ISlamic-Contract
20- Aug2020
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Islamic Contract

We will start our discussion of the Islamic Contract with three terminologies of the Islamic Jurisprudence which are pertinent to be understood at the outset of this chapter. They are:

  • Unilateral Promise (Wa’ da)
  • Bilateral Promise (Muwa ’Adah or Muahaidah)
  • Contract (Aqd)

Unilateral Promise (Wa’da)

It refers to a unilateral undertaking or promise extended by one person to another in which he promises to execute a contract in the future. E.g. to sell or buy something in the future. Since it is a unilateral promise, no question of future sale arises, as the future sale is not allowed in Islam.

For e.g. ’A’ promises to sell his car to ’B’ within the next three months for Rupees Two Hundred and Fifty Thousand (Rs. 250,000), this is a unilateral undertaking or Wa’da.

Enforceability

  • Wa’da is enforceable under the present law enforced.
  • According to Imam Abu Hanifa, Wa’da is not enforceable by law (Oada’an) but there is a moral obligation (Diayanat’an) on the promisor. However, some of the Hanafi jurists argue that Some Of the promises can be made enforceable under the doctrine of necessity.
  • According to Imam Malik, Wa’da is enforceable by law.
  • The consensus (Ijma) of present-day Scholars is that Wa’da is enforceable by law until and unless the promisor is not in a position to fulfill his/her promise. In this case, if it is not due to any of his negligence then he has to make good the loss to the promiser. For example, in case here,’ A’ promises to sell a horse to ‘B’ and the horse dies without any negligence on part of ’A’, then no damages are due on ’A’ for ’B’. But if it is due to his negligence then he has to make good the actual loss to the promises. This will be the case where ’A’ promises to sell a horse to ’B’ for Rs. 10,000 within the next month and subsequently sells it to ’C’ before the month elapses. This is a willful act of the promisor that loads to his inability to fulfill his promise to the promise, therefore, the promisor needs to compensate for the promises.

Consider another example ‘A’ was promised to purchase a Horse from ’B’ for Rs. 10,000. As a result of a promise to purchase by ’A’, ’B’ has purchased a horse for Rs. 8,000 – from the market to sell it to ’A’ for Rs 10,000/. on the promised date of purchase, ‘A’ refused to purchase the Horse from ‘B’. As a result of a breach of promise by ‘A’, the horse was sold by ’B’ in the market for Rs. 7500, at a Joss of Rs 500. This loss of Rs. 500 is the actual loss as a result of a breach of promise by ‘A’, which can be claimed by ’B’ from ‘A’.

Agreement (Muwa’adah or Mu’ahadah)

  • It means bilateral undertaking (Mutual promise) or agreement.
  • According to the majority of the present-day Scholars of Islamic Jurisprudence, Muwa’adah is not allowed in situations where Aqd is not allowed (e.g. forward contracts), and thus is not enforceable by law. This view is adopted by the majority of Islamic Financial Institutions of present-day and even by AAOIFI.
  • According to some Scholars of the Sub-continent (followers of Hanafi School), Muwa’adah is enforceable by law, however, Muwa’adah Of transactions like short-selling of currencies or shares is not allowed.

Contract (Aqd’)

  • An Aqd’ or contract is a bilateral agreement that is executed between two or more parties.

Example:

Contract of Sale, Contract of Marriage, etc.

Types of Aqd’

  • Uqood e Mu’awadah (Compensatory Contract)
  • Uqood e Ghaer Mu’awadah (Non-Compensatory Contract)

Uqood e Mu’awadah (Compensatory Contract)

These are compensatory contract where one person sells something to someone else for a price or compensation, for example, sale of a pen by ’A’ to ’B’ for Re. 50.

Uqood e Ghaer Mu‘awadah (Non-Compensatory Contract)

These are non-compensatory contracts where one person gives something to someone else without any compensation for example a contract of loan gift.

Essentials of Aqd’

Your essential elements are required to constitute a valid Aqd.

  • Mutaa’qidain (Contractors)
  • Alfaz e Aqd (Wording of Contract)
  • Ma’qood Alaih (Subject Matter)
  • Ma’qood Bi’hi (Consideration)

Mutaa’qidain {Contractors)

The contractors must not be mahjoor i.e. restricted to make a contract. Islamic Shariah identifies three types of people as mahjoor.

  • An insane person
  • A child not mature enough to understand the nature of the transaction
  • A slave not permitted by his master to enter into a contract

Alfaz e Ana (Wording of Contract)

Alfaz e Aqd should be absolute and immediate and non-contingent to a future event as a future contract Is not allowed in Islam. Also, the wordings should be unconditional. If the wordings of the contract are conditional, the condition must adhere to the following rules of Islamic jurisprudence.

