General Principles of Contracts & Transactions in Islamic Commercial Law

Muhammad Saarim Ghazi

Head Islamic Financial Services, Al - Hidayah Centre for Islamic Finance Member Working Group, Islamic Banking & Finance, Institute of Policy Studies, Islamabad

Principle 1 Free Consent

Free mutual consent of the parties is a pre-requisite for the validity of a contract.
Consent obtained through coercion, fraud, misrepresentation or some other illegal means renders a contract invalid in Shariah.

Similarly, a contract made in state of intoxication or by way of jest or through mistake is also invalid in Islamic law. The Holy Prophet (SAW) said The contract of sale is valid only by mutual consent.
(Sunan Ibn e Majah; Hadith no. 2185)

Principle 2 Prohibition of Gharar

Literal meanings; Indeterminacy, Speculation, Risk or Hazard. Technical meanings; Gharar takes place where the consequences (of a transaction) are concealed.
(Imam Sarkhsi; Al Mabsut, Vol 13 p 194)

Gharar
Shaikh Ibn e Taimiyyah: Usually, the riskiness deals with the variation of outcome (i.e. possibilities of profit & loss) and not the terms and conditions of the contract. Islamic commercial law does not disapprove risk & uncertainty when it refers to business outcomes as they constitute a law of nature. Islamic commercial law requires absolute certainty about the terms and conditions of contractual obligations. The contract must be free from uncertainty about the subject-matter and its counter-value in exchange. There should be no jahl or uncertainty about availability, existence and deliverability of goods and the parties should know the actual state of the goods. (quality & quantity) Subject-matter must be clearly defined and clearly known to the contracting parties in case of heterogeneous goods. Time of delivery & future performance must be clearly defined.

Examples of Gharar
Sale of a car which has been stolen by someone. Sale of goods yet to be acquired by seller. Sale of fish in water & birds in the air. Sale of an item that is yet to be owned and is difficult to be acquired by the seller, such as selling a horse that has escaped, or a lost car that is yet to be retrieved. Sale of an item that is not described properly. Sale of an item where the price has not been finalized. Sale of an item where the price is dependent on circumstances. Sale of an item without a proper description that can avoid dispute, e.g. selling a garment in a plastic packaging without allowing customers to inspect it. Sale of an item that is attached with conditions which are ambiguous, e.g. if my friend arrives or if the price goes up etc.

Principle 3
Prohibition of Riba
Literal meaning of Riba: Increase, Addition, Augmentation, Excess (Surat al-Rum verse 39) Technical meaning of Riba: (Riba al-Quran, Riba al-Nasiyyah Riba al-Duyun) Any Amount Over and Above the Principal amount stipulated in Loan Transaction. Every loan that derives a benefit is riba. (Al-Suyuti,Al Jame al-Saghir V.2 P.94) Any amount, big or small, over the principal, in a contract of loan or debt is Riba prohibited by the Holy Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity and whether it is simple or compound. (Surat al-Nisa verse 161, Surat Ale-Imran verse 130, Surat al-Baqarah verse 275-281) Riba al- Hadith, Riba al Buyu: (Riba al-Fadl plus Riba al-Nasa) Riba al-Fadl: Riba by way of excess: An unequal exchange of two things of the same kind such as exchange of wheat against wheat. Riba al-Nasa: Riba of delay: When articles of the same genera or different genera, whether measured or weighted, are exchanged with deferment on one side, whether or not there is real excess in favor of either side. Gold, Silver, Barley, Wheat, Dates, Salt.

