Contract/Law of Sale

At Islamic law a contract is distinct from a promise. Promises are morally not legally enforceable.[1] Therefore a contract is not an exchange of promises. However as with English law there must be valuable consideration, in absence of which the transaction is the giving and receiving of a gift . Ownership passes with a sale; if only possession not ownership is transferred for a limited time, for consideration then it is not a sale but a lease.

The paradigm commercial transaction upon which contract law  is based is a sale, most typically upon the sale of goods. Other types of contracts and the law governing them are developed based on the sale contract. Therefore what follows comprises both the basis of contract law and the law of sales.

Islamic law places a premium on legal certainty; this has implications specific to contemporary commercial transactions.

A valid contract requires each of the following four elements: 1) parties, 2) offer & acceptance, 3) property (subject matter) and 4) price.

1) parties

  • of majority age
  • have legal capacity (mental competence)
  • acting of free will, own volition
  • mutually consenting

2) offer & acceptance

  • clear and unambiguous
  • acceptance mirrors the offer
  • must be concluded at one time (before parties have parted company)
  • acceptance must be unconditional
  • must not be for a future time or date
  • both must be in past or present perfect tense

3) subject matter of sale

  • must exist at time of sale
  • specific
  • fixed
  • capable of ownership (property) and owned by the seller at time of sale
  • deliverable by the seller, capable of receipt by buyer
  • must be of value
  • must be known to the purchaser by sight or description
  • be property

4) price

  • the medium of exchange
  • not specific (units or currency are interchangeable)
  • fixed and known by the parties
  • must have value
  • determined by the market
    • prices may only be fixed to prevent monopoly, hoarding
    • a seller cannot be intercepted on way to market

Islamic law contains a Law of Set-Off with regard to the payment of contractual obligations.

Universal Conditions

Three cardinal prohibitions apply to sales and to all other contracts and transactions governed by Islamic law.

Specific Contractual Conditions

The parties may place one or more of three types conditions on a sale contract

  • those confirming effect of sale: delivery, full payment
  • those agreeing with purpose of the contract: pledge or guaranty
  • custom: period in which service provided (as a warranty)

Void and Voidable Contracts

A sale is voidable in case of defect, breach of conditions, and upon inspection only if the buyer reserves the right to do so; otherwise mutual agreement required for the sale to be voidable.

The appearance of the one or more of the following elements or qualities render a contract either void or voidable (upon discovery):

  • the sale purports to be for a limited time (in which case it is a lease not a sale)
  • uncertainty, ambiguity, vagueness or mistake regarding one of the above four elements
    • weights and measures must be accurate
    • chance or gambling may not be an element in the transaction
  • fraud, misrepresentation, deception or dishonesty (such as concealing defects)
  • bribery
  • if contract amounts to an unlawful or unfair taking
  • if subject matter is itself an unlawful thing or service
  • if subject matter is money
    • money may not be treated as a commodity
    • money may only be treated as medium of exchange, a store of value and a unit of accounting
      • the same is true not only of all currencies but also of gold and silver
  • if there are two agreements in one contract
    • for example a sale conditional on the sale or lease of another item or some other transaction
      • in addition to trafficking in an unlawful substance a beer tie would be a void contract
    • cannot sell an item for x cash price and y deferred price without agreement about which will be paid as selling price is unknown

Islamic law recognises as valid several types of sale contracts.

Sources

Mejelle, 1st Book, Chapters I – VII

Muhammad Yusuf Saleem’s Islamic Commercial Law (Wiley Finance 2013) is a valuable reduction of Islamic law pertinent to banking, finance and trade. The above explanation and the following (indicative) pages have drawn liberally from it: Law of LeaseLaw of AgencyLaw of PartnershipLaw of Banking, and Law of Guaranty.

Another work available in English translation referred to as authoritative by many scholars and practitioners in Islamic finance and banking, from which this website  draws upon, is Wahbah Zuhayli’s, Financial Transactions in Islamic Jurisprudence v 1 and 2 (Ūsūl al-Fiqh al-Islāmī) (Dar al-Fikr, Damascus, 2007 second edition), cited in full in Sources/Bibliography.

[1] Qur’an 17:34, 61:2, 23:8. However the enforceability of unilateral promises is an issue that the International Islamic Fiqh Academy has revisited (Resolution 40-41[7]) of 2006, which holds that in the financial context promises may indeed be binding and legally enforceable.