Reflection and Overview on the
Classifications of Contracts
Although contracts in
Islamic law of transactions are classified into different categories, it seems
that the basic contract, in many cases and situations are the contract of
exchange and utilization of usufruct. The former presupposes the transfer of
ownership while the later the transfer of usufruct of a property from one party
to another. This is clear from the definition of both sale and hire in Islamic
law Sale is defined as "the exchange of one commodity for another, one of
which is called the object and the other the price", or "the transfer
of ownership of property for another. Hire or ijarah is defined as the transfer
of the usufruct for a consideration. Both these two contracts constitute the
main activities of commercial activities because the remaining contracts are
largely dependent on these two contracts.
Therefore, the law on
sale as the contract par excellence and, next to it, on hire, was greatly
expanded in Islamic law literature. These two contracts are the bases for the
other contracts to take place. In other words, other contracts are dependant on
these two contracts to exist and to give effect. On the contrary, these two
contracts, relatively speaking, can be concluded between two parties without
any need for other (supporting) contracts. For instance, hiwalah, kafalah and
rahn cannot stand by itself in the sense that they are all dependent on the
contract of exchange be it sale or lease/hire. In the case of hiwalah which
means transferring a debt from one debtor to another, it cannot take place
unless the debt relationship has already established between the transferee,
the transferor and the principal creditor. The debt relationship, on the other
hand, may take place either out of deferred payment sale or out of direct loan
(qard) contract. Hence, it is obvious that hiwalah originates from the sale
transaction (as well as from loan transaction) kafalah, rahn, etc.
This shows, inter alia,
that contracts are inter-related to form a complete system of mu'amalah to
ensure justice as well as to meet the needs of people which vary from one
condition to another. Therefore, it is relevant to conclude that Islamic
commercial law consists of many different types of contracts to suit different
needs and circumstances. In other words, theoretically, Islamic commercial law
would be able to satisfy the need of a person to buy a commodity on credit, or
the need to have the guarantor against the third party, or the need to have the
fund for business enterprise purposes, or the need to have in advance the
capital to manufacture or produce agriculture produce or perhaps the need to
have a transferee to settle the debt owed by a third party (transferor) and the
like.
1. Contracts of Exchange
(Mu'awadat)
The main contract of
exchange in Islamic commercial law is the contract of sale. Sale, generally
speaking, involves an exchange of a commodity for another commodity (barter
trading) or of a commodity for money (sale) or of money for money (sarf).
Interestingly enough, riba which is prohibited by Islamic law, originates or
comes to exist from two types of exchange, namely unequal exchange of two
ribawi or usurious commodities (riba al-fadl or riba al-buyu') or an exchange
of money for money with different quantities (riba al-fadl) or without
simultaneous transfer and immediate delivery (riba al-nasi'ah or riba al-duyun)
or involving both possibilities which render the contract of exchange of money
for money null and void based on both riba al-fadl as well as riba al-nasiah.
The first impression that comes across to our mind is that both types of riba,
while quite similar to both contracts of barter trading and currency exchange
(sarf), are not similar in any way to an exchange of a commodity for money.
This, among other reasons, makes the trading distinct and free from any element
of interest. However, contracts of exchange dealing with barter trading and
currency exchange are susceptible to riba elements and for this reason, Islamic
law has relatively laid down more strict principles to ensure the legality of
these contracts and most importantly to free these two contracts from both riba
al-fadl and riba al-nasiah respectively.
Trading activities
i.e., contracts of exchange of a commodity for money however, are relatively
more exposed to the element of gharar, literally hazard or risk. In Islamic
legal terminology, this includes the sale of an article of goods which is not
present at hand; or the sale of an article of goods, the consequence or outcome
of which is not yet known; or a sale involving risk or hazard where one does
not know whether the commodity will later come to be or otherwise. Gharar may
render the contracts of trading void or voidable. Several reasons were given
for the prohibition of bay' al-gharar. Some of them were related to fraud since
such a sale amounts to obtaining the property of others by selling unavailable
goods and also the contract may lead to disputes and disagreements between the
parties in the contract. While in Islamic law, an agreement must bring an
immediate and certain obligation.
