This article has been written by Nisha, pursuing Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles ( MAR-01-2023 ) and has been edited by Oishika Banerji (Team Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
Primarily, the Islamic jurisprudence has based the contract law with regard to several underlying principles that help understand the functioning of such law. As in general we know that the Indian Contract Act, 1872 being a technical field of law has been based on several doctrines that has been reflected and adopted by judicial precedents as well, Islamic contract law does not separate itself completely from the same. Whenever we are talking about Islamic contract law, there are certain well-known terminologies that need to be understood to understand the law in an efficient manner. This article serves as a discussion of those terminologies alongside focusing on the Islamic contract law in large.
All about Islamic contract law
While we delve deeper in the Islamic contract law, we need to understand that jurists belonging to the formative/classical period of Islamic law had not expressly laid down a general theory of contract that can be associated with the Islamic law. Because of the same, two radically different, although equally mistaken, conclusions have arisen. The same has been stated hereunder:
- The first conclusion states that as Islamic contract law does not have any general theory to rest upon, the same reflects the existence of conceptual primitiveness that open rooms for ambiguity in this segment of law. This has been generally concluded by non‐Muslim scholars of Islamic law
- The second conclusion that we need to know is a reaction to the first point which has been laid down by Muslim scholars, who have tried to establish the fact that there does exist a general theory of contract law. The general theory that Muslim scholars have talked about rests its basis on the ability of Islamic law to enforce innominate contracts.
Contract under Islamic law majorly involves three terms, namely, Riba (Interest), Gharar (Uncertainty), and Maysir (Speculation).
Riba
Riba is also known as interest in Islamic Law. It is the interest which is charged on deposits and loans. The Islamic practice forbids Riba, even if it is at a low rate of interest as it is not ethical practice and it is also illegal. Riba is prohibited under Sharia law for many reasons. The Islamic banking system provides several setups which make sure that the transactions take place without charging explicit interest amounts.
There are two types of Riba:
- Riba in a loan contract.
- Riba in a sale or exchange contract.
Gharar
Gharar is also known as uncertainty under Islamic law. It is associated with deception, risk, hazards. It is prohibited under Islamic law as it gives rise to unclear or suspicious claims of ownership. For ex:- Futures and option contracts( contracts which have dates of delivery in the future time) give rise to gharar.
Maysir
Maysir is also known as speculation under Islamic law. It is prohibited in Islamic law as it creates money by chance, or by gambling without hard work. Due to Maysir, various financial products are not generally used such as the options, futures etc. Maysir is a practice of getting anything with short cuts too easily. It is like either a person wins by chance or fails. Earning like this can be declared as “Haraam”.
Essentials for a contract under Islamic Law
There are six essential elements which need to be fulfilled:-
- The offeror.
- The offeree.
- Offer.
- Acceptance.
- The subject matter.
- Consideration
To enter into a legally enforceable contract, both the parties must attend the age of puberty and both have to be of sound mind. Therefore, in a contract both physical and intellectual maturity are of great importance to determine the validity of the contract. Contracts can occur both in oral and written form and also be entered by the conduct of the parties. There is a kind of flexibility in the contract where an offeror is able to withdraw its offer before an offeree accepts it.
Subject of the contract under Islamic Law
The subject must be:-
- Lawful.
- In existence.
- Not fabricated.
- Deliverable.
- Precisely
The Islamic law prohibits dealing with nuisances to public orders such as alcohol, pork, gambling, pornography etc.
Good faith principle of Islamic Contract Law
The good faith principle of Islamic law establishes justice, fair dealing, prohibits riba, speculation or high risk. This principle is an absolute necessity for the functioning of international legal order. The principle is not only to make one understand what good or bad is, but what we are to be and to do in situations that turn out to be divergent and complicated, for a just and reasonable better living. The good faith principle also goes ahead to safeguard both the investors’ and also the firm, thereby disclosing misrepresentation, fraud, cheating, illegal purposes and people exploitation owing to their ignorance.
Types of contracts under Islamic Law
- Contracts resulting in a permanent transfer of ownership
In these types of contracts there is a permanent transfer of ownership of the subject matter of the contract. For ex:- A regular sale of a house, where one party transfers the ownership to the other party where the other party pays agreed consideration for the ownership.
