The workings of the Shari’ah law in the operations of personal and corporate guarantees

The Kingdom of Saudi Arabia (“KSA”) is a sovereign Arab state whose final code is the Shari’ah. The Shari’ah is an assortment of principles resulting from different sources, but predominantly the Holy Qu’ran and the Sunnah. As the KSA has not adopted a civil law system, no primary legislation governs financial transaction guarantees in the KSA.

The working of the KSA law for different case scenarios are summarised as follows:

In case of primary obligations of the guarantor:

The guarantor has a secondary responsibility when compared to the principal person, and if the principal is released from the guarantee, the guarantor is also not liable. In the case where the dealing with the primary person is declared void, the guarantor’s obligations are declared void as well. If the principal’s dealing does not satisfy the KSA Shari’ah law, then the eventuality of claiming from the guarantor is not enforceable.

The need for hard copies:

If the dealing is recorded in hard copies, the transaction will be accepted under the KSA law.NO soft copies of fax, telex, bank wire transfer or any other means of electronic communication is accepted in the KSA law. It is prudential for the lenders to gather evidence in the way of hard copies and not depend upon the electronic means of communication.

The favour of ruling:

KSA law is known to favour the guarantor’s as they take on the position as the guarantor’s takes on an obligation not because he has to but because he can. If the lender delays initiating a procedure against the guarantor then, Banking Disputes Settlement Committee in the past has been found to understand that any delays on the part of a lender to use its rights against a guarantor can be interpreted as a waiver of the lender’s rights against the guarantor.

Full and specific guarantee:

KSA law favours contract that has specified the reason for the contract and is of the view that the contract should have a date of expiry. The contract should not have a general obligation involving all the monies guarantee clause as they might face obstacles in enforcing this agreement.

Governing body:

The KSA law and other adjudicatory system do not conventionally identify the applicability of foreign law irrespective of any agreement between the parties in respect of authority and applicable laws. Based on this reason lenders should be prepared to enforce a guarantee provided by a KSA entity in the KSA.

Final word:

KSA law is quite clear on its stand regarding the personal and corporate guarantees; the lenders should take comprehensive guidance about the KSA law before entering into these contracts.