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INTRODUCTION
In this chapter, we will focus on Islamic contracts in general. In the previous chapter, we explored the riba and gharar. These two sets of principles
cut across all contracts in Islamic law. Contract is the very essence of transactions without which the transactions are void of legal significance.
Islamic commercial law lays down detailed rules leading to the formation of contract. The guiding principle is that there should not be any injustice
and to practise legitimate trade and business in an honest manner. Islamic contract law is not expressed as a general theory of contract but states
rules for various specific contracts such as the law of sales, lease, pledge and so forth.
Islamic commercial law is known in its Islamic legal term as Fiqh-al-muamalat. It deals with issues of contract and the legal affect(s) arising from
contracts such as being valid, void or voidable respectively. Islamic contracts cover a variety of dealings and transactions to meet the needs of
society. The first article of the Majallah al-Ahkam al-'Adliyyah (the civil code of the Ottoman Empire) endorses the idea that man is social by
nature and that social life is essential to him. This article states that...
"In view of the fact that man is social by nature, he cannot live in solitude like other animals, but is in need of co-operation with his fellow men
in order to promote an urban society. Every person, however, seeks the things, which suit him, and is vexed by any competition. As a result, it
has been necessary to establish laws to maintain order and justice "
This approach of the Majallah is seldom found in the other compilations of law. The Syariah Law of Contract is primarily based on three
fundamental principles:
1 The Principle of Justice: Ensures that neither party to a contract may exploit the other. Hence the riba is strictly prohibited.
2 The Principle of Transparency: Those concerned must share all available information. Withholding crucial information which has bearing
on the transaction could render the contract invalid. Furthermore, contracts involving a high degree of gharar are strictly prohibited. The
objective is to prevent transactions that lead to dispute and lack of trust.
3 The Principle of 'Maslaha': Means the common interest supported by the spirit of Syariah and not by a specific text. On the basis of
Maslaha, a particular form of transaction may be exempted from the general rule if it lias been shown to be in common practice to facilitate
business.
1 Lawfulness: The object must be lawful and should be permissible to trade. It must be of legal value, which means its subject matter and
underlying clause must be lawful and it must not be prohibited by Islamic law, neither a nuisance to public order nor morality.
2 Existence: The parties to a contract must legally own the object. The issue of existence presupposes that the object of a contract must be in
existence at the time of a contract (selling fruits which are not ripe/ready for the market is illegal as it does not meet this criteria).
3 Delivery: The object should be potentially capable of certain delivery to the buyer at the time of the contract. Therefore, Syariah prohibits
the sale of a camel which has fled, a bird in the air, or a fish in water.
4 Determination: The object should be something known to the parties. It must be determined precisely as to its essence, its quantity and its
value to avoid any kind of exploitation and future disputes.
In addition as per majority of jurists, the object should be permissi ble under
Syariah, thereby being halal.
Consideration
The consideration in the Islamic contract may consist of money, goods or services. It must be something which is capable of being given and in the
case of service, should be capable of being performed. It is the legal benefit received by one person and the cost charged on the other person. As an
example, selling a car for RM20,000. The seller gives up the car and gets the RM20,000 and the buyer gives up the RM20,000 and gets the car.
For price consideration, Islamic law does not restrict it to monetary price exclusively, but it may be in the form other commodity. This is similar to
barter trade. The Islamic prohibition against uncertainty requires that the good/s be in existence and the price determined at the time of the contract.
It must not be fixed at a later date with reference to the market price, nor can
it be left open subject to determination by a third party. As an illustration, in contracting the exchange of money, the rules of riba should be strictly
adhered to avoid the contract being void.
The underlying principle is that usually an incompetent person will make a contract without understanding that he/she is making a contract and not
realising the consequences of his/her action. In Islamic law, a minor, a person of unsound mind, a bankrupt person, a person legally declared a
prodigal, an intoxicated person or a person suffering from a deadly illness cannot enter i n t o a binding contract.
Legality
The subject matter must be legal for a contract to be enforceable. Islamic law does not enforce contracts of illegal activiti es and which
are not permissible under Syariah. In other words, the purpose of the contract must
be legal in terms of the Syariah. Some of the contracts that are strictly prohibited under Islamic legal provisions are listed below:
For example, a contract to grow grapes for wine-making would be void because the element of an unpermissible object (wine) exists in the contract
and will make the contract null and void.
