Centre for Islamic Economic

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Principles of an Islamic Contract

We will start our discussion of Islamic Contract with three terminologies of Islamic Jurisprudence which are pertinent to be understood at the out set of this write up. They are:

  1. Unilateral Promise (Wa’da)
  2. Bilateral Promise (Muwa’adah or Muhaidha)
  3. Contract (Aqd)

Unilateral Promise

It refers to a unilateral undertaking or promise extended by one person to another in which he promises to execute a contract in future. E.g. to sell or buy something in future. Since it is a unilateral promise, no question of future sale arises, as future sale is not allowed in Islam.

For e.g. “A” promises to sell his car to “B” within the next three months for Rupees Two Hundred and Fifty thousand (Rs. 250,000), this is unilateral undertaking or Wa’da.

Enforceability

  • Wa’da is enforceable under the present law enforced
  • According to Imam Hanifa (R.A), Wa’da is not enforceable by law (Qada’an) but there is a moral obligation (Diayanat’an) on the promisor. However, some of the Hanafi jurist argue that some of the promises can be made enforceable under the doctrine of necessity.
  • According to Imam Malik (R.A), Wa’da is enforceable
  • The concession (Ijma) of present day scholars is that Wa’da is enforceable by law until and unless the promisor is not in a position to fulfil his/her promise. In this case, if it is not loss to the promise. For example, in case here, “A” Promises to sell a horse to “B” and the horse dies without any negligence on part of “A”, then no damages are due on “A” for “B”. But it is due to his negligence then has to make good the actual loss to the promisee. This will be the case where “A” promises to sell a horse to “B” for PKR 10,000 within the next month and subsequently sells it to “C” before the month elapses. This is willful act of the promisor that leads to his inability to fulfill the promise to the promise, therefore the promisor needs to compensate the promise.

Consider another example “A” has promised to purchase a Horse “B” for PKR 10,000/-. As a result of promise to purchase “A”, “B” has purchased a horse for PKR 8,000/- from the market to sell it to “A” for PKR 10,000/-. On the promised date of purchase. “A” refused to purchase the horse from “B”. As result of breach of promise by “A” the horse was sold by “B” in the market for PKR 7,500/- at a loss of PR 500. This loss of PKR 500 being the actual loss as a result of breach of promise by “A” be claimed by “B” from “A”.

Agreement (Muwa’adah or Mu’ahadah)

  • It means bilateral undertaking (Mutual promise) or agreement.
  • According to majority of the present-day scholars of Islamic Jurisprudence, Muwa’adah is not allowed in situations where Aqd is not allowed (E.g. forward contracts), and thus is not enforceable by law. This view is adapted by majority of Islamic Financial Institutions of present day and even by AAOIFI.
  • According to some scholars of the sub-continent (followers of Hanafi School), Muwa’adah is enforceable by law, however, Muwa’adah of transactions like short-selling of currencies or shares is not allowed.

Contract (Aqd’)

An Aqd’ or contract is bilateral agreement that is executed between two or more parties.

Example: Contract of Sale, Contract of Marriage etc.

Types of Aqd’

  1. Uqood e Mu’awadah (Compensatory Contract)
  2. Uqood e Ghaer Mu’awadah (Non-Compensatory Contract)

Uqood e Mu’awadah (Compensatory Contract)

These are compensatory contracts where one person sells something to someone else for a price or compensation, for example, sale of pen “A” to ”B” for PKR 50/-.

Uqood e Ghaer Mu’awadah (Non Compensatory Contract)

These are non-compensatory contracts where one person gives something to someone else without any compensation for example a contract of loan gift.

Essentials of Aqd’

Four essential elements are required to constitute a valid Aqd.

  1. Mutaa’qidain (Contractors)
  2. Alfaz e Aqd (Wording of contact)
  3. Ma’qood Alaih (Subject Matter)
  4. Ma’qood Bi’hi (Consideration)

Mutaa’qidain (Contractors)

The contractors must not be mahjoor i.e. restricted to make a contract. Islamic Shariah identifies three types of people as Mahjoor.

