General Principles of Contracts & Transactions in Islamic.pdf

8/14/2019 General Principles of Contracts & Transactions in Islamic.pdf

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General Principles of Contracts &Transactions in Islamic Commercial Law

Muhammad Saarim GhaziHead Islamic Financial Services, Al - Hidayah Centre for Islamic Finance

Member Working Group, Islamic Banking & Finance, Institute of Policy Studies, Islamabad


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Principle 1

Free mutual consent of the parties is a pre-requisite for thevalidity of a contract.

Consent obtained through coercion, fraud, misrepresentation

or some other illegal means renders a contract invalid inShariah.

Similarly, a contract made in state of intoxicationor by way

of jest or through mistakeis also invalid in Islamic law.

The Holy Prophet (SAW) said The contract of sale is validonly by mutual consent.

(Sunan Ibn e Majah; Hadith no. 2185)

Free Consent


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Literal meanings; Indeterminacy, Speculation, Riskor Hazard.

Technical meanings; Gharar takes place where theconsequences(of a transaction) are concealed.(Imam Sarkhsi; Al Mabsut, Vol 13 p 194)

Principle 2

Prohibition of Gharar


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Gharar

Shaikh Ibn e Taimiyyah: Usually, the riskiness deals with the variation of outcome(i.e. possibilities of profit & loss) and not the terms and conditions of the contract.

Islamic commercial law does not disapprove risk & uncertainty when it refers tobusiness outcomes as they constitute a law of nature.

Islamic commercial law requires absolute certainty about the terms and conditionsof contractual obligations.

The contract must be free from uncertainty about the subject-matter and itscounter-value in exchange.

There should be no jahl or uncertainty about availability,existence and deliverabilityof goods and the parties should know the actual state of the goods. (quality &

quantity)

Subject-matter must be clearly defined and clearly known to the contracting partiesin case of heterogeneous goods.

Time of delivery & future performance must be clearly defined.


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Examples of Gharar

Sale of a car which has been stolen by someone.

Sale of goodsyet to be acquired by seller.

Sale of fish in water &birds in the air.

Sale of an item that is yet to be owned and is difficult to be acquired by the seller,

such as selling a horse that has escaped, or a lost car that is yet to be retrieved. Sale of an item that is not described properly.

Sale of an item where the price has not been finalized.

Sale of an item where the price is dependent on circumstances.

Sale of an item without a proper description that can avoid dispute, e.g. selling a

garment in a plastic packaging without allowing customers to inspect it.

Sale of an item that is attached with conditions which are ambiguous, e.g. if my

friend arrives or if the price goes up etc.


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Literal meaning of Riba:

Increase, Addition, Augmentation, Excess (Surat al-Rum verse 39)

Technical meaning of Riba: (Riba al-Quran, Riba al-Nasiyyah Riba al-Duyun) Any Amount Over and Above the Principal amount stipulated in LoanTransaction.

Every loan that derives a benefit is riba. (Al-Suyuti,Al Jame al-Saghir V.2 P.94) Any amount, big or small, over the principal, in a contract of loan or debt is

Riba prohibited by the Holy Quran, regardless of whether the loan is takenfor the purpose of consumptionor for some productionactivity and whether itis simpleor compound. (Surat al-Nisa verse 161, Surat Ale-Imran verse 130, Suratal-Baqarah verse 275-281)

Riba al- Hadith, Riba al Buyu: (Riba al-Fadlplus Riba al-Nasa)Riba al-Fadl:Riba by way of excess: An unequal exchange of two things of thesame kind such as exchange of wheat against wheat.Riba al-Nasa: Riba of delay:When articles of the same genera or differentgenera, whether measured or weighted, are exchanged with deferment on one

side, whether or not there is real excess in favor of either side. Gold, Silver,Barley, Wheat, Dates, Salt.

