6.1
The classical law of contracts and obligations have adopted the principle of freedom of contract and elaborated various requirements for formation and validity of contract.
The elements of contract under Islamic law:
1. Capacity to contract
2. There must be an offer & acceptance
3. Consideration
4. Ther must be absence of Riba and Gharar
6.2
Capacity to contract:
Contractual capacity, other than for contracts of marriage, is (with the exception of Maliki females) attained for males and females alike at the onset of physical puberty. There is an irributable presumption of law that no male below the age of 12 and no female before the age of nine has achieved majority and an equally irrebuttable presumption of law that by the age of 15 both males and females are adult. In between the minimum and the maximum ages whether majority has been attained is a question of fact. Moreover, a minor’s coming of age according to symptoms or age is not sufficient for perfection of his capacity and obligation of making over his property to him, and to give him a free hand in disposing of it. But it is necessary that he must possess sound judgment along with legal majority. The proof of that is the following quranic verse
“And put the orphans to test until they reach the age of marriage; then if you perceive in them sound judgment deliver to them their property” (Sura 4, verse 6)
This verse is decisive about the fact that making over property to the orphans, that is minors, is qualified by two conditions, the first is reaching the marriageable age, and the second is that sound judgment is found in them. If a child comes of age but has no sound or right judgment, he will have no perfect capacity and this property will not be made over to him. But he will be interdicted until right judgment is found in him.
A person having sound judgment is he who disposes his property well and know the method of its investment and protection. The Shafi jurist define sound or right judgment as competence of a child for disposing of his property well and observing the injunctions of the islamic shariah. If a child comes of age while he manages the affairs of his property and disposes of it very will according to the requirement of intelligence and wisdom, but does not manage his other affairs according to the injunctions of Shariah, he will not be considered having sound judgment. Abu Hanifa holds that when a person reaches the age of twenty-five years, he becomes a man having perfect capacity and his property must be delivered to him so that he may dispose of it. That is after this age no person is expected to improve his capacity to dispose of his property, and therefore it is useless to interdict him and prohibit him from disposing of his proerty. (An Introduction to the Study of Islamic Law, Dr. H.H. Hassan, 2005, p.p 356-357)
Children below the age of majority are subject the control of the guardian of their property. The person with the prior right to deal with the property of the child is the father. If the father is absent then a person appointed by the father has the right. If the father has not named the guardian of the property of his infant child the right passes to his nearest male kinsmen in the order of succession on death. The guardian of the property has the duty to safeguard the interests of the minor and to deal with the property of the minor as if it was his own.
A child below the age of majority who has reached the age of seven, which the Muslim jurists considered the age of discernment, has a restricted contractual capacity. The child may enter into a contract which is manifestly to its advantage so that it may be the recipient of a gift. Conversely the child may not enter a contract manifestly contrary to its advantage such as making a gift. Other contracts made by a child below the age of majority are not void but are deemed to be suspended pending the guardian’s consent or otherwise to their execution. The only exception to the general rules relating to contractual capacity are insane persons, persons who are, while not certifiably insane, feeble-minded, acknowledged spendthrifts and persons who are easily deceived. In their cases, the age of entering into contract is higher than the ordinary persons. In the case of persons possessing these defects the guardianship of minority may, with the permission of the judge, be extended. Also persons who are in their death-sickness are under an interdiction restricting their contractual rights.
Maliki women also do not achieve contractual capacity at puberty. A Maliki woman achieves contractual capacity only upon consummation of a valid marriage. Even then her contractual capacity is not absolute. She may not dispose gratuitously of more than one-third of her property. The Maliki jurists argued that as a married woman is presumed to be having sexual relations with her husband there is a possibility that she could become pregnant, with the inevitable result that she would deliver a child. Death in childbirth is equated with death-sickness.
In many parts of the Muslim world today the age of majority has been fixed by the various civil codes. It is interesting to note, however, that the courts in Abu Dhabi (where Maliki law prevails), have held that a woman who was over the age of 18, the age of contractual capacity for commercial contracts in that Emirate, was unable to validly contract because she was unmarried. The courts of Pakistan
6.3
Offer & Acceptance:
An offer is the first stage for making a contract. The offer has to be accepted in the same session in which the offer is made. However, what is meant by the same session is a question of fact, which may take a variety of forms.
A offer can be made in a number of ways:
1) It can be made verbally. This kind offer is to be made in the same meeting.
