elements of contract in islamic business law 2

8/8/2019 Elements of Contract in Islamic Business Law 2

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Islamic Law of Contracts and Business Transactions

Sigit S.Wibowo

September 19th , 2008

Sigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI September 19th , 2008 1 / 25
http://goforward/http://find/http://goback/


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Contents

1 Introduction

2 Mal (Wealth), Usufruct and Ownership

3 General Framework of Contracts

4

Elements of a Contract5 Broad Rules for the Validity of Muamalat

6 Wadah (Promise) and Related Matters

7 Types of Contracts

8 Commutative and Noncommutative Contracts9 Conditional or Contingent Contracts



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Introduction

Islam considers the property of people as sacred and inviolable astheir life and honour

Islam forbids the unlawful devouring of others property by way oftheft, embezzlement, usurpation, bribery, cheating and all otherunlawful means of acquiring wealth

These proscriptions are in addition to the main prohibitions like Riba,Gharar and Qimar



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Mal (Wealth), Usufruct and Ownership

Contracts deal with goods/wealth (Mal), usufruct of goods andtransfer of ownership of the goods/usufruct from one to another party

Wealth is anything that is useable and has legal and material value forthe people

valuepossessablelegitimate useabstract and intangible rightsduciary money (a medium of exchange)

Mal or property in Islamic commercial lawmovable and immovablefungible and nonfungiblenally determinate (Ain) and indeterminate (Dayn)



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Mal (Wealth), Usufruct and Ownership (contd)

With respect to the exchange of goods, Islamic law distinguishesbetween Mabi (the subject of sale) and Thaman (price)

Ownership can be any of the following categories of assets and can beacquired through contracts, succession or addition to the existingowned assets of someone

Ownership of assets (Milk ulAin)!denite and not related to timeOwnership of debt (Milk ud Dayn)Ownership of usufruct (Milk ul Manfat)!related to time

An important categorization of goods

fungible goods (Zwatul Amthal or Mithli), e.g. Salamnonfungible goods (Zwatul Qiyam or Qimi), e.g. Istisnaa

Sale and buy-back (Bai al Inah) is prohibited according to themajority of jurists, sale and lease-back is allowed by almost all



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Dening Various Related Terms

MithaqA covenant and refers to an earnest and rm determination on the partof the concerned parties to full the contractual obligations; it hasmore sanctity than ordinary contracts

Ahd or Wadah

a unilateral promise or an undertaking, although sometimes it alsocovers a bilateral obligation

Aqd (Contract)

the existence of two parties; the issuance of an outward act depicting

internal willingness; an oer (Ijab) and acceptance (Qabul). Further,there must be a legal union between the two declarations regarding thesubject matter or the contractual obligationsimplies obligation arising out of a mutual agreement



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Dening Various Related Terms (contd)

Aqd is used in two senses

in the general sense, it is applied to every act which is undertaken inearnestness and with rm determination, regardless of whether itemerges from a unilateral intention or from a mutual agreementin the specic sense, it is a combination of an oer (Ijab) andacceptance (Qabul), which gives rise to certain legal consequences

Islamic law relating to business generally deals with Ahd/Wadah(promise) and Aqd (contract)

Islamic nancial institutions presently enter into promises in respect ofa number of transactions, for instance:

Murabaha to Purchase OrdererIjarah Muntahia-bi-TamleekSale and lease-backDiminishing MusharakahDisposal of goods purchased through SalamDisposal of assets manufactured/constructed under Istisnaa



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General Framework of Contracts

Islamic law is related to the methodology of the Sharah in dealingwith Ibadat (devotional acts) and Muamalat (transactions)

Ibadat are held to be universal truths that are unaected by time andspaceMuamalat are matters pertaining to individuals interacting among

themselves

Imam Ibn Taymiyah

The acts and deeds of individuals are of two types: Ibadat, whereby their religiousness is improved, and Adat

or Muamalat (transactions), w hich they need in their worldly matters. An inductive survey of the sources of the

Sharah establishes that devotional acts are sanctioned by express injunctions of the Sharah. Thus, what is notcommanded cannot be made obligatory. As regards transactions, the principle governing them would be

permissibility and absence of prohibition. So nothing can be prohibited unless it is proscribed by Allah (SWT)

and His Prophet (pbuh) in the overall framework."



