Islamic law of contract

and types of sale

 Contents
 Definition of contract;
 Types of contract;
 General principles of contracts;
 Basic elements of contract;
 Definition of ownership and wealth;
 Types of sale;
 Ancillary and sub contacts;
 Q & A;
 Definition of contract
• Legally a contract is an agreement between two or more persons or
parties for doing something;
• A contract is also defined as it is an agreement which is enforceable by
law, recognized by law and effects legal rights and duties of the parties;
• According to Islam every action or work that takes place between two or
parties is a contract;
• Therefore, exchange of goods, receiving a gift, accepting a woman as
wife through Nikah and agreement on partnership etc. etc. come under
the umbrella of ‘contract’;
• Contract has different types for which the rules and law are different;
 Types of contract
 A contract can be of two nature:
Compensatory or financial contract;
-This is a contract in which there is exchange of either goods or
services against an agreed compensation / price / fee / charges;
Non Compensatory or social contract;
-This is a contract in which one party gives to other party without a
compensation.
 Types of contract

CONTRACT

Compensatory / Financial Contract Non Compensatory / Social Contract

Trade
Gift
Leasing
Employment Money lending

Partnership Guarantee (Damanat)

Paid agency Non-paid agency

Services against fee Rights transfer (Hawalah)

 General Principles of Contracts
• A compensatory contract is allowed in Islam with some conditions;
• Here are the rules that govern such contracts;
(1)-Permissibility as General Rule:
- Lawfulness and legality of subject matter (services or goods) of the contract;
- Exchange of impermissible good or services is not allowed;
(2)-Free Mutual Consent:
- Free mutual consent of both parties is an essential element of contract;
‫ق‬
- This is ensured through law of offer and acceptance; ‫اب ول‬
‫یا ج و ب‬
(3)-Prohibition of Riba:
- The contract should not contain any element of Riba (explicit or Implicit);
- All such contracts that involve in Riba are invalid;
 General Principles of Contracts
(4)-Prohibition of Gharar (Uncertainty):
- The prohibition of uncertainty is very Important here. Almost majority of rules are derived from this
basic rule of Gharar;
- Prohibition of Gharar includes:
o Prohibition of wagering contracts like short sale, blank sale etc. etc.;
o Prohibition of Qimar (Gambling) & Maysir (Games of Chance);
o Prohibition of Khilabah & Ghishsh (Fraud & Deception);
o Prohibition of complexity in structure of contract like Bayatan-e fi Ba’i-in (Combining two
inconsistent contracts);
(5)-Principles of Entitlement to profit with Risk & Lability for Loss;
- This is an important law which describe rights and responsibility of contracting parties;
 General Principles of Contracts
- According to this rule everyone has right of benefit if he bears responsibility;
- The application of this rule, however, is different in exchange of goods & services
and joint ownership contracts;
- Every contract has set of rules derived from this basic rule;
(6)-Legality of motives behind a contract:
- Contract should not contradict objectives of Shari’ah i.e. it does not meant for
twisting the transaction to develop a prohibited structure;
o Hiyal (subterfuges) not Allowed;
o Bay al-Inah (Buy back agreement – repo) is prohibited on pre agreed price;
o Bay bill-wafa (sale with promise of repurchase – redeemable sale);
o Sale of debt (Bai ud dain). Such transactions are not permissible;
 General Principles of Contracts
(7)-The contract should conform to the rules set by Shari’ah for
execution of contracts;
- This is another important rule. The contract, compensatory or non
compensatory, has a set of rules that need be compiled with;
- These rules explain the condition related to parties, subject matter,
compensation and other related issues of a particular contract;
 Basic elements of a contract
• Every contract has some basic elements which are as following:

 Parties / persons to contract;

 Wordings of contract;
 Subject matter of contract (the thing / task meant by the contract);
 Compensation (remuneration/price for exchange);
 Basic framework of the contracts (rights and responsibilities);
 Basic elements of a contract

Contract

Parties Wordings Subject matter Compensation

For example Exchange of Price or fee or fare

Offer &
Bayer & goods & services or rent for
Acceptance
Seller in a or partnership remuneration
sale contract

Framework of
contract
 Basic elements of a contract
 (1)-Parties to contract should be:

 Sane;
- Mature enough to understand the nature of transaction;
 Eligible to enter in such a contract;
- Should have authority (ownership or agent) to execute;
- Legally allowed for executing of such transaction (governmental
ban – license/permit requirement etc. etc.);
 Basic elements of a contract
 (2)-Wordings of a contract should:
 Contain Offer from one party and Acceptance from other (Ijab-o-Qobool) in
session of contract (Majlisul A’qd);
 This Offer and Acceptance can be:
- Oral/verbal (Qauli), purchase through bargaining;
- Implied/understanding (Isharah), purchase in super market;
 Be present i.e. they must create sense of immediate effect (words give sense
of future are not allowed, “I will buy it” does not make sense of immediate
effect);
 Unconditional and non contingent:
- Conditional wording do not create immediate effects, “I will accept if my
father allow it” is a conditional wording;
 Basic elements of a contract
 (3) –Subject matter of a contract should be:
 Lawful – legally and Islamically allowed;
- Subject matter and the underlying cause must he lawful;
- The transacted object must be legally owned by the parties to a contract;
 Existent – something that exists, contract of supply of mangoes in January;
 Deliverable – can be transacted and exchanged, sale of fish in water or bird in
air;
 Specified in clear manner;
 Quantified if quantifiable;
 Basic elements of a contract
 (4)-Compensation (remuneration/price for exchange):

 Conditions apply to subject matter also apply here;

 In case of barter system the application becomes important;
 Lawfulness, Existence, Deliverability, Specifiability and Quantifiability
becomes important;
 In normal trade specification of currency is enough;
 Basic elements of a contract
 (5)-Framework of contract means the rights and responsibilities of
parties under specific types of that contract which they are
executing:
 Both parties should bear the responsibility and have the rights which are
required by the nature of transaction;
 In case of sale ownership transfers after offer & acceptance so are the risk of
ownership;
 In case of rental arrangement ownership remains with lessor;
 Every contract has specific set of rules which will be explained it comes under
discussion;
 Conditional contracts in Islam
 A condition, which is not against the contract, is a valid condition.
For example a condition of delivery to buyer.
 A condition, which seems to be against the contract, but it is in the
market practice, if the condition of being void is not proved with clear
injunctions of Holy Quran and Sunnah, is not void. For an instance, a
condition that seller will provide five – year guarantee and one year
free services.
 Conditional contracts in Islam
 A condition that is against the contract and not in market practice
but is in favor of one of the contractors then the condition is void. For
example, if ‘A’ sells a car with a condition that “B” will use it on a fixed
date of every month, this contract will be void.
 A condition, which is against the contract, not in the market practice
and not in favor of any contractor, that is void itself but will not void
the contract. For example if both A and B decide to give to charity, a
certain percentage of both subject matter and consideration, upon
completion of sale.
 Void conditions and void contracts
 The contracts of compensation (Uqood Muawadha) like sale,
purchase, lease agreements become void by putting void condition.

 Non-compensatory (voluntary) agreements (Uqood Ghair Marwadha)

like contract of Qard-e-Hasanah, do not become void because of void
condition. However, in such contracts, the void condition itself
becomes infefffective.
 Definition of ownership
 Ownership (Milkiyat):
- It means ‘legal possession and authority of disposal of something
valuable in Shari’ah’;
- The ownership entails right of control and responsibilities for risk;
 Reasons and Causes of Ownership:
To acquire authorized and permitted things:
-(1)-Through contract;
o Compensatory: like sale;
o Non compensatory: like gift;
-(2)-As Successor (inheritance);
-(3)-Through increase in value;
 Nature of ownership
 Ownership may be following 03 types:
 Ownership of Asset;
 Ownership of debt;
 Ownership of Usufruct or benefit;
 Characteristics of ownership:
 The owner of a physical thing, has ownership of its benefits too but not other
way around;
 Ownership of physical items is not time bound but ownership of benefits is
time bound;
 Ownership of physical items can not destroy by death of owner but it
transfers;
 Definition of wealth
 The issue of definition of wealth (Maal) is debatable among school of
Fiqh;
 Some jurists define it in a manner that it becomes limited to physical
items only;
 Some other think its scope is wide and include non physical items too;
 According to this definition wealth includes:
 Matter:
- (1) Solid, (2) Liquid, and (3) Gases;
 Energy:
- Light, heat and other energy classes;
 Definition of wealth
 Rights:
- This includes (1) intellectual rights, (2) rights of specific utilization, (3)
specific rights and some other types of right;
- Frankly speaking the issue of rights requires more research;
 Issues pertain to wealth (maal) are now under discussion of scholars;
Sales and its types
 Definition of Sale
 Sale is ‘exchange of a thing of value with another thing of value with
mutual consent’;