Principle 3

Prohibition of Riba


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Every form of money acquisition of which depends upon luck or chance. Qimar & Maysirliterally means getting something too easily. In other words you gain what you

have not earned. Maysir is the word from Yusr. Maysir is used in Quran & Qimar in Hadith. Sayyiduna Abd Allah ibn Umar (Allah be pleased

with him) says: al-Maysir is the al-Qimar. The same has been narrated from Mujahid, Said ibnal-Musayyib, Hasan al-Basri, Muhammad ibn Sirin, Ata ibn Abi Rabah and others (may Allah bepleased with them all). (See: Tafisr Ibn Jarir, 2/358)

Qimar means gambling. Technically, it is an arrangement in which possession of a property is

contingent upon the happening of an uncertain event. Gambling (qimar) is from the word qamar, that which increases at times and decreases at

other times. It has been given the name al-Qimar due to the possibility that each one of thegamblers may lose his wealth to his counterpart, and it is also possible that one may gain fromthe wealth of the other. (Allama Allama Ibn Abidin Shami :Radd al-Muhtar ala al-Durr, 6/403)

By implication it applies to a situation in which there is a loss for one party and a gain for theother without specifying which party will lose and which will gain. (Speculative Risk)

Sayyiduna Abd Allah ibn Abbas (Allah be pleased with him) defined gambling in the followingwords:The risk of losing on both sides (or putting something at stake from both sides) (mukhatarah)is gambling. (Ahkam al-Quran, 2/11)

Examples Mobilizing resources on the basis of lottery & draws. Futures & Options contracts that are settled through price differences only.

Principle 4

Prohibition of Qimar & Maysir


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Fraud is to induce a person by some deceptive means with a view to obtain his consent to a

contract without which he would not have consented to the contract.

Contract can be revoked, if:

1. Misrepresentation of a material fact must occur,

2. There must be an intent to deceive,

3. The innocent party must rely on misrepresentation4. The innocent party must suffer as injury.

Khilabah:Concealing the defects of and in merchandise

Tatfeef: Giving short weight and measure

Najash/ Tanajush: False bidding to raise prices

Hiding defects of commodity in Sale.

Ghabn-e-Kaseer / Ghabn-e-Fahish

False Swearing

Talaqqi al-Rukban: Purchasing merchandise before they reach the market place.

Principle 5

Prohibition of Khilabah & Ghishsh (Fraud & Deception)


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Khilabah

Concealing the defects of and in merchandise/Hiding defects of commodity in Sale.

The Holy Prophet (s.a.w.s) once happened to pass by a heap of grain in a market place and on examinationfound that the grain beneath the surface was wet while that on surface was dry. He chided the seller for

resorting to such deceptive tactics and said: he who deceives is no one of us (Sahih Muslim, kitab ul

Iman)

If both the parties spoke the truth and described defects of the goods, then they would be blessed intheir transactions, and if they told lies and hide something, then the blessing of their transaction would

be lost (Sahih Bukhari, Kitab ul Buyu)

Tatfeef

Giving short weight and measure

A tradition from Ibn Abbas according to which when the Holy Prophet (upon whom be peace) arrived inMadinah the evil of giving short weight and measure was widespread among the people there. Then

Allah sent down Wayl ul-lil mutaffifin and the people began to give full weight and measure.

Najash/ Tanajush

False bidding to raise prices

It is to offer a high price for a commodity without any intention to buy it, the sole aim being to cheatsomebody else who really wanted to buy the commodity.

O People! With a view to bargaining with the people who come with their animals laden withcommodities for sale, do not go to meet them (outside the town) and if a person is bargaining withanother, do not interfere by bidding higher (Abu Huraira Subul al-Salam vol.3, p.18

Effects of Najash/ Tanajush

Hanafis, Malikis & Hanbalis: Buyer has a right to revoke the contract. Shafis do not acknowledge thisright.


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Ghabn-e-Kaseer / Ghabn-e-Fahish

Ghabn Fahish means excessive loss suffered by a party to the contract as a result of concealment ormisrepresentation, or deception or fraud practices by the other.

Ghabn Fahish in real estate or other property is a matter for the estimators alone (Jordanian Civil CodeArticle 146)

Ghabn-e-Kaseer / Ghabn-e-Fahish: Hanafi ViewpointExcessive loss suffered by a party alone is not a cause of nullity of contract but only when it is caused bya fraud or misrepresentation. Exceptions: Sale of property of Waqf, Bayt ul Maal or Property of insaneor minor.

