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Business activities involve cross border transactions of goods

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02/02/18 Free Law Essays Reference this

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Business activities involve cross border transactions of goods

International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more nations. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons. It refers to all those business activities which involve cross border transactions of goods, services and resources between two or more nations. Transactions of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc.

According to the book “International Business: texts and cases” by Francis Cherunilam there are three broad categories of laws which influence firms involved in international business. These categories are:

International laws, treaties and conventions.

Laws of foreign countries, with which a country is engaged in trading.

Laws of home country related to international business, which is basically the national laws governing businesses and trade; these are often different in different countries.

So it is likely that a company or country engaged in international trade and business would be influenced by Islamic law which may be prevalent in a foreign country for example Saudi Arabia, or in the home country itself. This focus of this paper is to discover how international trade is perceived in Islam, what laws or conventions supervise and guide international business transactions and how are these conventions or laws different from the prevalent/existing international business laws.

Islamic law or sharia is the code of law derived from the Holy Koran and from the teachings and examples of the Prophet Muhammad (PBUH). Sharia contains the rules by which a Muslim society is organized and governed, and it provides the means to resolve conflicts among individuals and between the individual and the state.

The main source of legislation in Sharia law is the Holy Koran which is not merely a religious text but a legal code. This legal code contains legal rules and injunctions in various areas of the law applicable to marriage, divorce, child custody, inheritance and last but not the least trade, commerce and contracts.

In general terms, sharia provides the context, the means, and methods within which business practices may be regulated, defines the parameters within which companies and individuals conduct business transactions, specify both the rights and obligations of parties who are involved in business transactions, and addresses the methods of legal redress to those who believe they are entitled to some type of recourse in the legal system.

According to one author: ‘Islam is perhaps one great religion which affords the merchant a highly honored place in society’ (LIEBER, 1968, p. 230). According to another writer: “There are certain religions, whose sacred texts discourage economic activity in general, counseling their followers to rely on God to provide them with their daily bread, or, more particularly, looking askance at any striving for profit”. This is certainly not the case with the Koran, which looks with favor upon commercial activity, confining itself to condemning fraudulent practices It is reported that the Prophet said: ‘Merchants are the messengers of this world and God’s faithful trustees on Earth’. Omar is alleged to have said: ‘Death can come upon me nowhere more pleasantly than where I am engaged in business in the market, buying and selling on behalf of my family’ (RODINSON, 1987, pp. 70-71).

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One reason for this positive attitude may have been the Prophet’s merchant activities before his mission, another the social and economic importance of trade in the Muslim Middle East, particularly in desert areas in which additional sources of income were vital, yet another the involvement of jurists in trading activity -largely as investors (COHEN, 1970).

The starting point or the foundation of any business transaction is the formation of a contract, however before this foundation can be finalized, we would like to mention that business transactions of all kinds be it national or international are broadly classified into the following categories:

Halal: a practice/transaction that is permitted under Islamic Law. Any trade or profession that is permissible but not essential for the society.

Harram: a practice/transaction that is forbidden under Islamic law. Specified kinds of professions and trades disallowed by the Islamic Sharia for example intoxicating drinks.

Riba (literally, interest): a principle of Islamic law that prohibits unearned or unjustified

profits in the form of interest in a commercial transaction. Specifically, the Koran warns

that money should not be “created from money.”

Gharar: prohibits any gain that is not clearly outlined or defined at the time of the making of the contract.

As mentioned above, in any commercial law regime, the foundation, basis or the starting point of any trade relationship both international and national is the law of contract or, more accurately, the law of contracts, for, as in Roman law, the sharia contains an array of contract types, the ‘nominate contracts’, each with its own rules. Here we would like to mention that there are two great principles applicable to the business environment in Islamic jurisprudence, firstly it is an individual’s absolute duty to honor all agreements entered into, and secondly all parties involved must observe “good faith” in all commercial dealings. A list of some common contract types recognized under the Islamic law or sharia is as follows:

Sale (bai’) : exchange of a thing of value with another thing of value with mutual consent. the sale of a commodity in exchange of cash.