 Thing of value means anything value of which is not canceled by

Shari’ah like pig, musical instruments etc.;
 Types of Sale
 With regards to subject matter, sale has two types:
 The sale of a commodity in exchange of cash is called ‘Bai’-e-Mutlaq (General
sale)’;
 The sale of a commodity in exchange of another commodity is called ‘Bai’-e-
Muqayazah (Barter sale)’;

 With regards to its legality sale has four types:

 Valid sale (Bai Sahih)
 Void/Non existing Sale (Bai Baatil)
 Hung sale – existing but defective (Bai Fasid);
 Valid but disliked sale (Bai Makrooh);
 Types of Sale
 (1)-Valid sale (Bai Sahih):
 A sale that meets all requirements laid down by shari’ah for its contractual
nature;
 (2)-Void/Non existing Sale (Bai’-e-Baatil):
 A sale that does not meet basic requirements of its contractual nature;
 (3)-Hung sale – existing defective (Bai Fasid):
 A sale that meets basic requirements of its contractual nature but contains an
impermissible elements;
 (4)-Valid but disliked sale (Bai Makrooh):
 A sale that meets basic requirements of its contractual nature but executed in
bad/unethical manners.
 Types of Sale
 With regards to payment of price sale has four types:

 (1)-Spot price sale – spot delivery of subject matter and price payment; -
Bai’-e-Mua’jjal;
 (2)-Deferred price sale – spot delivery and credit price; - Bai’-e-Muwajjal;
 (3)-Advance sale – advance payment of price with deferred delivery;
 (4)-Future sale – both price and subject matter are deferred;
- This is only allowed in manufacturing sale;
 Types of Sale
 With regards to disclosure of cost of goods to buyer (trust sales) the
sale has three types:
 (1)-Cost to cost sale ‫ت‬ – no gain no loss basic. Break even sale; - This is called
‘Tawliyyah’; ‫ولہ‬ ‫ع‬ ‫ی‬ ‫ب‬
‫ی‬
 (2)-Cost plus margin sale – some gain is called in seller is obliged to disclose
cost; ‫ب ی ع م ر با حہ‬
‫ض‬
 (3)-Loss sale – sale with loss; This type is called ‘Wazee’ah’; ‫ب ی ع و ی عہ‬
 A sale where no disclosure is made, is called “Musawamah” –bargain
sale;
 Khiyaar (Options) in sale
 The term Khiyar refers to the option or right of the buyer or seller to
revoke a contract of sale;
 The objective of these option is to provide protection to buyer or
seller from any unexpected eventuality:
 There are five Khiyars which can be used in a sale, they are as follows:
‫خ ش‬
 (1)-Khiyar-e-Shart (Optional condition):‫ی ار رط‬
- This option give both the Buyer or seller a right to revoke the sale within
the specific period;
- This is a time bound option which expires after that;
- It can be ‘option of buyer’ or ‘option of seller’ both;
 Khiyaar Options in sale
‫خ‬
 (2)-Khiyar-e-Roiyyat (Option of inspecting goods): ‫ی ا ر رؤیت‬
- This option give right of returning the goods inspection. This option is
applies a built in option;
‫خ‬
 (3)-Khiyar-e-Aib (Option of defect):‫ی ا ر عی ب‬
- This option give the buyer a right to reject if the goods found defective;
- Unless expressly told by the seller otherwise, this is a built in right;
‫خ‬
 (4)-Khiyar-e-Wasf (option of quality): ‫ی ا ِر وصف‬
- This option give the buyer a right to reject the good if they not qualify
specific standards or agreed parameters;
 Khiyaar Options in sale
‫غ‬ ‫خ‬
 (5)-Khiyar-e-Ghaban (option of cheating in price):‫ی ا ِر ب ن‬
- This option give the seller or buyer a right cross check the validity of price
charged or paid to him;
- This helps seller from being quoted extraordinarily lower price, similarly it
give right to buyer to revoke the sale or ask for return of excess price if he is
charged more than the market price extraordinarily;
 ‫ق‬
Revocation of sale (Iqala)‫ا ا لہ‬
 A sale can be revoked by mutual consent of the parties;
 The seller shall return the exact price what he has taken from buyer;
 Revocation can not be made a way of engineering the products for
providing the liquidity;
 Ancillary or sub contracts
 Number of other contracts have been discussed in Islamic law which serve
as sub or ancillary contracts;
 Some of them are discussed here:
 Promise (Wa’d):
- It is a unilateral promise for doing something or act or entering in a contract,
provided by one person to another;
- The enforceability of Wa’d by law is acknowledged by majority of present day
scholars provided the nonperformance of promiser is willful and non justifiable;
 Muaada:‫م واعدہ‬
- It is bilateral promise by both parties;
- Majority of the Shari’ah Scholars do not allow Muaada especially in a situations
where Aqd is not allowed (e.g. forward contracts);
 Ancillary or sub contracts
 Hawalah – assignment of debt:‫ح وا لہ‬
- Hawalah is transferring debt to another person without or with
settlement of loan on face value;
- Under this agreement the debtor is freed from a debt by another
becoming responsible for it;
- Hawalah is also done by shifting the responsibility from debtor to a third
person against his (debtor’s)debt on third person;
o Transfer of debt should take effect immediately, not to be suspended for period of time
and not to be concluded on a temporary basis or contingent on future unlikely events;
o However, it is permissible to defer payment of the transferred debt until a future
specified date;
 Ancillary or sub contracts
 Hawalah is not a sale of debt, it is in fact change of Debtor or creditor;
 Hawalah also applies to a mandate to pay and denotes the document by
which the transfer of the debt is completed. As such, it also means a
promissory note or a bill of exchange;
 Ancillary or sub contracts
 Kafalah (guarantee):
 Literally, Kafalah means “To take on the responsibility for the payment of
expense of a debt or for a person’s appearance in court”;

