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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

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 principles cut 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 injustice and to practise legitimate trade and business in an honest manner. Islamic contract law is not expressed as a general theory of contract but states rules 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 from contracts 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 by nature 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 men in order to promote an urban society. Every person, however, seeks the things, which suit him, and is vexed by any competition. As a result, it has 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 three fundamental 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 bearing on the transaction could render the contract invalid. Furthermore, contracts involving a high degree of gharar are strictly prohibited. The objective 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 facilitate business.

Contract (Aqad) in Arabic means 'a tie or knot binding two parties together'. The contract is a declaration of offer and acceptance made at the same time. Islamic law of contracts are developed through the work of Islamic jurists, based on the principles mentioned in the Quran and the narrations from Prophet Muhammad. There are many verses in the Quran, which mentions of a number of contracts, and axioms of wide application in the area 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 involved and 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 more parties 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 offer is 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 the second 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 the second 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, the terms 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 replies and 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 or under influence. 4 Existence of offer till the issuance of acceptance. An offer must remain open until it is accepted, rejected, retracted, or has expired. A counteroffer closes the original offer.

Contract Subject Matter
Islamic law stresses on the following matters described below when relating to 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 and underlying 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 in existence 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 prohibits the 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 its value to avoid any kind of exploitation and future disputes.

In addition as per majority of jurists, the object should be permissi ble under

Syariah, thereby being halal.

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 the case 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 an example, 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 to barter 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 can it 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 strictly adhered 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 Islamic law, 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 his or 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 not realising the consequences of his/her action. In Islamic law, a minor, a person of unsound mind, a bankrupt person, a person legally declared a prodigal, an intoxicated person or a person suffering from a deadly illness cannot enter i n t o a binding contract.

The subject matter must be legal for a contract to be enforceable. Islamic law does not enforce contracts of illegal activiti es and which are 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 contract and will make the contract null and void.

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. This

Source: Billah, MM., (2003)

contract is gratuitous in character and does not require the consent of the recipient. In other words, a unilateral promise binds only the person who makes 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 the delivery of a sought after subject matter. In a contract of Al-Jualah, the offeror is bound by the offer unilaterally until other parties accept it. Once it is accepted, both parties are bound by their promises equally. Unilateral contract comprises transactions in favour of the recipient such as gift (hibah), rebate "it oil set of a debt (ibra), will (ivasiyyat), qardh hassan loan and, 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. For example, 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 the offeror 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 and beneficial result for both the contracting parties. The main idea of a bilateral contract in Islamic law is that it establishes a legal relationship, arising from the 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

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 a contract. 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 for a 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 is an 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 affinity with a contract. As an illustration, an action to recover the money paid by mistake: if the innocent party mistakenly interprets the facts, pays to another party 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, this obligation 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. Islamic laws sanction this because an appropriation can only be recognised if something is exacted through a proper transaction with mutual consent.

Classification of contract according to the legal consequences is illustrated in the following chart:

Source: Adapted from Bitlah, (2003) and Khan, (1998)

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 legal effect of enforceability. In other words, a valid contract binds the contracting parties equally. In a broader sense, a valid contract is one that is legal both as regards to its asl (origin) and waqf (attributes) and is in compliance with Syariah requirements. For a contract to be valid, the following three 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 an exchange 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 the offer, 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 is not 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 business environment. Syariah renders any contract invalid in situations in which it will be impossible to achieve the consideration for which the contract was 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 contract since 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 its origin and attributes. In other words, the necessary elements and necessary conditions are against the Islamic law. Islamic jurists have a unanimous opinion that anything which is forbidden by Syariah, is not tradable and hence, cannot become the consideration or object of a contract. As such, a contract 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 sale concluded by a lunatic or a minor or prodigal. Such contracts are void because it doesn't fulfil the required substance of an agreement, in which sane, major or sour.; minded persons must do the offer and acceptance. Therefore, a contract is void when it is not valid, effective and enforceable

Binding Contract (Lazim)
A binding contract is a sound contract without any defect either in in substance or descriptions. A lazim contract can be further classified into two, based on the legal consequences: 1 Irrevocable Contracts: Irrevocable lazim contracts are those where the parties shall not have any right to revoke at any stage of the contract if such contract is concluded by mutual consent of the contracting parties Examples of lazim contracts are the contract of marriage or any other bilateral contract. In the contract of a marriage, there is no revocation by either party once it is concluded, except by a talaq pronounced by the husband. 2 Revocable Contracts: Under revocable contract, the right to rescind can be exercised by either party without the consent of the other party. There are two reasons due to which a contract becomes non-binding. One is the nature of the contract. The nature of a contract allows independence to both parties like agency (wakalah), partnership (sharikah) and several others. The second reason is where an option is stipulated in the contract that prevents it from becoming binding.

Enforceable Contract (Nafidh)
A nafidh contract is an agreement which does not involve any right of the third party. These contracts should not admit delays and must give rise to its effect immediately.

Withheld Contract (Mawquf)
A mawquf contract is an agreement in which the substance and the description are lawful, but is concluded with the consent of a party who does not own can be affected unless the goods are in existence at the time of sale with a condition that goods are defined and the date of delivery is fixed. As example, RM 10,000 paid in advance for a car to be delivered on a certain date. (b) Bai Istisna: This is a kind of sale where a commodity is transacted before it comes into existence. In other words to order a producer to produce a specific commodity for the purchaser. The rules to be observed are that the price is fixed with the consent of the parties and that the necessary specification of the commodity is fully settled between them.

