Essential Elements of Contract

By:Hussein Azeemi Abdullah Thaidihussein.ath@gmail.comTOPIC 5:FORMATION OF CONTRACTin Islamic FinacePillar (Rukn) in Islamic Perspective Majority of Mazhab: An elementary portion which forms something and the existance of that something is depending upon the existence of itPillar: Basic must-have component is a particular object.Pillar is different from condition (Shart) which it is not included as a basic constituent of a particular object

3 Pillars to a ContractAccording to majority of Islamic schools of thought (mazhab), there are 3 pillars to a contract:Contracting partiesSighah (offer and acceptence) Subject metterPillar 1: Contracting PartiesSeveral conditions need to be fulfilled:Legally competent: competence is measured by 2 aspects: puberty and prudence of financial management.Important to void fraud and disputesContracting party must reach an age of maturity, intellectually matured and not a bankrupt. Cont..Consent: A trade transaction becomes invalid if either the seller or the buyer is unjustly forced to conclude it.Prophet said: Selling should be only by mutual consent (Ibn Majah) Pillar 2: Sigah (offer and Acceptance)Sighah is the statement formed through offer and acceptance by the parties of the contract.Offer: what is stated by the one who transfers the ownershipAcceptance: statenebt by the one to whom the ownership is to be transferred usually, offer is issued by the seller and acceptance is from buyerImplication of Sighah in Financial ContractRepresenting the mutual consent of the contracting partiesThe contracting parties will have an effect on the subject matter i.e the ownership of the subject matter will be transferred to the buyer and the seller will be entitled for the consideration (price).Conditions of SighahUnderstandable by all contracting parties2. Clear-cut use of words3. Remain in full capacity4. Contracted in a single session5. Acceptance should be in accordance with an offer1. Understandble by all contracting partiesDisputes frequently occur when customers failed to examine cautiously the terms and conditions.Eg: Most of the terms and conditions are written in high frequency words of English. In many cases, some customers from rural areas cannot comprehend it.It is responsibility of the customers to consult the bank in order to comprehend terms in the contract

2. Clear-cut use of wordsThe contract is affected without delayThe words and language of sighah which are used must be something like I have sold, I sold, I sell, I am selling etc.Sighah must be not something which indicates future times as well as ambiguity like I will sell or I will buy.Sighah must not be in any form of persuasion. Eg: please buy itMust not in the form of enquiry. Eg: do you want to buy it?Clear-cut use of words (cont..)The majority of mazhab preferred to apply clear and expressive in order to avoid any confusion.Some of them insist on the use of past-tense.But mazhab malikis opinion approve all types of customary words which are understandable by contracting parties (This is the stronger view and suits the current needs)What matters is the objective of the contract i.e to obtain consentIssue: Muatah sale (sale without offer and acceptance)Can a contract be executed without a clear and stated offer/acceptance? Like when a person buys a drink through vending machine.Majoriti of mazhabs opined that such transaction is permissible and valid as long as both seller and buyer consented to the price and the subject matter.But mazhab shafii viewed it as invalid3. Remain in full capacityThis element is not fulfilled if one of the parties becomes incompetent to conclude the contract either by insanity, bankruptcy or anything alike4. Contracted in a single sessionThe offer and the acceptance have to be concluded in the same session of a contract. But it depends on the following circumstances:Presence of the offeror and the offeree in the one single session of contract. The one single session is fulfilled when the following elements are satisfied:Time: offer/acceptance are connected in one single session without any long gapPlace: must be at specific placeThe situation of contracting arties when meeting: both of them are not leaving each other with an intention of not wanting to proceed with the contractMazhab shafii: an acceptance need to be done immediately after an offer is made.Majority mazhab: a customer may delay his/her acceptance as long as the 3 elements are fulfilled.The majoritys view is more appropriate especially in the modern world

Session of contract when contracting parties is separated.Jurists have agreed that financial transaction such as sale, musharakah etc can be contracted even when parties are separated physically in term of their places.The contract still can be concluded by representatives or any modern communications systems such as whatsApp, email etc. but must be performed in one single session.Few contracts exempted from one single session:Aqad wasiat (estate administration)Aqad wakalah (agent)Aqad wisoyah (estate administrator)5. Acceptance should be in accordance with an offerScholars agreed that the acceptance have to be in sequence with the offer made. Eg: when a seller offers a laptop for RM2000, the acceptance from buyer must be on the same subject matter with the same price.Pillar 3: subject MatterUnsuitable Subject matter:If the subject matter is not considered a property of value. Eg: flesh of dead animal (not slaughtered) If the subject matter is nit owned by any of the parties. Eg: fish in the sea or a bird in the air.If the subject matter forbidden by Shariah. Eg: liquor, wine, pork etc..Conditions of Subject MatterLegally PermissibleIslamically ValuablePrecise determination on the essence (quantity & Value)Exist and Legally Owned by the vendorDeliverability of the subject matter

1. Legally Permissible

The object must be lawful and to be traded in the view of Islam.Any transaction involving unlawful item will render the transaction as void.Even if there is a law allows such unlawful object to be in trade, the transaction will still considered to be null.

2. Islamically ValuableValue of the object must be recognized by IslamThings like liquor, pork and drugs, interest-based investment are invaluable in Islam.Any kind of spent from proceeds of sale from illegal objects are also forbidden3. Precise determination on the essence (quantity & Value)Specific determination on the essence, quantity of the goods and its value is required in every contract of exchange.It is important to avoid ambiguity and disputes.

But there are several contracts exempted from this condition with the consent of the other party:Gift (hibah): a gift can be given even without the knowledge of the recipient.Will (wasiyyah): it is a valid will if it comes from his shares of properties without any certain specification.4. Exist and Legally Owned by the vendorSubject matter must be legally owned by the vendor/seller and is in existence at the time of contractBut in the modern instruments, there are several contracts which are permissible by conventional law even the subject matter is not yet owned by the seller at the time of selling. Eg: short sellingIn Islamic law of contract, such transaction is prohibited.5. Deliverability of the subject matterAll mazhab have agreed that anything which cannot be delivered or anything ehich its deliverability cannot be assured is not subject to be tradedReferencesZaharuddin Abd Rahman (2012). Contracts & The Products of Islamic Banking. Kuala Lumpur: CERT PublicationZuhayli, Wahbah (2002). Al-Muamalat al-Maliyyah al-Mu`asarah. Damascus: Dar al-FikrZuhayli, Wahbah (1997). Al-Fiqh al-Islami Wa Adillatuh. Damsyik: Dar al-Fikr.Abbas Husni Muhammad (1993). al-Aqd fi al-Fiqh al-Islami.