BWSS 2093

CONTRACT IN ISLAMIC FINANCE

Chapter Six
CONDITION OF CONTRACTS

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overview
Conditions of validity of contract (shurut
al-sihhah)
Conditions of Conditions of implication
(shurut al-luzum)
Conditions of effectuate (shurut al-nafaz)
Consequences of contracts.
Division of Contracts

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 Conditions for Validity of Contract (Shurut
al-sihhah)
Conditions for the validity of a sale contract are
divided into two, i.e. general and specific sets of
conditions.
General Conditions
 These conditions must be satisfied, for all types of
sale contracts to make them legally valid.
 The contract of sales is valid if the contract is free
from any of the following:
(1) Ignorance (al-jahāla) (2) coercion, (3) time
-restriction, (4) Deception (5) Harmful sales (6)
Corrupting condition.
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 1. Free from Ignorance (al-jahāla)
 Ignorance can be divided into four types:
a. Ignorance by the buyer on the object of the sale, i.e. its essence, type,
quantity & quality may render the contract invalid.
b. Ignorance of the price. If buyer not sure how much he/she will pay
may render contract invalid. Thus, price must be precisely determined
at the time of the contract & not in future.
c. Ignorance of the time-period to either pay or delivery of the object. If
buyer does not know when to pay in case of deferred sale or seller
does not specified when he/she will deliver the goods will make the
contract invalid. Thus, time of payment and delivery must be clearly
specified at the time of signing the contract.
d. Ignorance of the means of documentation, i.e. if buyer is ignorant
about terms and conditions, documentations required and a guarantor
may render contract invalid. Therefore, buyer must clearly understand
the terms and conditions attached to the contract.

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 2. Free from Coercion
 Contract will be valid if it is free from any form of coercion
according to views of majority of scholars.
 There are two types of coercion in sale:
 Perfect coercion (Ikrah tāmm) or total coercion: this is a
serious duress that leads to loss of life, or limb or one of
them. e.g. if he is threatened by death or permanent
physical disability.
 Imperfect coercion (Ikrah nāqis) or partial coercion: this is a
form of threat in the form of beating, or injustice such as
blocking promotion or immediate demotion or use of legal
means to implicate person to jail, etc.

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 Cont…
3. Free from Timing Restriction.
 A sale is invalid if transfer of ownership has an expiry date
or tie to specific time period.
Example: I sold you this dress or a car or a house for one
month.
 In this case, the sale is invalid, since ownership of a specific
object does not have an expiration date.
4.Free from Deception
Any sale contract that has element of deception such as
concealment of truth, manipulation & exploitation of others
are invalid.
 For Example: If a person sells a cow with the understanding
that it produces 10 litres of milk per day. But find to be
otherwise is invalid contract.
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 Cont…
5. Free from Harmful sales
Harmful sale occurs if the seller incur loss in the sale contract that
exceed the value of sales.
Or If the object of sale can’t be delivered without causing the seller
losses that exceed what he is selling.
 Example: buyer want to buy only a land not building or orchard on the
land. If the land only it may cost RM 100,000 but if the whole home
including building & orchards surrounding it, it may cost RM 1 million,
such contract invalid.
6. Free from Corrupting condition
Any condition that causes losses to one other party or make one party
have more advantages over the other party render the sale invalid.
Example: seller sells a car with conditions that the buyer will only use the
car one month after; or I will sell you the land only if you finance my child
education; or I will sell you the house on the condition you give me a room
to stay on for free.
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 Specific Conditions
 Different sales contracts have some specific conditions for
its validity:
1. In sales of movable goods (manqūl) such as car, computer,
TV, hand phone, etc., seller must produce receipt, car grant
before selling to other party.
2. In trust sales (buyū’ al-amāna) such as murābahah, cost
price or initial price & profit margin must be known to the
buyer.
3. In foreign exchange transactions ( bay al-sarf), transaction
must be based on spot rate & exchanging currencies must
be done prior to parting. Forward rate is not allowed.
4. In forward sales ( bay salam), a price must be fully paid in
advance on a spot basis & time of delivery and quality &
quantity must be specified at the time of the contract.
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 Cont…
5. Exchange of Ribawiyyah Items.
 If the object of exchange involves ribawiyyah items, i.e.
gold, silver, wheat, barley, dates and salts, then
 It must be like for like, equal for equal and hand to hand,
if the commodities differ, then you may sell as you wish
provided that the exchange is hand for hand.
6. Debt sales ( bay al-dayn)
 In case of debt sale ( bay al-dayn), debt can be transferred
from one party to third only the same amount and same
time. Debt can be sold by creditor to debtor himself at
discount. However, sale of debt to third party on deferred
payment at discount is not permissible.

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 Conditions of effectuate (shurut al-nafaz)
 Conditions of effectuate (shurut al-nafaz) can also be known as
condition of executability as in Wahba Al-Zuhayli’s book. Vol 1:26-32.
 There are two conditions to execute a sale:
1. Ownership or guardianship (wilāya)
 Ownership is the right of possession of an item whereby the owner is
free to use it or dispose it without legal constraints.
 If individual attain complete ahliyyah al-ada’ i.e. legal age and has sound
mind, he/she can possess ownership over goods and services & dispose
them without legal constraints.
 However, if the person is underage (ahliyyah wujub) or insane
(incomplete ahliyyah al-ada); he/she can only possess ownership over
goods & services or dispose the goods through his guardian.