2) This can be made in writing. This form of offer becomes effective as soon as the letter leaves the person offering and will remain valid until received by the recipient. The offer must be replied to immediately.
3) It can be made through message sent with some person, whose honesty is not doubted and if the offer is accepted it will be a good acceptance.
4) It can be made through signs and gestures particularly in those cases where the person offering is deaf or dumb or when the recipient does not understand the language of the person offering.
5) It can be made by conduct. An offer made through the delivery of goods is valid according to Maliki school. An offer can not be made by silence.
The Hanafi and Hanbali jurists says that the person offering has the option to withdraw his offer before it has been accepted since the person who is to receive has nem giving the chance to make up his mind whether to accept or reject the offer. It seems equitable that the person offering should have the right to withdraw his offer before acceptance is made. It is likely that the person offering might have made some mistake or forgotten to include something in his offer, therefore he can quickly withdraw his offer while the other party is still busy in making up his mind. But Maliki school takes a different view and said that once the offer is communicated to the recipient the person offering it has no right to withdraw the offer because he ought to have made up his mind before making an offer but will not be permitted to change it later on. (Abdur Rahman Ibn Doi, 1984, p. 357)
On the other hand, doctrine of Khiyar Al Majlish is relevent for the parties to the contract, duly completed by offer and acceptance, which gives the right to repudiate the agreement during session of bargain. A Prophet’s tradition express this doctrine which is:
“Each of the parties to a contract of sale has the option against the other party as long as they have not separated”
Imam Malik comments on this tradition in the following words: “Here in Medina, we have no such known limit and no established practice for this” and the points he then proceeds to discuss show that for Imam Malik a contract was binding as well as complete immediately mutual agreement had been reached. In this point professor Coulson remark that: “This is one of the many occasions on which the law expressed in the reported precedent of the prophet or later authority was rejected by the early Medinan scholars when it ran counter to their currently adopted doctrine”. Though Hanafi school also do not recognise this doctrine however, the Shafi and Hanbali jurist accept this doctrine.
6.4
Consideration:
In Islamic law, the consideration for the contract must be something which is ritually clean, and which has some value recognized under shariah. Thus contract for selling 100 bottle of wine shall not constitute a valid contract since wine is not recognized under shariah as goods.
6.5
Ther must be absence of Riba and Gharar:
The first principle of Islamic contract law is that ‘Muslims must abide by their stipulations’. This principle of ‘pacta sunt servanda’ does not entail complete freedom of contract but is accompanied by a recognition of the ethical dimension
of a transaction. Freedom of contract is restricted by ethical considerations. The scope of commercial activity in Islamic law is limited by two principles, namely the prohibition on interest (i.e. riba) and on gharar (i.e. an uncertainty in the object of a contract).
6.5.1
Prohibition on interest (Riba)
All schools of Islamic law agree that the taking of interest (i.e. the exchange of money for money with excess and delay), is prohibited. The prohibition placed by Islamic law on interest-based loans is derived directly from the Qur’an in several different revelations, which is the primary source of Islamic law.
Firstly in Sura 30 (Ar-Rum), Verse 39:
“That which you give in usury so that it increases in other people's wealth, will not increase with Allah; but the charity you give desiring the Face of Allah, to those, they shall be recompensed many times over.”
Secondly in Sura 4 (An Nisa), Verse 161:
“And for their taking of usury, that they were prohibited, and consuming the wealth of people in falsehood, for the unbelievers among them We have prepared a painful punishment.”
Thirdly in Sura 2, verse 275–279 provides that:
“Those who devour interest stand like one whom Satan has smitten with insanity. That is so because they keep saying: The business of buying and selling is also like lending money on interest; whereas Allah has made buying and selling lawful and has made the taking of interest unlawful”.
Though, in the Holy Koran, the term Riba has not been defined. However, islamic jurists have defined Riba as taking a monetary advantage without giving a counter value, or more specifically it refers to the “premium” that must be paid by the borrower to the leder along with the principal amount as a condition for the lone or for an extension in its maturity.
In Shariah the term riba is used in two senses:
a) Riba al nasiah
b) Riba al Fadl
6.5.1.1
Riba al Nasiah:
The term nisiah means to postpone, defer or wait and refers to the time that is allowed for the borrower to repay lone in return for the addition or the “premium”. Prohibition of Riba al naisah essentially implies that the fixing in advance of a positive return on a lone as a reward for waiting is not permitted in shariah. It makes no difference whether the return is a fixed or a variable precent of the principal or an absolute amount to be paid on maturity.
