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Islamic Contract

Islamic Contract

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Published by: Mohd Azrul Dseven on May 13, 2011
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Islamic Contracts
INTRODUCTION
In this chapter, we will focus on Islamic contracts in general. In the previous chapter, we explored the
riba
and
gharar.
These two sets of principlescut across all contracts in Islamic law. Contract is the very essence of transactions without which the transactions are void of legal significance.Islamic commercial law lays down detailed rules leading to the formation of contract. The guiding principle is that there should not be any injusticeand to practise legitimate trade and business in an honest manner. Islamic contract law is not expressed as a general theory of contract but statesrules for various specific contracts such as the law of sales, lease, pledge and so forth.Islamic commercial law is known in its Islamic legal term as
Fiqh-al-muamalat.
It deals with issues of contract and the legal affect(s) arising fromcontracts such as being valid, void or voidable respectively. Islamic contracts cover a variety of dealings and transactions to meet the needs of society. The first article of the
Majallah al-Ahkam al-'Adliyyah
(the civil code of the Ottoman Empire) endorses the idea that man is social bynature and that social life is essential to him. This article states that...
"In view of the fact that man is social by nature, he cannot live in solitude like other animals, but is in need of co-operation with his fellow menin order to promote an urban society. Every person, however, seeks the things, which suit him, and is vexed by any competition. As a result, ithas been necessary to establish laws to maintain order and justice "
This approach of the
Majallah
is seldom found in the other compilations of law. The
Syariah
Law of Contract is primarily based on threefundamental principles:
1
 
The Principle of Justice:
Ensures that neither party to a contract may exploit the other. Hence the
riba
is strictly prohibited.
2
 
The Principle of Transparency:
Those concerned must share all available information. Withholding crucial information which has bearingon the transaction could render the contract invalid. Furthermore, contracts involving a high degree of 
gharar 
are strictly prohibited. Theobjective is to prevent transactions that lead to dispute and lack of trust.
3
 
The Principle of 'Maslaha':
Means the common interest supported by the spirit of 
Syariah
and not by a specific text. On the basis of 
  Maslaha,
a particular form of transaction may be exempted from the general rule if it lias been shown to be in common practice to facilitatebusiness.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
Contract
(Aq
a
d)
in Arabic means 'a tie or knot binding two parties together'. The contract is a declaration of offer and acceptance made at the sametime. Islamic law of contracts are developed through the work of Islamic jurists, based on the principles mentioned in the
Quran
and the narrationsfrom Prophet Muhammad. There are many verses in the
Quran
, which mentions of a number of contracts, and axioms of wide application in thearea of a contractual relationship. These include various commercial contracts such as sale, hire, guarantee, security and deposits.Contract are drawn to ensure the existence of clearly recognised guidelines for all parties involved. They state the standings of all those involvedand the condition(s) of the transaction(s) that are to take place. A contract in Islamic law consists of an agreement made between two or moreparties and the base elements are similar to those of the English common law.
Offer and Acceptance
An offer is a proposal to make a deal. An acceptance is the acknowledgment made by the person to whom the offer was made to and that the offeris accepted. Therefore, an offer is an agreement that is made by one of the parties to the contract, and acceptance is the statement that is made by thesecond party in response to the offer. As an illustration, if the first party (seller) says, "I want to sell this house to you for RM150,000" and thesecond party (buyer) says, "I accept", then what has been said by the seller is 'Offer' and statement made by buyer is called 'Acceptance'.The key conditions of offer and acceptance are listed below:
1
 
It is necessary that the
acceptance conforms to the offer
in all its details. If the offer contains any material change in, or addition to, theterms of the original offer, it will not be accepted. A counter-offer is a new offer in Islamic law.
2
 
The
offer and acceptance has to be executed in the same session.
In
 
the event any party to the contract is missing, then the session lasts until the knowledge of it reaches the party through a messenger and he repliesand communicates his acceptance to the 'offeror'.
3
 
Assent must be genuine
as the person giving his consent may not be mentally competent or he may be a person subjected to coercion orunder influence.
4
 
Existence of offer till the issuance of acceptance.
An offer must remain open until it is accepted, rejected, retracted, or has expired. Acounteroffer closes the original offer.
Contract Subject Matter
Islamic law stresses on the following matters described below when relatingto the subject matter of the contract, namely, the object and consideration:
1
 
Lawfulness:
The object must be lawful and should be permissible to trade. It must be of legal value, which means its subject matter andunderlying clause must be lawful and it must not be prohibited by Islamic law, neither a nuisance to public order nor morality.
2
 
Existence:
The parties to a contract must legally own the object. The issue of existence presupposes that the object of a contract must be inexistence at the time of a contract (selling fruits which are not ripe/ready for the market is illegal as it does not meet this criteria).
3
 
Delivery:
The object should be potentially capable of certain delivery to the buyer at the time of the contract. Therefore,
Syariah
prohibitsthe sale of a camel which has fled, a bird in the air, or a fish in water.
4
 
Determination:
The object should be something known to the parties. It must be determined precisely as to its essence, its quantity and itsvalue to avoid any kind of exploitation and future disputes.
 
