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Fiqh of Islamic Finance II

Required Textbook: Understanding Islamic Finance by Muhammad Ayub Grading: Final Exam 100% (March 1, one week before last week of class) When: Tuesdays 6:45-8:00 January 4, 2011 to March 8, 2011 Basic Outline of the Course: Main topic of discussion will be Contract Law in Islam General Framework of Contracts (pp. 105-6) Types of Contracts (pp. 117-124) Promise vis--vis Contract (pp. 114-117) Elements of a Contract: Offer and Acceptance, etc. (pp. 106-110) Broad Rules for the Validity of Bai (pp. 110-114) Avoiding Gharar (pp. 44-57; 75-76; 110-111; 143-144) Avoiding Maisir/Qimaar (Gambling) (pp. 61-64; 76-77; 112) Two Mutually Contingent Contracts (pp. 112-113; 144-145) Avoiding Ribaa (pp. 43-44; 74-75; 111-112; 142-143this will most likely be in the Spring Quarter)

2011-01-04 Class Notes

Welcome to the second session of fiqh of finance. This quarter will focus on what is know as contract law in Islam. Contract law is a big course for first year law students, and of course Islam has its own principles for contract law and we will be covering that topic this term. The exam will be during the 9th week and will review the exam during the 10th week. The textbook is the same as the previous session. The syllabus describes what pages are being covered. We are still jumping around in the book since he has not put everything in the order or place the sheikh would like. We will not be covering the book chapter-to-chapter so to speak. The time is also expanded; the purpose of expansion is to leave more time for questions. Towards the last 15 minutes of class, the sheikh will stop lecturing and open the floor for questions. The goal for this is not to have an open fatwa session but to focus on learning the material and focus on comprehension. Q: Roughly how many terms is this text (book) equal to? A: Somewhere around 5 terms (sessions) or so, wAllahu alam. After next term, we will be covering the Islamic finance products and processes, innovative schemes, to get a basic idea of how they work and what is the criteria for them to be halal. This will be at least 2-3 terms. After that, we will have at least one more class discussing some of the things not discussed in the textbook, like some of the home purchasing schemes in the US. You can order the textbook online, it is not available currently at the MCA bookstore. (Note: You can also purchase it via Google Books, see link above)

Contracts Basically when thinking about any kind of financial transaction or investment, its always going to involve some kind of contract. Everything is going to go back to some kind of contract. The idea behind contract law is identifying what is a valid contract and what are the conditions a contract has to meet in order for it to be binding, what are some of the obstacles that could prevent that contract from being implemented, what are some of the rights that the contract holders or participants have with respect to annulling the contract. Differences between contracts Nowadays, when buying or selling online, is there any contract that takes place? Yes, there is at least an implied contract but it is different than if done face-to-face like in Safeway. Old school buying and selling. Once you go to the Internet, you are dealing with products that are not physically seen or exchanged in person. What are the limits of canceling such contracts? Do you think Islamic law has all of these points nicely tucked away? The Shariah will provide principles, sometimes broad and sometimes specific, for any kind of contract. Now if these principles are provided, where do the details come from? The sunnah is the source of the Shariah in many ways. The details would come from many different tools of the Shariah, for example qiyyas (analogy). Origins of Contract Laws A first year law student will take contract law in the US. Where do the details of this contract law come from? Everything in England is what is called common law, there are no written books. The US is beyond common law and has a written constitution. When it comes to contract law, there is something called the UCC, or Universal Commercial Code,which is pretty much followed by most states if not all. Shariah and UCC Are there similarities between the UCC and the Shariah? What if the Shariah is silent regarding an issue covered in the UCC? One principle in the Shariah is that one accepts the urf, customs of a people, as long as it does not conflict with the Shariah. These customs become law like the Shariah. In the UCC, this has sort of become like an urf for muslims living in the US. For details not covered explicitly in the Shariah, we can go to the UCC for details. Q: When the rules are applied according to the urf, does it have to be in accordance to the Shariah? A: They cannot contradict the Shariah if they are followed. These rules will vary region to region and profession to profession as well. As long as it is recognized, it can be considered urf. For example, if someone is going to build a house for you. You enter into a contract with a general contractor. His roles and responsibilities, even if not spelled out explicitly in the contract, there are things that are known to be the job of the contractor. He cannot come back and say that he did not know about these and they were not in the contract.

There may be things specific to the type of contract, i.e. houses and car related contracts can differ. This is why lawyers make so much money and why they have such extensive libraries of books in their offices. Aqd


The Arabic word for contract is aqd (

What does this word imply linguistically? It is something tied or bounded together. This is why we call our beliefs aqeedah. The word implies some kind of strong bond or tie between the parties that have entered into the contract. Definition of Aqd The technical definition: different scholars have given us different definitions. A couple of definitions, from the textbook: (pg #?) - The conjunction of an offer emanating from one of the two contracting parties with the acceptance by the other in a manner that affects the subject matter of the contract. Theres a famous book called majele al akhaam al-adliyyah (

During the time of the Ottoman empire, the later stages, when there was an attempt to modernize Islamic law (hanafi scholars) and organize the laws. There is an english translation which is based on the original turkish text. They translated aqd when two parties take up obligations in any manner. They are describing it in a general sense. A marriage contract is a kind of aqd. Among the modern scholars, one by the name of Abdurrazzaq Al-Samhuri ( ) described it as being a concurrence of two wills to create an obligation or shift it or relinquish it. He is mentioning something here, a concurrence of two wills. An aqd is supposedly a situation where two parties want something and meet at a certain point and thats where they agree. There has to be some kind of concurrence. In a contact, we have the existence of: - Two different parties - We have an offer that is supposed to be representing the will of the party (what the party wants) - We have an acceptance (the other party is agreeing to the wants) and - There has to be agreement on what is being discussed. Relationship between Aqd and Promise Once this aqd is agreed upon, from the Shariah point of view it is important for all Muslims to fulfill obligations of an aqd. Bai3a to a ruler is also kind of aqd. (The plural of aqd is 3uqood. ) Allah says in the Quran

O you who have believed, fulfill [all] contracts. Surah Maeda verse 1. Question related to aqd: What is the difference between an aqd and a promise? In arabic, what is a promise? wad (.) What does the word promise mean in English? It is a commitment to do something. In American English, is a promise legally binding? Not really... (a promise is not legally binding) For example, you are hiring someone to build something. Now, the building has not actually taken place yet and maybe a down payment is given in installments. When the contract is signed for work not being done, is that a promise to do the work (ie build what is described)? In that contract, is there not a promise? Ambiguity in the use of the word Promise The word promise as used in contract law in English is very ambiguous. For example, Blacks law dictionary will give a broad definition. It could be a binding process in law. Even the word promise is used ambiguous in innovative Islamic financial schemes. What is meant by promise is of great importance in contemporary Islamic financing. Ayub in the text gives some examples of ways promise is used in supposedly contemporary shariahcompliant transactions: Promise in the context of leasing A typical car lease in the US. At the end of the lease, what is typically found in the contract? The option for a buy-back of the car for the value determined by the car dealer. In the shariah, there is a big problem with this. It is a fundamental issue in Islamic contract. There are two contracts in one here. The Prophet saas prohibited two contracts in one. (insert hadith, [bayyatin bayya Br Waleeds help is needed here]) There is a lease contract and tied to it is a sale contract in the end. It is binding on the one giving the lease of the car (i.e. the dealer). Thus it is two contracts in one. There are a lot of problems with two contracts in one: 1) Usually one of the two parties will be hurt in these situations, and 2) These are easy ways to get around riba when there are two contracts in one. The banks know that this is haram (US banks who do shariah compliant lease contracts know this is haram) and that no shariah board will approve. Instead what is done is they sign the lease and in the lease, they put a promise from the one who is leasing the car that he will buy the car back at the end of the period from the Islamic banker, so it becomes a promise on the lessees part. Its a contract and a promise. Therefore, every Islamic bank using this follows a view that a promise is legally binding. So having a way around by having one contract and one promise is also not permissible because irrespective of the term they used if there is binding this means it is one more contract. Questions about promises in contracts

