Islamic Law of Contracts

17,444 views

Published on

Published in: Technology, Economy & Finance

Islamic Law of Contracts

  1. 1. 1123gh11PhD ProgramTerm PaperFRAUD AND DECEIT: COMPARATIVE LAW ISSUESISLAMIC LAW OF CONTRACTSSemester January 2013Professor Dr. Zainal Azam Abd. RahmanMace Abdullah1000491
  2. 2. 2ABSTRACTThis analytic research paper takes an expansive look at the legal theories of fraud and deceitfrom the comparative law, Islamic Law of contracts and conventional law perspectives. Itposits that the Islamic Law of contracts may need further development in the area of fraudand deceit, particularly as it relates to securities transactions, which inherently havecontractual implications. It is surmised that the Islamic Law of contracts presently does notgive a cohesive approach to these areas. It is remarkable that Islamic Finance is a primarycause for the “revival” of interest in the Islamic Law of contracts. Yet, as Islamic Finance hasgrown dramatically over the past several decades, the development of Fiqh in certain areas ofcontracts seemingly lags behind the rapidly advancing Islamic Finance. The advancement and“innovation” of Islamic Finance products is very likely to continue as Islamic Finance seeksto assert itself as the financial system of choice. Failure of the Islamic Law of contracts toadvance could hinder those prospects. That is not to say that the “root” solutions to modernday financial market abuses are nonexistent; because they do exist. Yet, modern day usoolisand fuqahahimust “dig” into the “roots” to find adequate remedies to such abuses assecurities fraud and deceit and intentional interference with prospective economic advantageand contractual relations. This paper approaches these areas cautiously, but with deliberation.Modern financial markets dictate adequate remedies for offenses in order to secure the rightsof investors and to penalize those who would seek to perpetrate fraud upon the marketplace.This paper is a humble effort to draw attention to the need for further development andapplication of the Islamic Law of contracts in this area. While one may suggest that these“gaps” can be filled by the Qanunii, this paper posits that the Islamic Law of contracts and/orits “roots” should be proactive in providing the rules (ahkam) and principle direction in allareas of Islamic Finance contracts, products and markets.Key Terms: comparative law; misrepresentation; ghubn or ghabn; fraud; tadlees; deceit;taghreer; breach of contract; naqd al-‘aqd; damages; ‘adhraariUsoolis (this is an English contrieved plural to Usooli) refer to those Islamic Law (Shari’ah) scholars whoderive rules of law (ahkam) from the Sources of Shari’ah; while fuqahah refers to Shari’ah jurists who applythose rules (ahkam) to cases.iiQanun is enacted law by a Muslim government. It may be based on religious principles or it may be secular. Indemocratic Muslim governments, it may be legislated through a democratic process, whereas in sovereignstates, it may result from decrees by a monarchy. More will be said of Qanun within the paper.
