Focused Capacity Building Program

for Shariah Scholars

Islamic Law of
Contracts and
types of Sale
Course Outline
 Definition of contract;
 Types of contract;
 General principles of contracts;
 Basic elements of contract;
 Definition of ownership and wealth;
 Types of sale;
 Ancillary and sub contracts;
 Q & A;
 Definition of contract
 Legally a contract is an agreement between two or
more persons or parties for doing something;
 A contract is also defined as it is an agreement
which is enforceable by law, recognized by law
and effects legal rights and duties of the
parties;
 According to Islam every action or work that takes
place between two or parties is a contract;
 Therefore, exchange of goods, receiving a gift,
accepting a woman as wife through Nikah and
agreement on partnership etc. etc. come under the
umbrella of 'contract';
 Types of contract
 A contract can be of two nature:
► Compensatory or financial contract;
─ This is a contract in which there is exchange of
either goods or services against an agreed
compensation / price / fee / charges;
► Non Compensatory or social contract;
─ This is a contract in which one party gives to other
party without a compensation.
 Types of Contract
CONTRACT

Compensatory / Financial Contract Non Compensatory / Social Contract

Trade Gift

Leasing

Employment Money lending

Partnership Guarantee (Damanat)

Paid agency Non-paid agency

Services against fee Rights transfer (Hawalah)

 Summary of Islamic Modes of
Financing

Islamic Modes of financing

Services Partnership Ijarah Trade

Paid - ‫المرابحة‬
agenc Shirka - ‫المشاركة‬ Operatin Murabah
y Permanen g a
‫السلم‬
t -
Guarantee Declining Salam
‫االستصناع‬
Working -
Istisnaa
- ‫المساومة‬
Investment agency Mudarabah - ‫المضاربة‬ Finance
Musawam
Restricte
a
d
Unrestricte
d
Funds supply – summary
of possible ways in Islam
 General Principles of
Contracts
 A compensatory contract is allowed in Islam with some conditions;
 Here are the rules that govern such contracts:
► (1)-Permissibility as General Rule:
─ Lawfulness and Legality of subject matter (services or goods) of the contract;

─ Exchange of impermissible good or services is not allowed;

► (2)-Free Mutual Consent:

─ Free mutual consent of both parties is an essential element of contract;

─ This is ensured through law of offer and acceptance;

► (3)-Prohibition of Riba:
─ The contract should not contain any element of Riba (explicit or implicit);

─ All such contracts that involve in Riba are invalid;

 General Principles of
►
Contracts
(4)-Prohibition of Gharar (Uncertainty):
─ The prohibition of uncertainty is very important here. Almost majority
of rules are derived from this basic rule of Gharar;
─ Prohibition of Gharar includes:

□ Prohibition of wagering contracts like short sale, blank sale etc. etc.;
□ Prohibition of Qimar (Gambling) & Maysir (Games of Chance);
□ Prohibition of Khilabah & Ghishsh (Fraud & Deception);
□ Prohibition of complexity in structure of contract like Bayatan-e fi
Ba'i-in (Combining two inconsistent contracts);
► (5)-Principles of Entitlement to profit with Risk & Liability for
Loss:
─ This is an important law which describe rights and responsibility of

contracting parties;
 General Principles of
─
Contracts
According to this rule everyone has right of benefit if he bears
responsibility;
─ The application of this rule, however, is different in exchange of

goods & services and joint ownership contracts;

─ Every contract has set of rules derived from this basic rule;

► (6)-Legality of motives behind a contract:

─ Contract should not contradict objectives of Shari'ah i.e. it does

not meant for twisting the transaction to develop a prohibited

structure;
□ Hiyal ‫( حيل‬subterfuges) not Allowed;
□ Bay al-Inah ‫( بيع العينة‬Buy back agreement – repo) is prohibited
on pre agreed price;
 General Principles of
Contracts
► (7)-The contract should conform to the rules set by
Shari'ah for execution of contracts;
─ This is another important rule. The contract,
compensatory or non compensatory, has a set of
rules that need be complied with;
─ These rules explain the condition related to parties,

subject matter, compensation and other related

issues of a particular contract;
 Basic Elements of a
contract
 Every contract has some basic elements which are as
following:

► Parties/persons to contract;
► Wordings of contract;

► Subject matter of contract (the thing/task meant by the

contract);
► Compensation (remuneration/price for exchange);

► Basic framework of the contracts (rights and

responsibilities);
 Basic elements of a
contract

Contract

Part Wordi Subject Compensa

ies ngs matter tion
For example Offer & Exchange of Price or fee or
Buyer & Acceptance goods & fare or rent or
services or remuneration
Seller in a
sale partnership
contract

Framework of
contract
 Definition of ownership
 Ownership (Milkiyat):
─ It means 'legal possession and authority of disposal of
something valuable in Shari'ah';
─ The ownership entails right of control and

responsibilities for risk;

 Reasons and Causes of Ownership:
To acquire authorized and permitted things:
─ (1)-Through contract;
□ Compensatory: like sale;
□ Non compensatory: like gift;
─ (2)-As Successor (inheritance);
─ (3)-Through increase in value;
 Nature of ownership
 Ownership may be of following 03 types:
1. Ownership of Asset;
2. Ownership of debt;
3. Ownership of Usufruct or benefit;
 Characteristics of ownership:
► The owner of a physical thing, has ownership of its benefits too
but not other way around;
► Ownership of physical items is not time bound but ownership of

benefits is time bound;

