Future Conditions in Commercial Contracts: A Mere Promise or a Binding Obligation?

Commercial agreements often include obligations that a party is required to commit to fulfilling at a future time. Illustrative examples include:

  • An obligation on a party to take a lease of a building once constructed.
  • A put option requiring other shareholders to purchase an investor’s shares at a specified future time.
  • An agreement to establish a joint venture company once certain agreed targets have been fulfilled.

The risk, under Shari’ah, that all such agreements have in common is whether the party making these commitments can be held to the agreement at that future time. Three out of the four main Shari’ah schools of thought (including the Hanbali school, which is the school of thought primarily followed by the Saudi judiciary) consider such terms as merely nonbinding ‘promises’ rather than binding obligations, and therefore unenforceable in court.

Under the fourth school of thought, being the Maliki school, such promises can be binding in certain circumstances, primarily where the beneficiary of the promise has acted in reliance on it. Whilst we have seen Saudi judges accommodating this view, it remains at the discretion of the individual judge subject to his particular Shari’ah mindset, creating significant uncertainty for the contracting parties.

Additionally, for the future promise to be considered binding, it would need to have sufficient clarity in detail, so that the enforceability of the promise is not undermined by the uncertainty of the terms being agreed. The future obligation should be sufficiently detailed and clear, to minimise the risk that it is
deemed unenforceable due to uncertainty. It should also be clear that the future obligation is a fundamental term of the contract, and that the benefiting party is entering into the contract in
reliance on such term.

The risks of enforceability challenges are reduced to minimal if the dispute at hand is to be heard
before the Committee for Banking Disputes or the Committee for Resolution of Securities Disputes,
as both take a much more commercial view with respect to upholding commercially agreed terms.

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