A lot of the Islamic real estate schemes will sell you a house that they dont actually own. Can someone sell you something that they dont own? They tell you to go find a house you want to buy. Say you find a house $3M they dont buy that house and make a deal with you instead they make you sign a binding promise that you will buy the house after they buy it, they are not going to buy it unless they get this piece of paper from you which is a promise that you are going to buy from them. Then they sell your loan to Fannie Mae (financial institution, a mortgage broker that deals in debt, they originate all the mortgages in the US). You are going to pay them over time but they want the money now. They sell the loan to Fannie Mae to get the cash upfront. So they are asking you make a promise and make that promise binding. What are the Shariah problems with legally binding promises in contracts? A big question that needs to be answered: While this debate will continue (ed: whether promises are binding or not), enforceable mutual promises will continue to provide Islamic banks with a means of fixing their financial rates of return in advance, i.e. nearly guaranteed profit margin. (This quote is from the textbook.) Basically what they are trying to do it to remove all of these from themselves and get fixed return which sounds like Riba. What is the difference between doing this and calling it shariah compliant and what the jews did on the sabbath ? The story of the Jews on the Sabbath; on Saturdays they are not supposed to work, however they trapped fish on the Saturday by setting the nets the day before and collecting them the day after the Sabbath. They are just trying to find some way around their shariah. Did Allah swt approve of what they did? No, in rather strong terms Allah swt did not approve what they did. Unfortunately we are also following the same thing to find some way to get around riba and claiming that if you want to make money you have to accept risk. Risk of Loss cannot be removed We are not talking about risk of default. It occurs in every contract. We are talking about risk of money invested with loss incurred. The two risks are very much different. We are concerned about removing the risk of loss, the investors have to bear the burden of loss of investment and not ask for guaranteed profit in a contract. There is a difference between something being morally binding and legally binding. In Arabic, one of the names used for riba is faidah, profit. Q&A Session: There is an entire chapter on leases which we will discuss later. Q about MARRIAGE!! contracts. In the Hanbali (or hanafi?) madhab, conditions are allowed in the contract. If the husband, for example, violates these conditions, it does not mean that the marriage comes to an end but the wife has the right to go to a judge to enforce the conditions or a right to a divorce. The madahab differ on conditions in the marriage contract. The marriage contract is not exactly the same as a business contract.

2011-01-11 Class Notes

Definition of aqd can be found on pages 103 and 104 of the textbook. Today, we need to finish the discussion of promise. What is the difference between promise and contract. Whether a promise is binding or not! The reason why we will spend time on this is because, this idea of a binding promise, that is virtually a contract. That is behind many of the innovative schemes as discussed in the book (pg 106 ??), including murabaha (entering into an agreement with the bank that they will buy and then) ijaarah, diminishing musharikha etc. These are all different things that we will be talking about in detail inshAllah. These are all dependent on, for them to work properly for the institution in the way they want, the promises they make have to be binding. They force you to promise to perform some action. This is very strange and suspicious to force someone to do promise to something. English word promise The reason you need to understand the English word promise is because there are a lot of different nationalities involved and their common tongue is English. So they use the English word. The English word promise is a little bit confusing with respect to contract. Because any contract you sign that burdens you to fulfill an obligation is essentially an agreement/promise you will fulfill. This is also called a promise. One of the text books says the binding promise is the essence of the contract that the law will enforce. And then it says a promise such an expression is binding whether enforceable by law or not. Even in English you have something which is a promise which can be legally binding. Shariah definitions of Arabic word Waad When we use the word promise in the English language it is not the same thing as the Arabic word waad. The first question is: What is the definition of Waad. What is it according to shariah? First one is a Maliki traditional definition: It states that it is the pronouncement by the promisor, of his intention to do something good by which the promisee will benefit. So basically the whole idea it has nothing to do with business and it is not some kind of putting on yourself burden or some responsibility. It should be an intention to do some kind of good. Another contemporary scholar defines a promise is where an individual does something good for someone else like giving someone a loan etc or to do some good deed. Promise is really something independent of a business contract. If you make a promise is it binding upon you? Is it binding morally? Do you have to fulfill it morally? Yes. Is it wajib? One thing that all the scholars agree on that when you a making a promise and you have intention not to fulfil it then this is a sin. When you promise something you should always say inshAllah. What about legally? Actually when you look at the fiqh schools there are at least six different opinions whether or not (morally and legally combined) a promise is binding or not. Different shariah opinions about the binding nature of a waad

Opinion 1: A promise is binding both morally and legally and it is obligatory. The ulimah who gave this opinion were not aware of the innovative schemes in the 21st century, we have to keep this point in mind. If you go from Arabic to English in the law dictionary then this will not convey the same meaning. Waad was not used as a portion of a business contract at that time. This is the opinion of Abdullah b. Umar and others. This is also the opinon of Ibn Shibrama (a Maliki judge and maybe from Andalus). The shaykh highlights him in the contemporary writings when they discuss promise thats the only view they give. This doesnt meant much to the people generally. Ibn Shibramas name always comes up on this point. That is one opinion Opinion 2: It is morally wajib to fulfil a promise but it is not legally binding. in other words you cannot take someone to court if he did not fulfill the promise. Many times back in the days you might promise someone something like buying a new car and someone promises to lend you the money. its not a business contract. It is one of the specific categories they mention. Suppose he doesnt lend you the money and you were dependent on that loan. According to this opinion morally I have to fulfill the obligation but you cannot take person who broke the promise to court. Tajudiin as subki shafee scholar held this opinion. Diyanatan(deen wise) it is wajib not from a qada (judge) point of view. There are some sins you cannot take someone to court. When you see some of the other opinion how some scholars taken the ramnification of the promise in to effect. Opinion 3: It is recommended but not obligatory to fulfill ones promises. From the religious moral point of view, it is recommended but not obligatory to fulfill ones promises. If it is just recommended then you cannot force someone to fulfill it in court. This is the majority opinion of the shafiee, hanbalis and some of the malikis. Even though it is the majority opinion of the scholars, the shaykh thinks sometimes its not clear if its morally or legally. For example ibn abideen the hanafi scholars later scholars and one of the best. He was asked about someone who promised someone to give him a piece of land and he did not fulfill that promise. Can they force this man to abide by this promise? ibn abideen said that it is not obligatory from the shariah point of view to fulfill. If he does good.

Opinion 4 (and 5): Conditions dictate whether the promise is binding / Liability of a contract forces the promise to be binding (Majority maliki opinion) 4 and 5 opinions combined is that if someone makes a promise to someone else and based on that promise the promisee does actions i.e puts some burden upon himself like for example if someone wants to get married . It costs money. so it costs 30K dollars the other person says i will lend you 20K, the person starts getting into the process. So the person has now spent 10K. so this persons promise was the cause the person put some burden upon himself. Some scholars (still not a business contract) then it is becomes binding both morally and legally for the one who promised. This is basically view of the malikis. This madhab said if the person is stuck because of your promise then its binding both legally and morally. So lets say he lies if it comes to the court. the burden of the proof is gonna be on the one who says he made the promise. You would have to witnesses. The burden of proof would be on the plaintiff who is

claiming of the promise. Promises and Contracts can be verbal (contracts dont have to necessarily be in writing). Opinion 6: Promise is binding if you are absolutely serious when making the promise (Al Ghazalis opinion) This leads us to Al Ghazalis view. People promise all sorts of stuff. They may not really mean it. They may not expect you to go for it. Al Ghazali says it is only legally binding if the person was absolutely serious while making the promise. The way you know he was serious is if he swears by Allah or brings witnesses. Promise is to do some good to someone. Thats how the contemporary people use it. In this case we are both benefiting. So its not mutual benefit but is unilateral. Very important point. Even if someone buys something from you, the buyer in the same majlis(sitting) can change his mind. No one can claim its binding. It is problematic when you now say its binding. This is what the shariah has taught. Evidences for opinions Each group presents some evidence. We know that fulfilling promises is obviously something very important in the shariah. In Surah Saf (61:2-3), Allah swt says:

Muhsin Khan: O you who believe! Why do you say that which you do not do?