 There are two forms of guarantee:

- Kafalah, or surety ship;
- Rahn or pledge/security;
 Both contracts used for guarantee or safe return of loans to their owners;
 Ancillary or sub contracts
 Wakalah (Agency):
 The literal meaning of Wakalat is looking after or taking custody. It
terminologically means ‘delegation of power to an eligible person for doing
something’;
 Wakalah is possible for those activities that can be performed by principal
himself;
 Wakalat is a trust contract which means agent is bound to discharge his
responsibility in the same way as an Ameen discharges his responsibility of
Amanat;
 Agency may be against consideration or without it so it (wakala) may be a
commutative or non-commutative contract;
 Ancillary or sub contracts
 Types of Wakala:
 Agency for legal issues (lawyer);
 Recovery agency;
 Sale & purchase agency (power of attorney);
 Agency for business and investment – Wakala tul Istismar;
- This is now commonly used in some Islamic management structures;
- A fee is charged which may be fixed in lump sum (x% of fund size) or as a
monthly or annual remuneration;
- The fee may be in two parts: 1. fixed, 2. variable linked to profit (similar to
bonus);
 ‫ت‬
Tawarruqe – Monitization‫ورق‬
 Tawarruqe is an arrangement whereby a person, in need of liquidity,
purchases a commodity from a seller on credit at a higher price, to
sell it in the market at discounted price;
 This is not an I’nah (buy back) transaction instead it is liquidity
generating transaction through onward sale of what one person has
purchased;
 It is strongly criticized if it is done in an organized way;
 ‫ ب ی ع عی ن ہ‬Buy Back
 Jua’alah – Prize based contract‫جُع ا لہ‬
 This term (Jua’alah) is derived from ‘jo’I’ which means ‘prize’. Its reference
is taken from the incident of missing bowl of king of Egypt in Hazrat
Yousaf’s time;
 Under it, a prize is prescribed as consideration against performance of a
defined service or result. So it is based on ‘output’ and result oriented;
 Difference between Jua’alah, Ijarah & Wakalah:
 In a time bound Ijarah, whether job is done or not, payment is made;
 In Wakala, fee is paid whether result is obtained or not;
 In Jua’alah contract, the job must be completed for payment of prize;
 In Jua’alah collection of bad debts against commission;
 Prize to locate lost car etc.
Q&A