registration process. However, following the recent establishment
of the Saudi Authority for Intellectual Property (SAIP), the
administration of trademarks will be taken over by SAIP.
The total official fee from filing to registration of one trademark in
one class is $2,405.
A trademark applicant in Saudi Arabia can file for the whole
class, including either the class heading or specific goods or
services of interest. The class heading cannot be partially
selected. The goods or services must be selected from an online
system and the applicant cannot change the nomenclature of
terms.
REGISTRATION OF TRADEMARK IN SAUDI
ARABIA
 In
Saudi Arabia, it takes three to four months
from filing to registration, unless there are
further office actions, in which case it may take
one month more.
APPEALS FOR TRADEMARK



Appeal against refusal of a trademark application or the
imposition of conditions by the trademark office can be filed
before the Administrative Trademark Committee within 60 days
of issuance. Appeals are filed through an online portal. No
hearings are conducted.
If the appeal is rejected, the applicant can appeal the decision of
the Administrative Trademark Committee to the Administrative
Court within a 60-day period. The Administrative Court will issue
a hearing notice to both parties and conduct hearings.
The decision of the Administrative Court may be further appealed
before the Administrative Court of Appeal. If the Administrative
Court of Appeal remands the case to the Administrative Court
with observations, the Administrative Court may reconduct
hearings by issuance of notice to both parties. The Administrative
Court may either reverse or maintain its earlier judgment, this
decision may again be appealed to the Administrative Court of
Appeal by the aggrieved party, in which case the Administrative
Court of Appeal will decide the matter. A final appeal can be filed
before the Administrative High Court on points of law only.
TRADEMARK REGISTRATION RIGHTS







The registered trademark owner acquires the exclusive right to
use the trademark in Saudi Arabia and the right to initiate action
against any unauthorised use of an identical or confusingly
similar trademark by any third party without permission.
Under Saudi trademark law, the right to license is recognised for
registered marks only.
Registration affords a presumption of lawful and true ownership,
unless proved to the contrary in a cancellation action.
There will also be a presumption of confusion among the public in
the event of unauthorised use of a similar mark by any third
party.
When opposing third-party trademarks or in infringement
actions, the owner of a registered mark need not provide any
other evidence in relation to ownership claims.
Infringement actions in Saudi Arabia, whether administrative or
before the courts, are recognised only for registered trademarks.
The registered trademark owner is entitled to the benefits of
border control measures in Saudi Arabia against the import of
counterfeit goods.
NOT A TRADEMARK UNDER SAUDI
TRADEMARK LAW
Under Saudi trademark law, the following cannot be considered as a
trademark or part of a trademark:






a mark which is devoid of distinctive character or which consists of
representations that are customary names given to goods and
services, or conventional drawings and ordinary images of goods;
expressions, drawings or marks that contravene public morals or
public order;
public emblems, flags, military emblems and other insignia
belonging to any of the Gulf Cooperation Council states, other states,
Arab or international organisations or any of their agencies, or any
imitation thereof;
symbols of the Red Crescent or Red Cross and any other similar
symbols, as well as imitations thereof;
marks that are identical or similar to symbols of a purely religious
nature;
geographical names, if their use is likely to cause confusion
regarding the source or origin of the goods or services;
NOT A TRADEMARK UNDER SAUDI TRADEMARK
LAW






the name, surname, photograph or logo or another person, unless
that person or his or her successors have previously consented to its
use;
information relating to honorary or academic degrees to which the
applicant for registration cannot prove a legal entitlement;
marks which are likely to mislead the public, or which contain false
information as to the origin or source of the goods or services or
their characteristics, and other marks which contain a fictitious,
imitated or forged commercial name;
marks owned by natural or legal persons with which dealing is
banned pursuant to a decision issued in this respect by the
competent authority;
marks that are identical or similar to a mark previously filed or
registered by a third party in respect of the same goods or services,
or similar goods or services if the use of the later mark indicates a
connection with the previous owner’s registered goods or services or
damage its interests;
patented’, registered’, registered drawing’, copyright’ or similar.
NOT A TRADEMARK UNDER SAUDI
TRADEMARK LAW


