W#4 Theory of contracts

8/7/2019 W#4 Theory of contracts

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TRANSACTIONS

INISLAMIC BANKING AND FINANCE



THEORY OF CONTRACT

³Formation of Contract (µAqd)´

LECTURE 3:



Presentation Outline

�Importance of Contract

�Definition of Contract

�Essential Elements of Contract

�Objective of Contract

�Processes of Contract

�Classification of Contract



Importance of Contract

�Divine scheme of interdependence

�Fulfillment and exchange of human

needs

�Social interaction and cooperation

�Spiritual and material development

�Inculcation of values



Dimensions of Contract

Implicit ContractRelates to rights of all the stakeholders

In the business

Explicit Contract

A formal contractBetween two

contractingParties or more



Theory of Contract (Explicit)

�A theory is an abstractrepresentation of the real world

�Theory embodies concepts,principles and rational for a givendiscipline

�Example: Ijab and Qabul (theory),concept of I&Q, principles of I&Q,and the rational for I&Q



Definition of Contract

�Literally al-¶Aqd means to tie between twoends or one end; real or abstract.

� Technically, it has the general and specificmeaning.

�Generally, it is whatever an individual, firm,

etc commits to undertake, unilaterally, e.g.al-Waqf or bilaterally e.g. al-Bay¶



Definition of Contract

Specifically, it is the linking of Ijabto Qabul in line with the Shari¶ahin such a way that the offer andacceptance has effect on the

subject matter or counter-values.



Essential Elements of Contract

�The Hanafi regard the basis or pillarsof contract as Ijab and Qabul

�While the Jamhur list 4 pillars: -

channel of communicationcontracting party (Ijab)Contracting party (Qabul)subject-matter or counter-values



Essential Elements of Contract

Co.X Co.Y

Co.Z

Co.JSubject Matter



Channel of Communication

�Any means of communicationbetween the two contracting parties,

which reveals their intentions toconclude a contract

�The intentions of the contractingparties can be revealed verbally, inwriting, by conduct and sign language



�Verbal communication is widely used.It is easy, precise, clear and can be

expressed in any languageunderstandable to the contractingparties, except in marriage ± where al-

Shafi¶ recommends the use of the termµNikah or Ziwaj¶





�Contracts in writing can be in anylanguage and in any form acceptable

to the contracting parties, on conditionthat the writing can be traced,documented and done in the format

customarily acceptable to the partiesconcerned.




�Expression by conduct (Ta¶ati) is anaction-based language without a verbalexpression e.g. the use of ATM.

�Hanafi and Hanbali validate it based onµUrf, Malik regards it as absolutely valid.

Shafi¶ invalidates it due to gharar

�Ta¶ati has implications for e-buss




�Sign Language is related to the muteand a person incapable of speech.

However, it is recommended for themto use writing if they are literate.Persons capable of speech should not

use sign language in performingcontracts (Shafi¶ and Hanafi)




�Some contracts can be performedwith only one medium

�Other contracts require more than

one media or channel of communication for clarity andconfirmation




There are 3 conditions for channel of communication:

�Clarity of expression between I&Q ± clear enough to reveal the intentions of thecontracting parties.

�Agreement between I&Q, especially thecontract terms and conditions.

�Continuity between I&Q (Same Majlis)



Issues on Ijab and Qabul

�Is the Majlis time-based or locationbased?

�Can Ijab be in one Majlis and Qabulin another?�Should the response to Offer be

instant or it can be delayed? What arethe implications to the interests of thebuyer or seller?



Issues on Ijab and Qabul

�Can the offerer withdraw his offer beforethe acceptance of the Qabil?

(Maliki=No, Jamhur=Yes

�Contracts that do not require the unity of the same majlis: wasiyyah (will), Isa¶(guardianship) and wakalah (agency)



�To revoke offer before acceptance

�To decline offer by the Qabil

�Completion of majlis customarily

�Loss of legal capacity (Real person)

�Damage/loss to subject matter

Termination of Ijab



People differ in nature, capacities, age,intelligence, physique, etc. Thesedifferences determine people¶s suitability

to contracts:

�Some are not suitable to perform any contract

�Some are suitable to perform certain contracts�Some are suitable to perform all types of contracts

Contracting Parties



Contracting parties: Ahliyyah

�The suitability or legal capacity to acquirerights and perform a contract

�Ahliyyah al-Wujub (legal capacity toacquire rights)�Ahliyyah al-Ada¶ (legal capacity to perform

a contract).

�The 2 are further classified into complete(c) and incomplete (ic).



Ahliyyah

Al-Wujub Al-Adac icc ic

Contracting parties: Ahliyyah



Contracting Parties: Ahliyyah

There are five stages of Ahliyyah:

fetus, Infancy (Tufulah), Childhood(Tamyiz), Adulthood (Bulugh),

Maturity (Al-Rushd)



Stage Ahliyyah

Al-Wujb

Ahliyyah

Al-Ada

Contract Ruling

fetus ic nil nil nil

Infancy c Nil ± byparents

Charity,gifts, etc

mawquf

Child

hood

c ic 3 types Valid/

mawquf

Stages of Ahliyyah



Stages of Ahliyyah

stages Ahliyyah

Al-Wujb

AhliyyahAl-ada

Contract ruling

Adult

hood

c c all valid

Maturity c c all valid



According to Ibn al-Salah: "Mawquf ,( (, refers to a narration attributed toa companion, whether a statement of that companion, an action or otherwise.



Contracting Parties¶

The obstacles to legal capacities are:

1.Natural (insanity, feeble-

mindedness, unconsciousness,sleep, terminal sickness

2.Acquired (drunkard-ness,extravagance, indebtedness or bankruptcy)



Contracting Parties: Issues

�Proprietary Theory vs. LegalEntity Theory

�Real Person vs. legal Person

�Implications for the Islamic

commercial contracts.



Subject-matter

�It can be in the form of a monetaryasset (goods, etc) or non monetary

asset (marriage, etc), or services

�The subject matter must be

valuable (mutaqawwim) andShari¶ah compliant.



Subject-matter

Conditions:�It must be lawful

�It must be present during the time of the contract�It must be deliverable

�It must be specific and made knownto the contracting parties



Subject-matter: Issues

�Real (haqiqi) possession and hukmi(legal) possession, e.g. shares.

�Definition of mal, especially thoserelated to financial rights

�Deliverability: local vs. internationalmarkets.



�The Shari¶ah has outlined the objective of every contract; specific or general

�The primary objective must conform to thesecondary objective

�Issues arise in relation to the apparent andhidden motive (intention): the two schoolsof Fiqh.

Objective of Contract



Classification of Contracts

1.With reference to Lawfulness

2.With reference to Exchange3.With reference to Pricing4.With reference to contracting

parties (unilateral or bilateral)



Classification of Contract

5.With reference to function or benefit:

contracts of exchange (µUqud al-

Mu¶awadhat), contracts of security (µUqudal-Tawthiqat), contracts of partnership (Al-Shirkah), contracts of safe custody (Al-Wadi¶ah), contracts of usufruct (µUqud al-

Manf¶ah) and contracts of assigned task/projects (e.g. Wakalah, Ju¶alah)



Process of Contract

�Initiating a contract

(Ensure all the pillars and conditions are met)

�Lawfulness

(The contract must be free from negative elements)

�Implementation

(Ensure rights and authorities to discharge contract)

�Boundedness(Option to conclude or cancel a contract)

�Completion



WA ALLAH A¶LAM

THANK YOU

W#4 Theory of contracts

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