Unilateral Contract
A unilateral contract is a form of promise made by one party with an intention and expectation that the other party to the contract would accept it.
This
contract is gratuitous in character and does not require the consent of the recipient. In other words, a unilateral promise binds only the person who
makes it until it is accepted by others, and once it is accepted, both parties are equally bound by the contract.
It is normally applicable in transactions like rewards (Al-Jualah) in which someone offers a particular reward to the world at large in return for the
delivery of a sought after subject matter. In a contract of Al-Jualah, the offeror
is bound by the offer unilaterally until other parties accept it. Once it is accepted, both parties are bound by their promises equally. Unilateral
contract comprises transactions in favour of the recipient such as gift (hibah), rebate "it oil set of a debt (ibra), will (ivasiyyat), qardh hassan loan
and, etc.
In other words, a unilateral contract is a binding promise that the offeror mull i's and is conditional upon the performance by the offeree. For
example, i person approaches a real estate agent and asks him to find a house for him i ii which he will pay him one month's rent as commission.
The agent finds • house as required which the offeror agrees to rent. The agent is entitled to In commission. The key here is that promise by the
offeror to anyone from the general public to undertake a task and the promise is made to an identified person .
Bilateral Contract
A bilateral contract requires at least two parties in which one party should make a proposal (offer) and the other should accept. The intention of
both parties must coincide and the declaration must relate to the same subject matter. The object of the contract must be able to produce a legal and
beneficial result for both the contracting parties. The main idea of a bilateral
contract in Islamic law is that it establishes a legal relationship, arising from
the mutual consent of the willingness of at least two parties in dealing with each other, in respect of certain rights and obligations thereof.
For example, A sells his car to B for RM150,000 on cash basis. In this case,
A consents to sell his car to B, who consents to buy the car with an obligation
to pay the price in cash.
I The differentiation between bilateral and unilateral contracts depend on what the offeree must do to accept the offer and to bind the offeror to a
contract.
II If to bind the offeror, the offeree must only promise to perform, the contract is a bilateral contract. Hence, the bilateral contract is a promise for
a promise. The contract comes into existence the moment the promises are exchanged.
Quasi Contract
A quasi contract by nature is not a contract. However, the implication gives rise to an obligation similar to that of the contract. A quasi contract is
an obligation, which does not originate from a proper verbal agreement as in the law of contract or tort. A quasi contract has little or no affinity
with a
contract. As an illustration, an action to recover the money paid by mistake: if the innocent party mistakenly interprets the facts, pays to another
party a sum of money which he does not really owe, the law being just, will require the wrongful receiver of the money to restore it. However, this
obligation is not based upon consent. Therefore, this description of quasi-contractual liability is different from any concept of contract.
Therefore, in a quasi contract, the obligation is enforceable using the Syariah principle, since it is a matter of restoring the rights of others. Islamic
laws sanction this because an appropriation can only be recognised if something is exacted through a proper transaction with mutual consent.
The nature of a valid contract is that there must be contracting parties who have the legal capacity and express their agreement in terms of a sound
ijab (Offer) and qabul (Acceptance) on a particular subject matter recognised by Syariah. In addition, for a contract to be valid there must be an
exchange of valuable consideration with a sincere intention, required from both parties, to create a legal relation.
To summarise, a valid contract is when the offer and acceptance both are sound and the subject matter is in compliance with Syariah requirements.
For example, the price of the subject matter: if an agreement of sale for a definite article is concluded by proposal and acceptance but the price is
not settled, the agreement would be fasid.
The object of a contract should be fit or suitable for carrying out a transaction, for example, it should be executable within the normal business
environment. Syariah renders any contract invalid in situations in which it will be impossible to achieve the consideration for which the contract
was agreed.
For example, if A offers B a certain amount of money to bring him the moon and B accepts the offer, the Syariah rules it out as an invalid contract
since it will be impossible to carry it out.
2 Murabahah: This is commonly known as cost plus profit. This is a sale agreement whereby the seller purchases the goods desired by the buyer
and sells them at an agreed price. The payment being settled within an agreed time frame, either in instalments or lump sum. The important
point in this contract is that the buyer knows the profit charged by the seller. In short, it is a cost-plus-profit sale in which the seller expressly
discloses the profit to the buyer. Due to the sharing of cost and profit by the seller, the jurists have considered it as a sale based on trust
(amanah).