marks whose registration for some goods or services may reduce
the value of goods or services distinguished by a previous mark;
marks which are a copy, imitation or translation of a third party’s
famous trademark or part thereof, to be used to distinguish goods
or services which are identical or similar to those distinguished by
the famous mark;
TRADEMARK INFRINGEMENT
Infringement means: Unauthorized use of another’s mark
The following remedies are available under Saudi trademark law:





interim injunction and precautionary measures. In practice, the
Saudi courts rarely grant interim injunctions;
permanent injunction restraining the defendant from further
infringement;
court order for the destruction of all infringing goods;
award of damages to the plaintiff. This should be based on:
 the profits earned by the defendant;
 the value of the goods or services infringed, based on their
retail price; or
 any other criterion which the court deems fit under the
circumstances;
award of adequate compensation other than infringer’s profits, in
case of deliberate imitation of the established mark;
TRADEMARK INFRINGEMENT
 court
order obliging the defendant to disclose
information about all persons or entities that
contributed to the infringement, through either
the production or distribution of infringing goods;
and
 depending on the nature of the infringement,
financial penalties., which may be doubled in
case of repeated infringement.
TRADE SECRETS
 A formula, design, customer list, or other secret
that sets a business apart from competitors.
TRADE SECRETS LAW OF SAUDI ARABIA
 A
commercial secret is defined under the Trade Secrets
Regulations as information not known in its final form or
where information is not usually easily obtainable by
those engaged in this type of business, as well as where
the information is of commercial value due to its
confidentiality, and where the rightful owner takes
reasonable measures to maintain its confidentiality.
However, the Trade Secrets Regulations do not protect
commercial secrets which are inconsistent with Shari’a,
public order and/or public morals.
 Obtaining, using or disclosing any commercial secret in a
manner that is inconsistent with “honest commercial
practices” and without the consent of the rightful owner is
deemed an abuse of the commercial secret under the Trade
Secrets Regulations.
LEGAL FRAME WORK OF TRADE SECRETS
IN SAUDI ARABIA
 Trade secrets are governed by the Regulations for
the Protection of Confidential Commercial
Information issued by Ministry of Commerce and
Industry Decision No. 3218 (as amended), passed
in 2005 (Trade Secrets Regulations).
DURATION OF RIGHTS
 As
long as reasonable efforts are taken by the
owner of the information to maintain the
information as a trade secret, the Trade Secrets
Regulations do not expressly provide for a limit
on the duration of the right
 Minimum protection period of five years is
specified subject to limited exceptions in the
context of secret information submitted to an
official competent authority for the purpose of
approval of the marketing of drugs or chemical
agricultural products in which new chemical
substances are used.
REMEDIES FOR TRADE SECRET
INFRINGMENT
 Remedies
include a claim for compensation for
damages for any person harmed as a result of a
violation of the provisions of the Trade Secrets
Regulations.
Antitrust Law
INTRODUCTION TO ANTITRUST LAW
 A series of laws enacted to:

Limit anti-competitive behavior in
almost all industries, businesses,
and professions operating in the
Country
ANTITRUST ACTIVITIES
 Monopolization of Market
 Mergers to create the Monopoly
 Price-Fixing-
Firms selling the same product
agree to fix prices.
 Exchanges
of Informationcompetitive process.
 Territorial
to restrains the
Restrictions- Occurs when firms
competing at the same level of business reach an
agreement to divide the market to eliminate
competition among those firms.
GOALS OF ANTITRUST LAWS
 Preserve small business
 More competition is better
 Prevent concentration of power
 Preserve local control
 Promote maximization of consumer welfare
ANTITRUST LEGISLATION IN SAUDI ARABIA
 The growth of large
corporations increased the
need for more constraints.
 On 21/5/1425 H 9 JULY
2004. Saudi Arabia’s new
Competition Law, as
enacted by Royal Decree
No. M 25. the Law came
into force on 19/11/1425 H
31 Dec. 2004.
APPLICATION OF COMPETITION LAW IN
SAUDI ARABIA
Natural
or
juristic
economic
activity,
person
undertaking
including
commercial,
agricultural, industrial, service business as well
as sale and purchase of commodities and
services in Saudi (the Establishments).
The Competition Law does not apply to public
(i.e. government) corporations and fully–owned
state enterprises.
AIMS OF COMPETITION LAW IN SAUDI ARABIA
The broad aim of the Competition Law is to
 protect and encourage the overall fair competition.
 monitor
and prohibit all competition practices that
might affect the fair competition and the Saudi
consumers’ rights.
 enhance the Saudi competition market and regulate all
commercial practices in the investment market.
 protect medium and small businesses to ensure the
continuity of their operations in the market.
 provide products and commodities with sufficient
quality and fair prices
PROHIBITED ACTS
 Economic
Concentration: “any act resulting in the
whole or partial transfer of the title to the assets, rights,
liabilities, shares or stocks of an Establishment to
another, or the merger of two or more departments in
one joint department”
 Dominant Position: “the position in which an
Establishment or group of Establishments are
controlling and/or capable of affecting a given
percentage of the market where they are carrying out
their activities” [Normally 40% of the market]
 Competition Arrangements: all agreements and/or
contracts between Establishments, whether written or
verbal, explicit or implicit, that aim or might as a
consequence restrict the trading or fair competition in
the market.
DISPUTES SETTLEMENT COMMITTEE
 The
Competition Law introduces the formation of a
specialised committee for the settlement of the
disputes and enforcement of the penalties under the
Competition Law (the Committee). The Committee
will be comprised of (5) members with a membership
period of (5) years (renewable).
PENALTIES AND COMPENSATION
Financial fines will be determined based on the nature of the
breaching activity.
 the circumstances and conditions of the breach.
 significance of the breach.
 consequences of the breach.
Financial fine not exceeding (10%) of the yearly total sales
which are under breach or (SAR 10,000,000) if the yearly
sales were inestimable.
Financial fine not exceeding (5%) of the yearly total sales
which are under breach or (SAR 5,000,000).
Fine not exceeding (SAR 2,000,000) of any other breaches and
without prejudice to the provisions of the related articles
under the Competition Law.
If the breaching party repeated its breach, the Committee
may double the issued financial fine in respect of the first
breach.
Chapter 6
law is the body of law that relates to
making and enforcing agreements.
 Contract
 A contract is an agreement enforceable by law.
law is the area of law that governs
making contracts, carrying them out and fashioning
a fair remedy when there’s a breach
 Contract
9-2
 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.
9-3
9-4

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.
9-5
 At common law, auctions, advertisements, displays
of goods on shelves, tenders and the like are treated
as mere invitations to create an offer. In contrast,
Sharia law recognises these as valid offers (Ijab)
which, upon being accepted (Qabul), will become
binding by law upon the parties involved in the
transaction.
 Generally, a statement with the description and price
of goods constitutes an offer, and a display of goods
with the price similarly is an offer However,
advertisers can specify that the advertisement is only
an invitation to treat.
9-6
9-7
 Bilateral contract: A contract entered into by way of
exchange of promises of the parties
 “A promise for a promise”
contract: A contract in which the
offeror’s offer can be accepted only by the
performance of an act by the offeree
 Unilateral
 A “promise for an act”
9-8
 Formal contract: A contract that requires a special
form or method of creation.
 Most common forms of formal contracts are
▪ Negotiable instrument
▪ Letter of credit
▪ Recognizance
▪ Contract under seal
 Informal contract: A contract that is not formal
 Valid informal contracts are fully enforceable and may be
sued upon if breached
9-9
 Executory contract: A contract that has not been
fully performed by either or both sides
 Executed contract: A contract that has been fully
performed by both sides
 A completed contract
 Express contract: An agreement that is expressed in
written or oral words
9-10
contract: A contract in which
agreement between parties has been inferred from
their conduct.
 Quasi-contract (implied-in-law contract): An
equitable doctrine whereby a court may award
monetary damages to a plaintiff for providing work
or services to a defendant even though no actual
contract existed
 Implied-in-fact
 The doctrine is intended to prevent unjust enrichment and
unjust detriment
9-11
Classification
Description
Valid contract
A contract that meets all the essential elements of
establishing a contract.
Void contract
No contract exists.
Voidable contract
A contract in which at least one party has the option of
voiding the contract
Unenforceable contract
A contract that cannot be enforced because of a legal
defense
9-12
Agreement
Agreement
Thisrequires
requires
an offer
the offeror
and an of
••This
an offer
by theby
offeror
and an acceptance
acceptance
the offer by the offeree
the
offer by theof
offeree
Consideration
Consideration
••AApromise
must
be supported
by a bargained
(thing,
promise
must
be supported
by a bargainedmoney,
benefit)-for consideration
thatsufficient
is legally
for consideration
that is legally
sufficient
Contractual
Contractual
capacity
capacity
Theparties
parties
must
contractual
••The
must
havehave
contractual
capacitycapacity
for the for
the contract
to be enforceable
against them
contract
to be enforceable
against them
Lawfulobject
object
Lawful
Theobject
object
a contract
must
be lawful
••The
of aof
contract
must be
lawful
9-13
 The manifestation by two or more persons of the
substance of a contract or in simple terms it is an
accepted offer.
 Requirements of an offer
 The offeror must objectively intend to be bound by the offer
 The terms of the offer must be definite or reasonably certain
 The offer must be communicated to the offeree
9-14
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
9-15
A statement of an offer has to be made in the past tense (SighatulMadhi) to be constituted as a valid offer in Sharia law.
 Once the offer has been accepted, the seller has no right to revoke
his offer.
 If he does revoke his offer, it will be considered a breach of
promise on his behalf, which is a great sin in Islam as it
encourages rivalry and mischief among the people.
 Unlike common law, Saudi Arabian law requires acceptance to be
made before the parties attempting to contract physically part.
 Certain terms must also be stated for a Saudi Arabian contract to
be enforceable. These include: the items involved, quantity, price,
parties and how payment will be made.

