BFI- YIBS 2022/202

CHAPTER FOUR: ISLAMIC LAW OF CONTRACT

A contract is a voluntary, deliberate and legally binding agreement between 2

or more competent parties. Contracts are usually written but may be spoken
or implied and generally have to do with employment, sale or lease or
tenancy.

A contractual relationship is evidenced by

An offer
Acceptance of the offer
A valid (legal or valuable) consideration
Shariah explain certain requirements for a contract to be valid and lawful.
Any contract which fulfils the prescribed requirements of Shariah, is deemed
valid and lawful. Islamic financial contracts have been developed throughout
the Islamic civilization based on the needs and requirements of society.

Definition of contract and its elements

After discussing the historical background of Shariah contracts very briefly,

we move on to explain the elements and prerequisites of a valid contract
in Shariah. Contract is also known as “Aqd”. Literally, this word “contract”
or “Aqd” means to conclude or to tie. As such, any covenant, pact,
agreement and treaty will also be referred to as Aqd since all of them
demonstrate firm resolution for execution. Plural word for Aqd is Uqood.
Technically, it can be defined as combination of offer and acceptance
between contracting parties which constitute legal obligations on them.

There are mainly three elements of a valid contract:

1.     Form of the contract (offer and acceptance).

2.     Subject matter of the contract.

3.     Contracting parties.
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1) Form of the contract

The form refers to the expressions which are made by contracting parties in
order to show their will and intention to enter into a contract. It is also
knowns as offer (Ijab) and acceptance (Qabul). The declaration which is
made first to create an obligation, is termed as offer (Ijab). And the
subsequent declaration to accept the offer, is called acceptance (Qabul).
There are some general requirements of for offer and acceptance.  First, it
should be in clear language and unconditional. Second, there should be
conformity between offer and acceptance. Third, both offer and acceptance
must be concluded in the same session. Generally, offer and acceptance are
exercised in words. However, it is not necessary to express them only in
words. It can be done by other methods such as writing and conduct etc.

2) Subject matter of the contract

Subject matter refers to the object of the contract upon which the legal
obligations are manifested. It can be a good or property of sale contract or
pledged object in a pledge contract and usufruct in a lease contract. The
general requirements for subject matter are summarized in the following.

1.     The Subject matter must not be a prohibited item in Shariah.

2.     It should be in the ownership of the seller.

3.     It should be in existence or available at the time of conclusion of the

contract.

4.  It must be identified and clearly known to the contracting parties in order
to avoid any dispute later.

5.  The delivery of subject matter must be confirmed and certain at the time
of contract.
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3) Contracting parties

There are at least two parties in a contract, the offeror and offeree. The
offeror is the one who makes an offer and offeree is the one who accepts that
offer. The main condition for these parties is that they must have legal
capacity and competency to enter into a contract. In other words, they must
be mature and sane. The maturity means that a person is capable to deal his
wealth properly and know the basics of business and trade. If someone is
immature or not have the legal capacity, then he is not allowed to enter into a
contract independently.

A condition that is against the contract and not in market practice but is in
favour of one of the contractors or subject matter, the condition is void. For
example: If “A” sells a car with a condition that he will use it on a fixed date
every month, this contract will be void.

A condition, which is against the contract, not in the market practice and not in
favour of any contractor, that is not a void condition. For example: if both A
and B decide to give a charity, a certain percentage of both subject matter and
consideration, upon completion of sale.

VOID CONDITIONS AND VOID CONTRACTS

The contracts of compensation (Uqood Muawadha) like sale, purchase,

lease agreements become void by putting void condition.

Non-compensatory (voluntary) agreements (Uqood Ghair Muawadha) like

contract of loan (Qard-e-Hasanah), do not become void because of void
condition. The void condition, however, becomes itself ineffective.

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CHAPTER FIVE: ISLAMIC LAW OF SALE AND PURCHASE

Bai (Sale) • Definition: Exchange of a valuable thing by another valuable thing

with mutual consent. It is also the sale of a commodity in exchange for cash.

Bai’ ‘Inah which means a contract of sale and purchase

Concepts of Islamic sale and purchase

Valid sale (Bai Sahih) :

Bai Sahih is a valid sale where all elements (contract, subject matter, price,
possession) together with their conditions are present.

Aqd (Contract)

• Mabee (Subject Matter)

• Thaman (Price)

• Qabza (Possession or delivery)

Conditions for (Contract) • Offer and Acceptance Must be in Past/Present

tense (Implied form is also applicable) • Sale must be instant and absolute • Sale
should be unconditional • A contract must not be comprise of any other contract
within itself.

Conditions for Subject matter • Existing (Salam and istisna are exempted) •
Valuable (Some things do have scope of becoming valuable with the change of
time) • Usable (In the light of shariah) • Capable of ownership/title (Things that
could be in private property) • Capable of delivery and possession (a stolen car)
• Seller must have ownership & risk(Other wise it will be dependent on the

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permission of its owner) • Specific / Quantified (Transaction will not be

completed until separated in W/H)

Conditions for Price •The price must be quantified •The price must be
specified in terms of currency etc. •The price must be certain at the time of
contract (either this or that will not be accepted)

Conditions for delivery or possession: physical and constructive

Void/ Non existing Sale (Bai Baatil) :

An agreement of sale which is unlawful in respect of its substance and

description. For example, an agreement of sale concluded by a lunatic or a
minor is batil since it does not possess substance of the agreement, which is the
proposal and acceptance by a sane or major person.