Pledge (rahn): a contract in which you have to deposit a collateral as a security

Guarantee (kafala)

Agency (wakala)

Hire (ijara)

Partnership (musharaka)

(Limited) partnership (mudaraba/qirad)


It is interesting to note that, as in civilian and unlike common law, the category of ‘‘aqd’ (contract) includes both unilateral and synallagmatic or bilateral relationships. Other contract types are more intriguing than those on the basic list, but since they evolved in accordance with/were recognized in response or as exceptions to the principles discussed below, they are not comprehensible without an understanding of those principles, and would not be mentioned here.

The conclusion is often drawn from the existence of the nominate contracts that there is no general law of contract in the sharia i.e. there was no ‘explicit general theory’ (HASSAN, 2002, p. 257). Discussions of ‘contract’ in modern books are often in fact discussions of sale. However, general principles do exist and it is these, and some of the consequences which flow from them, which we will look at in the following sections.

The fundamental general principle is obedience to God, entailing the respect of the principles of Islam. So we can see Islamic precepts and Islamic morality informing the rules in a detailed, substantive way which is quite different in nature from the general Christian background encountered in Western systems

The second principle is of freedom of contract. The sharia contains a principle of respect for the sanctity of contractual obligation. The Koran 5:1 provides: ‘O ye who believe! Fulfill your undertakings’ (the word translated as ‘undertakings’ is ’aqd, (which is the modern Arabic for ‘contracts’). In addition, what is not forbidden is allowed, a principle described by the jurist IBNTAYMIYAH: ‘men shall be permitted to make all the transactions they need, unless these transactions are forbidden by the Book or by the Sunnah’ (IBN TAYMIYAH, 1948, p. 167).

However, this does not mean that there is complete contractual autonomy. The Koranic injunction is only applied to those obligations entered into pursuant to a recognized contract type that respected the precepts of Islam. In other words, the Islamic nature of a contract is assured by its conforming to a type which has been verified as adhering to the requirements of religion. One can picture the nominate contracts as different types of electric light, determined in advance as providing an acceptable type of illumination. Parties are ‘free’ to turn on any of the light switches, but they cannot change the bulb or the wiring, nor can they construct new types. In other words, the nature and the essential terms of the particular contract are laid down in advance in order to ensure compliance with the sharia. According to RAYNER (1991, p.91): ‘the parties to a private transaction are only free to determine the terms and object of their agreement subject to the strictures placed upon them by the Sharia.’ And in Schacht’s words: ‘Islamic law does not recognize the liberty of contract, but it provides an appreciable measure of freedom within certain fixed types. Liberty of contract would be incompatible with the ethical control of legal transactions’ (SCHACHT, 1965, p. 144).

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Additionally there are certain terms and conditions required to be met before you can enter the contracts in the sharia. These six conditions are as follows and have to be duly satisfied by both the selling party and the purchasing party engaged in any international business practice:

They should be Baligh (reached the age of puberty).

They should be sane.

They should not be impudent, that is, they should not be squandering their wealth.

They should have a serious and genuine intention to sell and purchase a commodity and engage in a lawful business transaction

They have not been forced to sell and buy or engage in the business activity.

They should be the rightful owners of the commodity which they wish to sell or of the finance they have to start the international/national commercial dealing.

Another fundamental principle in terms of contract law includes the principles of equality and equity. The Koran (5:58) provides: ‘God doth command you to render back your Trusts to those to whom they are due; and when ye judge between man and man that ye judge with justice.’ A well-known tradition has become a statement of principle: ‘There shall be no unfair loss nor the causing of such loss (la darar wa la dirar)’ (Islam, 1998, p. 340). These principles have various consequences in their turn i.e. extensions to the general principles equilibrium. Unlike English-based common law, for example, which does not recognize the principle of inequality of bargaining power, the sharia on the other hand ‘emphasizes the idea of balance of counter values’ (ISLAM, 1998, p.341)5. Certainty of Contractual Obligation is another principle.