3 Tawliyyah: This is a sale at the cost price without any profit for the seller. This sale is again based on the principle of trust (amanah). The
contract appears to be a form of substitution contract where one party who has bought goods no longer needs them and is willing to assign the
right to a third party.
4 Wadiah: This sale takes place when the seller agrees to sell a commodity at a lower price than that of the cost price. Since the seller is selling the
commodity at a lower price, it is also a trust sale. This form of contract appears to be useful for a seller who is getting rid of his inventories to
improve his liquidity position. As an example, a departmental store announcing sale based on wadiah for certain goods. It may also serve as a
marketing strategy to increase the sales of other goods.
1 Cash Sale: Under this type of sale the purchaser is under obligation to settle the purchase price agreed upon when concluding a contract. In the
event the buyer is not able to settle the payment, the seller has the right to retain the goods sold until the buyer makes the payment.
2 Deferred Payment Sale: Under this sale the amount is payable on instalment basis. This is permissible provided the period is ascertained and a
fixed manner of payment is applicable to all types of sales except in the case of baisalam. This principle is normally followed for bat bithaman
ajil contracts. The bai bithaman ajil contract refers to the sale of goods or equipment on a deferred payment basis at a price which includes a
profit margin agreed by both parties.
3 Lump Sum Payment: The lump sump amount is payable in the future. This manner of payment is also permissible provided the date of payment
is fixed in advance. This manner of payment is also applicable on all types of contracts except baisalam.
4 Earnest Money (Bai): The advance payment of a partial amount of the total sale price is made to the seller which constitutes part of the
purchase price should the buyer decide to buy the goods. Otherwise, the seller forfeits the advance payment.
Essential Requirements for a Sales Contract
In addition to the above general rules, the sales contract should have essential
elements and the necessary conditions as illustrated in the following chart:
1 Modes of Offer:
(a) Orally: An offer can be made by words used for concluding a sale.
(b) Written: An offer could also be made by writing or deed which will have equal legal effect as the one made verbally.
(c) Gesture: An offer by gesture is valid if a person who is incapable of making it either verbally or in writing makes it. For example, an
offer made by a handicapped, dumb or deaf person.
(d) By post, telegram, telex, fax, telephone or e-mail. All these instruments convey offers made by words and writings.
2 Tense of Offer
An offer is generally made using the past tense, but in some situations, an offer could also be made in other tenses and manners. The offer
may be made in the aorist tense in which if it indicates a present tense then the sale is valid but if it indicates a future tense ("I will buy", "I
will sell") then the sale is invalid. In other words, an offer should be in definite, decisive language and absolute.
3 Termination of an Offer
An offer could be terminated and will not have any legal effect under the
following circumstances:
(a) Revocation: If the offeror after making the offer at any time before it is accepted, changes his mind and revokes his offer, the latter will
be effective and the offer will be treated as terminated.
(b) Rejection by the Offeree: If an offer is not accepted and the offeree rejects it, it will be treated as terminated.
(c) Counter Offer: An offer could also cease to have legal effect if it is neither rejected nor ignored by the offeree but the offeree may
accept it with some additional condition in which the expression of the offeree would be treated as a counter offer and it will eventually
terminate the original offer.
(d) Absence of Acceptance: An offer is made but no acceptance so far has been received to it hence, the offer will be terminated.
(e) Death: If death of either the offeror or the offeree occurs before it is accepted, the offer is terminated.
(f) f) Lapse of Time: An offer is made with a condition that it should be accepted within a specified period of time and if the offeree fails
to accept within the prescribed time limit, the offer is considered terminated.
4 Modes of Acceptance
An acceptance can be made in the following ways:
(a) Oral Acceptance: An acceptance may be made by word of mouth as long as the offeror could understand it.
(b) Written: An acceptance may be made in writing in the same way as it is made by word of mouth.
(c) Gesture: An agreement by implication or gesture is sufficient for the acceptance of the offer. For example, a sale is concluded by a
gesture, made by a dumb person.
(d) Delivery: A sale is concluded by an exchange being carried out, as that is evidence of the mutual agreement of the two parties.
(e) Payment: An acceptance of a contract of sale could be presumed by the payment made by the buyer in consideration of the subject
matter.
(f) Letter of Post: A letter or message sent by post or messenger containing the message of acceptance may be substituted for a verbal and
personal communication in the contract of sale.