  3. 3. 3INTRODUCTIONThis paper is analytic and compares and contrasts both the similarities and differencesbetween the Islamic Law of contracts and conventional law as they relate to the legal theoriesof fraud and deceit. The conventional law used in this paper draws extensively on commonlaw principles; particularly those of the United States. As a preliminary step to comparing thetreatment of fraud and deceit in contractual relationships, a cursory review of comparativelaw theory is made to “set the stage” for the analyses.This paper is important because it addresses what might be perceived as “stunted growth” ofa particular aspect of the Islamic Law of contracts. As Islamic Finance grows, Islamic Law orFiqhiiimust grow as well. This prospective growth can be analogized to the growth of a tree.The Islamic Law of contracts is like a tree that is firmly rooted by its classical texts and life-giving sources of law. But, its roots are buried under the fertile ground of its spiritual past;discoverable by those who know of them. Its roots are watered by the spring waters of theShari’ahiv. Without them, there is no life and the tree withers and dies. Yet it is its branchesthat bear its fruit. The higher branches and the fruit they bear can be analogized to theMaqasid ash-Shari’ahv. They bask in the sun of today’s promise and hope of the warm rainwater of the future. So it is with Islamic Finance and its indispensible Islamic Law ofcontracts. Roots and branches are not the same, but parts of a whole. The roots are firmlyfixed, but grow the tree must, as it adapts to its environment. As Almighty Allaah proclaimsin His Qur’an:“See you not how Allaah sets forth a parable? A good word is like a goodtree, whose root is firmly fixed, and its branches are to the heavens. Itbrings forth its fruit at all times, by the leave of its Lord. So Allaah setsforth parables for men, in order that they may receive admonition. And theparable of an evil word is that of an evil tree. It is uprooted from the surfaceof the earth. It has no stability” (14:24-26).The exigencies of today’s modern markets demand investors, intermediaries and others lookat the legal framework of jurisdictions as part of their financial decision-making process.Financial development and economic growth have been linked empirically. Some studies inthis area have indicated that legal systems are a qualitative factor that must be evaluated inorder to ascertain the prospects for both financial development and economic growth (Beck etal.12002). That research put forth the theory that financial intermediation better develops injurisdictions where (1) the legal and regulatory systems give high priority to creditorsreceiving the full present value of their claims, (2) enforce contracts effectively, and (3)promote comprehensive and accurate financial reporting. Thus, both the rights of creditorsiiiThe body of Islamic Law or jurisprudence is named Fiqh, which implies a deep understanding of a matter.ivShari’ah is the sum total of Guidance given human beings by their Creator, Almighty Allaah. It encompasseslaw, but extends beyond law into all aspects of human existence.vMaqasid ash-Shari’ah are the higher goals and objectives of the Shari’ah that give live, progress and safety tohuman beings.
  4. 4. 4(which can easily be extended to investors) and the efficiency and effectiveness of contractenforcement have been tested as being determinants of long-term economic growth in anintermediation model.This paper does not provide any empirical evidence, but it does seek to draw contrastbetween the dominant contractual system and the Islamic system of laws in the area ofcontracts with hopes of reevaluating the need for the Islamic Law of contracts to continue todevelop after a prolonged period of suspension resulting from the dismantling of the Islamickhalifatviand the stifling shackles of colonialism and its aftermath. While it is true thatIslamic Finance holds the key to future sustainable economic development, it is also true thatthe Islamic Law of contracts must continue its development in order for Islamic Finance tobecome the leading system worldwide.OVERVIEW OF COMPARATIVE LAWComparative law can be thought of as comparing the laws of one system, country orjurisdiction with those of another. The comparisons can vary and be modified to meet thegoals or intuitions of the researcher. But, commonly the comparisons are either done on themacro-level (e.g. Islamic Law compared to conventional law) or micro-level of particularcomponents within the systems or countries (e.g. contractual laws in one jurisdiction vis-à-visanother).At first blush, the comparative exercise might seem tedious. For the Muslim, comparing theFiqh derived from the Shari’ah to conventional laws may seem futile; it being believedaxiomatic as part of the Muslim worldview that the Shari’ah-based laws are superior andthere is little benefit that can be derived from the laws of others. Certainly, Muslims hold thisto be true in the area of ‘Itiqadiyyah, the branch of the Shari’ah that deals with thefundamental religious belief system and related laws. Yet, Almighty Allaah declares inQur’an:“O humankind! We have created you from a male and female and made youinto nations and tribes that you may know (or become acquainted with)each other. Verily the most honoured among you in the sight of Allaah isthe most righteous among you. Allaah is the most knowledgeable, the bestinformed.” Suratul Hujuraat, 49 Ayat 13.The verbal form ta’aarafoo indicates “knowing” is significant in the Ayat. Lane suggests:“(t)he difference between arafa and alima is that the former refers todistinct and specific knowledge, while the latter is more general. Oppositeto arafa is ankara (to deny) and opposite to alima is jahila (to beignorant).” (Lane21863).viReference is made the last quasi-unification of Islamic culture worldwide in the Ottoman Empire.
