FORMATION OF CONTRACT

FORMATION OF CONTRACT Prof. Dr. Zainal Azam Abd. Rahman

MUTUAL CONSENT: AS SHARIAH JUSTIFICATION FOR LAWFULNESS OF TRANSACTION/TRADE From the Quran From the Sunnah There shall be no valid sale except with mutual consent Sale will only become valid with mutual consent The Sunnah explains further the basic rule as provided in the Quran • Surah al-Nisa’: (4:29) • Prohibition on taking over/consuming other people properties without Shariah justification (the batil/illegitimate way) • Mutual consent as Shariah justification • Ways to establish mutual consent-valid contracting

THE NEED FOR TRUE/REAL CONSENT • Willingness and consent (rida): any difference? • Internal willingness (substance) or • External expression (form) • Form over substance or otherwise? • What is the intention of the parties? • The debate among the Muslim jurists ( fuqaha’) • Ways to express full consent must be explored • Special contracts that require special formalities • Contemporary issues

INTERNAL WILL NEEDS EXTERNAL EXPRESSION TO CREATE BINDING CONTRACTUAL RELATIONS • As a general rule, internal willingness alone is not enough to create contractual binding relations between parties or give rise to Shariah implications • Exceptions: under some situations niyah can determine external implications-whether the intention/motive is legitimate or not is relevant or niyah alone will have implication? • Internal desire/will need to be expressed clearly to be considered/accepted/reciprocated by the other party • However external form will not be enough unless in conformity with internal intent/will according to the majority of Muslim jurists • Imam Shafie held that appropriate external forms/words used can be taken to indicate internal intent unless otherwise proven • Court decisions rely on external evidence as a general rule • Examples debated by Muslim jurists

WHEN WHAT IS EXTERNALLY EXPRESSED CONFLICTS WITH INTERNAL WILL OF THE PARTIES • Internal willingness/will needs to be confirmed by external expression • The Hanafi: Rida and ikhtiyar are two different things • The Majority : the two are the same • The issue of joking, acting in a play, slip of tongue • The issue of conspiracy by the contracting parties to achieve some purposes-valid or otherwise • The issue of bai’ al-taljiah • Opinions of the jurists

PARTIES TO A CONTRACT: MUST THEY BE MULTI-PARTY • Both parties must have full legal capacity to create binding agreement or aqd • Can only one party create an enforceable contract/undertaking? • The guardian • The Wasiyy • The agent/wakil • The judge/court • Special conducts/tasarruf (whether consent from the intended party is needed/) • Vow/nadhr • Waiver, ibra’, write off, provision, giving discount • Waqf, will • Kafalah • Jualah

WAYS TO EXPRESS INTENT AND CONSENT: THE SIGHAH • The best is by way of verbal expression • By sending messenger/wakil • By writing • By sign language • By conduct • Modern communication and Islamic contracts (fax, telex, e-mail, trading platform, sms) • Contemporary issues ( Digital signature, e-government)

THE SIGHAH MUST: • Be able to show firm intention to enter into the contract • Be in the form where an offer is fully matched by an acceptance in the respective details • Be in the form where the offer is connected to acceptance without interruption • No revocation of the offer • No indication that that any of the parties is no longer interested • The contract formation session has not ended • Proper communication between the parties

THE MAKING OF AN OFFER:IJAB • Ijab(offer) according to Hanafi perspective is the first statement by either party • Ijab according to the Jumhur must come from the party who will transfer ownership • The need for specific tenses to convey firmness of intention to enter into contract? • Offer is normally made to specific person • Must be distinguished from: mere promise (wa’ad), declaration or other indications not intended to create ‘aqd • Firm, conditional and for future? • Contemporary Issues • Subject to contract acceptance • Letter of intent • Memorandum of understanding • Offer letter V Agreement • Master agreement V individual agreement • Preamble of agreement • Offer to subscribe shares/sukuk • Tafahumjaanibi

EXAMPLE:SPECIAL WAY OF CONTRACTING SALE • By way of al-muzaayadah: auction where highest bidder takes the goods/assets • By way of al-munaqasah: tender where the contract will go to the lowest offer • By way of bai’ al-mustarsil: where buyer leaves it to the seller to fix the price based on trust

AL-JUÁLAH: OFFER TO THE WORLD (offer of reward) • The majority holds it to be valid • Conditions that need to be fulfilled • The Hanafi approach and their argumentation- it is a defective ijarah • Contemporary use of this form of contracting • Ju’alah and Istisna’

REVOCATION OF OFFER • Offeror is entitled to revoke an offer before acceptance, why? • Offeror’s right shall have priority over potential right of the offeree • Hence no need to communicate revocation to the offeree • Hence acceptance made after revocation is not valid • Exception: offers that can not be revoked

EXPIRY OF AN OFFER • By rejection of offeree be it implied or expressed • By revocation of the offer by the offeree • Expiry of the session without acceptance • Death, insanity, parties losing conciousness • Destruction of the subject-matter

THE MAKING OF ACCEPTANCE: QABUL • Modes of acceptance • Expressed and implied acceptance • Must offer be immediately accepted? • Occasion of contract and acceptance • Must acceptance be communicated to the offeror or be witnessed? • Contemporary issues

CONDITIONS FOR VALIDITY OF ACCEPTANCE • Acceptance must be firm • Acceptance must be in line with the terms of the offer or better/more favorable • Made in a connected session/during the occasion of the contracting process • There has been no revocation of the offer by the offeror • There has been no indication of rejection before acceptance is made • Whether acceptance must be made immediately after the offer? • Yes it must but parties have khiyar al-majlis • No, but acceptance must be made before the expiry of the session of contracting

WHAT HAPPENS AFTER ACCEPTANCE: 1. KHIYAR AL-MAJLIS • Authority for khiyar al-majlis(option to set aside contract that has just been formed) from the Sunnah • Right to revoke recently formed contract before the end of the majlis al-aqd • Majlis as the place where the parties are contracting? • Majlis as a continuing session without interruption? • When the majlis is said to end/expire?

WHAT HAPPENS AFTER ACCEPTANCE:2. KHIYAR AL-SHART • The authority for validity of khiyar al-shart from the Sunnah • The operation of khiyar al-shart (option to terminate during the cooling off period) • Why khiyar al-shart is allowed? • Period allowed for khiyar al-shart, and the need to specify the period • Contracts that can be lawfully unilaterally or mutually terminated can not be tied to khiyar al-shart like ‘iarah, wadiah, hibah, wasiyyah, mudarabah, wakalah • Contracts where delay of both counter-values are not allowed can not be tied up with khiyar al-shart like sarf • Risk of ownership during the cooling off period: discourse by Muslim jurists

FACTORS THAT NEGATE OR AFFECT FULL CONSENT • Mistake • Fraud/taghrir/tadlis • ghubn (short changing the other party by over-charging) • Duress/ikrah • Breach of trust • Insanity • Weakness of mental ability/retarded • Sickness • Not being prudent • Intoxicated

FORMATION OF CONTRACT