In addition as per majority of jurists, the object should be permissible under
Syariah
, thereby being
halal.
Consideration
The consideration in the Islamic contract may consist of money, goods or services. It must be something which is capable of being given and in thecase of service, should be capable of being performed. It is the legal benefit received by one person and the cost charged on the other person. As anexample, selling a car for RM20,000. The seller gives up the car and gets the RM20,000 and the buyer gives up the RM20,000 and gets the car.For price consideration, Islamic law does not restrict it to monetary price exclusively, but it may be in the form other commodity. This is similar tobarter trade. The Islamic prohibition against uncertainty requires that the good/s be in existence and the price determined at the time of the contract.It must not be fixed at a later date with reference to the market price, nor canit be left open subject to determination by a third party. As an illustration, in contracting the exchange of money, the rules of 
riba
should be strictlyadhered to avoid the contract being void.
Capacity of the Parties to Contract
The parties entering into a contract must be
competent 
to make a contract. The party must have the legal capacity to make a contract. In Islamiclaw, no person can validly conclude a legal transaction without first having attained physical and intellectual maturity that being the equivalent of majority age. To enjoy full capacity, a person, whether male or female, should attain physical puberty and enjoy sound judgment or prudence in hisor her judgment. Islam does permit minors to get into agreement, which are beneficial but with the approval of the guardian.The underlying principle is that usually an incompetent person will make a contract without understanding that he/she is making a contract and notrealising the consequences of his/her action. In Islamic law, a minor, a person of unsound mind, a bankrupt person, a person legally declared aprodigal, an intoxicated person or a person suffering from a deadly illness cannot enter into a binding contract.
Legality
The subject matter must be legal for a contract to be enforceable. Islamic law does not enforce contracts of illegal activities and whichare not permissible under
Syariah.
In other words, the purpose of the contract must
be legal in terms of the
Syariah.
Some of the contracts that are strictly prohibited under Islamic legal provisions are listed below:1
 
Contracts in violation of the prohibition of 
riba.
 2
 
Contracts in violation of the prohibition of unpermissible good.3
 
Contracts in violation of the prohibition of 
gharar 
and
maysir,
etc.For example, a contract to grow grapes for wine-making would be void because the element of an unpermissible object (wine) exists in the contractand will make the contract null and void.
CLASSIFICATION BASED ON NATURE OF CONTRACT
Classification of contracts according to the nature of the contract is conceptually divided into three main categories, namely, unilateral contract,bilateral contract and quasi contract as explained below.
Unilateral Contract
A unilateral contract is a form of promise made by one party with an intention and expectation that the other party to the contract would accept it.Thiscontract is gratuitous in character and does not require the consent of the recipient. In other words, a unilateral promise binds only the person whomakes it until it is accepted by others, and once it is accepted, both parties are equally bound by the contract.It is normally applicable in transactions like rewards (
 Al-Jualah
) in which someone offers a particular reward to the world at large in return for thedelivery of a sought after subject matter. In a contract of 
Al-Jualah,
the offeroris bound by the offer unilaterally until other parties accept it. Once it is accepted, both parties are bound by their promises equally. Unilateralcontract comprises transactions in favour of the recipient such as gift (
 hibah
), rebate "it oil set of a debt (
ibra
), will
 
(ivasiyyat), qardh hassan
loanand, etc.In other words, a unilateral contract is a binding promise that the offeror mull i's and is conditional upon the performance by the offeree. Forexample, i person approaches a real estate agent and asks him to find a house for him i ii which he will pay him one month's rent as commission.
The agent finds • house as required which the offeror agrees to rent. The agent is entitled to In commission. The key here is
that promise by theofferor to anyone from the general public to undertake a task and the promise is made to an identified person
.
 