9-16
 Revocation of an offer: Withdrawal of an offer by
the offeror that terminates the offer
 Rejection of an offer: Express words or conduct by
the offeree that rejects an offer
 Rejection terminates the offer
 Counteroffer: A response by an offeree that contains
terms and conditions different from or in addition to
those of the offer
 A counteroffer terminates the previous offer
9-17
 Lapse of time
 A stated time period after which an offer terminates
 If no time is stated, an offer terminates after a reasonable
time
 Termination by operation of law occurs if
 The subject matter of the offer is destroyed through no fault
of either party
 Either the offeror or the offeree dies or becomes
incompetent
 The object of the offer is made illegal by law
9-18
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
9-19
 An
offeree’s acceptance must be unequivocal
(leaving no doubt)
 Mirror image rule: A rule which states that for an
acceptance to exist, the offeree must accept the terms as
stated in the offer
 Acceptance-upon-dispatch rule (mailbox rule)
 A rule which states that an acceptance is effective when it is
dispatched, even if it is lost in transmission
9-20
 Something of legal value given in exchange for a
promise
 Legal value: Support for a contract when either
 The promisee suffers a legal detriment or
 The promisor receives a legal benefit
 Bargained-for exchange: Exchange that parties
engage (thing, money, benefit)in that leads to an
enforceable contract
9-21
Contract
Description
Illegal
consideration
A promise to refrain from doing an illegal act. Such a promise
does not support a contract.
Illusory promise
A contract into which both parties enter but one or both of the
parties can choose not to perform their contractual obligations.
Thus, the contract lacks consideration.
Preexisting duty
Something a person is already under an obligation to do. A
promise lacks consideration if a person promises to perform a
preexisting duty.
Past consideration
A prior act or performance. Past consideration (e.g., prior acts)
will not support a new contract. New consideration must be
given.
9-22
 The parties must have contractual capacity for the
contract to be enforceable against them
9-23
 A doctrine that allows minors to disaffirm (cancel)
most contracts they have entered into with adults
 The minor must be restored to the same position he or she
was in before the minor entered into the contract
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
9-24
 Adjudged insane: Declared legally insane by a
proper court or administrative agency
 A contract entered into by a person adjudged insane is void
 Insane but not adjudged insane: Being insane but
not having been adjudged insane by a court or an
administrative agency
 A contract entered into by such person is generally voidable
 Some states hold that such a contract is void
9-25
 A person who is under contractual incapacity because
of ingestion of alcohol or drugs to the point of
incompetence
 A contract is voidable only if the person was so intoxicated
when the contract was entered into that he or she was
incapable of understanding or comprehending the nature of
the transaction
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
9-26
 Contracts contrary to statutes
 Contracts to perform activities that are prohibited by statute
are illegal contracts
 Illegal contract: A contract that has an illegal object
▪ Such contracts are void
 Contract contrary to public policy: A contract that
has a negative impact on society or that interferes
with the public’s safety and welfare
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
9-27
 A contract that courts refuse to enforce in part or at
all because it is so oppressive or manifestly unfair as
to be unjust
 Elements of an unconscionable contract
 The parties possessed severely unequal bargaining power
 The dominant party unreasonably used its unequal
bargaining power to obtain oppressive or manifestly unfair
contract terms
 The adhering party had no reasonable alternative
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
9-28
Classical Sharia law rarely discusses the idea of contractual
freedom outside the standard contract types. Instead, it
provides for situation where standard contracts can be altered
or combined. There are specific prohibitions raised by
other hadiths, some important ones prohibiting a loan and a
sale, two sales in one, and a sale of what one does not have.
 Stipulations are divided into three types