  5. 5. 5Thus, it seems reasonable that engaging in a comparative examination of the laws of others isa worthwhile exercise that can lead to greater mutual acceptance. More importantly, it canlead to a greater understanding of one’s own laws. The reader is reminded that in what wascalled his “Last Sermon,” Allaah’s Messenger, ASvii, commanded his followers explicitly totake his message to those who were not presence, as they may be more capable ofunderstanding it than those present. It is further noteworthy that those present were of the firstand most honoured of Islamic generations, including such torchbearers of Islamic Law as‘Umar ibn al-Khattab, RAAviii, ‘Ali ibn Abu Talib, RAA, and many, many more. This papersuggests that comparative law not only familiarizes Muslims with the laws of others, but alsohelps Muslims understand their own Islamic laws better.One legal scholar puts it this way:“Comparative analysis, however, can reveal more than the mererelationship between various legal systems. It can be a window into ourown societys perceptions and intuitions. We know our native culture well,have learned to appreciate it and, in some instances, we may assume it to besuperior to others. Sometimes we may be right, but just as often we arewrong. Exposure only to a single legal system can be insulating anddistorting.” (Eberle32007).Imam Ghazali indicates in his discussion of knowledge that one of the branches of religiousknowledge is that which “relates to the activities of the world, such as the books of law and isentrusted to the lawyers and jurisprudent…” He elaborated by explaining further:“If you question (w)hy have you included Fiqh or jurisprudence within theworldly sciences and Faqihs or jurisprudent as worldly scholars, the reply isthis: Fiqh contains the laws of the administration of the world and Faqihsare such lawyers. There is of course no doubt that a Faqih also deals withreligion, but that is done through intermediary of this world as the world isthe seed ground of the hereafter.” (Ghazali41993).In this regard, the Messenger of Allaah, AS, when he came to Madinah Munawarah, oncecame upon the indigenous people there artificially inseminating the palm trees. He is reportedto have said, what means: “…there is no need to do that.” Thereupon the farmers ceaseddoing so and subsequently their crops failed. He then said: “You know more about your ownworldly affairs.” (Bukhari and Muslimix).viiAS means ‘alayhi Salaam or Peace be upon him, the customary salutation upon the Messenger of Allaah,Muhammad ibn ‘Abdullah.viiiRadi’a Allaahu anhu, i.e. may Allaah be pleased with him; a accolade generally reserved for Companions ofthe Messenger of Allaah, AS, who in Arabic are called Sahabah.ixThese are references to Hadeeth collections of the sayings, actions and tacit approvals of Prophet Muhammad,AS, which are alternatively referred to as Sunnah. The six most widely accepted in Islaam are: Bukhari, Muslim,Abu Dawud, Ibn Majah, an-Nasai’ee and at-Tirmidhi. There are others, including Ahmad and the Muwatta,however.
