INTRODUCTION OF ISLAMIC

Law of Contract
For MBA Program, Course : EIF
1) M.Arshad
2) Bilal Ahmed
3) Akash Noor
4) Atiq ur Rehman
 Islam is a Deen which means way of life. Life is full of problem and issues.
To over come and resolve these issues All Mighty Allah has reveled laws
and Rules in the Holy Quran which is imposed on human life to follow and
make their lives miserable.
Islam opposes the ways that unlawfully devour the assets which belong to
others, such as by theft, robbery, blackmailing, bribery, or land grabbing.
An average man deals with contracts almost every day in his life and
contract is not something rare. So, it is important to identify the implications
of Shariah to the contracts.
Different transactions have different characteristics that need to conform to
the principles of Shariah and any transaction that either involves those
prohibited elements and / or that involves characteristics that do not
conform to Shariah are regarded as invalid.
 Bay is Arabic word for Sale and it literally means exchange of one thing
with another. One thing is the subject matter (Mabi) and the other thing is
the price (Thaman). The Majallah28 gives almost the same definition for the
sale. However, in the language of law, a sale is an exchange of property
for property with mutual consent of the contracting parties, which is
completed by declaration and acceptance.
 In Arabic Asl refers to something which is fundamental. In reference to the
Islamic law of contract Asl refers to the fundamentals elements and
components of the Islamic law of contracts.

(A code of Islamic commercial law based on the Fiqh-e- Hanafia)

The Fundamental elements (Asl) of Islamic contract are:

Existence of contracting parties (Aqidain).

The offer (Ijab) and acceptance (Qubul).
The subject matter (Maqud alayh ).
Explanation

Existence of contracting parties (Aqidain)

There shall be two distinct contracting parties who must have the capacity for execution i.e. both shall be sane, adult and able
to take decisions by themselves and not by any duress.

The offer (Ijab) and acceptance (Qubul)

There shall be a clear statement made by the offeror to the offeree. Either the seller or the buyer can make an offer which can
be accepted by the other party.
It is necessary that the offer should be communicated clearly and there shall be no ambiguity in it and the acceptance after the
offer should be in the same sitting or unto a time mentioned by the offeror
If the offer is not accepted by the other party unconditionally with in the same sitting or to the time mentioned by the offeror,
then the offer becomes canceled and either the other party or the earlier party can make a new offer.

The subject matter (Maqud alayh)

The subject matter of the contract shall meet the definition of Mal-e- Mutaqawam / i.e. anything which is usable and
which has legal and material value for people). It implies that the subject matter of the contract must have the following
attributes:
value
possessable
legitimate use.
 The external attributes or Wasf of a contract are factors in addition to the fundamental elements
of a contract which are necessary to categorize the contract as a valid contract.
Examples
Identifying the selling price
The selling price shall be fixed in an unambiguous manner at the time of execution of the
contract. Identifying the exact amount and currency of exchange is essential.
Identifying the date of delivery
The date of delivery shall be fixed without any uncertainty.
Identifying the subject matter
The subject matter shall be identified by specification and / or designation without implying any
vagueness
Sellers ability to transfer the subject matter easily
It shall not be established that the seller would not be able to transfer the subject matter easily.
Avoiding the stipulation of inappropriate condition
The contract shall not stipulate conditions which are inappropriate to the injunctions of Shariah.
For example, the seller shall not sell goods which are not in his ownership.
Selling without obtaining possession of the subject matter
The subject matter must be in the possession of the seller at the time the seller enters into the
contract to sell the same to the buyer.
Based on fulfilling the Asl and Wasf, the contracts are divided into the following
three types according to Hanafi scholars:
valid contracts.
voidable contracts.
void contracts.
Other scholars categorize contracts into valid and void only. According to
them, voidable and void contracts are the same and the implications of
voidable and void contract are those which apply for void contracts.
A valid contract is a contract in which all the fundamental elements (Asl) are in order, none of those is
breached, and it is free from prohibition of external attributes of a contract. In short, a valid contract is a
contract which is in accordance with the principles of Shariah, both in reference to the Asl and Wasf.
Implications of a valid contract
If in a contract the elements of the contract are in order, all the fundamental elements are met, the external
attributes are legal and the contract is not suspended or dependent upon ratification, the contract is said to
be Nafiz. The Nafiz contracts are further divided into binding (lazim) and non binding (ghair lazim) contracts.
A contract which cannot be revoked by any of the party unilaterally is binding contract. A contract which
can be revoked unilaterally by any of the party, without the consent of the other party is a non binding
contract.
Some of the examples of the non binding contracts are:
Wakalah (agency).
Shirkah (partnership).
Wadiah (deposits or Amanah).
Ariyah (commodity given for use without any compensation or rent) etc.
A contract that has all the elements of a contract, but is not legal with respect to external or
nonessential attributes of the contract is not valid.
It is not necessarily void and if the cause of the irregularity can be removed, the contract is termed
as Voidable.
If the defect is removed the contract becomes valid under the principles of Shariah.

