Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Operations Management Checklists > Islamic Law of Contracts

Operations Management Checklists

Islamic Law of Contracts

This checklist offers a brief guide to the nature of contracts in Islam-derived law, and outlines some key differences between these contracts and their Western legal system equivalents.


Checklist Description

This checklist offers a brief guide to the nature of contracts in Islam-derived law and outlines some key differences between these contracts and their western legal system equivalents.

Back to top

Definition

The basic prerequisites to establish a valid contract agreement under Islamic law relate to the legal status of the parties seeking to sign the contract, the way the contract is presented or accepted, and finally the subject and consideration of the actual contract.

Parties seeking to engage in a contract may only do so if they are considered legally fit to do so—essentially, adults of sound judgment. Both written and verbal contracts can be considered acceptable, with the proviso that the offer and the acceptance must be performed at the same meeting session, without any interruption or venue change before immediate acceptance. In contrast with Western conventions, Islamic law permits acceptance by conduct; under some circumstances, even not responding to a proposal can imply acceptance. Even once an offer has been accepted during a single session, Islamic law includes the principle that parties retain the right to revoke the contract until the moment either party physically departs the venue. However, interpretation of how this principle can be best applied in practice in the modern era can vary between countries.

In terms of the contract content, Islamic-derived law stresses that the subject of the contract must not relate to prohibited items (such as alcohol, tobacco, or gambling equipment), must be legally owned by one party in the contract and in existence at the time of the contract agreement (i.e. items yet to be built may not be the subject of a standard contract), and must be physically deliverable. As with other legal systems, the exact nature of the goods must be clearly defined in terms of quality and specifications. With the exception of money-exchange deals, the price at which goods will change hands must be agreed at the time of the contract: agreements cannot be based on either future market rates or on the opinion of any external party. While many different types of contract exist, the most common contract for the sale of goods is the mu’awadat contract of exchange. These can include a barter-style exchange of goods, a sale of goods in exchange for money, or a money-exchange deal. Another common form of contract is ijara, which is commonly used in leasing, either for equipment, real estate, or to provide access to labor.

Back to top

Advantages

  • Contracts in Islam-derived law fully respect the high moral principles of values expected of all Muslims.

  • Islamic contract law is regarded as a product of divine intervention and has been in use for many centuries across North Africa, the Middle East, and Asia.

  • Contract law in Muslim countries supports only transactions which would be classified as “ethical” in the West.

Back to top

Disadvantages

  • Islamic contract law can be highly complex, both in terms of its jurisprudence and in its application.

  • Technological innovations such as fax and e-mail systems have created some grey areas as to what constitutes a single session of contract discussions.

  • Careful consideration needs to be given to the implications of one party failing to honor the contract, given that Islam prohibits any exploitation of another party’s genuine misfortunes.

Back to top

Action Checklist

  • Variations in the details of contract law do occur from country to country. Therefore, acknowledge potential differences in the implementation of Islamic contract law in more liberal Muslim nations such as Qatar, compared to more conservative peers such as Yemen.

  • When considering potential agreements, shariah committees in Islamic financial institutions may pass a judgment on the compatibility of the proposed contract with the ideals of Islam. However, given the subjectivity element, you should appreciate that variations may occur in contracts acceptable to different institutions.

Back to top

Dos and Don’ts

Do

  • Understand the practicalities of “penalty” clauses that you may wish to insert into a contract. Shariah law does not permit the charging of interest (riba), and any penalties due may need to be paid to charity under some circumstances.

  • Seek expert advice related to Islamic contract law. Given the complexity of many elements of Islamic law of contract, particularly the definition of what constitutes acceptance of a verbal proposal, expert qualified advice should be sought before contract discussions begin, let alone any contract is signed.

Don’t

  • Don’t assume that the principles of Islamic law bear close comparison with those of Western laws. Contracts agreed under Muslim-derived laws can be less binding in nature than most contracts drawn up under Western legal systems. Take professional advice to determine under what circumstances the agreed contract may not apply in practice.

  • Don’t assume that the implementation of Islam-derived law takes the same form throughout the Muslim world. Western-leaning countries such as the United Arab Emirates may adopt a more progressive approach to contract law than nations such as Iran or Pakistan.

Back to top

Further reading

Books:

  • Rayner, Susan. The Theory of Contracts in Islamic Law. London: Graham and Trotman, 1991.
  • Vogel, Frank E., and Samuel L. Hayes. Islamic Law and Finance: Religion, Risk and Return. The Hague: Kluwer Law International, 1998.

Articles:

  • Hussein, Hassan. “Contacts in Islamic law: The principles of commutative justice and liberality.” Journal of Islamic Studies 13:3 (September 2002): 257–297. Online at: dx.doi.org/10.1093/jis/13.3.257
  • Islam, M. W. “Dissolution of contract in Islamic law.” Arab Law Quarterly 13:4 (1998): 336–368. Online at: dx.doi.org/10.1163/026805598125826184

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share