We have already seen that the sharia contains a principle of the binding nature of the contract which is, however, subject to limitations set by the nature of the nominate contract system. It is also limited by notions of fairness. For example, the judge has considerable power to ‘reconstruct or readjust an existing contractual obligation’ (RAYNER, 1991, p. 93), notably to redress an imbalance of obligation. In short we can say that sharia law’s application to commercial transactions is in terms of the general principles of trade and commerce under Islamic legislation and Islamic Jurisprudence which guide and supervise the focal and starting point of any business transaction i.e. entering into a contract. After the conditions mentioned above have been fulfilled, both parties would enter into a contract, which is governed by the following principles.

Freedom of contract (every agreement is lawful among Muslims except one that goes against the principles of Islam); promisory liability based on consent and tort liability based on trespass; principles of property law: rules of property, abuse of rights, principle of ‘la darar’ (no harm) and ‘la darar’ (no inflicting of harm), and wrongful appropriation; and Islamisation of specific contracts such as sale (bay), gift (hiba), partnership(sherika), lease (ijara), construction

(muquaula), and agency (wakala).

It is not clear in the sharia whether it is mandatory or only recommended to put a contract in writing, and whether it has any effect on the validity of the contract if it is not put into writing. However, most Sharia courts encourage a written contract therefore that is the practice followed, as it gives a proof of the assent of both parties to engage in a particular business transaction.

Coming to international business, freedom of trade and operation of market forces are allowed in Islam but they are subject to the limits set by Sharia beforehand. Islam allows normal trade-buying and selling of goods again and again at a reasonable price for a reasonable profit. However there are a few practices which are termed makrooh or haram in the Islamic jurisprudence in other words they are prohibited. These are as follows:

Islam has prohibited any kind of transaction involving uncertainty (Garar) as this could lead to quarrel or litigation. The Prophet of Islam has forbidden transaction involving unspecified quantity, acceptance of money for fish in the river or bird in the air as there is element of uncertainty. Similarly the Prophet of Islam has prohibited sale of fruit till they are ripened. (Chapter on Transactions involving uncertainty i.e. Garar in the book of tradition of Muslims). However, if the element of uncertainty is very small, the transactions are permissible. For example, it is permissible to sell root vegetables while they are still on the ground. 

Islam also condemns the practice of hoarding to make high profit by withholding the commodity from the market so that it becomes scarce. The Prophet of Islam has said, “If any one withholds goods until the price rises he is a sinner” (Tradition of Muslim) “The withholding of grain for 40 days out of a desire of high price is prohibited in Islam” (Tradition of Ahmad, Hakim etc)

Islamic law sometimes also places restrictions on the nature of specific investments which may be harmful for society; for example, firms may be precluded from investing in alcohol or tobacco products or many forms of “adult” entertainment. Another point is that Islamic law has prescribed measures to prevent manipulation of market, exploitation of seller or buyer and fraud. The Prophet of Islam prohibited people from going out of town to buy merchandise, which was on its way to city market. The reason for this prohibition is that the market place, where the forces of demand and supply determine prices, is the best place for trading transactions. In the situation of buying on way to market, the seller may not know the real market price and he may be deprived of legitimate price. So overall we can see that sharia allows for free trade if it remains within the limits of ethical boundaries marked by the law. Another important point to discuss here is that of damages or recovery, parties planning to engage in international trade might be concerned about what damages might be recoverable under Islamic Jurisprudence, under Islamic Law, only actual and direct damages are recoverable. Speculative, indirect, or consequential damages are not. This limitation represents the aspect of the Sharia’s insistence on certainty. Punitive damages are not recoverable in an Islamic jurisdiction, since recovery is limited to compensation for actual injury and cannot exceed restitution for the injury suffered. Punitive damages are also rejected on the basis that it is the responsibility of the state in the exercise of the public right to punish wrong doers. If there is an element of Interest involved in a transaction it is, as part of damages, never recoverable. damages are given if the other party turns out to be fraudulent in any case for example, under sharia if a false statement is given about the value of an item, presenting it as more than it really is and/or presenting an item in an unrealistic manner i.e. presenting merchandize that is mixed with something else as pure; or presenting an imitation as the genuine article. This is known as “Ghish and Tadlees meaning fraud and deceit” in the Sharia. For example, in a crate of apples, if you place the good ones on the top and the bad ones inside – this is “Ghish”. If you change the odometer in your used car to show lower mileage – this is “Tadlees”, if any or both of these factors surfaces after a contract to trade has been entered into then payment of damages would be liable.

