Following notes on Contracts in Islam have been taken from Principles of Mahomedan law By D.F Mulla.
From Mu’az bin Jabal, he narrated that Rasulullah SAW said:
Surely the best work is the work of traders who; when they speak never lie and when given trust never betray and when promising never break and when buying never denounce and when selling never exaggerate and when performing obligations never delay and when deserve for anything never put in hardship.
(Narrated by al-Baihaqi)
Generally Islam permits trade and commerce and the contracts that are applied thereto are termed muamalat in the Shariah.
Muamalat are civil contracts and all civil contracts can be used in Islamic banking and finance.
Types of Contracts
Wa’d – Unilateral Promise
One party binds itself to perform a function for another
Does not normally create legal obligation
Legal obligation is created:
Genuine need of the masses
Muwaa‘adah – Bilateral Promise
Two parties performing two unilateral promises on the same subject
Use of two unilateral promises can lead to a forward contract, which is impermissible
Not allowed and non–enforceable according to majority (AAOIFI, IFA and others)
Some Hanafi/subcontinent scholars allow it provided no other prohibition (excessive gharar or short selling)
‘Aqd – Contract
Promises do not constitute contracts
‘Aqd literally means ‘to bind’.
3 types of contracts in Shariah
Mu’aawadha – (Consideration)
Void conditions and gharar void the contract
E.g., sale, purchase, lease, wakala
Tabarru‘ – (Gift/Loan) (gratuitous) – proprietary transfer without consideration
Void conditions are void themselves and gharar is tolerated
E.g., gift, bequest, waqf, kafala, ‘aariya, qardh, hawala
Dhimniyya – (Supplemental Contracts)
Validity of Contracts:
Validity depends on:
- Legality/illegality of the subject matter
- Existence and precise determination of the subject matter
- Delivery or deliverability of the subject matter
- Absence of excessive uncertainty
- Precise determination of consideration (price)
Valid (Sahih) contract
is legal both in its asl – fundamentals [rukn (offer and acceptance) and object] and wasf – ancillary components
Ancillary components are those that are in addition to rukn and object e.g., a condition that violates the nature of the contract or if the object is not deliverable
Contract is concluded and exchange of ownership takes effect
Void (Batil) contract
rukn and conditions on the object are not satisfied or that is illegal in both rukn and ancillary characteristics
Contract is not concluded and exchange of ownership does not take effect
Voidable (Fasid) contract
legal in its asl (has all the elements of a contract) but is not legal in its wasf – ancillary component
Contract is concluded and ownership is realised upon possession
Riba and gharar are causes of irregularity according to Hanafis and invalidity according to other schools.
Gharar can be defined as:
‘uncertainty that is present in the basic elements of an agreement eg wording, subject matter, consideration and the liabilities’
Other Ulama have defined Gharar as that level of uncertainty which can lead to disputes. Hence if a contract has uncertainty which is insufficient to lead to dispute then the contract is valid in the eyes of this group of Ulama.
For complete Muslim Law notes click here.