Hanbali viewpoint: Voidable at the option of injured party

Shafiiviewpoint: Buyer has no right revoke the contract because lesion has occurred due to his

negligence.False Swearing

Swearing (by the seller) is beneficial to the trade, i.e. it may persuade the buyer to purchase the goods, butin that way he will be deprived of Gods blessing to the earning (Sahih Bukhari, Kitab ul Buyu)

Inflated Price in Trust Sale

Where the seller in a trust sale, sells goods at an inflated price to buyer. The buyer bases himself on the price

the seller claims to have himself paid in order to suggest to him a purchase price.

Kinds of trust sale: Tawliyyah, Murabaha, Wadiah

Effects of Inflated Price in Trust Sale: Voidable at the option of buyer.

Tadlis bi al-Ayb (fraud with defect)

Soundness of subject matter and free of defects is an implied condition of the contract. Conract is void at

the option of buyer if he was unaware of the defect before hand.


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Talaqqi al-Rukban

Purchasing merchandise before they reach the market place at a lower or cheap price.

It is forbidden to meet the riders (i.e. the traders) on the road (for the purpose of taking undue

advantage). Whosoever meets a trader on the road and buys goods from this trader, the vendor has theright of option and cancellation of such deal when he arrives at the market Subul al-Salam vol.3, p.21

The honest & truthful merchant will be on the Dayof Judgment together with Prophet,the faithful

ones, the martyrs and the pious people

Hadith


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The Holy Prophet (SAW) prohibited from two sales in one sale(bayatan-fi-Bai).

The sale of the two articles for two prices.

Contingent sale.

The sale of a single object for two prices.

The First ControlContracts combining should not include the cases that are explicitly banned by

Sharia.

The Second Control

It should not be used as a trick for committing Riba.

The Third Control

It should not be used as an excuse for practicing Riba like imposing excess

repayment in terms of quality or quantity on the borrower.

The Fourth control

Combined contracts should not reveal disparity or contradiction with regard totheir underlying rulings & ultimate goals.

Principle 6

Prohibition of Combining Two Inconsistent Contracts or Contingent Contracts

Sharia Controls on Contracts Combining(AAOIFI Sharia Standard No. 25)


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Preservation of Din (religion)

Preservation of Nafs (Life)

Preservation of Nasl (Progeny)

Preservation of Aql (Intellect)

Preservation of Maal (Property)

Any Transaction or conduct that offends any of these objectives in invalid in

Sharia.

The requirement of conformity of contract with the objectives of Sharia is

similar to the requirement of modern law that an agreement should not be

against public policy (as discussed in Priniciple 10 below)

Principle 7

Conformity of contracts with Maqasid-e-Shariah


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A person is entitled to profit when he bearsrisk of loss.

Risk refers to inherited or natural.

Risk sharing is encouraged rather than risktransferring.

Example

A businessman is entitled to Profits & Gains in hisbusiness because he is ready to bear Loss.

Principle 8

Principles of Liability for loss and Entitlement to Profit


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What is not explicitly prohibited is permissible.

All the agreements are permissible unlessthey violateany text of the Quran or the Sunnah or oppose the

objectives of the Shariah.

Principle 9

Permissibility as a General Rule


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In order to be enforceable, a contract cannot violate "public policy"

For example, if the subject matter of a contract is illegal, a contractcannot be enforced.

A contract for the sale of illegal drugs, for example, violates public policyand is not enforceable.

It is important to note that public policy can shift according to changingconditions.

Maqasid e Shariah as discussed above

Principle 10

No Violation of Public Policy


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It is implicit within all contracts that the parties are acting ingood faith.

For example, if the seller of a property knows that the buyerthinks the property being purchased is an occupied office

building,but secretly intends to sell the buyer an unoccupied

office building, the seller is not acting in good faith and thecontract will not be enforceable.

Principle 11

Good Faith


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Reading List:

Islamic law of Contracts & Business Transactions by Dr.

Muhammad Tahir Mansoori: Chapter 1: General Principles of

Contracts and Transactions in Islamic Law

IIBI (Institute of Islamic Banking & Insurance) London: Module

II, Lesson 1


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Muhammad Saarim Ghazi

Head Islamic Financial Services, Al - Hidayah Centre for Islamic FinanceMember Working Group, IBEF Program, Institute of Policy Studies

Email: [email protected]: +92 300 515 9750

General Principles of Contracts & Transactions in Islamic.pdf

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