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Islam has provided “the right of withdrawal” after a business deal has been concluded but between

certain boundaries.

In order to protect the customer from fraud and deceit in a business transaction, the Sharia has introduced the principle of “Al-Khiyaar” – the right of withdrawal which is of seven types:

Khiyaaru ‘l-Majlis: the right of canceling the deal before leaving the business premise; unless it is specified as “final” in the deal.

Khiyaatu ‘l-Haywaan: (applies to sale of animals) the right of returning the animal within three days unless that right is waived in the deal.

Khiyaaru ‘sh-Shart: the right of canceling or returning the merchandise based on the condition in the Contract. For example, when the seller says that the item can be returned within one week or one month.

Khiyaru ‘l Ghabn (Fraud): the right of returning the merchandise if it was sold for a price that was exhorbitant than its actual value. (The actual value is to be defined by ‘urf, in this context, the market.)

Khiyaatu ‘t-Ta’kheer: if the customer makes a deal but delays the payment or makes a partial payment without any pre-condition for deferring – the merchant has to wait for three days and then he has the right to cancel the deal. Similarly, if the customer is required to make a non-refundable deposit and then is unable to make the full payment as per the Agreement, then the merchant can cancel the deal.

Khiyaaru ‘rRu’ya: if you buy an item just based on the description of the seller it or you were shown the item, but then you find it to be of a lower quality – in such a case, you have the right to cancel the deal after actually seeing or handling the item.

Khiyaaru ‘l’Ayb: if you find the merchandise to be defective, then you have two choises – either cancel the deal or retain it with compensation. Unless, of course, the deal is based on “as is” condition; then in that case you cannot return the item or ask for compensation.

If the deal has been finalized but the merchandise has not yet been delivered to or received by the customer and the merchandise is destroyed, then the merchant will be bear the loss and the customer will be eligible for repayment.

Countries with an Islamic heritage can be grouped into four categories when it comes to how commercial transactions are affected under Sharia Law. At one end of the spectrum lie the countries that are most observant of Sharia law (Saudi Arabia, Iran, Pakistan, and Afghanistan); those who have made serious attempts to revive the traditional Islamic jurisprudence(as is the case of the Jordanian Civil Code of 1976 and the United Arab Emirates 1985 Code of Civil Transaction); those whose legal systems have developed far from it and have been greatly influenced by the French legal system (Lebanon, Syria, Iraq, Kuwait, and Egypt); and legal systems, which completely abandoned the traditional Islamic law as in the case of Turkey and adopted instead western-style codes. Adherence to Sharia law also varies depending upon the area of law: the rules of marriage, divorce, child custody, and inheritance are still strictly followed in most of the Muslim world; on the other hand, however, in most Muslim countries; except for the prohibition of interest, Sharia law has a few applications in the area of commerce and trade. Taking the example of countries Pakistan and Iran which are Muslim states but do not adhere to the sharia laws of trade and commerce, in case of Pakistan British law is still followed for these areas with a few amendments even though Sharia commercial law is a complex system and covers numerous areas.

A thorough understanding of the role and function of both the Islamic and western law in the international business environment is a critical “skills piece” of the international manager. Only by understanding the range of issues and the elements and characteristics of the legal system, and by developing a clear knowledge of who will be the key decision-maker in the legal environment, can the international manager avoid the pitfalls and traps that might befall the unsophisticated and unknowledgeable in a globalized economy.

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