Muhsin Khan: Most hateful it is with Allah that you say that which you do not do. One of the ways Allah describes the Prophet is that they fulfill promises. Allah describes Ibraheem as:

And [of] Abraham, who fulfilled [his obligations]. Surah An Najm V 37 One of the signs of the munaqfiq is that when he make s a promise he breaks it. According to the hadith of the Prophet . Most of the ulama understand this to mean not strict obligations. One of the reasons they say this is, this goes back to definition of promise. When you make a promise it is like giving a gift which is a hiba. So there are certain ahkam for al hiba. One of the rules for giving a gift is that gift giving is not binding until that thing changes possession. You are free to change your mind at the last moment. It is not binding. They say that this is in essence is not binding like the giving of a gift. All of the madahhib agree you should say inshAllah. When you say inshAllah its not a loophole. It may not come to pass. Another hadith which is weak: there is a hadith in muwatta of Imam Malik. Someone came to the prophet and asked, Can I lie to my wife? He said, there is no goodness in lying. So the man said

sometimes I promise my wife but then I don't do it. The Prophet said la junaha alayk - there is no burden upon you. With regards to Opinion 4 (maliki opinion about conditions dictate whether a promise is binding), this goes back to the hadith of the prophet there should be no causing of harm and no reciprocating of harm. By pulling out last minute after you made a promise you are harming the person. There are some good things behind the maliki view but has condition. The promisor should know full well the person is depending on him. It should be something where he is made aware of the fact that both parties are acting on this promise. OIC resolution of waad The shaykh gives the decision (qarar) of the majma3 al fiqhi of OIC (Organization of International Conference). In this council you will find the most divergent opinions because of the diversity of the scholars (including scholars from Iran representing the Shia school). They would publish their findings annually. They would come up with resolutions. The OIC discussed the question of al-wa3ad. What is nice about there publication is they publish the article and even the details of the discussion. It seems the final resolution is based on vote. Sometimes there are a lot of things pointing to a different direction. There are published on the Internet. In Arabic it is called majma3 al fiqhi. Its two. One by OIC and rabatah al islamii. The shaykh emphasizes this because the book is in English and gives you half of the resolution and not the other half. They distinguish between alwa3ad and al muwaida (it implies some kind of reciprocity). This not just a promise. It is like the initial stages of some kind of agreement. A promise to agree to something by two parties. Former is unilateral promise and latter is bilateral. Discussion of the OIC statement on al-wa3ad First of all OIC states that waad is a unilateral promise. And they say it is binding on the promisor (from a moral point of view) unless he cannot fulfill it. And then they say it is legally binding, if it is related to promisee incurs some kind of liability based on that promise. In other words it is the same as the Maliki perspective which states that a liability of contract can make a promise binding. So for big business transactions if its a sabab, it forces the promisee to incur some kind liability then it is legally binding. Therefore the promisor maybe forced to fulfill the promise or pay the actual damages to the promisee. There is a distinction of paying the promisee and fulfilling the damages. The shaykh thinks that this is much fair from the shariah perspective. The promisor should be held responsible for just the damages. This is only if the person did not fulfil the promise even though he had the means to fulfil the means. Then the OIC talks about the bilateral promise or initial agreement. The discussion about bilateral promise is not covered in the textbook. The OIC said that a bilateral promise is permissible with the condition that both the parties (or one of the parties) have the option to get out. if there is no such option then this is not permissible. There has to be an option. When you go and buy a house they will make you sign a promise that is binding. The bank forces you to sign a binding promise to remove all of their risk from the contract. Lets say you change your mind. They want to make a profit of you. They are trying to escape the shariah principle (of risk). They are saying you

cannot make such a promise that is binding on the parties. In contract law there is such a thing as a promise to offer. By the way most of the times the house is already in the hearts of the people. Legally they should have the option. The reason for this is to make sure that something that is not allowed in shariah to encroach in the contract. If there is no option in the bilateral promise, then it is not permissible. You dont want to allow something that is disallowed in the shariah. You cannot sell something you dont own. Their point is that these promises 1. if they are treated as binding like a contract and as such create a contract not allowed in the shariah then it cannot be considered binding. having two sales in one contract is not binding. If the promise creates a kind of contract that is not allowed in the shariah, then it cannot be considered binding. We must also keep the principle of sadd udharaia3 blocking the means that people use to get around the shariah. You should not enter into something that is illegal from a shariah point of view. Dont enter into a contract that is not correct. There must be need or necessity. The author of the textbook has some interesting discussion where he contradicts himself. We will discuss it in the next class or after the Q&A session if there is some time. Q & A session: Q: Why is the promise of the Islamic financing contracts harmful or how does it differ from the binding nature of a promise due to liability of a contract? A: Basically they are trying to escape from risk in the contract. Essence of riba is a risk free profit. That is essentially what theyre trying to do. Sheikh had a friend who applied to one of these places, since these places take your mortgage and sell it to Fannie Mae who enforce certain restrictions on the mortgage contract. This one brother who was applying he was clearing himself of riba, he sold all that stuff and wanted to buy the house through halal way, he didnt qualify with the Islamic financing firm and they suggested to him, why dont you buy it from the bank your credit is fine! :) Q: Warranty of products A: You can get some warranty with a product that you buy. But if you buy extended warranty for a product, that is a completely separate contract. Whether the warranty is halal or not, is a separate issue which we might discuss later. Made to order contracts?? Q: A: Risk of default is there in any contract. It is independent and can happen everywhere. If this risk is very high, then it falls under a separate category and we will discuss it later.

2011-01-25 Class Notes

Relationship between Wa3ad and Islamic Business Contracts

The Shariah differentiates between al wa3ad and a contract. Al wa3ad is basically is the pronouncing your intention to do good to someone else. As such it is a goodly act. It should never enter the business realm. That wa3ad should never enter in the business realm. when you make that wa3ad then the believer does his best to fulfill it. That kind of promise is not legally binding. However as a result of not fulfilling that promise if you cause harm to someone and you do not fulfill your promise then according to the Maliki madhab then the other party can resort to the courts in order to force your to fulfill the promise. Either force you to fulfill that promise or make the individual whole. If you are talking about business kind of mutual agreements there are some kind of business transactions in which it puts a burden and you must nor fulfil it. If I build something and you promise to give me something and you back o In English law the promise is either binding and not binding. They dont differentiate between what is a legal contract and what is not a legal contract. This would be a kind of legal responsibility. As such you are legally bound to fulfill it. This is where you have entered into a legal contract. Promise is the basis of any contract in Western Contract theory but the fuqaha do not consider this as a alwa3ad. Al wa3ad is unidirectional, only one party is making a promise. While bilateral agreements in general are either non binding or they are binding. If they are non binding, then they should not be made binding if by treating them binding you are making things in the contract that the shariah has not allowed. This is something the shariah will not support and thus it is not binding. Interesting to see in the textbook how he soldifies his position. This idea of binding promise is the key to the Islamic financial products. It is very important they get a fatwa on this. UAE just issued a fatwa that the bank riba is permissible. We are actually discussing the core Islamic financial industry principle. Muhammad Ayub on page 112 mentions that the shariah has prohibited two mutually contingent contracts. Two Mutually Contingent Contracts Two mutually contingent contracts means that there are two binding things at once. He gave some examples of such contracts. The sale of two articles one who intends to purchase one item he has to buy the other one for a certain price. Two contracts in one not allowed. Third example he gives of a contingent sale. Basically, i will sell it to you if you do x y and z. Fourth example, combines sale and lending in one contract. Like lease with option to buy . Profits with liability Next on page 113, he talks about important principle. Profits with liability. This principle states that profit entitlement only when he bears the risk of loss. This is important for sale by hire or partnership. Then on page 114 he says that keeping mind the present day business practices contemporary scholars have reached a consensus that al wa3ad is binding and enforacble by law with the only exceptions being acts of God. Shaykh says absolute certainly its not true that the contemporary scholars have reached a consensus that wa3ad is binding and enforceable.

Later on the same page, talking about a similar kind of promise. Some scholars have criticized this concept. Many edicts have declared binding. First he says its a consensus and then the scholars have criticized it. Why does he say it? Critique of legally binding promise by Dillon Ray Dillon Ray who is not a Msulim, has written a book on contract theory and he feels uncomfortable about the binding nature of a a promise. Muhammad Ayub quotes Dillon Ray and then answers him. Then on the next page he says many traditional jurists such as Malikis, Hanbalis and almost all contemporary jurists say that binding promise is allowed. According to the Shaykh all of this is not true. Just in those few pages this is a slippery slope they are going on. He starts with the asl and then he moves from one position to the other by going from one to the other and make the promise binding. He is squarming. Unfortunatley many shaykh put themselves in this position when going on the shariah board. In fact the majority of scholars say it is mustahab to fulfil the promise. How can you get from that to say that the promise is legally binding? The jump has a reason behind it. Just to give you another view from another book, Criticism of Islamic Banking There is an individual who used to work in the industry. His name is Muhammad Salim. He has wirtten a small book on Islamic banking and in it he says, that the Islamic Banking is $300 billion deception. He talks about murabaha. Origins of Murabaha Contracts Murabaha is cost+sales contract. It began as this. If people enter the market and they are unskilled preinternet times the idea was that they will ask the people of the area who is an honest person. He finds that honest person and finds the things they want. They ask him how much is the cost and how much profit rate do you want. Originally it was very simplistic idea meant to more then anything else to help the buyer. So a lot of money of the contemporary Islamic banks make is via murabaha. Lets say you are a business man or an investor. You open a rental car business you go to the bank and you tell the bank you need 30 rental cars. if you buy them i will buy them at the cost and a certain markup. Now is this a binding promise? Is this promise one sided? If you go buy that i will buy that from you. This is not wa3ad but a mu3ahida. This contract has two mutually contingent contracts, I will buy the cars at certain markup if you buy them for me. This two party promise is not permissible. Quote from the paragraph as practice by the islamic banks, the central problem bank keeps their ownsership period very short. it may not amount to few seconds and are closed ...... Basically as they buy they transfer ownership to the buyer. What is more the bank does not take any operational risk. Indeed like a real trading transaction the bank purchase it only after the customer agrees to it. The bank gets a pre agreed price. this is not from the shariah and is cloaked in Islamic form. When it is in fact riba. The islamic banks go to great lengths to not take risks. Muhammad Ayub said the same thing. Profit has to be associated with risk. Islamic banks have arrived to a wonderland where they use language and found loopholes the spirit of isIamic dealings is not there. Pages 26 and 27. There are other books.