  6. 6. 6The Messenger of Allaah, AS, is reported by his wife, Umm Salamah, RAA, to have said:“I am a human being too. You come to me disputing and quarrelling.Perhaps some of you indulge in logic to prove your assertions and it may bethat I give my decision on the strength of your argumentation. Should I,therefore, give one that which is his brother is entitled to, he should not takeit, for it would be as if I am giving him a coal of fire” (Muwatta’).These Ahadeeth demonstrate that even the Messenger of Allaah, AS, himself, was notinfallible and our own investigations, determinations and decisions should be tempered bythat fact. Moreover, it is known factually that the Messenger of Allaah, AS, rendered verdictsbased upon laws and customs that existed prior to the advent of Islaam. In fact, the Shar’Man Qablana (earlier Scriptures) are generally regarded as a secondary Source of Shari’ah.And Muslims are commanded to believe all the Books of Almighty Allaah, both in Qur’an(2:4, 2:285, 5:44 and 5:46) and Sunnah (the Hadeeth of Jibreel, AS, found in the “FortyHadeeth” of Imam Nawawi and Bukhari). Similarly, the Messenger of Allaah, AS, imposedthe Arab tribal custom of ‘aqilah in at least one of his verdicts. It is ‘aqilah from whichTakaful (the Islamic notion of asset pooling to mitigate risks) can trace its Fiqh origins. TheProphet, AS, being aware of this tribal practice, is reported to have used ‘aqilah in his rulingsas follows:“Narrated by Abu Hurairah, RAA; who said that once two women fromHuzail clashed when one of them hit the other with a stone which killed herand the baby in the victim’s womb. The heirs of the victim brought anaction to the court of the Prophet, AS, who gave a verdict that thecompensation for the foetus to be a male slave or female slave while thecompensation for the killed woman is a blood money (diyat) to be paid bythe ‘aqilah (the relatives of the father’s side) of the killer.” Bukhari, Vol. 9,# 45.In Muamulatxthe general rule of Fiqh is that of mubah or abaahah, i.e. permissibility unlessthere is a specific nass or text that forbids the transaction. Thus, there is more latitude in theinterpretation of laws in this area which enable examinations and consideration of the laws ofother societies in the search for solutions to legal problems. We may, perhaps, thereby gaininsight into the administration and governance of various matters of this life, e.g. those thatrelate to healthcare, urban planning, technology, capital markets, transportation, wastemanagement, pollution, employment and immigration to name a few. Each of these areas hascontractual implications. This is not to suggest that Islamic usoolis and fuqahah need mimicconventional legal theorists as Islamic Finance practitioners have sometimes mimickedconventional finance practitioners. But it is to suggest that something beneficial may bederived from examining the problems they face in jurisprudence and applying Usool al-FiqhxThe branch of Islamic Law or Fiqh that provides rules for the human dealings or interactions and theirproperties.
  7. 7. 7principles to those problems. The failure to do so may very well result in the expansion ofQanun instead of the expansion of Fiqh.Theories of Comparative Law. There are competing views in comparative law. The twoprominent views are “transplanting” and “culturalism.” Professor Alan Watson is theprincipal proponent of what is termed “transplanting” (Watson51976). Transplanting positsthat legal systems and societies are two separate “notions” and are largely autonomous. Thus,a legal system or its concepts and principles can be transplanted into societies that areradically different from the transferring society. They argue that lawmakers decide to importor transplant other laws into their society because they perceive the laws to be good (Small62005).Culturalists, such as Otto Kahn-Freund, postulate that because “law is a culturally determinedartefact,” it cannot be separated from its societal purpose or circumstances that gave rise to it(Ibid). Put differently, legal systems are part and parcel of the culture that gives genesis tothem. Hence, they posit that a very large degree of “encounter is required before cross-contextual or poly-contextual understanding will occur” between the legal practitioners ofdifferent societies (Ibid). The extent of “diffusion” is linked to a number of factors orcontexts; e.g. the similarities between the two societies and cultures. Small defines “context”as “those circumstances that specifically drive the development of a particular rule” (Ibid). Itis analogous to the Fiqh and conventional law concept of