Classification of Sale Based on the Nature of Profit- sharing
Sale can be further classified based on the nature of profit agreed in the contract as mentioned below: 1 Musazvamah: This is the most common form and is known as spot sale. The seller and buyer enter into an agreement for the selling and buying of goods. The goods are delivered at once and are paid for immediately. In other words, it is basically a sale by mutual consent, completed and concluded through negotiations between the seller and buyer in which no reference is made to the original cost price. It is a 'profit sale' but the actual cost price and the amount of the profit is unknown to the buyer because the seller is not bound in a musawamah sale to disclose the cost price. 2 Murabahah: This is commonly known as cost plus profit. This is a sale agreement whereby the seller purchases the goods desired by the buyer and sells them at an agreed price. The payment being settled within an agreed time frame, either in instalments or lump sum. The important point in this contract is that the buyer knows the profit charged by the seller. In short, it is a cost-plus-profit sale in which the seller expressly discloses the profit to the buyer. Due to the sharing of cost and profit by the seller, the jurists have considered it as a sale based on trust (amanah). 3 Tawliyyah: This is a sale at the cost price without any profit for the seller. This sale is again based on the principle of trust (amanah). The contract appears to be a form of substitution contract where one party who has bought goods no longer needs them and is willing to assign the right to a third party. 4 Wadiah: This sale takes place when the seller agrees to sell a commodity at a lower price than that of the cost price. Since the seller is selling the commodity at a lower price, it is also a trust sale. This form of contract appears to be useful for a seller who is getting rid of his inventories to improve his liquidity position. As an example, a departmental store announcing sale based on wadiah for certain goods. It may also serve as a marketing strategy to increase the sales of other goods.

Possibilities of Payment Under Sales Contract
The possibilities of payment based on the sale contract are as mentioned below: 1 Cash Sale: Under this type of sale the purchaser is under obligation to settle the purchase price agreed upon when concluding a contract. In the event the buyer is not able to settle the payment, the seller has the right to retain the goods sold until the buyer makes the payment. 2 Deferred Payment Sale: Under this sale the amount is payable on instalment basis. This is permissible provided the period is ascertained and a fixed manner of payment is applicable to all types of sales except in the case of baisalam. This principle is normally followed for bat bithaman ajil contracts. The bai bithaman ajil contract refers to the sale of goods or equipment on a deferred payment basis at a price which includes a profit margin agreed by both parties. 3 Lump Sum Payment: The lump sump amount is payable in the future. This manner of payment is also permissible provided the date of payment is fixed in advance. This manner of payment is also applicable on all types of contracts except baisalam. 4 Earnest Money (Bai): The advance payment of a partial amount of the total sale price is made to the seller which constitutes part of the purchase price should the buyer decide to buy the goods. Otherwise, the seller forfeits the advance payment.

Essential Requirements for a Sales Contract
In addition to the above general rules, the sales contract should have essential elements and the necessary conditions as illustrated in the following chart:

Source: Adapted from Usmani, 2002

Contract: Offer and Acceptance
The term 'offer' means that one person proposes to either sell his commodity to another person or buy from him, and 'acceptance' means that the person who has been offered gives his approval of the proposal. 1 Modes of Offer: (a) Orally: An offer can be made by words used for concluding a sale. (b) Written: An offer could also be made by writing or deed which will have equal legal effect as the one made verbally. (c) Gesture: An offer by gesture is valid if a person who is incapable of making it either verbally or in writing makes it. For example, an offer made by a handicapped, dumb or deaf person. (d) By post, telegram, telex, fax, telephone or e-mail. All these instruments convey offers made by words and writings. 2 Tense of Offer An offer is generally made using the past tense, but in some situations, an offer could also be made in other tenses and manners. The offer may be made in the aorist tense in which if it indicates a present tense then the sale is valid but if it indicates a future tense ("I will buy", "I will sell") then the sale is invalid. In other words, an offer should be in definite, decisive language and absolute. 3 Termination of an Offer An offer could be terminated and will not have any legal effect under the following circumstances: (a) Revocation: If the offeror after making the offer at any time before it is accepted, changes his mind and revokes his offer, the latter will be effective and the offer will be treated as terminated. (b) Rejection by the Offeree: If an offer is not accepted and the offeree rejects it, it will be treated as terminated. (c) Counter Offer: An offer could also cease to have legal effect if it is neither rejected nor ignored by the offeree but the offeree may accept it with some additional condition in which the expression of the offeree would be treated as a counter offer and it will eventually terminate the original offer. (d) Absence of Acceptance: An offer is made but no acceptance so far has been received to it hence, the offer will be terminated. (e) Death: If death of either the offeror or the offeree occurs before it is accepted, the offer is terminated. (f) f) Lapse of Time: An offer is made with a condition that it should be accepted within a specified period of time and if the offeree fails to accept within the prescribed time limit, the offer is considered terminated. 4 Modes of Acceptance An acceptance can be made in the following ways: (a) Oral Acceptance: An acceptance may be made by word of mouth as long as the offeror could understand it. (b) Written: An acceptance may be made in writing in the same way as it is made by word of mouth. (c) Gesture: An agreement by implication or gesture is sufficient for the acceptance of the offer. For example, a sale is concluded by a gesture, made by a dumb person. (d) Delivery: A sale is concluded by an exchange being carried out, as that is evidence of the mutual agreement of the two parties. (e) Payment: An acceptance of a contract of sale could be presumed by the payment made by the buyer in consideration of the subject matter. (f) Letter of Post: A letter or message sent by post or messenger containing the message of acceptance may be substituted for a verbal and personal communication in the contract of sale.

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