The Theory of Contract

CHAPTER V

The Theory of Contract

Introduction

Humans are social beings who are not self-sufficient to fulfil all their needs individually without help from others. They need to trade, interact and cooperate with each other. A person needs to trade in what he has but does not need with what he needs. It is through these trading, and exchanges that humans fulfil their mutual economic needs. While emphasising on the sanctity of private ownership the Quran also recognises the necessity for its transfer on mutually agreed terms. It states that a person should not take another’s property unlawfully but by way of trade and with mutual consent (4:29).The only valid way through which ownership could be transferred is through mutual agreements and trading. Since these mutual agreements and trading may take various forms, there are therefore different types of unilateral and bilateral contracts.

The well-developed Islamic theory of contract is intended to lay down the principles of trading and mutual agreements. It explains detailed rules and regulations on the formation of a contract, the parties who may enter into a contract and the properties or the services on which contracts are concluded. Theserules and regulations are applicable to all types of commercial transactions whether they are unilateral or bilateral, or concluded by individuals or organisations. This chapter will focus on the meaning and definition of contract, its pillars and their conditions. We will also discuss issues related to consent, intention and motive of the parties.

Definitionof Contract (‘aqd)

The Quran states: “O you who have attained to faith! Be true to your covenants! (5:1). The covenants (uqud) referred to in this verse could be the covenants between Allah swt and man which implies man’s obligations towards Him. They also include man’s obligations towards his own soul and his obligations towards his fellow-men. The verse embraces the entire area of a person’s religious, moral, social and economic responsibilities. This verse also provides a fundamental principle, which governs the sanctity of all undertakings including contracts, whether private or public between Muslims or between a Muslim and a non-Muslim.

‘Aqd is Arabic word which literally means to tie, bind, fasten, link together, as to tightly tie the rope, or to bind the two ends of something and thereby forming a strong connection. It also means covenant, fulfilment, agreement, undertakings, obligations and determination. Technically, ‘aqd refers to a legally binding obligation, which has consequences for its subject.

A mere promise does not amount to a contract. Although it is strongly recommended that a promise be fulfilled (the QurÉn: 17:34, 61:2, 23:8), it cannot be enforced by the court of law. A breach of promise is distinguished from a breach of the contract as the former falls in the realm of morality. However, in certain circumstances a promise may become legally binding. Article 84 of the Mejelle states: “Promises when they take a conditional form are binding”. The Mejelle provides an example where A tells B to sell a certain property to C and A assures B that if C does not pay the price then A would pay it. Subsequently, C could not pay the price as such A is under obligation to pay the price to B. Thus a promise is binding when it is conditional and the person who is promised relies on the promise and takes some actions. This mechanism of promise is widely used by Islamic banks in B.B.A. and murÉbahaÍ transactions. The customer promises that if the bank purchases a certain specified property he will purchase the same property from the bank for a certain agreed upon price to be paid in a certain known period. The bank at this stage cannot sell the property to the customer as the bank does not own it. When the bank relies on the promise and purchases the property the customer is under an obligation to purchase the property from the bank based on the promise which he has made.

The contract must be recognized by law and legally binding. An agreement to destroy certain goods or to steal some property is not recognized by law and as such unenforceable. Thus, the mere agreement of the parties is not sufficient but the agreement should also be recognized by the SharÊ‘aÍ. Thus, a contract should be in line with the general principles related to the purposes of SharÊ‘aÍ(MaqÉÎid al SharÊ‘aÍ) and should not contain elements of usury, gharÉr, and prohibited conditions. Furthermore, a contract should not be made on prohibited properties.

In Islamic law the word ‘aqd could be used in its broader sense and may include all legal undertakings or obligations. These undertakings may be made unilaterally such as the creation of endowment (waqf) or writing off loans (IbrÉ). The creation of waqaf does not need the involvement of two parties and is made without any consideration. That is to say, the creator of waqaf does not expect any material benefit in return for his waqaf. ‘Aqd could also include bi-lateral contracts or agreements such as sale, rent, and mortgage. A’qd when used in its wider sense is synonymous with iltizam which literally means commitment. Iltizam refers to an obligation which a person undertakes either by his own will or by operation of law whether unilaterally or bilaterally. It is an obligation, which binds a person to transfer a specific right, performs an act or refrain from doing an act. Tasaruf which literally means disposition is a term with the widest meaning that includes all verbal and non-verbal actions that have legal consequences. It includes, not only the various bilateral and unilateral contracts such as sales, gift, and waqf, but also includes other actions such as acquisition of property through the various lawful means, using or exploiting properties, acknowledging another person’s right, marriage, destroying a property, theft, murder, usurpation, giving testimony and etc. These actions may bring benefit to a person or may subject him to liability in this world and in the Hereafter.