spatio-temporality, whichrepresents the poly-contextual “dimensions of space-place and time” (Khan72009).Diffusion is the process by which legal constructs are spread. The literal meaning of diffusionis to spread something, as in all directions. It also has the meaning of something slowly beingmixed with something else. In technical terms, “diffusion” can be said to be the speed atwhich laws from different societies influence each another. Diffusion may not necessarily bethe “mixing” of the rules of law between the societies or systems, but may be the degree towhich they are parallel to one another in functionality or usage. This has been sometimesdescribed as “parallelism” in comparative law discussions. When diffusion is evident, it hasbeen described as “pluralism.” Another way of ascertaining diffusion may be to observe whatchanges in the rules and what does not (Westbrook82008). As Westbrook states:“The phrase “diffusion of law” suggests that laws similarly will lose theiridentities and be folded into an amorphous mass...Diffusion suggests thefear of…homogenization; the fear that our legal system, and by implicationour culture, will lose whatever it is that makes it special. Not too deeplyburied within this anxiety are worries that ethnicity, race, power, home, andthe seat of our beliefs will be obliterated by, or at least subordinated to, amodern global culture” (Ibid).Of course, Westbrook reluctantly admits in a footnote that some values are worth preservingand protecting, i.e. resisting diffusion (Ibid).Two other comparative law views are also noteworthy; i.e. the functional method ofcomparative law and the concept of natural law. In 1971, Konrad Zweigert postulated the
  8. 8. 8basic methodological principle of all comparative law is that of functionality (Michaels92006). Functionalism posits that in substance it shifts the focus in comparative law fromattempts to understand how things ‘really’ are (their substance) to understanding them only intheir (functional) relation to particular viewpoints (their function). In a less abstract sense,functionalism posits that if “similar problems cause similar solutions, then the solutions mustsomehow be inherent in the problems, and similar functions must be fulfilled by the samekinds of institutions” (Ibid). Moreover, functionalism asserts that social needs repeatedly giverise to legal problems and that in response to these “needs,” correlations can functionally befound between institutional forms because they are the “natural” or “preferred” means indealing with the legal problems; i.e. though from different sources, the legal rules arefunctional equivalents. In this sense, its most useful purpose might be that of an “evaluativefunction of determining the better law” (Ibid). To that end, it can be said that the true functionof laws is to secure justice based upon truth.An example of the application of functionalism can be seen in the arbitration dispute betweenSaudi Arabia and ARAMCO. The arbitration panel in that case wrote:"Although the Concession Agreement is connected which the Hanbalischool of Moslem law, as applied in Saudi Arabia-from which it derives itsvalidity and effectiveness-the Interpretation of this Agreement should notbe based on that law alone. The Interpretation of contracts is not governedby rigid rules; it is rather an art, governed by principles of logic andcommon sense, which purports to lead to an adaptation, as reasonable aspossible, of the provisions of a contract to the facts of a dispute…”http://www.trans-lex.org/260800.It further stated:“Law must, in case of need, be interpreted or supplemented by the generalprinciples of law, by the custom and practice in the oil business and bynotions of pure jurisprudence…” (Encyclopaedia of Hydrocarbons10).What these statements indicate in the modern law context is that law must have a flexiblenature to it. That is because techniques, technologies, terminologies and dealings in generalamong human beings change with time. However well intended, too rigid an interpretation ofFiqh does not always lead to the best result. It may be for this reason that the Fiqh legalmaxim that states “custom is a source of law” is one of Islamic Law’s most powerful,because custom or ‘urf will incorporate into its practices and conventions, the techniques,technologies, terminologies and dealings that tend to work best for society.Natural law is somewhat embedded in the functional methodology of comparative law.Though natural law was discussed by the Greek philosophers of Athens, it was ThomasAquinas, the Christian monk, who is best known for articulating the theory of religiousnatural law. In substance, he posited:
  9. 9. 9“[T]he rational creature is subject to Divine providence in the mostexcellent way, in so far as it partakes of a share of providence, by beingprovident both for itself and for others. Wherefore it has a share of theEternal Reason, whereby it has a natural inclination to its proper act andend: and this participation of the eternal law in the rational creature is calledthe natural law” (Weinreb112004).Thus, one can see that in a sense, natural law is to comparative law, what Adam Smith’s“invisible hand” is to economic theory. Yet, Aquinas used a normative approach, whilemodern day proponents of natural law have modified it to fit their positivistic notion of law(albeit laced with moral considerations). For example, Weinreb posits that secular natural lawconsists of: (1) the right not to be subjected to constraints too great to be resisted; (2) the rightto physical and mental well-being; (3) the right to education; (4) the right to moral consciousness; and(4) the right to moral opportunities, or plainly put, the freedom of choice, even if that opportunityleads to moral mistakes (Ibid).International law is mentioned here briefly as it will be referred to shortly in the context ofthe conventional view of “fraud and deceit.” International law can apply to states,organizations or private parties. The latter is the focus of this paper. International law is basedon treaties, conventions, customs or principles. It is particularly important in cross-borderand/or mutli-jurisdictional dealings. Of special consideration are the enforceability provisionsin the contracts, as well as the dispute resolutions features. Negotiations are important wherethe parties have divergent understandings of the law of contracts and it concomitantprinciples. Hence, contracts must be thoroughly thought out and well written to reflect theunderstandings of the parties involved and the likely interpretation given to the contractterms.There have been several attempts to harmonize international contracts. Most notable may beregional efforts, e.g. the European Union’s Principles of European Contract Law. There havebeen other initiatives in the area, which include: (1) the United Nations’ Convention onContracts for the International Sale of Goods (CIGS); (2) the UNIDRIOT Principles ofInternational Commercial Contracts; (3) the Hague Principles on the Choice of Law inInternational Contracts; and (4) the suite of contracts promulgated by the InternationalFederation of Consulting Engineers.CONTRACTUAL NORMS AND DECENCYThere are a number of comparative contractual norms of decency found in the Islamic andconventional laws of contracts. The Islamic norms include, but are not limited to: (1)trustworthiness; (2) truthfulness; (3) generosity in bargaining; (4) modesty of claims; (5)leniency towards the debtor; (6) voluntary rescission; and (7) the prohibition of “cut-throat”business practices. All are amply buttressed by nusus or texts in Qur’an and Sunnah(Hassan122006).
  10. 10. 10For example, Almighty Allaah says in Qur’an:“O you who believe! Eat not up your property among yourselves unjustly,except that it is a trading by mutual consent of yours…” (4:29).“Give in full the measure and do not be of those causing loss. And weighwith scales that are straight. Do not defraud people of their things, and donot commit corruption in the earth” (26: 181-3).“Woe to those who give less in measure and weight. Those who, when theyhave to receive by measure from men, demand full measure, and when theyhave to give by measure or weight to men, give less than due” (83:1-3)The Messenger of Allaah, AS, re-emphasized these principles:“O you traders, beware of telling lies in (your business) transactions” (at-Tabaarani).“It is unlawful to possess the property of a Muslim without his expressconsent” (al-Bayhaqqee).“The truthful merchant (is rewarded by being ranked) on the Day ofResurrection together with the Prophet, the truthful ones, the martyrs andthe pious people” (at-Tirmidhi).Hakim b. Hazim, RAA, reported Allaahs Messenger, AS, said:“Both parties in a business transaction have the right to annul it so long asthey have not separated; and if they speak the truth and make everythingclear they will be blessed in their transaction; but if they tell a lie andconceal anything the blessing on their transaction will be blotted out”(Muslim).Abu Hurairah, RAA, reported that the Messenger of Allaah, AS, said:" Do not envy one another, and do not inflate prices for one another, and donot hate one another, and do not turn away from one another, and do notundercut one another in trade, but be slaves of Allaah and brothers. AMuslim is the brother of a Muslim: he does not oppress him, nor does he failhim, nor does he lie to him, nor does he hold him in contempt. Piety(taqwaa) is right here [and he pointed to his chest three times]. It is evilenough for a man to hold his brother Muslim in contempt. The whole of a