Therefore, it is not
surprising to find that Islamic law has prohibited many pre-Islamic period's
contracts of exchange because they were either uncertain or not known to one or
both parties to the contract which may eventually lead to dispute and
injustice. Such contracts are like bay' al-mulamasah, bay' al-hasat, bay'
al-munabadah, bay' al muwafah, bay'muzabanah, bay al-mukhadarah, bay'
al-muhaqalah, al-haml, bay'atan fi bay'ah or safqatan fi safqah, bay' al-kali
bi al-kali, bay' wa salaf, etc. All of the above examples reflect clearly the
hazardous elements that each of them contains and therefore, render the
contract either void or voidable.
From this brief
introduction, we may infer that as far as barter trading and currency exchange
are concerned, the principles of Islamic law which govern those transactions
are mire concerned with the questions of equality between two items because
these two types of exchange are vulnerable to riba element. On the contrary,
the possibility of riba interference dies bit arise in the case of trading
since trading activities are basically free from riba but are always exposed to
exploitation and fraud. The question of equal amount and simultaneous transfer
of the property being exchanged is irrelevant in trading activities simply
because these two factors do not inflict any legal effect on the sale contract.
This, the golden principle in trading is that the contract should not contain
any element of either gharar or jahalah (lack of knowledge) because otherwise,
the contract is deemed either void or voidable according to the degree of
gharar or jahalah respectively. Also, for this reason, it is respectfully
submitted, that the issues of the first possession of the property before the
second sale qabd, the capacity to deliver the property, etc., are always
questioned by, and debated amongst, the jurist only ill relation to trading
(alone) because these two issues and the like are concerned with gharar and
jahalah and not with riba.
On the contrary, the
issues of gharar and jahalah, have no effect whatsoever in certain contracts in
the Islamic law of transactions because the nature of this type of contract
does not require and demand a precise specification and identification of the
property being transferred from one party to another. This is absolutely
applicable to the contracts of gratuity ('uqud al-tabarru'at) such as hadiah,
hibah, wasiyyat, etc. Why gharar affects trading and not gratuity contracts is
a question worth of reflection. The immediate answer would be that trading
differs from gratuity contracts because the former is a bilateral contract
which requires an exact knowledge of the property to fulfill the requirement of
legal consent while the latter does not require such knowledge since the
consent of the recipient is not necessary. Again, the classification of
contracts as given earlier would help the jurists to ascertain the legal
position of the respective contracts in a given situation. Interestingly
enough, the difference between the two types of contract such as between the
contract of exchange and gratuity would induce different legal effects e.g.
khiyar or the right to revoke the contract. While khiyar (option) is
undoubtedly part and parcel of the sale transaction, it finds no place in
gratuity contract. Should we continue to examine the similarity and
dissimilarity between one type of contract with another in issues pertaining to
legal position, rights, obligations, liability, risk, merits, modus operandi,
etc., we would have certainly produced so many pages on the topic which is not
the intention of the present paper.
To be more specific, we
should confine our present discussion to the contracts of exchange ('qud
al-mu'awadat) which will include a variety of contracts which differ from one
another on terms of specific legal requirements, rights, obligations and
liabilities but common to each other in terns of the result of the contract,
namely the transfer of ownership from one party to another. Therefore, the
element common to all contracts under contracts of exchange is the transfer of
the ownership and possession from one party to another. Should this be absent
and lacking in a contract, the contract is no longer a contract of exchange.
The relevant legal maxims which governs this situation is article 3 of the
Majallah al-Ahkam al-'Adliyyah which reads as, "In contracts, attention is
given to the objects and meaning, and not to the words and forms". The
maxim clearly states that it is the object and aim of a transaction which will
be determinative to the legal position of that transaction. The maxim cited is
related to another maxim describing the function of intention in all aspects of
Islamic law which reads as follows, "matters are determined according to
intention". To illustrate the maxim governing the legal position of a
contract as pointed out by article 3 of the Majallah, the drafters of the
Majallah have cited the case of bay' al-wafa'. Bay' al-wafa' is basically a
sale of commodity on the condition that the seller be allowed to get the
commodity back upon paying its price. Therefore, in bay' al-wafa', the seller
by returning the price, can demand back the thing sold, and the buyer, by
returning the thing sold, can ask for the price to be reimbursed. Also, neither
the seller nor the purchaser can sell to another a thing sold by bay' al-wafa'.
This trahsaction is perceived by the Majallah as a pledge contract, not because
of the words and forms used in the offer and acceptance but rather due to the
intention and meaning as it is clearly expressed in the maxim cited earlier.