Non muslims also tear apart Islamic financial industry. Here the muslims say this and that and in reality they are doing the same thing that capitalists are doing. the reality is that the promise is not binding in a business setting In Islamic contracts you cannot sell something you dont own. That is what they are in essence doing. if it were an option then he is free to get out of it. the bank has to be at risk. the bank has to take possession of the goods. They dont take that ownership. its just an exchange of money for money? Shaykh when we say risk, is it not in the mind of all business people to reduce risk, what is the Shairah understanding of risk and ways to reduce it without going to areas of prohibition You can try to eliminate operational risk. However you cannot remove the possibility of risk by tying people to something. If you do eliminate all risks from a contract then you are no longer entitled to profit and it becomes riba. Profit is associated with risk in Islamic contracts. take the marriage contract it follows the same pattern as the business contract. when you enter into the contract it makes the party legal to one another and it imposes on them certain obligations and gives them each certain rights. the husband is supposed to maintain the wife. would we call that a promise? from islamic perspective its not a promise. in western contract in a prenup they will call that a promise and make it legally binding. Not so much in shariah. it distinguishes between mu3ahida and wa3ad. Arabic is much more powerful. bilateral promise cannot be used in business. at the minimum it will have two contracts in one. Books written before 1985 the Muhammad Najatulah Siddiqui, Fazlu ur Rahman are some of the authors who have written on Economics in Islam. Now if you pick a book on Islamic banking it is might be biased after the recent Fatwas (books after 1985/1990 tend to be less biased). It doesnt have to be ribawee or have some other problems with it. Any islamic bank out there now? There are some better then others. Malayisa is leading on the accommodating fatawa. The rest of the muslim world doesnt accept. Will talk about them later. Much of the research is in the malaysian sector. Assembly of Musilm Jurists in America(AMJA) AMJA when shaykh attened their conferences it was in Copenhagen and then was it was in S. Africa after that. The imam training programs.When asked What were you doing in Copenhagen Shk Answered he was attending the conference for AMJA(full not the acronym). Amja also offers fatwa line. The difference between a fatwa and a resolution, fatwa is from the specific Mufti and Resolution is collective agreement of the Jurists. Aqd: what is an aqd? it is a contract. It is a vague term in english. If you go to the store and you get 10 bucks for candy and you take that candy was there any contract involved. no one thinks of it. Financial transaction that took place and there has to be a contract behind it. What do you need to have a sales contract? Two parties offer and acceptance object of the contract exchange of produce/money = may be the result of the contract

When you talk about the Hanafis - the main objective/arkhan/rukn.(shk dropped this, did not elaborate) You say the main components of the contract are 1. Contracting parties 2. Offer/acceptance 3. Object of the contract 4. Contractual Sesssion For the majority of the fuqaha, the elements, rukn/arkhan of a contract are made up of three things. These form the central components. 1. Offer and Acceptance 2. Contracting parties 3. Subject Matter/or Object of the contract. Some contemporary scholars add 4. Contractual Session. Rukn, Shurot, Obligation. The shurot are external/met prior to the action. The Arkan: Central component - If you do not fulfill these the central component or obligation is not fulfilled. e.g. Salah Facing the Qiblah = Shoroot Actions of the Salah = Arkan

For E.g. in some of the madhaib(may be all, shk has to check). If you miss one of the Arkan, it invalidates the whole rakaa that was performeed. but in some of the madhaib if you miss the obligatory (nonintentiona) then that does not invalidate the salah, but sajda sahw has to be performed. In Some Madhaib, the first Tashahud it is wajib and in others it is sunnah. (there is no atonement for missing an Arkan, if you miss a Ruku there is no Sajda Sahw. Instead, it invalidates and has to start over again. Atonement(correction) is only for Wajib and Sunnah). In Hanafi fiqh there is only one Arkan for contracts - it is Offer and acceptance. This difference between Hanafi and non-Hanafis has no real effect. It is considered matter of semantics. Contract Theory is about - taking the three arkan above and discuss and arrive at make the contract completely binding make it suspended what may occur to make it void what may occur to make it non-binding what may occur to make it non-binding on one of the parties

The ultimate goal is to define what are sound/binding contracts based on the Arkan. We should understand a few concepts: 1. As Sahee (eg. Al Aqd As Sahee) and Subset of above Ghair Lazim, Sahee non-binding 2. Al-baatil (a void contract, does not meet the requirements of a sound contract) For the three Madhaibs Hanbali shafai and Maliki - a contract is going to be Sahih or Baatil For the Hanafi there is a third category - Fasidh, a defective or incorrect contract Q&A Q: Islamically, loans are a brotherly act, would the banks also do it with the same intention? A: That was what the books previously (before 1985) talked about it. Q: What kind of service would that bank offer (which does not have the incentive) A:

2011-03-22 Class Notes

Terms related to contracts Some analogies may be given to the marriage contract, because of the fact that it is a contract and it parallels in many ways the same basic ideas of a financial arrangement. Types of Contracts A saheeh ( )contract. Means something which is valid or sound. In contract theory, there are contracts that are saheeh. One that means all of the arkaan and all of the preconditions for the contract to be binding and have legal force. Opposite of saheeh contract is a baatil ( )contract. Analogy between contract and hadith does not apply only to saheeh but also to baatil. A baatil contract is void, and therefore does not have any validity. For example, if it is a sale contract, you will not have a change of ownership. It is as if the contract did not take place. For the majority of the scholars (Shafiis, Hanbalis and Maalikis) they divide the contract into two types: the contract is either sound or not sound. The Hanafi school introduces another term -- faasid (.) When a non-Hanafi refers to a contract as faasid they really mean baatil. The important thing is to discuss what the difference is between these terms. Faasid means there is something not right with the contract; you have to look at the contract and say what is the issue with the contract and say that certain parts have problems. They may specify that the contract still has some legal ramifications. Or they might say that it can be fixed. This is a very big difference between the madhaahib. If you look at modern innovative financial instruments, then this can lead to a very different outcome. If you dont take the Hanafi view, then you are

saying the contract was void from the beginning. There is a big difference between saying there is a contract but needs to be fixed, and saying that the contract had no validity. What are the differences between baatil and faasid contracts? So the Hanafis, look at a few issues. The key criteria is an offer and an acceptance. If there is an issue with the offer and acceptance, e.g. the offer was not sound, then from a Hanafi perspective, they will say the contract is baatil. But now contracts are so complex -- 20 to 25 pages long. So there are a lot of things besides offer and acceptance, such as guarantees or other external non-essential attributes. So if there is something in that contract and it is not quite right. Can a faasid contract be fixed later? If a judge sees that after a month, then the Hanafi perspective is that not everything will void the contracts. So they look at the external non-essential aspects of the contract and if there is a problem with the non-essential part, then they would regard it as faasid. Theoretically it can be fixed. Obviously if the defect is not something that cannot be fixed from a shariah perspective, then it can not be fixed. For example contracts dealing with Sale of alcohol, here the item being sold is haram, and this is considered an essential part, and hence there is no way to make it valid. But imagine A is selling something to B, and this is paying over time. But there is a clause that says: you have to pay interest if there is a late payment. The strict non-hanafis would say this is a baatil contract, and the change of ownership never took place. But according to Hanafis it is faasid and the contract does not need to be redone. Then the individual would get his money back if he paid a late penalty. Basic elements of the contracts are going beyond just offer and acceptance. E.g. selling something not owned, or selling something that doesnt exist. Example of things that will make a contract faasid is aspects of riba or uncertainty. For example, the price that is to be paid for the car, from the Hanafi point of view, this can be fixed later. How do the Hanafis determine what is essential? Sheikh read a PhD dissertation on this topic and he came to the conclusion that there are no strict guidelines for it. The definition of what is essential is not well defined. Is knowingly entering a faasid contract haraam? If you enter a faasid contract knowingly, then it is haraam. Because you are purposely trying to not define the price and then after the fact raise it. For non-Hanafis, these contracts are baatil. In Saudia, some people would borrow money from western banks and then later take it to the Sheikh and ask them to cancel the interest portion. This loophole has been fixed by the Saudia courts, which allowed some to borrow money and then renege on the payment of interest based on the faasid aspect of contracts. What about coercion in the contract? Hanafis would argue that it is faasid because it is fixable. The hanafis have an interesting view when it comes to coercion. If someone is coerced into doing something, then you had some free will in doing it (you could have chosen to suffer the consequences by not accepting under coercion).