Some of the examples of voidable contracts are:

Sale contract with unlawful consideration, i.e. a sale whose consideration or price is something
prohibited by Islamic law, such as wine or pork;
Two sales in one contract i.e. where a single contract relates to two sales, such as selling one
commodity for two prices, one being cash and the other a credit price, thus making the contract
binding against one of the two prices without specifying either
IMPLICATIONS OF A VOIDABLE CONTRACT
A voidable contract becomes valid if the cause of defect or irregularity is removed.
where the buyer has received the object with permission of the seller, he becomes the owner.
(Al- Atasi , 1403 AH, Majallah, Article 371)
However, if the defect is not removed and the buyer in the voidable contract has taken the
possession of the subject matter with the consent of the seller then the ownership passes to the buyer
and the buyer is liable to pay a mutually agreed price or the market value of the subject matter to
the seller and not necessarily the price fixed in the earlier agreement.
The parties can still cancel the contract if the buyer has not disposed off the subject matter to third
party and in this case the subject matter must be returned back to the seller and the seller must return
the consideration back to the buyer. Until the seller returns the consideration to the buyer, the buyer
can take the subject matter as a pledge.
If the buyer has taken the possession of the subject matter and any of the following has occurred to
the subject matter, than none of the parties has any right to cancel the contract:
buyer has donated it.
buyer has added or subtracted from it.
it is changed regarded as the same object.
buyer has disposed it off by onward sale.
In Islamic law, where a buyer has obtained possession of the subject matter of a voidable sale with
the consent of the seller and then subsequently sold the subject matter to a third party, this second
sale is not void because of the fact that the first sale is a voidable sale. However, any personal use of
such subject matter will remain impermissible including eating and wearing etc.
 A contract which does not meet one or more of the fundamental elements of a contract and / or
it involves some illegal external attributes are considered void. A contract which is entered into,
for the sale of a thing which have element of uncertainty and / or speculation is void.

Implications of a void contract:

If a contract is identified as void then the buyer does not have the title to the asset, the seller
does not have the right to the consideration and consequently the ownership is not transferred
and the transaction is null and void. The subject matter shall be returned to the seller if the
delivery has already taken place.
As the contract is null and void; the original buyer has the right to recover the subject matter from
the third party even if the buyer has sold the subject matter to the third party (irrespective of
whether or not the second contract is valid, voidable or void).
 Wad is an Arabic word which literally means Promise.
Wad refers to the promises related to financial transactions. Wad mostly refers to unilateral
promises; however it is also covers bilateral promise sometimes.
Wad generally means that a party to a transaction binds itself to do some action for the other
party. There has been a debate between different scholars about the legal implications of Wad
and most of the traditional (Malikis, Hanbalis and some Hanafi and Shafiye) and contemporary
jurists are of the opinion that Wad is legally binding. They argue that, considering Wad as legally
binding is not against the text of the Quran and Sunnah, therefore it is accepted.
As a general principle, a Wad is binding if it meets the following conditions:
it is unilateral;
The promisee has incurred some expenses and / or liabilities as a result of the promisor s promise.
The actual sale (for which the promisor has promised the promisee) must take place through the
exchange of offer and acceptance and the promise shall not be considered as an alternate to
the subsequent offer and acceptance.
if the promisor backs out of its promise; he shall reimburse the promisee, the actual cost
(opportunity cost shall not be reimbursed).
 Hamish Jiddiyah in Arabic literally means margin reflecting the firm intention of the
promisee. In many contracts one party or institution takes a security deposit from the other
to take a commitment from them that they will fulfill that particular contract. One party
takes money from the counter party as a firm commitment before the execution of sale
and adjusts that amount in consideration at the time of execution of contract.
When the giver of deposit do not fulfill his part of commitment, the taker of deposit can
recover any actual loss on expenses incurred or purchases done by the Hamish Jiddiyah
and the remaining amount of Hamish Jiddiyah will have to be given back to the giver of
deposit. The actual loss does not cover the loss in respect of cost of funds.
It is to be noted that Hamish Jiddiyah is the security deposit which the promisor gives the
promisee to ensure that the promisor would fulfill his promise. Once the promisor fulfills his
promise and executes the contract, Hamish Jiddiyah shall either be returned back to the
promisor or alternatively it can be adjusted in the contract price.
 After the contract has been executed, the seller might demand some surety from the buyer that
the buyer would fulfill his contractual obligations. Urboun is the sum of money which the seller asks
the buyer for this purpose.
Urboun is the earnest money given as a commitment at the time of execution of the contract as
part of consideration. Amounts taken in tenders are an example, in which the bidders show their
sincerity to buy a property at a consideration he bid. At time of acceptance of bid the deposit
will become a part of total consideration and unaccepted bidders will get there whole money
back.
If the buyer is not able to fulfill his contractual obligations, the seller would deduct the amount of
actual loss faced by him as a result of the buyers inability to fulfill the contractual obligations from
the Urboun and return the remaining amount to the buyer.
Bay Muajjal
The Use of Ruses (Hiyal)
Bay Inah
Commodity Murabaha (Tawarruq)
Hibah
 Explanation