Basic Rules for the Validity of Conditions In Contract:

There are four basic rules for budging the validity of conditions in a contract:

  • A condition that is not against the contract is a valid condition.
  • A condition, which seems to be against the contract, but it is in the market practice, that type of condition is permissible unless its voidness is proven with the clear injunctions of the Holy Quran and Sunnah. For example, ‘A’ buys an air conditioner on a condition that the seller will provide him a five-year guarantee and one-year free service. This type of condition does not invalidate the contract. A condition that is not against the contract is a valid condition.
  • A condition that is against the contract and not in the practice of the market but it is in favor of one of the contractors, this type of condition is void. For example. if ’A’ says he sells a car with a condition that he riffs use it on a fixed date every month, this contract will be void.
  • A condition, which is against the contract, not in the market practice, and not in favor of any contractor, does not avoid the condition. For example, undertaking to give charity in case of wilful default by the defaulting party.

Now a question arises what is the ruling of void condition, whether it invalidates the contract or not? The answer lies in detail about the impacts of the void condition. Sometimes a void condition invalidates the contract and sometimes it does not invalidate the contract, however, the condition itself is annulled.

To elaborate on this, Islamic jurists and scholars have written that the compensatory contracts (Uqood-e-Mu’awadah) like sale, purchase, lease agreements become void by putting avoid the condition. However, non-compensatory (voluntary) contracts (Uqood Ghair Mu’awadah} like contracts of the loan (Qard-e-Hasanah], do not become void because of void condition, however, the void condition, itself becomes ineffective. for example: if ’A’ gives to ’B’ a loan with a condition of premium at the time of repayment, this condition of interest is void. However, this condition does not invalidate the contract, therefore all transactions done by this borrowed money will be valid. But the rendition of Interest itself is revoked; therefore ’B’ is not liable for the payment of interest.

Ma’qood Alaih {Subject Matter)

The subject matter should exist, should be valuable, usable under ‘Shariah, capable of ownership & title and delivery & possession. Also, it should be specified, quantified and the seller must have its title and risk at the time of the sale. For example, a certain mobile phone.

Ma’qood Bihi (Consideration)

It should be quantified, specified, and ascertained at the time of executing the Contract. For example, a price of Rs. 300. It should be noted that Ma’qood Bihi (consideration) is not required for Uqood Ghair Mu‘awa4ah.

Other Issues In Aqd

We will discuss two more issues in Aqd’ here.

  • Safqatain fi Safqatin (Two contracts in one contract).
  • Tawkeel fil Aqd’ (Agency contract)

Safqatain fi Safqatin {Two contracts in one contract)

It means accumulation or mixing up of two different contracts in such a manner that execution of one becomes contingent on the execution of another. This Is not allowed by the Holy Prophet PBUH in Hadith and it renders a contract void. This is the reason why hire purchase contract in not allowed in Islam.

Tawkeel fil Aqd’ (Agency or Wakalah Contract)

It means the appointment of an agent (Wakil) on behalf of a contractor to carry out a contract or trade on behalf of the principal. There are two types of wakalah contracts.

  • The first one in which all the rights and obligations are passed on to the principal (Muwakkil) from the contractor, for example, that of Nikkah (Contract of marriage). Therefore, if a person ’A’ makes ’B’ his agent to marry him with a lady ’C’ then ’B’ is not responsible for any rights, responsibilities, and benefit, if Nikkah (Marriage) is between ’A’ and ’C’, Hence, lady ‘C’ can only claim for her dowry (Mehr) and other expenses from ‘A’ directly and not from ’’B”.
  • The second one in which the rights and obligations remain with the agent. For example, if ’A’ appoints ’B’ as his agent and ’B’ buys a car from ‘C’ for Rs. 500,000 on credit and does not disclose this to ‘C’ that he is acting as an agent for ‘A’ then ‘C’ can claim his money from only ’B’. However, if ‘B’ discloses this then ’C’ can claim his money from ’A’ as well.

Wakalah Isthithmar (Investment Agency)

It means the transaction in which one party appoints another party as its agent to carry out a trade transaction on behalf of the principal. The difference between the Wakalah Isthithmar Contract and Mudarabah Contract is that in Mudarabah Contract, both the parties share in the profit arising out of the trade transaction whereas, in Wakalah Isthithmar Contract, the Wakeel is only given a fee for his services by the principal and does not share in the profit.

In the classical books of fiqh, it is called “Ijaratul Ashkaas” – The remuneration of the agent can be fixed, lump sum, or on a commission basis.

Written by: Dr. Muhammad Imran Usmani

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