Principle 4
Prohibition of Qimar & Maysir
Every form of money acquisition of which depends upon luck or chance. Qimar & Maysir literally means getting something too easily. In other words you gain what you have not earned. Maysir is the word from Yusr. Maysir is used in Quran & Qimar in Hadith. Sayyiduna Abd Allah ibn Umar (Allah be pleased with him) says: al-Maysir is the al-Qimar. The same has been narrated from Mujahid, Sa id ibn al-Musayyib, Hasan al-Basri, Muhammad ibn Sirin, Ata ibn Abi Rabah and others (may Allah be pleased with them all). (See: Tafisr Ibn Jarir, 2/358) Qimar means gambling. Technically, it is an arrangement in which possession of a property is contingent upon the happening of an uncertain event. Gambling (qimar) is from the word qamar, that which increases at times and decreases at other times. It has been given the name al-Qimar due to the possibility that each one of the gamblers may lose his wealth to his counterpart, and it is also possible that one may gain from the wealth of the other. (Allama Allama Ibn Abidin Shami :Radd al-Muhtar ala al-Durr, 6/403) By implication it applies to a situation in which there is a loss for one party and a gain for the other without specifying which party will lose and which will gain. (Speculative Risk) Sayyiduna Abd Allah ibn Abbas (Allah be pleased with him) defined gambling in the following words: The risk of losing on both sides (or putting something at stake from both sides) (mukhatarah) is gambling. (Ahkam al-Qur an, 2/11)

Examples Mobilizing resources on the basis of lottery & draws. Futures & Options contracts that are settled through price differences only.

Principle 5
Prohibition of Khilabah & Ghishsh (Fraud & Deception)
Fraud is to induce a person by some deceptive means with a view to obtain his consent to a contract without which he would not have consented to the contract. Contract can be revoked, if: 1. Misrepresentation of a material fact must occur, 2. There must be an intent to deceive, 3. The innocent party must rely on misrepresentation 4. The innocent party must suffer as injury. Khilabah: Concealing the defects of and in merchandise Tatfeef: Giving short weight and measure Najash/ Tanajush: False bidding to raise prices Hiding defects of commodity in Sale. Ghabn-e-Kaseer / Ghabn-e-Fahish False Swearing Talaqqi al-Rukban: Purchasing merchandise before they reach the market place.

Khilabah
Concealing the defects of and in merchandise/ Hiding defects of commodity in Sale. The Holy Prophet (s.a.w.s) once happened to pass by a heap of grain in a market place and on examination found that the grain beneath the surface was wet while that on surface was dry. He chided the seller for resorting to such deceptive tactics and said: he who deceives is no one of us (Sahih Muslim, kitab ul Iman) If both the parties spoke the truth and described defects of the goods, then they would be blessed in their transactions, and if they told lies and hide something, then the blessing of their transaction would be lost (Sahih Bukhari, Kitab ul Buyu)

Tatfeef
Giving short weight and measure A tradition from Ibn Abbas according to which when the Holy Prophet (upon whom be peace) arrived in Madinah the evil of giving short weight and measure was widespread among the people there. Then Allah sent down Wayl ul-lil mutaffifin and the people began to give full weight and measure.

Najash/ Tanajush
False bidding to raise prices It is to offer a high price for a commodity without any intention to buy it, the sole aim being to cheat somebody else who really wanted to buy the commodity. O People! With a view to bargaining with the people who come with their animals laden with commodities for sale, do not go to meet them (outside the town) and if a person is bargaining with another, do not interfere by bidding higher (Abu Huraira Subul al-Salam vol.3, p.18 Effects of Najash/ Tanajush Hanafis, Malikis & Hanbalis: Buyer has a right to revoke the contract. Shafis do not acknowledge this right.

Ghabn-e-Kaseer / Ghabn-e-Fahish
Ghabn Fahish means excessive loss suffered by a party to the contract as a result of concealment or misrepresentation, or deception or fraud practices by the other. Ghabn Fahish in real estate or other property is a matter for the estimators alone (Jordanian Civil Code Article 146) Ghabn-e-Kaseer / Ghabn-e-Fahish: Hanafi Viewpoint Excessive loss suffered by a party alone is not a cause of nullity of contract but only when it is caused by a fraud or misrepresentation. Exceptions: Sale of property of Waqf, Bayt ul Maal or Property of insane or minor. Hanbali viewpoint: Voidable at the option of injured party Shafii viewpoint: Buyer has no right revoke the contract because lesion has occurred due to his negligence.