Literally it means a credit sale. Technically, it is a financing technique adopted by Islamic banks
that takes the form of Murabaha Muajjal. It is a contract in which the seller earns a profit margin
on his purchase price and allows the buyer to pay the price of the commodity at a future date in
a lump sum or in installments. He has to expressly mention cost of the commodity and the margin
of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the
same as the spot price or higher or lower than the spot price.

Hiyal literally means to come in between as a way-out and it is important to know that for most of
the deeds to be acceptable in Shariah the substance of the deeds must conform to the
underlying Shariah principles. This claim is supported by the following Hadith of the Holy Prophet
(SAAWS):
The reward of deeds depends upon the intentions and every person will get the reward
according to what he has intended.29
All the attempts in which the ultimate objectives are to bypass the underlying Shariah principles
are prohibited. These are prohibited because these are considered as deceit and deceits are
specifically prohibited in Quran and the Sunnah.
Explanation

Bay Inah is one of the examples of the use of Ruse. AAOIFI defines Inah as:
it refers to the process of purchasing the commodity for a deferred price, and selling it for a
lower spot price to the same party from whom the commodity was purchased.30
29 Sahih Bukhari, Volume 1, Book 1, Hadith Number 130 AAOIFI Shariah Standard No. 30 Monetization (Tawarruq)

Bay Inah is a double sale by which the borrower and the lender sell and then resell an object
between them, once for cash and once for a higher price on credit, with the net result of a
loan with interest.
It is prohibited in Shariah because the net result of Bay Inah is an interest bearing loan and
interest is strictly prohibited in Shariah.

Tawarruq is also known as Monetization and is defined by AAOIFI as:

The process of purchasing a commodity for a deferred price determined through Musawama
(Bargaining) or Murabaha (Mark-up Sale), and selling it to a third party for a spot price so as to
obtain cash..31
The purchaser can use the commodity himself or sell it in the market to get cash for other needs.
However, this is the practice of real purchase and sale (termed Tawarruq) and different from
Bay Inah that involves buy-back by the original seller and that has been prohibited by
the Holy Prophet (SAAWS).
Explanation

Hibah literally means Gift. Hibah is a non-remunerative contract which means that one party
transfers an asset while the other party does not give anything in consideration. In non-
remunerative contracts (such as Hibah), some of the restrictions and adherence to some of the
principles of Shariah are different from those which are applicable to remunerative contracts.
One of the examples is that for the effectiveness of Gharar it is important that the contract must
be an exchange based contract. But in case of Hibah it is not an exchange based contract.
Therefore if someone accepts a box as a gift from another person and does not know the
content of box, Hibah is still valid.
Just for better understandability, if the same box is sold to another person in exchange of some
consideration without disclosing the contents of the box; the sale contract is voidable on the
basis of Gharar.
The ownership in Hibah is transferred as soon as the receiver obtains possession of the underlying
asset. After having given a gift, one cannot take it back except with the consent of the person to
whom the gift was given.
31 AAOIFI Shariah Standard No. 30 Monetization (Tawarruq)
 TERMS OF REFERENCE

Asl Voidable (Fasid)

Bay (Sell) Void (Batil)
Aqidain Wad / Ahd
Qubul Hamish Jiddiyah
Ijab Urboun
Maqud alayh Bay Muajjal
Wasf Commodity Murabaha (Tawarruq)
Valid Contract Bay Inah
Wakalah The Use of Ruses (Hiyal)
Shirkah Hibah
Wadiah Mal-e- Mutaqawam
Ariyah