Sheikh gave the example of shotgun marriage contracts in the US, when a father of a girl arrives with a shotgun and forces a boy to marry his daughter because she is pregnant. They argue that the will was there, but it was not complete, this contract is not going to be baatil it will be faasid; indeed it becomes suspended (mawqoof -- -- )it is left to the person who is coerced i.e he can say that he accepts the marriage or he can reject it. In case of shot gun marriage i.e. faasid they do not say that marriage baatil and if they have children then the children are legitimate. If the exact object is not described, or the exact selling price is not set, then they would consider this faasiq. So the fix is to remedy the issue. If the price is not compeltely determined and the contract has 3 or 4 pirce they would say this is faasid and not baatil and the remedy has to be what is the missing in the contract ie. Choose one price. The Hanafi view has some benefits, but it also adds some difficulties. To say that a whole 25-page contract is void because of one incorrect part seems difficult to live with. But sometimes they go too far and have fully thought about this. There is still room on their part to define what constitutes between baatil and faasiq. Conditional Sale I will buy your house on the condition that somebody will buy my house within 60 days. Are conditional contracts like that baatil or faasid from a Hanafi perspective? From the Hanafi perspective, it is faasid contract. To make it sahih, they have to remove the contingency from the contract, it has to be buy it right now and not make it dependent upon selling your house. Hanafis make distinction between a faasid sales contract which has already taken place and the one which is not taken place. When goods and money have already changed hands and when they have not been consummated. For a faasid contract where goods and money have not taken place, and if it cannot be fixed, then it is made baatil. Undoing whole contracts when there is something wrong with them can be confusing and can cause lot of harm. Hanafis consider themselves to be very pragmatic. Things for a contract to be considered Baatil in the Hanafi perspective: 1. Offer and acceptance. 2. If there is something externally incorrect such as riba Q&A Session Putting conditions in a contract are acceptable, however making a contract contingent upon a condition is not allowed. Majority of scholars agree that prenuptial agreements are not valid, however Shaikh has written an opinion that they are valid. Different kinds of pre-requisites of a contract () Shuroot Al Iniqaad (

Shuroot required for initiating a contract, such as sanity or maturity of an individual. If person is not sane then he cannot enter into a contract. Contracts that do not this shuroot, are they baatil or faasid from a Hanafi perspective? In general they will be baatil. Suppose a 11 year old buys an expensive game without permission from his parents, is that contract baatil or faasid? A child could have spending money and can buy some candy is okay, but something that is expensive or not typically considered allowed by customs of the society, then it is faasid. If the urf or customs of the society are changing, that children are allowed to spend $200 - $300, then the contract is considered sahih. Shuroot Al-Sihha () Shuroot required for the soundness of the contract. Two people who are legally competent to enter a contract, but even when they enter into the contract, there are still some conditions that need to be met for the soundness of the contact. Shuroot Al-Nifaath () Shuroot required for executing the contract. Conditions that must be fulfilled before the contract can be put into practice. There might be some contracts with conditions in them, for example if money transfer is involved, then the transfer has to take place, if these conditions are not met, then the contract is considered to be suspended Shuroot Al-Luzoom () Conditions that must be met to make it binding. We will discuss these shuroot next time and the ramnifications of not meeting these shuroot. Q&A What about contracts involving Shafies and Hanafis, and the Hanafi scholar consideres it to be faasid, what should a shafiee do? There has to be a ruling authority and they are forced to choose between the shafiee and hanafi opinion. There was a time when there two courts and this could be problematic.

2011-03-29 Class Notes

We discussed the prerequisites for a contract. We are trying to determine a sound and binding contract and differentiate it with unsound and/or non-binding contracts. Last time we discussed four shuroot or conditions or pre-requisites. Shuroot Al Iniqaad (

) Shuroot Al-Sihha () Shuroot Al-Nifaath () Shuroot Al-Luzoom ()

If conditions for initiating a contract are not met, then the contract will not be valid. For non-Hanafis it will be a baatil or void contract, as if the contract did not exist in the first place. A insane person does not have the shuroot to enter a legal contract and the contract is baatil. If person is able to legally enter a contract, but there are certain aspects of the contract that are not valid, selling something that you do not own, or price is not determined, then the contract is not valid. The hanafis try to determine what is it exactly that is not met, if it has to do with the essence of the contract, then for the Hanafis also it is baatil. But if there are some secondary issues with the contract, then the Hanafis will determine it to be a faasid contract. The part that is faasid needs to be rectified. If Shafiee says this contract is faasid what does he mean? It means the same as baatil. Shuroot Al-Nifaath () Shuroot that are required for the execution of the contract. Some of the earlier conditions are met. This is for the Shafiee and the Maliki madhab. They consider contract to be suspended or mawqoof ( )if it does not meet the shuroot al nifaath. In this case, the defect needs to be fixed or removed and the contract will become sound. If a minor enters into a contract, he is not fully capable for executing the contract, then this contract is suspended until somebody enters the contract on behalf of the minor. One type of mawqoof loan is a Fudhooli ( )arrangement -- a word used to describe an agent or gobetween. But he is not given any legal authority. He brings the parties together, then the person for whom he is acting as an agent will pay him. Sometimes he will arrange everything, and will prepare a document that looks like a contract, but it is mawqoof, since the person can not be considered to have the power to execute the deal. Another type of mawqoof is the contract with lien on it. Mortgage: someone has a lien on a property. the owner cannot dispense the property without the permission of the party who has a lien on that property, this is true in shariah perspective as well. If you try to sell property that has a lien on it, then the contract is mawqoof or suspended, until the party that has the liens approve of the sale. The term may not be the same with Hanbali or Shafiee but they have this concept as well.

Difference between fudhooli and wakeel Wakeel has legal authority to enter into a contract. Whereas a fudhooli does not have legal authority to enter into a contract. So a contract with a wakeel is binding and is not suspended. Shuroot Al-Luzoom () We have contracts that are binding and non-binding. What do we mean from the Shariah perspective? Binding Contract is Laazim () Non-binding Contract is Ghair Laazim (

In a non-binding contract, any of party involved in the contract have the right to unilaterally void the contract. Some contracts by their nature are non-binding. For example: agent (wakeel) arrangements are nonbinding. At either time, the arrangement for agency can be stopped by either the agent, or whom he is an agent for. Similarly, depositing something with someone as a trust is a contract, this is also a non-binding arrangement. The one you deposited it with may return it at any time, and the depositor may get it back at any time. If there is an option in buy-sell contract e.g. return within 30 days, then the contract is non-binding, since the party has the right to return the goods. When the economy in the US was good, buyers could return an item that was bought within any time limits. Now they are getting stricter, 30 days to return an item. This option given to a buyer makes it nonbinding. In shariah, you cannot make a contract to be non-binding for ever like having the policy that you can return the goods whenever you want may be 20 yrs down the line, there has to be some time when the ownership has to be transferred, and it becomes laazim. Depending upon the various shuroot the status of the contract differs and if all of the conditions are met, then the contract becomes sound, legally binding contract. Q: Is there a time limit for fixing the various shuroot? A: It cannot be open ended. It has to be fixed, voluntarily and mutually by the two parties. Q: Mawqoof is a sub category within faasid, right? A: Yes, it is sub category of faasid. Q: For the 30 day return policy, should the seller also have right to get the commodity back? A: No Q: Can a party that is impacted by a contract but is not involved in it, can he raise objections based on the shuroot? A: In general the answer is no. This is a particular field of study in fiqh, where you have legal rights to do it but you are not allowed to do it, because of harm to the parties. This is a topic which will be studied later. Q: In the following scenario, someone is charging for a freight service, the final costs which aren't know until the end, how does that work? There is some amount of uncertainty in the contract itself, in general uncertainty in the contract makes a contract void, you cannot have very risky contract where you dont know what you buy, sell , how much you are paying. There is some level of uncertainty called gharar which is allowed. We will talk about that uncertainty and what is the shariah ruling on it. Q; Are there any other shuroot due to modern conditions A: If you mean by this general category in the board, No , even in western contract law the contract is either valid or invalid, . So the conditions for todays contract fall into one of the above categories.