False Swearing
Swearing (by the seller) is beneficial to the trade, i.e. it may persuade the buyer to purchase the goods, but in that way he will be deprived of Gods blessing to the earning (Sahih Bukhari, Kitab ul Buyu)

Inflated Price in Trust Sale

Where the seller in a trust sale, sells goods at an inflated price to buyer. The buyer bases himself on the price the seller claims to have himself paid in order to suggest to him a purchase price. Kinds of trust sale: Tawliyyah, Murabaha, Wadiah Effects of Inflated Price in Trust Sale: Voidable at the option of buyer.

Tadlis bi al-Ayb (fraud with defect)

Soundness of subject matter and free of defects is an implied condition of the contract. Conract is void at the option of buyer if he was unaware of the defect before hand.

Talaqqi al-Rukban
Purchasing merchandise before they reach the market place at a lower or cheap price. It is forbidden to meet the riders (i.e. the traders) on the road (for the purpose of taking undue advantage). Whosoever meets a trader on the road and buys goods from this trader, the vendor has the right of option and cancellation of such deal when he arrives at the market Subul al-Salam vol.3, p.21

The honest & truthful merchant will be on the Day of Judgment together with Prophet, the faithful ones, the martyrs and the pious people Hadith

Principle 6
Prohibition of Combining Two Inconsistent Contracts or Contingent Contracts The Holy Prophet (SAW) prohibited from two sales in one sale (bayatan-fi-Bai). The sale of the two articles for two prices. Contingent sale. The sale of a single object for two prices.
Sharia Controls on Contracts Combining (AAOIFI Sharia Standard No. 25)

The First Control Contracts combining should not include the cases that are explicitly banned by Sharia. The Second Control It should not be used as a trick for committing Riba. The Third Control It should not be used as an excuse for practicing Riba like imposing excess repayment in terms of quality or quantity on the borrower. The Fourth control Combined contracts should not reveal disparity or contradiction with regard to their underlying rulings & ultimate goals.

Principle 7
Conformity of contracts with Maqasid-e-Shariah

Preservation of Din (religion) Preservation of Nafs (Life) Preservation of Nasl (Progeny) Preservation of Aql (Intellect) Preservation of Maal (Property)

Any Transaction or conduct that offends any of these objectives in invalid in Sharia. The requirement of conformity of contract with the objectives of Sharia is similar to the requirement of modern law that an agreement should not be against public policy (as discussed in Priniciple 10 below)

Principle 8
Principles of Liability for loss and Entitlement to Profit

A person is entitled to profit when he bears risk of loss.

Risk refers to inherited or natural. Risk sharing is encouraged rather than risk transferring. Example A businessman is entitled to Profits & Gains in his business because he is ready to bear Loss.

Principle 9
Permissibility as a General Rule

What is not explicitly prohibited is permissible. All the agreements are permissible unless they violate any text of the Quran or the Sunnah or oppose the objectives of the Shariah.

Principle 10
No Violation of Public Policy
In order to be enforceable, a contract cannot violate "public policy"
For example, if the subject matter of a contract is illegal, a contract cannot be enforced. A contract for the sale of illegal drugs, for example, violates public policy and is not enforceable. It is important to note that public policy can shift according to changing conditions.

Maqasid e Shariah as discussed above

Principle 11
Good Faith

It is implicit within all contracts that the parties are acting in good faith. For example, if the seller of a property knows that the buyer thinks the property being purchased is an occupied office building, but secretly intends to sell the buyer an unoccupied office building, the seller is not acting in good faith and the contract will not be enforceable.

Reading List: Islamic law of Contracts & Business Transactions by Dr. Muhammad Tahir Mansoori: Chapter 1: General Principles of Contracts and Transactions in Islamic Law IIBI (Institute of Islamic Banking & Insurance) London: Module II, Lesson 1

Muhammad Saarim Ghazi

Head Islamic Financial Services, Al - Hidayah Centre for Islamic Finance Member Working Group, IBEF Program, Institute of Policy Studies Email: saarim.iiu@gmail.com Cell: +92 300 515 9750