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General Framework of Contracts (contd)

Muamalat, in turn, pertains to two types of activities, i.e. social andeconomic and/or nancial

A basic rule of Islamic law: the apparent wording, any format or

writing of the contractOnly that will have legal consequences; any party who has enteredinto a contract cannot say that it was not his intent (Niyyah)

The validity of the contract requires that its motivating andunderlying cause should be according to the requirements of theSharah



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Elements of a Contracts

A contract comprises the following elements

they must be mature and sanean oer (Ijab) and acceptance (Qabul)a legal (Sharie) basis of union between the two declarations and the

contractual obligationsfree from all prohibited factors

The contract is invalid if the following elements are not foundproperly:

the form, i.e. oer and acceptance (Sighah)the contracting parties (Aqidain)the subject matter (Maqud alayh)



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Elements of a Contracts (contd)

There are seven components in a contract (Sanhuri)

the concurrence of oer and acceptance;the unity of the Majlis (session/meeting) of a contract;

plurality of the contracting parties;sanity or the power of distinction of the contracting parties;subject matter susceptible to delivery;the object (Mahall) dened;the benecial nature of the object, in that trade in it is permitted as

per Sharah rules.



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Broad Rules for the Validity of Muamalat

Free mutual consent

All transactions, in order to be valid and enforceable, must be based onfree mutual consent of the partiesConsent obtained through oppression, fraud and misperception rendersa contractinvalid as per Islamic lawConsenting parties have certain and denite knowledge of the subjectmatter of the contract and the rights and the obligations arising from it

Prohibition of Gharar

All valid contracts must be free from excessive uncertainty (Gharar)about the subject matter or the consideration (price) given in exchange

Avoiding Riba

Riba is an increase that has no corresponding consideration in anexchange of an asset for another asset

Avoiding Qimar and Maisir (games of chance)

All contracts involving Qimar and Maisir are prohibited



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Broad Rules for the Validity of Muamalat (contd)

Prohibition of two mutually contingent contracts

The sale of two articles in such a way that one who intends to purchasean article is obliged to purchase the other also at any given price.The sale of a single article for two prices when one of the prices is notnally stipulated at the time of the execution of the saleContingent sale.Combining sale and lending in one contract

Conformity of contracts with the Maqasid of Sharah

The injunctions of the Sharah are directed towards the realization ofvarious objectives for the welfare of mankind

Prots with liability

This principle states that a person is entitled to prot only when hebears the risk of loss in business

Permissibility as a general rule

Everything that is not prohibited is permissible



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Wadah (Promise) and Related Matters

In Wadah or Ahd, one party binds itself to do some action for the

otherAhd generally does not create legal obligation but in certain cases itbecomes legally binding and enforceable

Keeping in mind the intricacies of present-day business, particularlywhen conducted by Islamic banks, contemporary scholars have

reached the consensus that Wadah is enforceable by law until andunless the promisor is not in a position to full it on account of anyforce majeure

If nonfullment is due to any wilful act of the promisor, he has to

make good the loss to the promiseeThe dierence between a contract (Aqd) and a bilateral promise isthat the ownership in bilateral promise is not transferred at the timeof signing the promise Aqd, not only the ownership transfers but alsothe rules of inheritance apply as soon as it is executed



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Wadah (Promise) and Related Matters (contd)

The Islamic Fiqh Academy of the OIC has made the promise incommercial dealings binding with the following conditions

The promise should be unilateral or one-sidedThe promisor must have caused the promisee to incur some liabilities or

expensesIf the promise is to purchase something, the actual sale must take placeat the appointed time by the exchange of oer and acceptance. Merepromise itself should not be taken as the actual saleIf the promisor backs out of his promise, the court may force him eitherto purchase the commodity or pay actual damages to the seller. Theactual damages will include the actual monetary loss suered by him,but will not include the opportunity cost


( )


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Token Money (Hamish Jiddiyah) and Arbun

Hamish Jiddiyah the margin reecting the rm intention of thepromisee

Islamic banks take token money from the promisee clients, which is theamount taken from them to convey seriousness in purchasing the

relevant commodity/assetBanks hold token money as a trust and adjust it in price at the time ofthe execution of the sale

Arbun the earnest money given at the time of execution of the saleas part of the price

Taken from the buyer as part of the price after execution of the saleagreement


T f C


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Types of Contracts

The Islamic Fiqh Academy of the OIC has made the promise incommercial dealings binding with the following conditions

Valid (Sahih)Voidable/defective (Fasid)Void (Batil)


V lid C


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Valid Contracts

The validity of any contract depends on the legality or illegality of thesubject matter, the existence and precise determination of the subjectmatter, delivery or the ability to deliver the subject matter without

involvement of excessive uncertainty and precise determination of theprice or consideration in a contract.