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 Cont…
2. No ownership rights or authoritative consent
Third party cannot execute contract on object of sales that
he/she does not legal owned.
Person cannot sell or rent goods which is owned by some
else.
Example: you cannot sell your brother’s car or house
without his consent or you cannot rent a rented house to
third party without consent of lessor.
In both cases, sale is suspended and its executability
depends on the consent of the legal owner.
However, if the third party are given authority to execute
the contract on behalf of the principal as in the case of
wakallah, the contract is valid. Example, landlord hire service
of agent to sell, or rent his property is allowed.
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 Condition of Conditions of Implications
(shurut al-luzum)
 The Conditions of implication (shurut al-luzūm) is also known as
condition for bindingness.
 Sale contract is not binding, when there are many options attached
to it. Why?
 because one party can use the option to invalidate the contract.
 These options include:
o Options by condition (khiyār Al-shart.), e.g. if you don’t pay by 3pm
today, I have right to revoke the contract.
o Option by description (wasf),
o Option in relation to price payment (naqd),
o Options due to specification(ta‘yīn), inspection (ru’ya), defect
(‘ayb), or deception (ghubn ma’a al-taghrīr).
 If any of those options are present in the sale contract, the contract
is not binding on the party who has the option right. He/ she may
validated or invalidate the contract.
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Division of Contracts.
Valid Contract (Sahīh)
Fāsid Contract (Defective Contract)
Void or invalid Contract (bātil)
Voidable contract
Suspended Contract (Mauqūf)

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 Valid Contract (Sahih)
A valid contract (Sahih) is a contract whose
nature, essence (asl) and attributes (wasf) are in
accordance with shariah.
 Thus, a contract will be deemed valid when:
I. Its elements are complete
II. Conditions relating to elements have been met
III.It is free from external prohibited attributes such
as no gharar, riba, maysir, ignorance, deception,
fraud, etc.
 When all the conditions mentioned are found the
contract is valid and its effects should not be
delayed. 14
 Fāsid Contract (Defective Contract)
Defective or irregular contract is called bay
al-fāsid contract.
The fāsid contract is a contract whose
elements are present (e.g. there is offer and
acceptance) and all the essential conditions
are complete but external attributes are
unlawful.
The contract is legal as regards to its asl but
its defect due to its prohibited attributes
( Wasf) such as there is gharar, riba, fraud,
etc. 15
 Some forms of Defective contracts.
i. Bay’ al-majhūl: it refers to sale in which the object
of sale or its price or the time of payment remains
unknown and unspecified.
ii. Contingent contracts: it is a contract that is
contingent upon an uncertain event. E.g. A says to
B “I sell you my house if X sold me his house”.
iii. Forward sales where future price is fixed today or
use of option instrument in derivative markets.
iv. Two sales in one i.e. sale one item with two prices
such as bay al-innah.

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 Causes of fāsid contract
i. Defective consent, i.e. a consent obtained
through coercion or deception.
ii. Uncertainties and ignorant which leads to
disputes (gharar and jahl).
iii. Corrupted conditions that are not related
to the contract, or not accepted in
commercial terms or gives advantages to
one party.
iv. Contain elements of Ribā (usury) or undue
enrichment.
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 Revocation of Defective Contracts.
Islamic law does not approve a defective contract.
Therefore, its revocation is necessary regardless
of whether delivery has been made or not.
However, it cannot be revoked if :
 The subject-matter has changed shape or is
destroyed or
 It has been disposed of by the buyer through sale
or donation, and the second purchaser has sold it
further.
 In all these cases the contract cannot be revoked.

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Void or Invalid Contract (bay batil)
 Hanafis defines void or invalid contract as
illegal contract in its essence (asl) as well
as its wasf.
the word asl refers to elements and
essential conditions pertaining to the
contract
 While wasf is the external attributes of the
contracts.
Example, all transactions that are
prohibited in Islam such as wine, pork,
casino, gambling, riba-based etc. 19
 Causes of Invalidity of contract.
1. Intrinsic causes,
 These are causes related to asl or element
of contract such as the unlawfulness of
subject matter such as wine, pork, non
existence of SM & absence of contractual
capacity.
2. Extrinsic causes:
These causes related to wasf. i.e. external
attribute such as containing element of ribā or
gharar or maysir,. 20
 Voidable contract
 A voidable contract, unlike a void contract, is a
valid contract which may be either affirmed or rejected at
the option of one of the parties.
 At most, one party to the contract is bound. The other
party may reject the contract, & make it invalid or void.
 Reasons that can make a contract voidable include failure
by one or both parties to disclose a material fact; a
mistake, misrepresentation or fraud; undue influence or
duress; one party become legally incapacitate to enter a
contract; or a breach of contract.

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 Mauqūf Contract.
Mauqūf contract are known as suspended
Contract.
It is a contract in which (a) the element are
found (b) condition are met (c) wasf is legal
BUT (d) the effects are dependent upon
ratification.
It is said to be valid contracts (Sahih) & their
effects can be delayed till the happening of
a future event. i.e. held up in suspense.
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Causes of Suspension.
a) Defective capacity: contract of minor
possessed discretion (sabi mumayyaz)
or the one under interdiction or by
someone with lunacy or partial insanity.
b) Lack of proper authority i.e. acting as a
guardian or agent on behalf of
somebody without proper authority.
c) Right of the third party attached to the
subject matter.
d) Death illness, such as cancer,.
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 References
Mansuri, M.T. (2007). Islamic law of contract
and business transaction. New Delhi: Adam
Publishers.
Al-Zuhayli, W. (2007). Financial transactions in
Islamic jurisprudence. Trans. by El-Gamal M.A.
Damascus: Dar al-fikr.
ISRA, (2012). Islamic financial system:
Principles & operations. Kuala Lumpur: ISRA.
Hasan, A. (2011). Fundamentals of shari’ah in
Islamic finance. Kuala Lumpur: IBFIM.
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The End and Appreciation.
May Almighty Allah bless
everyone
and increase our Knowledge.
Amin.
Jumpa lagi

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