Pillars of Contract

Consent is the cause for the existence of a certain contract. If either party to a contract does not give his consent the contract does not exist. The Quran has stated that mutual consent of the parties is the basis for the formation of a contract. It states: “O ye who believe! Eat not up your property among yourselves in vanity, but let there be among you trade by mutual consent”. (4:29) The Prophet is narrated to have said:“It is unlawful to take the property of a Muslims except by his consent”. However, consent is a hidden phenomenon and unless expressed it cannot be ascertained.The emphasis on consent led the scholars to introduce detailed principles concerning offer (ijab) and acceptance (qabul)that would establish the presence or absence of mutual consent. The use of offer and acceptanceby the parties concludes a contract as itindicates that the parties consented and agreed to the contract.

Pillars (arkan, singular rukun) refer to important constituent elements of a contract. According to the Hanafi jurists a contract stands on two pillars which are offer and acceptance. The parties to a contract or the subject matter of a contract are not the pillars of the contract but are considered the requirements. They argue that offer and acceptance necessarily include and imply the existence of parties and of the subject matter.The majority of the Fiqh Schools, on the other hand, argues that there are three pillars to a contract. They are expression (sighah), which includes offer and acceptance, the party, or the parties (al ‘aqid) and the subject matter (mahal al ‘aqd)or the property on which a contract is concluded.

Expression (Ijab and Qabul)

According to the Hanafis the party who first manifests his willingness to make a contract is said to be making an offer (ijab). The party who first expresses his consent could be the buyer or the seller. The manifestation of the willingness coming from the other party is termed acceptance (qabul). To the majority of the Fiqh Schools, offer is a statement that comes from the seller who as an owner of a property offers it for sale. The statement that comes from the buyer, according to them amounts to acceptance. According to them even if the first statement comes from the buyer and the second statement comes from the seller the latter is considered offer while the former is acceptance. The contract is said to be concluded when the connection between the offer and the acceptance takes place.

Methods of Expression

The most obvious form through which consent could be expressed is through spoken words or verbal communication. However, jurists are also of the opinion that consent may also be inferred from a written offer and acceptance, conduct, gesturesandany thing that is customarily regarded as indicative of consent.

Expression of offer and acceptance through spoken words is the most original way to express consent. It is also the most frequently used, as it is easier and clearer. The law does not stipulate the use of specific phrases for expressing consent. Any phrase and words are acceptable as long as they indicate consent. However, the words used should show a definite and present intention to form a particular contract. The words should also indicate whether the contact made by the parties is a sale, waqf, rent or a mortgage contract. Furthermore the words used for the expression of the consent should be in past or present tenses. Futures tenses should not be used as they amount to a mere promise and not a contract. For example the phrase “I will sell the house to you” only indicates a promise to sell in the future and is not a contract. It does not showa present and definite intention to sell the house.

A contract may also be concluded without words and by the action of the parties. This is known in fiqh as al-mu’atat which refers to an exchange of action that would indicate consent. For instance, a contract of sale is concluded when a buyer takes an item with a price tag on it and gives the seller the price. Customarily this indicates that the parties consented to the transaction. However, it is necessary that the price of the sold item is known.

A person who cannot express his consent verbally may do so by gestures. Gestures which are customarily regarded as indicative of consent could be used for the purposes of making offer and acceptance. For instance, nowadays gestures are commonly used for transactions in stock exchanges.

The parties to a contract may also enter into agreement through writing, whether they are in each other’s presence in a meeting or not provided that the writings are clear and written in a formal way and signed or sealed. Exchange of offer and acceptance through modern means of communication such as fax and internet is included under writing.

Conditions of Offer and Acceptance

Clarity

The words used in offer and acceptance should clearly indicate and express the consent of the parties with certainty. Any phrase or word could be used as long as they convey with clarity the intention of the parties.

Conformity of Offer with Acceptance

Both offer and acceptance should agree with each other. The Mejelle states that if an offer is made in a certain manner the acceptance should correspond to it. For example when a seller offers to sell two computers for RM 3000 the buyer should accept the offer and buy both computers for RM 3000. He cannot buy one of the computers for RM 1500. In order to ensure the agreement between offer and acceptance, the acceptance should be unconditional and unqualified. For example, there is no agreement between offer and acceptance when a seller wants the price immediately and the purchaser is willing to pay later or when the seller wants the price in Euro and the purchaser wants to pay in Ringgit.

