Islamic Law of
Contracts
Arslan Tahir
Introduction
The Islamic law of Contracts is the basis of all Islamic finance transactions.
The Fiqh al muamalat (Islamic commercial jurisprudence): is a comprehensive body
of principles and rules, designed to promote harmonious relations between
contracting parties and avoidance of the kinds of problems in contracting that can
result in falling-out of the contracting parties leading to costly litigation or other
misfortunes
The Islamic Law of contract
• The term used for ‘contract’ in Arabic is aqd, which means
• - To tie between two ends, to fasten, to link
• - In Islamic law, it means agreement, commercial arrangement, legal transaction, document or
deed
• It is an agreement among parties concluded through an offer and acceptance with the
consequences of binding legal obligation.
• The Aqd’ ( the contract)
• The Wa’d ( unilateral promise)
• Muwaada or Mua’hida ( bilateral promise)
The Islamic Law of contract
WA’D (Promise)
• Wa’ad is a binding unilateral contract where a party promises
or undertakes to carry out a unilateral contract ndertakes to
carry out a unilateral contract
• - A unilateral undertaking or a promise by one party to do or not
to do certain actions in the future . The primary difference
between a promise and a contract is that the promise is binding
only the maker whereas a contract binds both parties.
The Islamic Law of contract
Bilateral Promise ( Muwaada)
• Muwa’adah:a conditional/unconditional bilateral contract
Example.
• A provides a unilateral promise to B that he will purchase B’s house for
US$ 250,000 any time within the next 12 months.
• B gives a unilateral promise to A that he will sell his house to A for US$
250,000 any time within the next 12 months.
The Islamic Law of contract
• Aqd’ ( Contract)
• Definition
• “ is transaction that is executed between two or more parties for
• mutual benefit and with mutual consent”
The Islamic Law of contract -Aqd’ ( Contract)
• Requirements of a valid contract :
• There must be at least two independent parties
• There must be offer and acceptance relating to both price and asset.
• Acceptance should match the offer.
• There must be a material effect ( transfer of ownership) following
exchange of asset and consideration ( Payment or Fee).
The Islamic Law of contract
Aqd’ ( Contract)
• Types of Aqd’
• 1. Compensatory contracts: where one person sells something to someone
else for a price or other compensation. e.g. A sold his car to B for US$
5,000.
• 2. Non-compensatory: where one person gives something to someone else
without any compensation e.g. Inheritance or Donation.
The Islamic Law of contract
Aqd’ ( Contract)
• Components and Conditions Influencing Contracts:
• Contracting parties
• Subject matter
• Offer and acceptance.
The Islamic Law of contract
Aqd’ ( Contract)
• The Contracting Parties should fulfil the following conditions :
• Mature : Adult under Islamic law.
• Sane : mentally sound at the time of the execution of the contract both
temporarily or permanently.
The Islamic Law of contract
Aqd’ ( Contract)
• The following are the conditions that must be met for
Offer and Acceptance :
• Acceptance should be absolute.
• Connection of offer and acceptance
• Acceptance needs to take place before the offer is withdrawn.
The Islamic Law of contract
Aqd’ ( Contract)
• Sharia’a options of Sale :
• Buy p er’s option to Rescind: before the execution of contract.
• Option of Inspection.
• Option of Defect: right to return if defective.
• Option of Quality: as specified.
Option of Price: fair price within the market range.
The Islamic Law of contract
Aqd’ ( Contract)
• A classification of contracts with respect to their effect could divide them into:
• Valid (Sahih): the components and conditions of sharia’a are met. Valid contract could
be either :
1- Nafiz :enforceable contract or
2- Mawqoof :enforceable until authorised.
• Voidable ( Fasid):sound in its essence , but is unlawful in its conditions.
• Invalid ( Batil): not good in its essence or components.
The Islamic Law of contract
Contracts of Exchange
• Exchange or the transfer of ownership of specific objects or goods either
by exchanging :
• Good for good ( barter trading).
• Good for money ( Sale)
• Money for money (Sarf)
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