Offer ( ) and Acceptance ( ) Whether you are talking about western contract law or shairah contract law, every contract has an offer and acceptance. Whatever comes first is the offer and the response to the offer is the acceptance. In a marriage contract, shafiees and hanafis differ about who must give the offer and who should accept. But in general there is no difference. Conditions for proper offer and acceptance From the laws point of view, it cannot know what is really in your heart, the only way the law can judge your intention is by what you write. Condition #1; Wording of the offer and acceptance The way that the offer and the acceptance is expressed, what terms are used, what are the words used, how is it presented, have to be very clear. It cannot be ambiguous. We have to figure out how to express proper offer and acceptance. Condition #2: There must be complete agreement between the offer and acceptance. This is known as mirror image rule in the American Contract theory. They are moving away from that. Why? MIrror image rule says there has to be one-one correspondence between offer and acceptance. Why are they moving away from it? Germans and British have their own contract theory. The reason why they are moving away from it, is due to minor details that have been adjusted in the acceptance. And if you strictly follow mirror image rule, is because the contracts are multiple pages long and it is difficult to mirror them exactly. Condition #3: The acceptance must be directly in connection/relationship with the offer. I offered you a car for $10,000 and you cannot come back a year later and say I accept it. Or better yet, somebody says I will buy your car for $10,000 and then I drive the car for a year and say that I now accept it. This is not directly related, because now the goods have been used for a year. Nullifying a contract An offer and acceptance can be nullified if the one making the offer rescinds the offer during the same meeting even if the other party has accepted it. The accepting party will have to rescind its acceptance as well. That contract is non-binding until the session comes to an end. Based on a hadith (Bukhari and Muslim), the Prophet (may the peace and blessing of Allah be upon him) said, The two parties in a contract have a right so long as they have not separated. If they are both honest and made everything clear, they will be blessed. However if they lied or concealed, the blessing of the transaction will be destroyed. Accepted by all madhab except the Malikis. , ,

There are special cases such as offer and acceptance is an example of electronic contract, which we will discuss later. As soon as the offer is rescinded, then the offer comes to an end. If you make an offer without the other party accepting it, then the offer comes to an end, because it would be unfair to the one making the offer. Once the majlis or the meeting comes to an end, then offer comes to an end. If the one making offer looses legal capacity before the offer is accepted, then the offer comes to an end. For example, if the person dies before the meeting comes to an end, as soon as he looses legal capacity, then the offer is no longer valid. This goes without saying. If the object of the contract is no longer in existence, then the offer is no longer valid. For example, I will sell you vinegar for $5.00 but let us say it becomes alcohol before it is accepted, then the offer is no longer valid. Next time we will discuss the way a contract is expressed. English language is different than Arabic language. We have to know how the differences in languages are manifested in the expression of the contract. Our scholars have given us guidance for contracts in Arabic and we will have to study the nuances of English language to understand contracts written in English.

2011-04-05 Class Notes

Last time we talked about offer and acceptance which are the main constituents of a contract. Ulema discussed the expressions that make up a contract. They discussed this in detail because it is a reflection of the inner will of the two parties involved in the contract. It has to be based on free will. Allah swt says do not devour each others wealth .... Bayyi has to based on the approval of the individuals involved in the contract. We cannot look into a persons heart, all we can base is on the words used to express the contract. Books on fiqh describe the wording that is to be used for describing the contract. It has to be unambiguous. The Arabic language is unique wrt tenses of the verbs. It is much restrictive and less freedom as compared to English language. Perfect tense Al-Madhi in the Arabic Language Offer: I have sold this to you. Response: I have accepted it. This would be considered a sound contract according to the scholars. Knowing the Arabic language helps you in understanding the intention of the buyer and seller. We have to understand how the equivalent would work in Arabic language

Imperfect tense Offer: I am selling it to you. In Arabic language, there is some doubt, it could mean tomorrow. And hence the response could also be vague. Scholars disapprove of it Future Tense I will sell it to you. I am going to sell it to you. Using a future tense is not a sound contract. These sentences do not convey that the deal is consumated. Scholars who discuss the fiqh of bayy, will discuss the tense of the offer and acceptance.

Conclusions in English language might be different than a contract expressed in the Arabic language. In English, if you say, "I will sell this to you for 10 dollars" probably no.of people would consider this as offer, but strictly speaking in the light of contract law in shariah "I will sell you" does not necessary entail the sale is going to take place, as it doesn't say when this sale is gig to be executed, if it now or later. When do you plan to sell? This is a sign that the seller is intending to sell it and the contextual indicators might show the intention to sell. I am selling it to you for $10 I am buying it from you The analysis in English language, is considered to be a done deal, even though the tense is not perfect tense. The perfect tense is used much more in Arabic. In English we would say someone is arriving if we see them coming up the driving. But in Arabic we would say he has arrived. So in English, I am selling and I am buying would be considered an valid offer and acceptance, even though the same is not necessarily true in Arabic. If you used I have sold this to you in English it would cause huge confusion. Thus if we try to understand the Arabic term in english it will cause some confusion and it implies something different than what you want to imply. Therefore we have to be careful when translating the texts in the Arabic can lead to great confusion. I am willing to sell it to you for $10.00 I accept it. Is this a proper offer and acceptance? I am willing implies his intention, but is he actually selling it. Is he informing you his intention to sell something but is not an offer. Most English speaking people would consider it to be a done deal.

I want to sell it to you for $10. I accept it Here the connotation is less strong.

These are some technicalities related to Offer and acceptance.Is the intent to sell or is he trying to see if the buyer is accepted or trying to figure out if the price he is offering is good for you. These technicalities lead people to courts because of the vague aspect of the language. There is other ways some one may convey offer and acceptance other than verbal. Madhab Perspective on non-verbal transactions You can write a letter to someone saying I am selling my car and individual may write back saying I accept it. Thus this is not verbal but a way of expressing your will to buy something. The Shafii school is very strict on this issue. They insist on verbal offer and does not accept written offers. E-Commerce is a written contract. Shafii view is very restrictive and nobody takes it into consideration. Anoher very important form in offer and acceptance where they no virtual way for contract. it is narrated from Sufyan Al-Thawri and he came to some who is selling pomegranate and he put down few cents to the seller and he took the pomegranate and thus there is no communication took place, there was no verbal communication. There was eye contact, but there was no verbal sign for the offer and acceptance. Shafii have a difficult time with it. This non verbal contract is very common nowadays. When you buy groceries and pay for your goods, you do not have a verbal communication for each item being sold. At the end you have a total price in front of you and the cashier does not have to say a word. You give them money and then return the change. There is no verbal offering. But there was expression of a will by your action, you place the items in front of the cashier, you checked the price being rung, you might contest the price of an item and say I dont want it, etc. The Maaliki position is that your silence is clear sign of the accepting of the offer. This practice does go against the basic principle in business contract. You have to convey the offer and the buyer has to accept the offer. But if the urf is that it is accepted, then it is also acceptable. Hanafis are in between, they would accept it for minor purchases but not for major purchases. The checkout at stores is true for major purchases such as electronics or furniture where the transaction can exceed thousands of dollars. Even here in the USA, the urf is different for some items, depending on where you are, how the purchase takes place etc. Its not as simple as being divided on price, but if you buy a car, or a house, then you will definitely be signing some papers. And those papers will explicitly state the offer and acceptance, and your signature is your agreement. Very few modern scholars accept that the offer has to be verbal (the Shafii opinion). Most scholars today are happy with any signal of acceptance (including silence). Mirror Image Rule: Components of the acceptance have to reconcile with components of the offer.