6.5.1.2
Riba al Fadl:
Riba al Fadl relates to the hand to hand purchase and sale of commodities. The discussion of riba al fadl has arisen from the hadith requring that if gold, silver, wheat, barley, dates and salt are exchanged against themselves, they should be exchanged on the spot and be equal and like.
Apparently it seems to be something very innocuous because even in a barter transaction one would be tempted to sell a given quantity of wheat for a similar quantity of wheat paid and delivered then and there. But on a deeper examination it becomes clear that this prohibition was primarily to close the slightest possiblity of increase on the principle amount which was possible if this back door is left open. For example if a person want to sell salt in exchange of wheat then there is possiblity of riba. As the price of wheat and salt are not same. For this reason there is a possiblity that one party will suffer loss and other party will get some extra economic benefit over the premium. Moreover, if this trade do not took place on the spot then also there is a possiblity of riba. This is because the price of the product might not be same in the whole period. So here also one party will suffer loss; whereas other will gain though uncosciously. For this reason it is said that this hadith is in fact a discouragement to enter into this kind of transaction.
Of the six commodity specafied in the relevant tradition of the Prophet dealing with Riba al Fadl, two unmistakably represent commodity money; whereas, the other four represent staple food items. Hence the jurist have over the centuries debated the question whether Riba al Fadl is confined only to these six items or it can be generalised to include to other commodities; and if so, what should be the reasoning used for this purpose. On the basis of the characteristics of gold and silver as commodity money, it has been almost unanimously concluded that all the commodities used as money enter the sweep of Riba al Fadl. With respect to there four items, there is a difference of opinion. One opinion argues that since all four commodities are sold by weight or measure (Hanafi, Hanbali, Imami and Zaydi) therefore, all items which are so saleable by weight or mesure would be Riba al Fadl. A second opinion is that since all four items are edible, Riba al Fadl would be involved in all commodities which have the characteristics of edibility (Shafi and Hanbali). A third opinion is that since these items are necessary for substence and are storable (without being spoiled) therefore all items that sustain life and are storable are subject to Riba al Fadl (Maliki). The Zahiri school however confines Riba al Fadl to only to six commodities specifically mentioned by the Prophet. It is however the only school and a minority to be so restrictive. A fourth but perhaps a more plausible, explanation is that all the six commodities were used as money in and around Medina
a) An exchange of two commodities of the same species takes place
b) The commodities can be weight and measured
c) There is a delay in performance or excess in quantity
d) Excess in quantity may be allowed if the commodities are from different species but no circumstances delay in performance can be allowed.
If there is any element of riba in any contract, then the contract would be void to the extent of excess amount and the other pert will remain valid.
After discussing both kind of riba it appears that the prohibition on interest-bearing loans is a strict one in Islamic law. Islamic banking practice is therefore limited to financial agreements that do not involve the charging of interest. One of the means of avoiding the charging of interest is the Murabaha contract that is widely used in Islamic banking.
6.5.1.3
Murabaha contract:
A Murabaha contract can be defined as the sale of a commodity for the price at which the vendor has purchased it, with the addition of a stated profit known to both the vendor and the purchaser. It is therefore at its most basic an ordinary contract of sale.As such it must satisfy all the usual conditions of a regular contract of sale.
A Murabaha contract is not a loan given on interest but a sale of a commodity for a deferred price, which includes an agreed profit, added to the cost. In order to make a Murabaha contract distinguishable from an ordinary, interest-bearing loan the following essential conditions have to be fulfilled.
1) The Murabaha contract must fulfil all the usual requirements of an ordinary
contract under Islamic law.
2) The institution providing the finance to the client must purchase the commodity in its own name from a third party.
3) At the point of purchase the commodity must come into the possession of the institution and the commodity must remain in the risk of the institution until the commodity is sold to the client.
In addition, the Murabaha must comply with the basic rules of a contract of sale under Islamic law.
a) The object of the sale must be property (i.e. an object having a legal use).
b) The commodity must be in the ownership of the seller at the time of sale (i.e. it must be in the physical or constructive possession of the seller when it is sold to another person). Constructive possession means that the commodity has not been physically delivered but has come into the control of the seller and all rights and liabilities in the commodity, including the risk of its destruction or disappearance, are borne by the seller.
c) The delivery of the commodity must be certain and not dependent on contingency or chance.
d) The price must be certain at the time of the contract.
e) ‘In the event of an intrinsic defect existing in the object, the buyer has the
unconditional right to rescind the sale. This right (khiyar al-‘ayab) cannot be ceded by a contractual stipulation, any such stipulation would be null and void.’
