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FORMATION OF CONTRACT

Prof. Dr. Zainal Azam Abd. Rahman

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MUTUAL CONSENT: AS SHARIAH JUSTIFICATION FOR LAWFULNESS OF TRANSACTION/TRADE

From the Quran Surah al-Nisa’: (4:29) Prohibition on taking

over/consuming other people properties without Shariah justification (the batil/illegitimate way)

Mutual consent as Shariah justification

Ways to establish mutual consent-valid contracting

From the Sunnah There shall be no valid

sale except with mutual consent

Sale will only become valid with mutual consent

The Sunnah explains further the basic rule as provided in the Quran

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THE NEED FOR TRUE/REAL CONSENT

Willingness and consent (rida): any difference? Internal willingness (substance) or External expression (form) Form over substance or otherwise? What is the intention of the parties? The debate among the Muslim jurists ( fuqaha’) Ways to express full consent must be explored Special contracts that require special formalities Contemporary issues

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INTERNAL WILL NEEDS EXTERNAL EXPRESSION TO CREATE BINDING

CONTRACTUAL RELATIONS

As a general rule, internal willingness alone is not enough to create contractual binding relations between parties or give rise to Shariah implications

Exceptions: under some situations niyah can determine external implications-whether the intention/motive is legitimate or not is relevant or niyah alone will have implication?

Internal desire/will need to be expressed clearly to be considered/accepted/reciprocated by the other party

However external form will not be enough unless in conformity with internal intent/will according to the majority of Muslim jurists

Imam Shafie held that appropriate external forms/words used can be taken to indicate internal intent unless otherwise proven

Court decisions rely on external evidence as a general rule Examples debated by Muslim jurists

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WHEN WHAT IS EXTERNALLY EXPRESSED CONFLICTS WITH INTERNAL WILL OF THE

PARTIES

Internal willingness/will needs to be confirmed by external expression

The Hanafi: Rida and ikhtiyar are two different things The Majority : the two are the same The issue of joking, acting in a play, slip of tongue The issue of conspiracy by the contracting parties to

achieve some purposes-valid or otherwise The issue of bai’ al-taljiah Opinions of the jurists

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PARTIES TO A CONTRACT: MUST THEY BE MULTI-PARTY

Both parties must have full legal capacity to create binding agreement or aqd

Can only one party create an enforceable contract/undertaking?– The guardian– The Wasiyy– The agent/wakil– The judge/court

Special conducts/tasarruf (whether consent from the intended party is needed/)

– Vow/nadhr– Waiver, ibra’, write off, provision, giving discount– Waqf, will– Kafalah– Jualah

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WAYS TO EXPRESS INTENT AND CONSENT: THE SIGHAH

The best is by way of verbal expression By sending messenger/wakil By writing By sign language By conduct Modern communication and Islamic contracts (fax,

telex, e-mail, trading platform, sms) Contemporary issues ( Digital signature, e-

government)

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THE SIGHAH MUST:

Be able to show firm intention to enter into the contract Be in the form where an offer is fully matched by an

acceptance in the respective details Be in the form where the offer is connected to acceptance

without interruption– No revocation of the offer– No indication that that any of the parties is no longer

interested– The contract formation session has not ended– Proper communication between the parties

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THE MAKING OF AN OFFER:IJAB

Ijab (offer) according to Hanafi perspective is the first statement by either party Ijab according to the Jumhur must come from the party who will transfer

ownership The need for specific tenses to convey firmness of intention to enter into

contract? Offer is normally made to specific person Must be distinguished from: mere promise (wa’ad), declaration or other

indications not intended to create ‘aqd Firm, conditional and for future? Contemporary Issues

– Subject to contract acceptance– Letter of intent– Memorandum of understanding– Offer letter V Agreement– Master agreement V individual agreement– Preamble of agreement– Offer to subscribe shares/sukuk– Tafahum jaanibi

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EXAMPLE:SPECIAL WAY OF CONTRACTING SALE

By way of al-muzaayadah: auction where highest bidder takes the goods/assets

By way of al-munaqasah: tender where the contract will go to the lowest offer

By way of bai’ al-mustarsil: where buyer leaves it to the seller to fix the price based on trust

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AL-JUÁLAH: OFFER TO THE WORLD (offer of reward)

The majority holds it to be valid Conditions that need to be fulfilled The Hanafi approach and their

argumentation- it is a defective ijarah Contemporary use of this form of contracting Ju’alah and Istisna’

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REVOCATION OF OFFER

Offeror is entitled to revoke an offer before acceptance, why?

Offeror’s right shall have priority over potential right of the offeree

Hence no need to communicate revocation to the offeree

Hence acceptance made after revocation is not valid Exception: offers that can not be revoked

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EXPIRY OF AN OFFER

By rejection of offeree be it implied or expressed

By revocation of the offer by the offeree Expiry of the session without acceptance Death, insanity, parties losing conciousness Destruction of the subject-matter

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THE MAKING OF ACCEPTANCE: QABUL

Modes of acceptance Expressed and implied acceptance Must offer be immediately accepted? Occasion of contract and acceptance Must acceptance be communicated to the

offeror or be witnessed? Contemporary issues

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CONDITIONS FOR VALIDITY OF ACCEPTANCE

Acceptance must be firm Acceptance must be in line with the terms of the offer or better/more

favorable Made in a connected session/during the occasion of the contracting

process There has been no revocation of the offer by the offeror There has been no indication of rejection before acceptance is made Whether acceptance must be made immediately after the offer?

– Yes it must but parties have khiyar al-majlis– No, but acceptance must be made before the expiry of the session

of contracting

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WHAT HAPPENS AFTER ACCEPTANCE: 1. KHIYAR AL-MAJLIS

Authority for khiyar al-majlis (option to set aside contract that has just been formed) from the Sunnah

Right to revoke recently formed contract before the end of the majlis al-aqd

Majlis as the place where the parties are contracting?

Majlis as a continuing session without interruption? When the majlis is said to end/expire?

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WHAT HAPPENS AFTER ACCEPTANCE:2. KHIYAR AL-SHART

The authority for validity of khiyar al-shart from the Sunnah The operation of khiyar al-shart (option to terminate during the

cooling off period) Why khiyar al-shart is allowed? Period allowed for khiyar al-shart, and the need to specify the

period Contracts that can be lawfully unilaterally or mutually

terminated can not be tied to khiyar al-shart like ‘iarah, wadiah, hibah, wasiyyah, mudarabah, wakalah

Contracts where delay of both counter-values are not allowed can not be tied up with khiyar al-shart like sarf

Risk of ownership during the cooling off period: discourse by Muslim jurists

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FACTORS THAT NEGATE OR AFFECT FULL CONSENT

Mistake Fraud/taghrir/tadlis ghubn (short changing the other party by over-charging) Duress/ikrah Breach of trust Insanity Weakness of mental ability/retarded Sickness Not being prudent Intoxicated