Shafiis say the response to the offer has to be immediate. The other madhabs say that if the offer is out there in the same majlis i.e. gathering, you have the right to think about it. Shafie school rescinds the offer immediately at the end of the meeting or majlis. There is no evidence to support this view. Offers arent necessarily permanent, however. For example, if someone sells you a painting right now for $500. Then the painter dies, and this is his last painting, then it becomes very valuable. Then you offer to accept it. This is causing harm to the seller. Thus there has to be some kind of limit for how long the offer is valid. Note: Offer is considered different from advertisement. An advertised price is not an offer, it is an acceptance. Maybe we can talk about the difference between advertisements and contracts in the future. When does an offer end? One way to do this is a conditional statement: this offer is valid for 30 days, this is acceptable in shariah. But that is not the default case. If it is stipulated, then he is bound to live by the stipulation. But what if it is not stipulated? When does the offer come to an end? The default case is that offer is valid unless the offerer rescinds the offer before any acceptance takes place maybe due to sellers remorse. Then the offer is no longer valid. Similarly, if the offeree rejects the offer, then the contract is off the table. Suppose neither offerer rescinds the offer or the offeree rejects the offer, then when does the offer end? This is where the concept of the majlis comes in (or the contractual session). The Islamic position is that the offer remains valid as long as that majlis is still in session. Shafiis demand an immediate response. But lets say we are trading a car. Seller says: I offer you the car for $10,000. The buyer looks around, deciding, looking. But if either party walks away or otherwise signals that they are leaving, then that offer is no longer valid. That may sound more restrictive than it really is. Once the session has come to an end, it is easy to make a new offer and an acceptance. Either one can make the offer. E.g. buyer decides he goes back. Then he may make an offer, I want to buy this car from you for $10,000. (If you were offering it in Arabic, it would be perfect tense) This time the buyer is making the offer. Then it is up to the seller whether to accept. The offer comes to end when the majlis comes to end. The contractual session doesnt preclude a later new offer. He cant say Im accepting your previous offer, since its a new offer. One of the reason why this discussion are common in fiqh because these issue arise. These issues arise in courts. This forces the fuqaha to go into details which a student of fiqh of bayaa wonders why they are going into. The fuqaha have to answer it and when the write a book on fiqh, they have to go into details.

Questions for Shaikh: 1. Verbal v/s written, isnt there a requirement for transactions to be recorded (verse from the Quran....), so how can we explain that a written offer is not accepted? A: Recording is not necessary for every kind of transaction. It is a recommendation and not a requirement by many scholars. It is equivalent to a receipt. From the shafie perspective it is just a record of transaction that has already taken place.

2. If an offer is put forth and the buyer or offeree accepts it, does the seller or offerer have the right to refuse it? A: This would be problematic since nobody would take an offer seriously. There is one option which is known as khiyaar al majlis ( , both have right to relinquish the offer. Once the majlis is over, then the offer is binding. This could cause great deal of hardship. 3. When purchasing a car from a dealer, there is often a lot of I need to go check with my manager but they intend to come back. When the dealer goes to the manager, is that the end of a majlis? A: Car dealerships play a game with offers and they do not intend to sell it at the offer. When you respond, the salesman leaves to talk to the manager, he proposes a counter offer or accepts your offer. His leaving could be considered the end of majlis and the offer is no longer legally binding. 4. (Cont. from Q3) Isnt the salesman a middleman which we discussed last time, what about that? Is this a sound contract? A: No that is not the case. The salesman has the right legally to sell the car at any price and he does not have to check with the manager.

Options (Khiyar) There are three different types of options. Two are agreed upon by many scholars, and the last one is contentious. Khiyar al Qabool () You have the option to accept it or reject it. Somebody makes an offer and you have the right to accept it or reject it. Khiyar al Rajoo () Offerer has the right to rescind the offer before the offer is accepted. Malikis do not agree with this khiyar. Because they consider it to be a promise and it is obligatory on t offerer has to fulfill it. Hambalis, Hanafis and others do not have a problem with it. Khiyar al majlis () It is related to the meeting which we discussed earlier. This is very important concept, When does the majlis begin and end, are the questions that need to be answered. Otherwise you will have anarchy in business transactions. Jamiatul Imaam - PhD dissertations published in one book this is all about the option of the majlis and the option of Al-3ayb i.e defect, over half of it is related to khiyar al majlis. Hanafis and Malikis do not accept this concept at all, even some Hanbalis. In Imam Maliks Muwatta the hadith for Khiyar al Majlis is recorded, even though it is recorded he did not accept it. We will discuss this next time

2011-04-12 Class Notes

Notes for this class are not very accurate or complete, because the audio connection was very poor for the three students who were transcribing the notes. Khiyar al-Majlis One of the most debated concepts. Some ulama accept . Hadith: authentic hadith.

One of the aspects of Maliki madhab is that even if the hadith is sahih and if the people of Madinah did not act upon it, then Imam Malik rejected the hadith. Remember Imam Malik is from the generation of taba tabieen and during his lifetime there were tabieen and taba tabieen. Why did Imam Malik take this course of action? Imam Malik was from 100 - 120 years after the death of the prophet. He said the practice of the people of Madinah is mutawattir. Discussion of hadith of khiyar al Majlis If the hadith is pretty clear they will apply it, if it is not clear then they will make taweel, in this case when does the majlis end. Shaikh feels that this madhab or approach is not strong but it will be discussed in the history of fiqh or usool al fiqh class. Ibn abu Darr accepted this hadith. Chain of this hadith is very strong. Imam Shafiee is saying who Imam Malik is accusing, if he is not applying it, then I dont know who he is doubting in the chain, is he doubting Umar or himself??? One of the scholars of Madinah, like Said ibn Musair or many of the sahaba, was Said ibn Musaib, Zuhri, ibn Abi Dha??? who was harshest in criticism of Imam Malik about this hadith and he said that Imam Malik should make taubah. We have a rather large division between Shafiees and Hanafis on this topic. Those who reject khiyar al Majlis, including some hanafis who reject it, if the hadith has some problematic aspect to it, they will look for further evidences to support their argument, such as the Quran. So here they quote the Quran which says that oh you who believe fulfill your contract, and they say that this verse contradicts the hadith about khiyar al Majlis.

You have made an offer, and now the khiyar al majlis has ended without acceptance????, here the shariah is making the contract invalid, so how can you say that now you have to fulfill the contract. ?????? The Hanafi argument is that deal becoming final, simply by the act of showing your approval. They accept khiyar al ilm...????, an option to invalidate contract if the part is defective. And they say that they have evidence for this khiyar al .....

Another hadith Basic response to this hadith which Hanafis say that there is no khiyar al Majlis because the prophet gave an item in sale to another sahaba while he had offered it to Umar. So they say since the prophet sold it to another sahaba and not Umar, it shows there is no khiyar al majlis. The response is that Umar might have walked away and it did not signify one khiyar al majlis. They also quote a statement of ibn Umar. The buyer and seller has the option until they separated. If the text is ambiguous then you cannot use the text as an argument. ... Ibn Rushd claims that khiyar al majlis has been abrogated, so how can someone respond to this claim? The burden of proof is on the individual who claims abrogation. In majority of cases, when an evidence goes against the madhab, then they claim that it is abrogated. Ibn Rushd does not give any evidence for this claim of abrogation. If this is a strong claim, then you can forget about all other arguments and just simply present the evidence for it.

Another argument is that the prophet has prohibited bayaa al gharr?????, a transaction or sale in which there is uncertainties or high risk. How can you take this evidence and conclude that there is no khiyar al majlis? This argument is weak on a number of points. Any transaction you enter into, there is going to be some kind of uncertainty. We have to know the limits of gharr, acceptable gharr. Shariah has sanctioned some acceptable levels of gharr. This topic of khiyar al majlis has been hotly debated by the fuqaha over the centuries, and they keep on adding arguments. Shaikh does not want to go into all of the arguments, he has refuted some of the stronger arguments. He is going to discuss a few more. They say that the back and forth of offer and acceptance, is akin to an auction. In an auction, there are more than two parties, and in the hadith of khiyar al majlis there were only two parties. And this understanding of analogy of auction arose centuries later and it was not the understanding of earlier scholars. Umoom??? al balwaa??? Something that inflicts everybody.

You expect that the prophet would have conveyed the message in such a way that the sahaba would have understood it. They say it should have come down to us in such a way that it is well known. The response to it, we dont know when this hadith of khiyar al majlis was conveyed to Umar, and it is not necessary for the prophet to repeat the hadith to all of the sahaba, he knew that the news would reach everyone, if it was conveyed to Umar. Shaikh feels that the contemporary scholars would be of the opinion that there is khiyar al majlis. Later scholars are madhab independent, and shaikh expected that scholars who did not have bias of a madhab would conclude that khiyar al majlis exists. Sanhouri one of the contemporary scholars, who was trying to modernize Islamic Contract Law, in the sense of categorizing and discuss it in contemporary fashion. He was strong in law than in Shariah. He rejected khiyar al majlis since the majlis itself is ill defined. But this is no basis for rejecting the hadith. He says that applying khiyar al majlis would lead to more conflict. And he makes taweel for the hadith, and his understanding is that the back and forth of offer and acceptance is khiyar al majlis and you are free to accept or reject the offer. What would be a good response to this argument? We have to see how the text was understood by the prophet and the sahaba. In some of the narrations of the hadith, Umar would like to leave quickly in a transaction, so that the other person would not change his mind. So this understanding does not agree with Sanhouris understanding of khiyar al majlis.