  • An insane person
  • A child not mature enough to understand the nature of transaction
  • A Slave not permitted by his master to enter into a contract

Alfaz e Aqd (Wording of Contract)

Alfaz e Aqd should be absolute and immediate and non-contingent to a future event as a future contract is not allowed in Islam. Also, the wordings should be unconditional. If the wordings of the contract are conditional, the condition must adhere to the following rules of Islamic jurisprudence.

Basic Rules for a Validity of Conditions in Contract:

There are four basic rules for judging the validity of a contract:

  1. A condition which is not against the contract, is a valid condition
  2. A condition, which seems to be against the contract, but is in the market practice, that type of condition is permissible unless it void-ness is proven with the clear injunctions of the Holy Quran or Sunnah. For example, “A” buys an air conditioner or a condition that this seller will provide him five-year guarantee and one-year free service. This type of condition does not invalidate the contract.
  3. A condition that is against the contract and not in the practice of market but is in favor of one of the contractors, this type of condition is void. For Example, if “A” says he sells a car with a condition that he will use it on a fixed date every month, this contract will be void.
  4. A condition, which is again the contract, not in the market practice, and not in favor of the contactor, is not a void condition. For e.g., undertaking to give charity in case of willful default by the defaulting party.

Now a question arises what is the ruling of void condition, whether it invalidates the contract or not? The answers lie in detail about the impacts of void condition. Sometimes a void condition invalidates the contract and sometimes it does not invalidate the contract, however, the condition itself is annulled.

To elaborate this, Islamic jurists and scholars have written that the compensatory contracts (Uqood-e-Mu’awadah) like sale, purchase, lease agreements become void by putting a void condition. However, non-compensatory (voluntary) contracts (Uqood Ghair Mu’awadah) like contracts of loan (Qard-e-Hasanah), do not become void because of void condition, however, the void condition, itself becomes ineffective. For example, if “A” gives to “B” a loan with the condition of premium at the time of repayment, this condition of interest is void. However, this condition does not invalidate the contract, therefore all transaction done by this borrowed money, will be valid. But the condition of interest itself is revoked, therefore “B” is not liable for the payment of interest.

Ma’qood Alaih (Subject Matter)

The subject matter should exist, should be valuable, usable under Shariah, capable of ownership & title and delivery & possession. Also, it should be specified, quantified and the seller must have its title and risk at the time of the sale. For example, a certain mobile phone.

Ma’qood Bihi (Consideration)

It should be quantified, specified and ascertained at the time of executing the contract. For example, a price of PKR 300 should be noted that Ma’qood Bihi (Consideration) is not requisite for Uqood Ghair Mu’awadah.

Other issues in Aqd

We will discuss two more issues in Aqd’ here.

  1. Safqatain fi Safaqtin (Two contracts in one contract)
  2. Tawkeel fil Aqd’ (Agency Contract)

Safqatin fi Safqatin (Two contracts in one contract)

It means accumulation or mixing of two different contracts in such a manner that execution of one becomes contingency on execution of another. This is not allowed by the Holy Prophet صلی اللہ علیہ و آلہ وسلم in Hadith and it renders a contract void. This is the reason why hire purchase contract is not allowed in Islam.

Tawkeel fil Aqd’ (Agency or Wakalah contract)

It means the appointment of an agent (Wakil) on behalf of contractor to carry out a contract or trade on behalf of the principal. There are two types of wakalah contracts:

  1. First one in which the rights and obligations are passed on to the principal (Muwakkil) from the contractor, for example, that of Nikkah (Contract of Marriage). Therefore, if a person “A” makes “B” his agent to marry him with a lady “C” then “B” is not responsible for any rights, responsibilities and benefits, if Nikkah is between “A” and “C”. Hence, lady “C” can only claim her dowry (Mehr) and other expenses from “A” directly and not from “B”.
  2. Second one in which the rights and obligations remains with the agent. For example, if “A” appoints “B” as his agent and “B” buys a car from “C” for PKR 500,000/- on credit and does not disclose this to “C” that he is acting as as an agent for “A” then “C” can claim his money from only “B”. However, if “B” discloses this then “C” can claim his money from “A” as well.