  11. 11. 11Muslim is inviolable for another Muslim: his blood, his property and hishonour" (Muslim).This last Hadeeth is particularly important relative to a later discussion herein belowregarding fraud and deceit and related damages (‘adhraar) because it states that lying to oneanother is a violation and that the “whole” of a Muslim is inviolable. Moreover, it annotatesthe three areas of damage (dharar), i.e. blood (personal injury or diyat), property (or mal) andhonor (or ‘ardhu). The latter term, ‘ardhu, carries such meaning that it takes up over elevenpages in traditional explanatory definitions and notes in Lanes (see endnote 2). Among themeanings given to ‘ardhu are to: Put someone in a state of disquietude of mind or destruction of the mind Make something as an obstacle to another Defraud Expose someone as to harm Hinder or obstruct Dishonor someone or his/her family Intervene carelessly Cover (as with a cloud or darkness) everything except gold or silver DeceiveThus, it is abundantly clear from the nusus or texts that not only are honesty, decency and fairdealing settled norms in the Islamic Law of contracts, but the protections afforded to innocentpeople are comprehensive in scope, including mental security. It should be further noted thatthese are some of the same protections afforded Muslims under the Maqasid ash-Shari’ah,xii.e. protection of each person’s self (nafs), property (maal), spiritual life (deen), intellect(‘aql) and family (nasl).Sanctity of Contract. There are several Ayat in Qur’an that command and declare thesanctity of contracts and of keeping commitments once given. Among them are:“O you who believe! Fulfill the contracts…” (5:1).“…And fulfill the covenant; verily the covenant shall be questioned about”(17:34).“Allaah will not impose blame on you for what is meaningless in youroaths, but He will impose blame upon you for what you intended ofoaths…”(5:89).The Messenger of Allaah, AS, plainly stated:xiHigher Objectives of the Law, which include the mandatory protections of religion, life, family, mind andproperty
  12. 12. 12“The Muslims are bound by their stipulations” (Abu Da’ud).“Every agreement is lawful among Muslims except one which declaresforbidden that which is allowed, or declares allowed that which isforbidden” (at-Tirmidhi).The conventional notions of the sanctity of promise parallel the Islamic Law of sanctity ofcontract. The conventional underpinnings are based on natural law, moral compulsion,private autonomy (a notion that individual freedom is an extension of rights conferred by thestate), reliance (a notion that it is the vulnerability of the promisee that necessitates thatcontracts be held sacrosanct) and the necessities of trade (i.e. a indispensible tool of socialand economic order). (Calamari131982). While this paper is not the place for a detaileddiscussion of all of these premises to the conventional theory of sanctity of promise, a quotefrom former American Chief Justice of its Supreme Court gives the reader a glimpse of theconventional view, particularly the aforementioned notion of natural law:“If, on tracing the right to contract, and the obligation created by contract,to their source, we find them to exist anterior to, and independent ofsociety, we may reasonably conclude that those original and pre-existingprinciples are, like many other natural rights brought with man into society;and, although they may be controlled, are not given by human legislation”(Ibid).Moreover, it is noted by Calamari that this notion of enlightened natural law was preceded bycanon law (Catholic) and rabbinical (Judaic) thinking during the Middle Ages andRenaissance periods of conventional legal development (Ibid).Implied Covenant of Good Faith and Fair Dealing. Under prevailing common lawprinciples "(e)very contract imposes upon each party a duty of good faith and fair dealing inits performance and enforcement" (Restatement (Second) of Contracts14§ 205). Good faith isdefined in the Uniform Commercial Code § 1-201(20) as "honesty in fact in the conduct ortransaction concerned" (Ibid). Good faith performance or enforcement of a contract is basedon “faithfulness to an agreed common purpose and consistency with the justified expectationsof the other party; it excludes a variety of types of conduct characterized as involving "badfaith" because they violate community standards of decency, fairness or reasonableness”(Ibid).Fair dealing in the implied covenant of good faith has been interpreted in a manner thatrequires performance that is “fair” and “reasonable.” Parties cannot merely perform inaccordance with the terms of a valid, enforceable contract; the performance must lead to aresult that a court would see as fair. Thus, the terms of the contract will not be allowed tocontrol if they lead to an unfair result and a court will intercede to reform the contractaccordingly (Dobbins152005). The requirements under this conventional law notion are