2011-04-19 Class Notes

We talked about khiyar majlis which allows even though the offer and acceptance has been made and as long as they are in the same majlis, there is option to cancel the transaction. Our textbook author is ambiguous whether he accepts khiyar al majlis or not. Shaykh is now reading from the book, page 107. The passage that shaykh read talks about khiyar al shart which is another option, an option to return the goods from the transaction, which is equivalent to the 30 day return policy as long as both the parties agree to it before the transaction. And then shaykh continued reading and pointed out that he is now talking about the option to void the transaction if the meeting has not ended. But the author does not mention any thing else on the topic. Ethics of returning goods in the return policy time period Thirty day money back guarantee is non binding. Once the offer and acceptance is made, the buyer now becomes the owner of the goods. And if he takes possession, then he is the owner. And if something happens to the goods, if it is destroyed then the loss is entirely the buyers.

Once you make acceptance, then the intention is to buy something and it is not supposed to temporary. Similar to the marriage contract, you cannot enter a marriage contract with the preconceived notion that it will be temporary and that you will divorce. The intention is to have the contract to be permanent. Some people have intention is to use the items for 29 days and return it before the 30 day return policy. This is their intention when they entered the contract. Morally and ethically you are doing something haraam and you should not be practicing this type of transactions. We have modern means of contract, which we will discuss later. Q: What if you return it because you found similar item cheaper elsewhere? A: Assuming you entered the transaction to buy it permanently and if the store has a policy to match lower price, then it is okay. However the 30 day return policy is for you to be satisfied with the quality of the product and not to accommodate you finding it at a lower price later. So Shaykh says that it would be ethical to keep it, even if you find it cheaper elsewhere. However there are some who buy an item and try to sell it at a higher price elsewhere and if they are unable to sell it at a lower price, then they return it. This is no ethical either. If you find an item and try it out and see that it does not work out. Then in the 30 day return policy you can return it without any harm. This what the intention of the 30 day policy which was instituted by merchants because they found it to be beneficial to sell their goods. Correspondence between offer and acceptance This is the mirror image rule of the offer and acceptance. This makes sense logically. It is showing the will and intent of the buyer and the seller. Offer: If I offer my car at $10,000 price Acceptance: I accept to buy the car at $15,000 price Is this a sound contract? Is the mirror image being met here? No, because the offeree is paying more than the offer Offer: Selling my computer at $10 Acceptance: I accept it for Saudi Riyals 38 Note The exchange rate is 3.8 Is the mirror image being met here? This is not sound contract because the offer does not match the acceptance. Because you are placing a burden on the buyer. From classic Hanafi book by Kisai: Offer: Sell two slaves for $200 Acceptance: Accept one slave for $100 Does the mirror image rule fit here?

When people are selling more than one thing and they might be trying to get rid of inferior product and if somebody is allowed to split it up. And here the offeree does not match the offerer and it is not a sound contact. Offer: 3 for $10 Acceptance 1 for $3.34 If you look closely at the items that are sold in a bundle, but sometimes the price for three is a discounted offer and if sold individuallly it might be a higher price. The seller is trying to move the items in volume. And hence the offer and acceptance do not match. Offer: Selling the same item to two buyers for $15,000 Acceptance: One of the buyer says I will buy it for $15,000 Does the mirror image rule fit here? Since he is offering it to two buyers and it might be because he wants one party who is poor to be joint owner of the item. And the seller has to get both of the parties to agree in order for it to become a sound contract. Offer; I will sell my car for $10,000 Acceptance: I will buy your car for $10,000 and pay it over six months The mirror image does not meet, because the default case is that the monies have to be done at the same time.

Khiyar al Qabool option of accepting the offer Khiyar al rujoo option of taking back the offer Khiyar al majlis option to invalidate a transaction before the end of the meeting Transactions can be done face to face, via phone, via email, via electronic transaction, via ads. So the question is whether the two parties have to face each other. No it is not a requirement that the two parties have to be there face to face. Some scholars say that a marriage contract has to be done face to face. There is minority opinion that they do not have to be present face to face to sign a marriage contract. Imam Nawawi says that you do not have to see each other and they are yelling out to each other. So when does this majlis come to an end? Similarly with phone, email or electronic transaction? There is no physical majlis but a virtual majlis. When does this majlis come to an end? Does it come to an end on the phone when you start discussing something else, such as weather, etc. Contemporary scholars have dealt with it in detail. The strongest opinion is that the majlis continues until the phone call comes to an end (based on khiyar al majlis). If an offerer gives an offer and the offeree has to accept or reject the offer in the majlis. This offer will not be good forever. The offer is time bound until the majlis ends or the offerer indicates that the offer is valid for 30 days.

The offeree does not have to accept or reject the offer in the majlis, you can discuss other matters, or check your smartphone to see if the offer is good by checking the blue book value and then at the end of the majlis you can accept or reject the offer. Swiss and German laws do not have the option for the offerer to take back the offer before the offeree accepts the offer. So now if you are in phone call transaction and if the offerer hangs up the phone call before the offeree accepts the offer. Then the offeree can call back and accept the offer. This is allowed in Swiss and German laws. Is this practice allowed in the shariah? Is yes, why. If not, why not? Does this depend on the madhab? In shariah there is khiyar al rujoo which allows the offerer to rescind his offer. And he can end the majlis. Maliki school does not believe in khiyar al majlis, so the offeree has the option to call back and accept the offer. What about the internet, email, snail mail etc. Electronic or physically. You send it and the other party receives it. A lot of problems can be solved if the conditions are set in the offer. Many people do not include the conditions when they send out the offer. Where is the majlis? When is the majlis? Or is it when the offer is opened? Where is the acceptance? All this is not part of Islamic Fiqh but it is aspects of life and therefore has to be handled. The question of writing of the contract there are 3 trends i.e. 1. some school are very accommodating, 2. others are very strict 3. and the in between. He thinks that the more accommodating bring up more issue. For example, when you send out a contract by email, the other party receives it almost immediately. If after 2 hours you rescind your offer and send another message but if he has not seen the offer, this brings about a problem.

Hypothetical sequence of events to illustrate a point: On Monday morning at 8 am the offerer sends an offer to the offeree by express mail selling his cow for $1,000. Tuesday at 8:00 AM it arrive and the offeree has not yet opened it Wednesday at 8:00 AM he opens it and intends to accept it but does not send it yet Thursday morning at 8 am the offeree send his acceptance. Friday the offerer receives the acceptance and decides to accept the offer Saturday offerer sends back the acceptance of the offeree Now insert the following sequence of events to the above sequence of events: Wednesday at 10am the cow gives birth to a calf. Thursday 10 am the cow dies. After the offeree has sent his acceptance back. Either party can revoke the offer or acceptance before the contract is complete. What if the offer is lost? What if the object changes or destroyed (e.g. the cow giving birth) what will happen to the contract? What happens if one of the parties declares bankruptcy in the meantime? These are some of the issues that come up.

Our fuqaha have discussed these issues and come to some kind of agreement. The offer takes place whenever the offerer declares the offer. The agreement takes place whenever the offeree accepts the offer. It is regardless of when the response is sent or if the offerer is aware of the response. In our case on Thursday at 8:00 AM the offerree accepted the offer and if he did it in front of the witness, then he would get the cow and the calf. If there are no witnesses, then the burden of proof is on the offeree. Different opinions on when the agreement takes place Hanafi view is that as soon as the offeree declares the acceptance of the offer and he does not have to send the response. This is the first view. Second view is that the agreement takes place when the offeree dispatches the response Third view is that the agreement takes place when the offerer receives the response Fourth view is that the agreement takes place when the offerer is made aware of the response And these points are true in general for contract law and not just the Islamic contract law. In the Hanafi school, there is no question that as soon as the person declares his acceptance of the offer, then the offer and acceptance is completed. Al-Nawawi, al-buyuti?? also accept this view. Practically speaking how difficult is this to implement? Should customs (urf) come into effect. Q: What about khiyar al majlis for the above sequence of events? A: For thos ulama believe in khiyar-al-majlis, when he reads the offer and is thinking about the offer, it is still part of the majlis. If he changes his mind and is done in front of witnesses it is fine. Otherwsie it is between the individual and Allah.

In the United States, we have urf or law here which is arbitrary, which is known as mailbox rule. Shaykh is reading it and he will send it to us for us to review. Acceptance takes place when the offeree sends the response back to the offerer in the authorized mode expressed or implied by the offerer. It is accepted when the response is put in the mailbox. If the letter of revocation arrives after the acceptance response is sent then it is no longer valid. Acceptance becomes valid when the offeree sends the response, even if the response is never delivered or lost. Revocation becomes valid when the offerer send the revocation in the mailbox before the offeree has sent the acceptance. Homework: Is the mailbox rule consistent with the shariah?