The case of bay'
al-wafa' attracts the attention of the drafters of the Majallah since bay'
al-wafa' is a transaction peculiar only to the Hanafi school of law and
furthermore, the Majallah is primarily based on the Hanafi point of view. In
addition, bay' al-wafa' is so unique because it is termed as a sale while in
actual fact, as endorsed by the Majallah itself, it is rather a pledge (rahn)
contract. That is to say, the relationship between the two parties to that
contract could not be between the buyer and seller since the transfer of
property and corresponding consideration is not final and ultimate. Rather, the
contractual relationship would be between mortgagor (seller) and mortgagee
(buyer) neither the seller nor the purchaser can sell to another a thing sold
by bay' al-wafa'.
Contracts of exchange
in the classical Islamic law of transactions, as mentioned earlier, include a
number of contracts such as bay' al-musawamah, bay' al-murabahah, bay
al-tawliyyah, bay' al-wadi'ah, al-bay' al-mua'ajjal, bay' al-salam, bay'
al-istis'na', bay' al-muqayadah, bay' al-sarf, bay' al-muzayadah, etc. Apart
from these types of sale, there are also other types of sale which are
disputable among the jurists such as bay al-'arabiin, bay'al-'ayyinah and bay'
al-dayn. In dealing with these different categories of sale contracts, the
writer is more inclined to classify them into appropriate sections for the sake
of clarification and distinction. The classification is based on certain
factors which distinguish one contract of sale from another. Therefore, with
special reference to the thing sold, sales are divided into four categories as
follows:
a.
sale
of property to another person for a price and this is the most common category
of sale and is consequently specifically called sale
b.
sale
by exchange of money for money which is known as sarf transaction which
consists of selling cash for cash
c.
sale
by barter i.e., exchange of object for object whereby neither of which is money
payment; each of the two commodities constitute both the price and the object;
and
d.
sale
by immediate payment against future delivery such as bay' al-salam (forward
sale) and bay' al-istisna' (sale on order). The item of the sale is yet to
exist in the future date.
From another
perspective i.e., the nature of profit agreed upon in the contract, sales are
also divided into four categories as follows:
1. Musawamah sale which is basically a sale by mutual
consent completed and concluded through negotiations between the seller and
buyer in which no reference be made to the original cost price. It is also a
'profit sale' but the actual cost price and the amount/percentage of the profit
is unknown to the buyer because the seller is not bound, in musawamah sale, to
disclose the cost price.
2. Murabahah sale which is the sate of a commodity for
the price at which the seller has purchased it, with the addition of stated
profit known to both the seller and buyer. In short, it is a cost-plus-profit
sale in which the profit is expressly disclosed by the seller. From this, we
can infer that murabahah sale in its original Islamic connotation is simply a
sale. The only feature distinguishing it from other kinds of sale is that the
seller ill murabahah expressly tells the purchaser how much cost he has
incurred and how much profit he is going to charge in addition to the cost.
Therefore, if a person sells a commodity for a lump sum price or instalment
basis without reference to the cost, this is not murabahah, even though he is
earning some profit on his cost because the sale is not based on a 'cost-plus'
concept. In this case, the sale is called musawamah. Due to speciality of
murabahah, it has been considered by the jurist as a sale based on trust
(amanah).
3. Tawliyyah sale which is a sale at cost price
without any profit for the seller. It is similar to murabahah with reference to
the basis of the sales, namely amanah.
4. Wadi'ah sale which takes place when the seller
agrees to sell a commodity at a lower price than that of the cost price. Since
the seller is selling the commodity at a lower price, it is also a trust sale.
According to the manner
of payment, there are three possibilities of payment pertaining to a sale
contract as follows:
a.
Cash
sale in which the purchaser is under obligation to settle the purchase price
agreed upon when concluding a contract if the buyer could not settle the
payment for one reason or another, the seller has a right of retaining the
thing sold until he has received the payment of the price.
b.
Deferred
payment sale which is payable on installment basis. This is permissible
provided the period thereof is definitely ascertained and fixed manner of
payment is applicable to all types of sale except in the case of bay' al-salam.
c.
Lump
sum payment payable in the future. This manner of payment is also lawful
provided the date of the payment is fixed in advance. Also, this manner of
payment would be applicable to all types of sale with the exception of bay'
al-salam.
d.