- Contracts resulting in the temporary transfer of ownership
These are the types of contracts where the transfer of ownership is not permanent. For ex:- A loan agreement where the loan amount is transferred by the payee on a temporary basis to the borrower. At the maturity period, the borrower returns the amount to the payee again.
- Contracts resulting in no transfer of ownership
These are the types of contracts where there is no transfer of ownership. For ex:- lease agreement where the lessor leases the assets to the lessee under the terms of the lease. There is no transfer of ownership, here the lessor has the legal title over the assets, the lessee only has the right to use the assets. Sometimes, under a lease agreement the title of the leased asset might transfer but for a time after that it would end.
Conditions that must exist for contracts in Islamic Law
- Existence of parties to the contract:- Both the parties must be real, not insane, and are responsible enough for their work.
- Existence of subject matter of the contract:- The subject should be permissible and should be in the possession of the relevant part.
- Existence of offer and acceptance:- They can either be oral or written and are time bound.
- Free will of the parties:- Both parties are free to enter into the contract, there should be no force, threat or coercion.
- Contract should not contradict any objective of Shariah:- The contract shouldn’t contradict the objectives which are referred to in the Maqasid Al- Shariah.
- Contract should be free from the prohibition of shariah:- The contract should be free from the major prohibitions which are stated above in this article. Apart from that the contract should be prohibited from the sale of debt with debt.
- Al – Kharaj- Bi- Daman:- That means if a person is willing for profit of any sort then he/she must be willing for the loss to incur in the future.
Conditions for cancellation of offer
· When the offer withdrawal
· If the death occur of either of the party
· Termination of the session
· Destruction of the subject matter
· Revocation of offer
Limitation on enforceability of contract
Under Sharia law not every contract agreement is deliberately ignored unless it is not allowed in the disclosure in the book of God, it is invalid. The Sharia hardly talks about contractual freedom beyond the standard contract types. Rather, it provides a situation where a contract can be merged. Some more ban upraise by other Hadith, some pertinent ones are ban on loan, and sale, two sales in one, and a sale of what one does not have. The contract may or may not be void if the court observes a condition void.
Remedies for breach of contract
Revocation is allowed under some specific circumstances, such as when the seller fails to perform his or her obligations, when the product is not in the proper manner either it is defective or completely broken, when the quality of the service is not up to the mark, when some unforeseen circumstances occur which prevents the contract completion.
As per the Islamic law, contractual remedies are limited to direct and actual damages. The courts will not accept speculative awards such as economic loss of chance, interest, possible profits, and other. Moreover, injunctive relief and specific performance are typically unavailable.
The connection between contracting parties and any object covered by the agreement is fixed by Islamic law in terms of liability for loss or damage. A party may possess the item as a “guarantor” or a “trustee” (damin). Unless there is evidence of a trust violation, a trustee is not at all accountable for damage to the item. Nonetheless, a damin is equally at risk of losing money as an owner. The guarantor has no recourse if an item is destroyed due to an act of God or force majeure.
Conclusion
The contract in Islamic law doesn’t generally end with speaking or writing, the thing which is required is the consent of both the offeror and the accepter. The first stage of any contract is the offer then the acceptance. There must be a declaration by the offeror and then there must be an acceptance to the contract to be completed. Both the offer and the acceptance must take place at the same meeting (majlis). In Islamic law, there are several types of contracts but we actually focus on those which are to be used in Islamic Financing. The Quran contains a number of contracts which are specified which includes commercial contracts, deposits, security etc. The Islamic contract law is much wider in scope as compared to the English and French as the Islamic law includes more settlements, conveyances, transfers, payments etc. which are not included in either English and French.
References
- https://www.studocu.com/my/document/universiti-sultan-zainal-abidin/islamic-law-of-transactions/formation-of-contracts-under-islamic-law/32376847
- https://www.learnsignal.com/blog/types-of-contracts-in-islamic-law/
- https://www.saudilegal.com/saudi-law-overview/islamic-contract-law
- https://islamicmarkets.com/education/islamic-law-of-contract
- https://www.cambridge.org/core/journals/journal-of-law-and-religion/article/abs/principles-of-islamic-contract-law/A10DB890F47EE47D1BD5D0CCA5D6735B
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