The above requirements are regarded as essential for the validity of a Murabaha
contract since the contract would otherwise be indistinguishable from an ordinary
interest bearing loan which, of course, is invalid under Islamic law.
The rules formulated by the religious supervisory boards of the main Islamic banking organisations insist that the bank can only legally sell the object of the Murabaha contract to the client once the bank has received it. Nicholas D. Ray, in his book Arab Islamic Banking and the Renewal of Islamic Law (Graham & rotman, 1995) found that the rules of the International Association of Islamic Banks stipulate that ‘Selling is postponed until the bank gets actual ownership and possession of goods and becomes responsible for any defects therein’. The same applies to the Faisal Islamic Bank of Egypt, the Islamic International Bank for Investment of Development as well as the Second Conference of Islamic Banks.
In a recent decision the Supreme Court of Pakistan defined the essential characteristics of a Murabaha agreement.
[...] Murabahah is a sale and not a financing in its origin. It must, therefore, conform to all the basic standards of a sale. It may be used only where the client of the bank really wants to purchase a commodity. The bank must purchase it from the original supplier after taking into its ownership and (physical or constructive) possession sells it to the client. All these elements must be visibly present in a valid Murabahah with all their legal and logical consequences, including in particular, that the bank must assume the risk of the commodity so long as it remains in its ownership and possession. This is the basic feature
of the Murabahah which makes it distinct from a interest-based financing and once it is ignored, though for the purpose of simplicity, the whole transaction steps into the prohibited field of interest-based financing.
(M. Aslam Khaki v Muhammad Hashim PLD 2000 SC 225, at pp.748–749, per Justice Maulana Muhammad Taqi Usmani.)
The ownership of the goods by the bank for the interval between the two sales can be identified as the most important difference between an interest bearing loan and a Murabaha agreement. During that interval the bank bears the risk that the goods may be destroyed or harmed, or develop a defect. In practice, Islamic banks will procure insurance cover for the period during which they bear the risk in the object of the Murahaba contract.
Compensation for late payment is permitted in modern Islamic banking practice as long as it does not amount to the charging of interest. A contractual provision for the payment of liquidated damages which is calculated on the basis of an annual or daily interest would obviously be prohibited since it amounts to riba (i.e. interest) which is, as explained above, repugnant to Islamic law. In practice, damages for late payment by the purchaser can be contractually provided for by agreeing a pre-determined (i.e. contractually fixed) price for the object of the Murabaha contract if payment takes place after a certain settlement date. This price will be higher than the price payable for the object if payment is effected on the due date.
Other restrictions include the prohibition of an exchange of an obligation for an
obligation and the prohibition of a delay in the exchange of goods.
The essential ingredients of a contract are the offer and the acceptance which must be made in the same meeting (majlis). The offer can be withdrawn as long no acceptance of it has taken place and the majlis, or meeting, has not been terminated. The object of the contract must be specified in order to prevent speculation or interest. A classic example for the specificity requirement is the prohibition on the selling of dates which are still unripe, to be delivered when ripened. Since it is unknown when they will ripen the contract is void. For the same reason Islamic law prohibits gambling, although some of the present day civil codes of the Middle East, for instance the Jordanian Civil Code, allow gambling on racecourses.
Contractual liability arises out of the non-performance of a contractual obligation or the negligent performance of a contract. Liability and obligation are extinct as soon as the contract is properly performed or the debtor is ‘acquitted’ (i.e. the creditor waives his right to the performance of the contract unconditionally). An amicable settlement is also possible, as is the renegotiation of the contract. Another way to extinguish a contractual obligation is to transform it into a new one by way of assignment. A debt owed can, for instance, be assigned to satisfy a claim.
6.5.2
Uncertainty in the object of a contract (Gharar)
Literally Gharar means fraud, the word gharar has often been used to mean risk, uncertainty and hazard. In Islamic law of contract, gharar means uncertainty and ignorance of one or both parties over the substance, attributes of the object of sale, or of doubt over its existence at the time of contract.