Earnest
money (bay' al-'arabun) in which advance payment of sum of money is made to the
seller which constitutes part of the purchase price should the buyer decides to
buy the good. Otherwise, the advance payment is forfeited to the seller.
According to the
subject matter of the sale, it can be divided into three categories namely,
sale of commodity (movable and immovable), currency (sari) and debt (dayn). As
for the very purpose of sale contract, it may classified into two categories
that are exclusively of exchange purposes and the other for exchange as well as
for financing purposes.
Apart from the previous
perspectives on which sales are usually classified, sales are also divided into
a few categories according to the nature of the price whether is has been fixed
from the very beginning or otherwise. This is however, the writer's personal
reflection on certain contracts of sale available in the Islamic law of
transactions. These categories are as follows:
a.
The
price is mentioned by the offeror and accepted by the offeree. This is the
practice in normal sale transaction whether it involves musawamah or murabahah
or salam or istisna' and other types of sale with the exception of tawliyyah
sale since the price offered in the latter must not go beyond the original cost
price.
b.
The
price is mentioned by the buyer and later accepted by the seller, seller, in
this context, is not bound by any 'offer' of the buyer but, on the contrary is
bound to honor the highest price offered by the respective buyer or 'bidder'.
This is called as bay' al-muzayadah or bay' man yazid or sale based on
auctioning. In this transaction, the price will be fixed only by the highest
offer made by the bidders.
c.
The
price in some sale transactions, is divided into two stages; the second payment
is pending on the ultimate decision of the buyer to proceed with the contract
or otherwise. This takes place in bay' al-'arabun (earnest money) in which the
buyer agrees to purchase a commodity and pays to the seller an amount of money
in advance. If he decides to buy the commodity, the amount paid will be
deducted from the purchase price, but if he declines or fails to buy the
commodity, the advance payment is forfeited to the seller.
The fundamental basis
of sale contract consists of one piece of property being exchanged for another.
Offer and acceptance are also referred to as the fundamental basis of sale,
since they imply exchange. As for the object, it must be in existence,
deliverable and known to the purchaser. These conditions are applicable to many
types of sales except in few contracts such as bay' al-salam and istisna'
2. Contracts of Utilization of
Usufruct ('Uqud al-Manfa'at)
The above type contract
is divided into two categories which are the transfer of the usufruct for a
consideration and the transfer of the usufruct without a consideration. The
former is a bilateral contract while the latter is not. The former is known as
contract ijarah while the latter is known as 'ariyah contract. The details of
these two contracts are as follows:
2.1 Contract of Ijarah (transfer of usufruct for a consideration)
Ijarah is a word that
conveys the sense of both hire and lease. Ijarah is of two kinds, namely use of
corporeal property which may take one of three forms:
- Immovable property, such as land or premises
- Merchandise, such as furniture, machinery,
etc.
- Animals.
The second type of
ijarah is personal service. The salient features of ijarah contract are as
follows:
- The lessor must be the absolute owner of the thing or the agent of the owner of his natural or legal guardian.
- The thing given for rent and the amount of
rent should be fully and precisely known to both parties.
- In a contract of hire, it is necessary to make
known the use to which the thing hired is to be put, so as to avoid later
dispute.
- When land is taken for rent, the period must
be fixed and the purpose for which it is rented specified.
- In hiring an artisan, the benefit should be
made known by a statement of the nature and method of workmanship.
- It is the responsibility of the lessor to
maintain the property leased in such a way as to retain the benefit of the
property.
- If the lessee damages the property hired, the
lessor can annul the lease on application to the court.
- The lessee can sub-let immovable property but
not movable property.
- The thing hired should be treated as a trust
in the hands of the user.
2.2
'Ariyah (Lending for Gratuitous Use)
In addition to the
above general rules, the contract of 'ariyah requires the following rules;
- The lender may withdraw the loan whenever he
wishes.
- The thing lent must be capable of giving a
benefit.
- The thing lent for use must be defined.
- The borrower becomes the owner of the benefit
without giving any payment to the owner.
- The maintenance of the thing borrowed for use
is the responsibility of the borrower.
- When lending for use is restricted as to time,
place and nature of use, the restriction are to be observed.
- The borrower cannot let or pledge the thing
lent for use, the borrower must immediately return it.
- When the lender demands the thing lent for
use, the borrower must immediately return it.
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