W#4 Theory of contracts
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Transcript of W#4 Theory of contracts
8/7/2019 W#4 Theory of contracts
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TRANSACTIONS
INISLAMIC BANKING AND FINANCE
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THEORY OF CONTRACT
³Formation of Contract (µAqd)´
LECTURE 3:
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Presentation Outline
�Importance of Contract
�Definition of Contract
�Essential Elements of Contract
�Objective of Contract
�Processes of Contract
�Classification of Contract
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Importance of Contract
�Divine scheme of interdependence
�Fulfillment and exchange of human
needs
�Social interaction and cooperation
�Spiritual and material development
�Inculcation of values
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Dimensions of Contract
Implicit ContractRelates to rights of all the stakeholders
In the business
Explicit Contract
A formal contractBetween two
contractingParties or more
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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
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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¶
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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.
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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
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Essential Elements of Contract
Co.X Co.Y
Co.Z
Co.JSubject Matter
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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
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�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¶
Channel of Communication
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Channel of Communication
�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.
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Channel of Communication
�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
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Channel of Communication
�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)
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Channel of Communication
�Some contracts can be performedwith only one medium
�Other contracts require more than
one media or channel of communication for clarity andconfirmation
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Channel of Communication
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)
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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?
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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)
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�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
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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
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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).
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Ahliyyah
Al-Wujub Al-Adac icc ic
Contracting parties: Ahliyyah
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Contracting Parties: Ahliyyah
There are five stages of Ahliyyah:
fetus, Infancy (Tufulah), Childhood(Tamyiz), Adulthood (Bulugh),
Maturity (Al-Rushd)
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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
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Stages of Ahliyyah
stages Ahliyyah
Al-Wujb
AhliyyahAl-ada
Contract ruling
Adult
hood
c c all valid
Maturity c c all valid
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According to Ibn al-Salah: "Mawquf ,( (, refers to a narration attributed toa companion, whether a statement of that companion, an action or otherwise.
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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)
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Contracting Parties: Issues
�Proprietary Theory vs. LegalEntity Theory
�Real Person vs. legal Person
�Implications for the Islamic
commercial contracts.
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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.
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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
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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.
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�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
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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)
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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)
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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
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WA ALLAH A¶LAM
THANK YOU