Contracts and Its Types

Islamic Banking and Finance

Contracts and its

types
‫ق‬
‫ع ود‬
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Outlines
01 Introduction to contracts

02 Types of contracts

03 Conditions for the components of contract

04 Shariah Rulings of a contract

 Islamic Banking and Finance

Introduction to Contracts
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Concept of a
Contract Party A
Subject Matter
Party B
‫ق‬
‫عد‬ Offer Acceptance
Lexically aqd means “to tie” , “to knot”
or “to join” or “to fasten”

Consideration

In Islamic commercial law it is defined as “Aqd as a legal relationship created by the

conjunction of two declarations, from which flow legal consequences with regard to
the subject matter.”[Al-Inayah]
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Concept of a Contract ‫عقد‬

 In simple words Aqd takes place when two parties undertake obligations in respect of any
matter and is affected by offer (Ijab) and acceptance. [Majallah]
 According to Islam every action or work that takes place between two or parties is a con-
tract;
 Therefore, exchange of goods, receiving a gift, accepting a woman as wife through Nikah
and agreement on partnership etc. etc. come under the umbrella of 'contract‘.
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Ahd/Wa’d (Promise)
 A promise is the commitment to do or not to do something.
 It is different from the contract in the sense that
o there is no offer and acceptance involved in it
o Result delays until its execution in contrast to contract which has its spot result
 A promise may be unilateral (wa’d) or bilateral (Muwa’da)
Example:
A promises to sell his car to B within the next 3 months for Rs. 500,000; this is a unilateral
undertaking or Wa’da.
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Types of Contract
A contract can be of two nature:

 Compensatory or financial contract;

This is a contract in which there is exchange of either goods or services against an agreed com-
pensation / price / fee / charges;

 Non Compensatory or social contract;

This is a contract in which there is exchange of either goods or services against an agreed com-
pensation / price / fee / charges;
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TYPES OF CONTRACT

Compensatory Contracts Non-compensatory Contracts

Focus of this course

Exchange Gift
Participation
Money lending
Rental
Other ancillary Guarantee (Damanat)

Non-paid agency

Debts Assig (Hawalah)

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Conditions for the components of a contract

Contract

Parties Wordings Subject Matter Compensation

Components of a contract
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Conditions for the components of a contract

CONTRACTING PARTIES
 Parties to contract should be:
– Eligible to enter in such a contract;
– Sane;
– Mature enough to understand the nature of transaction;
– Legally allowed for executing of such transaction (licence/permit
requirement etc. etc.);
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Conditions for the components of a contract

WORDINGS OF A CONTRACT
 Wordings of a contract should:
– Contain Offer from one party and Acceptance from other ( Ijab-o-Qobool) in a
session of contract (Majlisul A'qd);
– This Offer and Acceptance can be:
 Oral/verbal (Qauli), purchase through bargaining;
 Implied/understanding (Ishsraa), purchase in super market;
– Be Present i.e. they must create sense of immediate effect (words give sense of
future are not allowed, “I will buy it” does not make sense of immediate effect)
– Unconditional and Non-contingent – conditional wording do not create imme-
diate effects, “I will accept if my father allow it” is a conditional wording;
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Conditions for the components of a contract

SUBJECT MATTER OF A CONTRACT
 Subject matter of a contract should be:
– Lawful – legally and Islamically allowed;
 Subject matter and the underlying cause must be lawful;
 The transacted object must be legally owned by the parties to a contract
– Existent – something that exists, contract of supply of mangoes in January;
– Deliverable – can be transacted and exchanged, sale of fish in water or bird in air;
– Specified in clear manner, Toyota corolla, XLi, engine # and chassis #;
– Quantified if quantifiable, X1000 kg of wheat;
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Conditions for the components of a contract

COMPENSATION IN A CONTRACT
 Compensation (remuneration/price for exchange):
– Conditions apply to Subject matter also apply here;
– In case of barter system the application becomes important;
– Lawfulness, Existence, Deliverability, Specifiability and Quantifiability
become important;
– In normal trade specification of currency is enough;
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Shariah Rulings of a contract

 A Financial Contract is allowed in Islam with some conditions:
– The contract should not contain any element of Riba (explicit or implicit);
– The contract should not have element of Gharar (excessive uncertainty);
– The contract should conform to the rules laid down by Shari'ah for execution
of contracts;
– The contract should not be for those activities which have been considered
impermissible (Haram) i.e. general prohibitions;
 Element of Riba can easily be recognized and eliminated;
 Similarly compliance to the ruling about general prohibition can also be
achieved easily;
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Shariah Rulings of a contract

 The conformity with laws of Shari'ah and the element of Gharar are important
points that need elaboration;
 Every contract has some basic elements which should conform to rules of Shari’ah
 Conditional contracts are not permissible in Islam;
 However, business norms allow conditional contracts especially in current business
scenario;
 Ulema and scholars have described the method for inserting a condition in a con-
tract;
 Three types of conditions are allowed while one type is not allowed;
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Shariah Rulings of a contract

 A condition, which is not against the basic objective of the contract, is a valid con-
dition, e.g. a condition of free delivery to buyer’s premises;
 A condition, which is against the basic objective of the contract, but is in the mar-
ket practice, is also a valid condition, e.g. condition of five-year warranty and one
year free service;
 A condition, which is against the basic objective of the contract, not in the market
practice and not in favour of any contractor, is a valid condition, e.g. a charity im-
posed on a transaction;
 A condition that is against the basic objective of the contract and not in market
practice and favours one of the contractors or subject matter or price, is a void and
invalid condition, e.g. selling a car with a condition from seller of its free use for
two days every month;
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‫خ‬
‫ج زاکم ہللا ی را‬

Rahmat.ullah@iqra.edu.pk