Continuity Between Offer and Acceptance

Offer represents the consent of one of the parties to a contract. It is an expression of his willingness at a particular time. If it is not taken within that particular time, it may not survive. The party who has made the offer has the right to withdraw or change the offer. It is therefore necessary that the acceptance should reach the offer within that particular time. The jurists insist that the acceptance should not come after a lapse of time but should immediately follow the offer. In other words there should be continuity between offer and acceptance. In order to ensure continuity between offer and acceptance both of them should be made in the same bargaining session.

Unity of Session

The session of contract (majlis al-‘aqd) refers to a place or a time period where negotiations between the parties take place. Offer and acceptance should be made in the same session. If an acceptance is made during the same place or time where an offer is made a contract is concluded. However, if the acceptance is made after the parties are separated or after the negotiation is over a valid contract does not exist. The wisdom behind this rule is to allow the parties to make a new offer. This will enable them to take into account the changing situation in the market. For instance, the prices of commodities or share prices rapidly change and it would be unfair to stop a party to a contract from changing his offer.Thus, both parties to a contract should conclude the contract within the negotiating session. If the acceptance is made at anytime before the session breaks up, the contract is concluded. However, after the session is over the offer ceases to exist and as such any acceptance made is not valid. An opportunity is given to the contracting parties to make a fresh offer and acceptance. A new offer may essentially be a restatement of the previous offer or it could be different from it. How immediate the acceptance should be made and the length of session depends on the type and nature of a particular contract and the customs of the people.

The unity of session does not necessarily mean that the contract should be concluded in the same place. It is possible that two parties are in different places as long as there is a connection between them. For example, a contract could be concluded by telephone or any other electronic correspondence. Unity of session, in this case, refers to the unity of time, i.e. a contract made at the same unit of time in which the parties are negotiating. In a telephone conversation the session starts at a moment when the conversation starts and ends when the parties enter into another discussion or when the conversation is cut off.

Neither of the parties either expressly or impliedly avoids the contract.

The offer lapses when one of the parties leaves the place or he brings in unrelated topics for a discussion. This indicates that he wants to avoidthe contract. If the acceptance is made subsequent to these actions the contract is not valid as the offer does no longer exist.

That the offerer has not withdrawn the offer before the acceptance.

The party who has made the offer may withdraw it before it could be accepted. If the offer is withdrawn before the acceptance could be made, there is no valid contract. The majority of the Fiqh Schools allow the withdrawal of offer within the session of the contract but before an acceptance could be made. They argue that at this stage there is no binding obligation. They also argue that the right of the offeror over his property is stronger than the right of a person to whom the offer is made.

The Malikis, on the other hand, argue that the offeror cannot withdraw his offer before an acceptance is made or an offer is rejected. They say the offeror is bound by his offer, until it is either accepted or rejected by the offeree, or when the session is over. They argue that the offerer, by his offer, has established to the offeree the right to accept. Thus, unless the offeree accepts or rejects, the offer cannot be withdrawn.

Since the Malikis argue that the offerer cannot withdraw his offer, they also say that the offeree could be given a certain specified period, within which he could either accept the offer or reject it. This, they say, is based on the hadith, which has become a general principle:“Muslims are bound by their conditions to which they agreed to”.

The Parties to a Contract

Transactions could only take place through mutual consent. The issue that who is capable of giving a valid consent is therefore a fundamental issue in Islamic transactions. The consent given by a child or a lunatic to a certain transaction is not valid. They do not have the necessary capacity to manage their wealth or to trade with it. In order to conclude a contract, a person should have the requisite legal capacity (ahliyyah). Ahliyyah literally means capacity or competence. Technically, it refers to the ability or competence of a person to establish rights for himself, or to undertake responsibility. However, a person may not have the requisite legal capacity to conclude transactions but he may still receive rights and obligations. A child or a lunatic person, for instance, cannot conclude contracts but are entitled to receive their share of inheritance and are obliged to pay for the necessities bought for them through their guardians. Muslim jurists have therefore recognized two types of capacities: the capacity to receive rights (ahliyyah al-wujub) and the capacity to perform and subsequently to acquire rights and obligations (ahliyyah al-ada).