► Ownership of physical items can not destroy by death of owner

but it transfers;
Sale and its types
 Definition of Sale
 Sale is 'exchange of a thing of value with
another thing of value with mutual consent';

 Thing of value means anything value of

which is not canceled by Shari'ah like pig,
musical instruments etc.;
 Types of sale
 With regards to subject matter, sale has two types:
► The sale of a commodity in exchange of cash is called 'Bai'-e-
Mutlaq (General sale)';
► The sale of a commodity in exchange of another commodity is

called 'Bai'-e-Muqayazah (Barter sale)';

 With regards to its legality sale has four types:

1. Valid sale ( Bai Sahih)
2. Void/Non existing Sale ( Bai Baatil )
3. Hung sale – existing but defective (Bai Fasid);
4. Valid but disliked sale (Bai Makrooh);
 Types of sale
 (1)-Valid sale ( Bai Sahih):
► A sale that meets all requirements laid down by Shari'ah for its
contractual nature;
 (2)-Void/Non existing Sale [Bai'-e-Baatil];
► A sale that does not meet basic requirements of its contractual nature;

 (3)-Hung sale – existing but defective (Bai Fasid);

► A sale that meets basic requirements of its contractual nature but
contains an impermissible element;

 (4)-Valid but disliked sale (Bai Makrooh):

► A sale that meets basic requirements of its contractual nature but
executed in bad/unethical manners.
 Types of sale
 With regards to payment of price sale has four types:

► (1)-Spot price sale – spot delivery of subject matter and

price payment; - Bai'-e-Mua'jjal [‫]معجل‬
► (2)-Deferred price sale – spot delivery and credit price;

─ Bai'-e-Muwajjal [‫;]مؤجل‬

► (3)-Advance sale – advance payment of price with

deferred delivery;
► (4)-Future sale – both price and subject matter are

deferred;
─ This is only allowed in manufacturing sale;
 Types of sale
 With regards to disclosure of cost of goods to buyer
(trust sales) the sale has three types:
► (1)-Cost to cost sale – no gain no loss basis. Break even
sale; - This is called ‘Tawliyyah';
► (2)-Cost plus margin sale – some gain is earned in seller

is obliged to disclose cost;

─ This is called Murabaha;
► (3)-Loss sale – sale with loss; This type is called
'Wazee'ah';
 A sale where no disclosure is made, is called
“Musawamah” - bargain sale;
Summary of Types of Sale
Exchange of Goods -
Trade

Cost undisclosed
Cash sale sale
General sale
On spot delivery and
General bargain sale -
payment
Musawama
Credit sale – Bai'
Cost Barter Sale
Muajjal
disclosed
Delivery on spot and one payment
at the end sales
Cost + profit sale -
Delivery on spot and payment in Murabaha
instalments Below cost sale –
Advance sale – Bai' Wazee'ah Currency Sale
Mua'jjal Cost to cost sale -
Payment on spot with deferred Tauwliya
delivery
Sale of Gold &
Future sale Silver
Payment and delivery both deferred –
illegal sale
 Ancillary or sub contracts
 Number of other contracts have been discussed in Islamic
law which serve as sub or ancillary contracts;
 Some of them are discussed here:
► Promise (Wa'd):
─ It is a unilateral promise for doing something or act or entering
in a contract, provided by one person to another;
─ The enforceability of Wa’d by law is acknowledged by majority of
present day scholars provided the nonperformance of promiser
is willful and non justifiable;
► Muaada:
─ It is bilateral promise by both parties;
─ Majority of the Shari'ah Scholars do not allow Muaada especially in
a situations where Aqd is not allowed (e.g. forward contracts);
 Ancillary or sub contracts
► Hawalah – assignment of debt:
─ Hawalah is transferring debt to another person without or with
settlement of loan on face value;
─ Under this agreement the debtor is freed from a debt by
another becoming responsible for it;
─ Hawalal is also done by shifting the responsibility from debtor
to a third person against his (debtor's) debt on third person;
□ Transfer of debt should take effect immediately, not to be suspended
for period of time and not to be concluded on a temporary basis or
contingent on future unlikely events;
□ However, it is permissible to defer payment of the transferred debt
until a future specified date;
 Ancillary or sub contracts
 Kafalah (guarantee):
► Literally, Kafalah means “To take on the responsibility for
the payment of expense of a debt or for a person's
appearance in court”;

► There are two forms of guarantee:

─ Kafalah, or surety ship;
─ Rahn or pledge/security;
► Both contracts used for guarantee or safe return of loans
to their owners;
 Ancillary or sub contracts
 Wakalah (Agency):
► The literal meaning of Wakalat is looking after or taking
custody. It terminologically means 'delegation of power to
an eligible person for doing something';
► Wakalah is possible for those activities that can be
performed by principal himself;
► Wakalat is a trust contract which means agent is bound to
discharge his responsibility in the same way as an Ameen
discharges his responsibility of Amanat;
► Agency may be against consideration or without it so it
(wakala) may be a commutative or non-commutative
contract;