Bilateral Contract
A bilateral contract requires at least two parties in which one party should make a proposal (offer) and the other should accept. The intention of both parties must coincide and the declaration must relate to the same subject matter. The object of the contract must be able to produce a legal andbeneficial result for both the contracting parties. The main idea of a bilateralcontract in Islamic law is that it establishes a legal relationship, arising fromthe mutual consent of the willingness of at least two parties in dealing with each other, in respect of certain rights and obligations thereof.For example,
A
sells his car to
B
for RM150,000 on cash basis. In this case,
 A
consents to sell his car to
B,
who consents to buy the car with an obligation
Source: Billah, MM., (2003)
 
to pay the price in cash.I
 
The differentiation between bilateral and unilateral contracts depend on what the offeree
 
must do to accept the offer and to bind the offeror to acontract.II
 
If to bind the offeror, the offeree must only promise to perform, the contract is a bilateral contract. Hence, the bilateral contract is a promise fora promise. The contract comes into existence the moment the promises are exchanged.
Quasi Contract
A quasi contract by nature is not a contract. However, the implication gives rise to an obligation similar to that of the contract. A quasi contract isan obligation, which does not originate from a proper verbal agreement as in the law of contract or tort. A quasi contract has little or no affinitywith acontract. As an illustration, an action to recover the money paid by mistake: if the innocent party mistakenly interprets the facts, pays to anotherparty a sum of money which he does not really owe, the law being just, will require the wrongful receiver of the money to restore it. However, thisobligation is not based upon consent. Therefore, this description of quasi-contractual liability is different from any concept of contract.Therefore, in a quasi contract, the obligation is enforceable using the
Syariah
principle, since it is a matter of restoring the rights of others. Islamiclaws sanction this because an appropriation can only be recognised if something is exacted through a proper transaction with mutual consent.
CLASSIFICATION ACCORDING TO LEGAL CONSEQUENCES
Classification of contract according to the legal consequences is illustrated in the following chart:
Valid Contract (
Sahih) 
 
A valid contract is defined as a contract in which its essence and attributes are according to
Syariah
principles and which subsequently has the legaleffect of enforceability. In other words, a valid contract binds the contracting parties equally. In a broader sense, a valid contract is one that is legalboth as regards to its
asl
(origin) and
waqf 
(attributes) and is in compliance with
Syariah
requirements. For a contract to be valid, the followingthree conditions should be met:1
 
All the elements required by law must be complete.2
 
The additional conditions must be fulfilled.3 The purpose of the contract and its subject matter must be in compliance with
Syariah
principles.The nature of a valid contract is that there must be contracting parties who have the legal capacity and express their agreement in terms of a sound
 ijab
(Offer) and
qabul
(Acceptance) on a particular subject matter recognised by
Syariah.
In addition, for a contract to be valid there must be anexchange of valuable consideration with a sincere intention, required from both parties, to create a legal relation.To summarise, a valid contract is when the offer and acceptance both are sound and the subject matter is in compliance with
Syariah
requirements.
Invalid or Deficient Contract (
Fasid) 
 
An invalid contract is an agreement, which is lawful in its substance but unlawful in its description. The substance of an agreement refers to theoffer, acceptance and the subject matter. Invalid contracts have the essential elements but don't fulfil all the necessary conditions.For example, the price of the subject matter: if an agreement of sale for a definite article is concluded by proposal and acceptance but the price isnot settled, the agreement would be
fasid.
 The object of a contract should be fit or suitable for carrying out a transaction, for example, it should be executable within the normal businessenvironment.
Syariah
renders any contract invalid in situations in which it will be impossible to achieve the consideration for which the contractwas agreed.For example, if 
A
offers
B
a certain amount of money to bring him the moon and
B
accepts the offer, the
Syariah
rules it out as an invalid contractsince it will be impossible to carry it out.
Void Contract (Batil)
A void contract is an agreement in which both its substance and descriptions are not in compliance with
Syariah.
A void agreement is illegal in itsorigin and attributes. In other words, the necessary elements and necessary conditions are against the Islamic law. Islamic jurists have a unanimousopinion that anything which is forbidden by
Syariah,
is not tradable and hence, cannot become the consideration or object of a contract. As such, acontract will be void if 
A
and
B
agree on a liquor deal.In the same manner, there can be no valid contract for the sale and purchase of stolen goods or delivery of inferior goods now on the promise of returning superior merchandise later as it will constitute a kind of 
riba
or interest. Another example of a void contract is the agreement of saleconcluded by a lunatic or a minor or prodigal. Such contracts are void because it doesn't fulfil the required substance of an agreement, in whichsane, major or sour.; minded persons must do the offer and acceptance.Therefore, a contract is void when it is not valid, effective and enforceable
Source:
Adapted from
Bitlah, (2003) and Khan, (1998)

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