For Gharar to have legal consequence it must fulfil four conditions:
a) It must be excessive and not trival: There is a consensus of opinion that gharar to have effect it must be excessive. Excessive gharar may originate as Ibn Rushd has explained, in ignorance and lack of information over the nature and attributes of an object, a doubt over the availability and existence, doubt over its quantity, or want of exact information concerning price, unit of currency in which the price is paid and the terms of payment. It may concern with the time of payment or prospect of delivery. On the other hand traffling gharar is one which is found in nearly all contract but does not feature prominently, in other words which is negligible. This is not so fundamental as to likely give rise any dispute.
b) It occures in case of cominutatuve contract ( a contract in which each of the contracting party gives and receives and equivalent): therefore gharar does not occure is case of obligations crated unilaterally e.g declaration of wakf.
c) It affects the subject matter fo the contract directly, for example in a cow it is the animal itself and not its yet to be born calf.
d) No public interest would be served by the entering into such contract if such a contract is made for the purpose of public interest, then even if there is excessive gharar the contract would be valid. This is because satisfying the people‘s need takes priority by virtue of the quranic principle of removal of hardship (raf cal haraj). For this reason salam contract (advance purchase) and istisna (manufacture contract) contract have been made valid regardless the gharar element therein simply because of the people’s need for them.
A gharar is prevented in the following circumstances:
1) When the parties have adequate knowledge of the counter value they intend to exchange
2) When the object is known to exist and is obtainable
3) When its quality, quantity and attributes are identified and it can be deleivered.
Apart form these, despite gharar, Islamic law recognizes two kindes of contract namely competition for horse ride and competition on islamic quiz.
6.6
Pre-emption:
In contracts for the sale of real property the right of pre-emption (Shuf’a) may arise. Shuf’a means that in certain cases where property is sold a third party may replace the vendee by paying to him the amount which the vendee paid for the property. The right to pre-empt arises first when property is jointly held. Where one of the co-owners sells his share the other co-owner may repurchase the property from the purchaser. Also, where a person is a joined owner of an easement attached to the property sold, he has a right to pre-emption. In Hanafi law a person whose property is immediately adjacent to the sale property has a right to pre-empt. The Hanafi law giving the neighbour a pre-emptive right is preserved in the Egyptian civil code. In many cases where Hanafi law applied, the right of a neighbour was thwarted by the vendor making a gift to his purchaser of choice of a narrow strip of land adjacent to his neighbour’s property and then of course selling the purchaser the remainder of the property. This device was effective as the right of pre-emption does not arise over gifted property. A person
wishing to exercise his right to pre-emption must act immediately upon learning
of the sale. He must exercise his right with due formality and in the presence of
witnesses.
6.7
Gift
Every sane Muslim who has attained majority (with the exception of women in Maliki law as explained above) may dispose of his entire property by gift. A transfer of property by one person to another constitutes a Hiba (i.e. a gift), if the transfer of the property is made immediately, is accepted by or on behalf of the other person and nothing is given in exchange for the property so transferred. With the exception of Maliki law a gift is completed on acceptance by the donee and transferred to him. The Malikis, however, consider that the gift is completed before the handing over is made. It is essential for the validity of a gift that the donor should divest himself completely of all ownership of and control over the property which is the subject of the gift. However, as explained in the chapter on succession, certain conditions exist in respect of death-bed gifts: a gift made by a Muslim during a death-illness cannot take effect beyond a third of the estate nor can it be made in favour of an heir, unless the other heirs give their consent to the gift after the donor’s death.
6.8
Law of torts
You have seen in the chapter on penal law that many crimes are treated in a fashion that is more similar to torts in English law than it is to criminal law. The law of civil liability for tortious actions is not well developed in Islamic law. Perhaps the basis of the law lies in the Qur’anic verse ‘There is no dhara [prejudice] in Islam’. The basic principle of the Islamic law of torts is that compensation is only available for actual damage. No damages in traditional law can be awarded for moral damage, like injury to one’s reputation or for pain and suffering. However, many codes in the countries
of the Middle East do allow damages to include compensation for pain and suffering. The courts in Saudi Arabia, however, still apply traditional law and, besides refusing compensation for future loss, also refuse moral damages. Various regulations in the Kingdom do provide for compensation to be awarded for pain and suffering but such compensation can only be ordered by a tribunal appointed to enforce the regulation itself, like the Labour Court which hears cases of work-related injuries suffered by
workers.
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