Islamic law of contract

and types of sale

11//
 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 contracts;
 Q & A;

22//
 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;
33//
 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 there is exchange of either goods or
services against an agreed compensation / price / fee / charges;

44//
 Types of contract

CONTRACT

Compensatory / Financial Contract Non Compensatory / Social Contract

Trade Gift

Leasing Nikah

Employment Money lending

Partnership Guarantee (Damanat)

Paid agency Non-paid agency

Services against fee Rights transfer (Hawalah)

55//
 General Principles of Contracts

 A compensatory contract is allowed in Islam with some

conditions;
 Here are the rules that govern such contracts:
► 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;
► Free Mutual Consent:
─ Free mutual consent of both parties is an essential element of contract;
─ This is ensured through law of offer and acceptance;
► Prohibition of Riba:
─ The contract should not contain any element of Riba (explicit or implicit);
─ All such contracts that involve in Riba are invalid;

66//
 General Principles of Contracts

► 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:
□ Prohibition of wagering contracts like short sale, blank sale etc. etc.;
□ Prohibition of Qimar (Gambling) & Maysir (Games of Chance);
□ Prohibition of Khilabah & Ghishsh (Fraud & Deception);
□ Prohibition of complexity in structure of contract like Bayatan-e fi Ba'i-in
(Combining two inconsistent contracts);
► Principles of Entitlement to profit with Risk & Liability for
Loss:
─ This is an important law which describe rights and responsibility of
contracting parties;

77//
 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;
► 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;
□ Hiyal‫( حيل‬subterfuges) not Allowed;
□ Bay al-inah ‫( ب يع ا لعينة‬Buy back agreement – repo) is prohibited on pre
agreed price;
□ Bay bil-wafa ‫( ب يع ب ا لوفاء‬sale with promise of repurchase –
redeemable sale);
88//
 General Principles of Contracts

□ Sale of debt (Bai ud dain). Such transactions are not permissible;

► 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 complied with;
─ These rules explain the condition related to parties, subject
matter, compensation and other related issues of a particular
contract;

99//
 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);

10
10//
 Basic elements of a contract

Contract

Parties Wordings Subject matter Compensation

For example Buyer Offer & Acceptance Exchange of goods Price or fee or fare
& Seller in a sale & services or or rent or
contract partnership rumneration

Framework of
contract

11
11//
 Basic elements of a contract

 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.);

12
12//
 Basic elements of a contract

 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 (Ishsraa), 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 unon contingent:
─ Conditional wording do not create immediate effects, “I will
accept if my father allow it” is a conditional wording;

13
13//
 Basic elements of a contract

 Subject matter of a contract should be:

► Lawful – legally and Islamically allowed;
─ Subject matter and the underlying cause must be 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;

14
14//
 Basic elements of a contract

 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 become important;
► In normal trade specification of currency is enough;

15
15//
 Basic elements of a contract

 Framework of contract means the rights and responsibilities

of parties under specific type 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
when it comes under discussion;

16
16//
 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:
─ Through contract;
□ Compensatory: like sale;
□ Non compensatory: like gift;
─ As Successor (inheritance);
─ Through increase in value;

17
17//
 Nature of ownership

 Ownership may be of following 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;

18
18//
 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;

19
19//
 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;

20
20//
 Sale and its types

21
21//
 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.;

22
22//
 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);

23
23//
 Types of sale

 Valid sale ( Bai Sahih):

► A sale that meets all requirements laid down by Shari'ah for its
contractual nature;
 Void/Non existing Sale [Bai'-e-Baatil];
► A sale that does not meet basic requirements of its contractual
nature;
 Hung sale – existing but defective (Bai Fasid);
► A sale that meets basic requirements of its contractual nature
but contains an impermissible element;
 Valid but disliked sale (Bai Makrooh):
► A sale that meets basic requirements of its contractual nature
but executed in bad/unethical manners.
24
24//
 Types of sale

 With regards to payment of price sale has four types:

► Spot price sale – spot delivery of subject matter and price
payment;
─ Bai'-e-Mua'jjal ‫عجل‬
[ ‫]م‬
► Deferred price sale – spot delivery and credit price;
─ Bai'-e-Muwajjal ‫ؤجل‬
[ ‫;]م‬
► Advance sale – advance payment of price with deferred
delivery;
► Future sale – both price and subject matter are deferred;
─ This is only allowed in manufacturing sale;

25
25//
 Types of sale

 With regards to disclosure of cost of goods to buyer ()trust

sales) the sale has three types:
► Cost to cost sale – no gain no loss basis. Break even sale;
─ This is called 'tawliyyah';
► Cost plus margin sale – some gain is earned in seller is obliged
to disclose cost;
─ This is called Murabaha;
► Loss sale – sale with loss;
─ This type is called 'Wazee'ah';
 A sale where no disclosure is made, is called “Musawamah”
- bargain sale;

26
26//
 Khiyaar [‫ ]خيار‬Options 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:
► Khiyar-e-Shart (Optional condition):
─ 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;

27
27//
 Khiyaar [‫ ]خيار‬Options in sale

► Khiyar-e-Roiyyat (Option of inspecting goods):

─ This option give right of returning the goods inspection. This
option is applies a built in option;
► Khiyar-e-Aib (Option of defect):
─ 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;
► Khiyar-e-Wasf (Option of quality):
─ This option give the buyer a right to reject the good if they not
qualify specific standards or agreed parameters;

28
28//
 Khiyaar [‫ ]خيار‬Options in sale

► Khiyar-e-Ghaban (Option of cheating in price):

─ 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;

29
29//
 Revocation of sale

 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;

30
30//
 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:
─ 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);
31
31//
 Ancillary or sub contracts

► Hawalah – assignment of debt:

─ 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;
─ Hawalal is also done by shifting the responsibility from debtor to
a third person against his (debtor's) debt on third person;
□ 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;
□ However, it is permissible to defer payment of the transferred debt until a
future specified date;

32
32//
 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;

33
33//
 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/surety;
► Both contracts used for guarantee or safe return of loans to
their owners;

34
34//
 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';
► Wakala 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;

35
35//
 Ancillary or sub contracts

 Types of Wakala:
► Agency for legal issues (lawyer);
► Recovery agency;
► Sale & purchase agency (power of attorny);
► 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);

36
36//
 Tawarruqe - Monitization

 Tawarruq 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;

37
37//
 Jua'alah[‫ – ]جع ا لة‬Prize based contract

 This term is derived from ‘jo'l’ which means ‘prize. Its reference is taken
from the incident of missing bowl of king of Egypt in Hazrat Yousuf’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.

38
38//
 Q&A

39
39//