Condition (ta’liq)
conditioning of contract on a future event
Concomitance (iqtiran)
varying the terms of the contract
Extension (idafa)
delaying the beginning of a contract until
a future time
9-29
 Combinations of contracts conditioned on each other
are open to many objections, because they confuse
the price of the individual contracts and obstruct
meting out fair remedies for breach, thereby opening
a door to riba and gharar. There are two major types
of contracts that are prohibited in Islamic law:
contracts involving usury (lending money) or
uncertainty.
9-30
 The Quran forbids riba in the strongest terms. Riba is
an unjustified enrichment and the principle
encompasses a total ban on the charging of interest.
 Usurious transactions were classified into three
classes:
ribaal-fadl
unlawful excess in exchange of counter
values in a contemporaneous transaction
riba al-nasi’a
unlawful gain by deferring the
completion of exchange of counter
values
ribaal-jahilya
exemplified by the lender asking the
borrower at maturity date if he will settle
the debt or increase it by charging
Copyright © 2013 Pearson Education,
Inc. Publishing as Prentice Hall.
9-31
interest
Riba al-fadl and riba al-nasi’a apply to the exchange of two
precious metals (gold or silver) and four commodities (wheat,
barley, dates and salt), based on the Prophet’s tradition.
 Promises for future performance were forbidden if goods comprised
these articles as the transactions were suspected to contain riba.
 The interpretation of riba has continued to be revised under the
changing economic setting. By the turn of the century, the leading
Islamic scholars Abduh and Rida held the view that riba alJahilya was forbidden but it could be deemed lawful under extreme
necessity, and that riba al-fadl and riba al nasi’a are under a
rebuttable presumption of prohibition
 The ban against interest rates has been circumvented by both parties
pretending that a greater amount was lent or that the difference
between loan and debt is actually a commission rate

9-32
Gambling is another type of transaction condemned in the Quran.
Intoxicants, games of chance [maysir], [worship of] idols, and [divination by]
arrows are but an abomination, Satan’s handiwork…
The Sunna takes this prohibition much further; it not only condemns gambling
but also sales of gharar (peril, risk or hazard).
The Messenger of God forbade the ‘sale of the pebble’ [hasah, sale of an object
chosen or determined by the throwing of a pebble] and the sale of gharar.
Besides this, other transactions which are conditioned on uncertain events are
also prohibited. Lack of knowledge about the existence or nonexistence of
the subject matter, or concerning its quality, quantity, or date of
performance, was held to trigger gharar. The ongoing refinement of the
doctrine has been narrowed down to the presence or absence of
uncertainty about future performance and not to the existence or nonexistence of the subject matter at the time of contract. If the nonexistent
article or subject matter is certain to be delivered or performed at a future
date the prohibition of gharar does not apply.
9-33

Rescission is allowed under specific circumstances, such as the merchandise is defective or
the quantity incorrect; the quality of service inferior; or when unforeseen circumstances
prevent the completion of the contract.

In accordance with Islamic law, remedies for contract are restricted to direct and actual
damages. The courts will not recognize economic loss of chance, interest, potential profits
and other speculative awards.

Saudi Courts also preclude consequential damages based on anticipated profits. Courts
would only award reparations for immediate damages.

Islamic law fixes the relationship of contracting parties to any object involved in the
contract as to liability for loss or damage. A party holds the object either as a ‘trustee’
(amin) or as a ‘guarantor’ (damin). A trustee is not liable at all for injury to the object,
unless shown to be in breach of trust. A damin, however, bears the same risk of loss as an
owner. If an object is destroyed through an act of God or force majeure, the guarantor has
no recourse.
9-34
9-35