Existing sale but void due to defect (Bai Fasid) :

An agreement of sale that is lawful in its substance but unlawful in respect of its
description. The substance of the agreement refers to proposal, acceptance and
the article of sale. The description refers to characteristics other than the
substance, such as price of the article of sale. 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 although it is enforceable (mun‘aqad) so
far as its substance is concerned. In a fasid sale, the buyer should not
possess the subject matter. If possessed with the consent of the seller, title or
ownership will pass to the buyer but usage of subject matter will be
impermissible. He must return it to the seller.

Valid but disliked sale (Bai Makrooh) :

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A sale will be Makrooh when the transaction is complete and one gets
possession of the goods but is disliked eg. sale after Juma Azaan, sale after
hoarding or where a third party intervenes to buy something which was under
negotiation of sale between other parties.

Types of Sales:
Following are the common types of sales

1.Bai Musawamah: It refers to normal sale in which cost price is not known.
2.Bai Murabaha: It refers to a sale in which cost and sale price is known to the
buyer.
3.Bai Muqayada: It refers to barter sale excluding currency sale.
4.Bai Surf: It refers to the sale of gold, silver and currency.
5.Bai Salam: It is a kind of sale in which payment is spot while the delivery of
the good is deferred.
6.Bai Istisna: It refers to such sale in which commodity is transacted before it
comes into existence. It is basically an order to manufacture.
7.Bai Muajjal: It refers to such sale in which payment is delivery is spot while
payment is deferred but cost is not known.

Prohibited transactions in Islam

Islam prohibited unethical business transactions

1) Dealing of Haram items: unlawful items such as carrion (death meat), pigs,
and idols are prohibited in Islamic transactions.
2) Sale of Al-Gharar: uncertainty, risk or speculation is prohibited in Islamic
transactions.
3) Hoarding of food stuffs: excessive purchase and storage of foodstuffs in
expectations of future rise in price is haram in Islamic transactions.

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4) Exploitation of one’s ignorance of market condition (price and quantity of

goods)
5) Al-Najish (Trickery): A situation where a person offers a high price for
something without intending to buy it just to cheat or defraud another person
who really means to buy it.
6) Cheating and fraud in business transactions
7) Swearing : A recourse of swearing that items are in good quality. Swearing
in business for persuasion is forbidden in Islam.
8) Giving short measure: taking full measures of goods from others and
giving short measures in your turn.
9) Dealing in stolen goods.

KHIYARS

The term khiyar refers to the option or right of the buyer & seller to rescind
(cancel officially, revoke) a contract of sale.

Conditions under which Khiyar can be exercised

1. Khiyar-e-Shart (Optional condition): At the time of sale Buyer or Seller

can put a condition that he has an option to rescind the sale within the specific 4
days. This option is called Khiyar-e-Shart. Specification of the days is necessary
for this Khiyar. Within this period, he has the right to rescind/dissolve the sale
without any reason. If the buyer puts the condition, it is called Khiyar-e-
Mushtari (option of buyer) and when put by the seller, it is called Khiyar-e-Bai
(option of seller). This Khiyar is not transferred to heirs.
2. Khiyar-e-Roiyyat (Option of inspecting goods): Where the goods can be
returned after inspection. This applies automatically to all contracts. Eg. ‘A’

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buys machinery from ‘B’ without seeing. However, ‘A’ has the option to return
the machinery after inspection.
3. Khiyar-e-Aib (Option of defect): Where the goods can be returned if found
defective. It is the responsibility of the seller to supply goods free of error/defect
or point out the defect to the buyer. No way is he allowed to cover the defect of
the goods which constitutes as fraud. In one of the hadiths, Prophet has stated
“He is not amongst us who indulges in fraud.” Therefore the buyer has the right
to return the good in case of a defect which is considered a defect in the market
and which depreciates the value of the goods. Eg. ‘A’ buys batteries from ‘B’.
However, ‘A’ has the option to return them to ‘B’ if the batteries are found to be
defective or not in working condition.
4. Khiyar-e-Wasf (Option of quality): Where the goods are sold by
specifying a certain quality by the Seller but which is absent in the goods. Eg.
‘A’ buys a car from ‘B’ who has specified automatic transmission of the car.
However when ‘A’ uses the car, he finds the transmission to be manual.
Therefore he can return the car to ‘B’ in the absence of a specific quality.
5. Khiyar-e-Ghaban (Option of price): Where the seller sells the goods at a
price which is far expensive than the market price, a Buyer has the right to
return it to the seller. Eg. a Parker pen is sold to ‘A’ by ‘B’ at a price of
Rs.500/-. However after the sale, ‘A’ discovers its market price to be Rs.250/-,
he has the option to return the pen to ‘B’.

IQALA (Recession of Contract)

Where parties freely consent to rescind the contract i.e. each party will give
back the consideration received by it.
Neither the buyer nor the seller has the sole right to rescind the contract after
execution of a contract. Often the buyer wants to rescind the contract after
buying goods. In this case, it is necessary that he gets the seller’s consent.

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Therefore this mutual agreement between buyer and seller to rescind the
contract is called Iqala.
In one of the hadiths, Prophet has stated “He who does the Iqala (rescinding of
the contract) with a Muslim who is not happy with his transaction, Allah will
forgive his sins on the Day of Judgment.”
However, it may be noted that the price of the goods being returned under Iqala
will remain unchanged.
Effect on third Parties: Iqala is treated as a new sale as if a new contract is
entered into between the parties rescinding the original contract.

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