Contracts Eective Instantly or from a Future DateMawquf (Suspended) ContractsBinding (Lazim) and nonbinding Contracts


V id bl (F id) C


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Voidable (Fasid) Contracts

Causes of invalidity are of two types

Intrinsic causes which relate to the basic elements of the contract, such

as unlawfulness or nonexistence of the subject matter, or the absenceof contractual capacity in any of the partiesExtrinsic causes that relate to Wasf, i.e. external attributes such asRiba or Gharar contained in the contract.


V id (B til) C t t


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Void (Batil) Contracts

Contracts that do not full the conditions relating to oer andacceptance, subject matter, consideration and possession or delivery,

or involve some illegal external attributes are considered void (Batil).The sale of a thing having an element of absolute uncertainty orspeculationA Batil contract does not give rise to any eect


C t ti C t t (U d M dh )


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Commutative Contracts (Uqood-e-Mu awadha)

Classication according to object

Bai Muqayadhah (barter sale)

Bai al Hal (simultaneous exchange of goods for money, spot sale)Bai al Sarf (exchange of money or monetary units)Bai Salam (sale with immediate payment and deferred delivery)Bai Muajjal (deferred payment sale, commonly known as a credit sale)Bai Mutlaq (normal sale of goods for money, also called absolute sale)


Commutative Contracts (contd)


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Commutative Contracts (cont d)

Classication according to subject

Bai Tawliyah (resale at cost price)Bai Murabaha (resale at cost price plus prot bargaining on protmargin)Bai Wadhiah (resale with loss); The above three forms of sale aretermed Buyual Amanat or trust sales)Bai Musawamah (sale without any reference to the original costprice-bargaining on price)

Ijarah or the contract of hiring is divided into:

Ijarat al Ashkhas (rendering services)

Ijarat al Ashya (letting things)

Istisnaa (contract of manufacturing)

Wakalah can be both commutative and noncommutative contracts


Uqood Ghair Muawadha (Tabarru) or Gratuitous


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Uqood Ghair Mu awadha (Tabarru ) or Gratuitous

Contracts

The main feature of these contracts is the donation of property

The donor transfers ownership of any property to a party withoutconsideration. The following contracts fall under this category

Hibah (gift)Wasiyyah (bequest)Waqf (endowment)Kafalah (guarantee)Ariyah (loan of usable item free of any charge)

Loan (Qard)Hawalah (assignment of debt).


Conditional or Contingent Contracts


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Conditional or Contingent Contracts

As a general rule, conditional contracts are not validThis, however, requires some detail and some conditions could be

acceptable, that is three types of stipulations/conditionsTaliq conditions which suspend a contract to any future event.Idafa an extension that delays the beginning of any contract until afuture time.Iqtiran (concomitance) that varies the terms of the contract

Valid conditions are those that conrm the eects attributed tojuridical acts by the Sharah and which are admitted explicitly by it,such as the option of stipulation (Khiyar al-Shart) reserved for a partyto revoke or ratify a contract within specied days

Such a condition is valid because the Sharah has sanctioned theoption of stipulation and the option of inspection (Khiyar al-Ruyah)The stipulation to sell on the condition that the seller will not handover the goods to the buyer unless he pays the price is also a validcondition, because it stresses and conrms the eects of the contract

and realizes its objectiveSigit S.Wibowo () Prog. Ekstensi Manajemen-FEUI September 19th , 2008 24 / 25

Reference


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Reference

Muhammad Ayub (2007), Understanding Islamic Finance. West

Sussex, U.K.: John Wiley & Sons Ltd. (Chapter 5)


elements of contract in islamic business law 2

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