  13. 13. 13implied, as opposed to expressed, and are part of every contract in most common lawjurisdictions. In many such jurisdictions, the consequences of contractual conduct beingcarried out in “bad faith” may result in the conduct being viewed by a court as tortious orharmful to the innocent party’s person or property. Moreover, because they are implied, theycannot be waived as a matter of law in many jurisdictions.Islamic Law of contract has the notion of good faith and fair dealing as well. It has beendefined as husn al-niyyah or an act done with good intention or faith. Thus, it compels theparties to deal with one another honestly, i.e. full and fair disclosure. In this respect, it isfound in Qur’an:“O you believers! Do not betray Allaah and the Messenger, nor knowingly,betray your trusts” (8:27)And it is reported by Abdullah ibn Amr ibn al-As that the Messenger of Allaah, AS, stated:"If anyone has four characteristics, he is a pure hypocrite, and if anyone hasone of them, he has an aspect of hypocrisy until he gives it up: whenever heis trusted, he betrays his trust; whenever he speaks, he lies; whenever hemakes an agreement, he breaks it; and whenever he quarrels, he deviatesfrom the truth speaking falsely" (Agreed uponxii)Good faith and fair dealing can be observed in the Islamic Law of contracts in several of itsoriginal contractual forms, i.e. murabahah (cost-plus, which requires disclosure of cost),tawliyyah (sale at cost), wadee’ah (resale at less than original cost) and ishraak (the selling ofpart of a partner’s share in a firm or partnership at the price he originally paid with the sharedratio being fixed and known to each party). These are the contracts of trust or ‘uqud al-amanah in Fiqh (Abdullah162009). However, there has been some erosion of these salientprinciples in the nominate contracts of musaawamah, e.g. bai bithaimin ajjal (BBA), wherethe exigencies of modern commercial transactions necessitate an implied fairness in dealings.Nonetheless, the conventional law notion of caveat emptor or “buyer beware” has nocounterpart in the Islamic Law of contracts. Defects, as we shall see, are subject to thekhiyaar ash-shurut or various rights of option under the rules of Fiqh.Price fixing and intervening to inflate prices secretively is proscribed as Abu Hurairah, RAA,reported Allaahs Messenger, AS, as saying:“Do not meet the merchant on the way and enter into business transactionwith him, and whoever meets him and buys from him (and in case it isdone, see) that when the owner of (merchandise) comes into the marketxiiThis designation indicates that the Hadeeth has been authenticated in both the collections of Bukhari andMuslim (generally regarded as the most authenticated Ahadeeth).
  14. 14. 14(and finds that he has been paid less price) he has the option (to declare thetransaction null and void)” (Muslim).ISLAMIC LAW OF MISREPRESENTATIONThe Islamic Law of contract prohibitions against fraud (tadlees) and deceit (taghreer) arepenumbra rules that lay in the “shadow” of the general contractual prohibitions againstexcessive ambiguity (gharar) and are intentional forms of misrepresentation (ghabn orghubn). Gharar can be defined as excessive or intolerable uncertainty or ambiguity incontracts. Linguistically, it has meaning of something likeable in appearance, but distastefulin reality (Lahasna172012). Technically, gharar signifies intolerable “uncertainty orignorance of one or both parties of the substance or attributes of the subject of sale or doubt”of the subject matter’s “existence at the time of sale.” It is a form of risk that is avoidable andtherefore prohibited. The presence of gharar in an Islamic contract will result in it beingeither void or voidable (Ibid).There are several classifications and varieties of gharar. The most notable classifications arethose of gharar faahish and gharar yasir, the former being the prohibited class because of itsintolerability and the latter being that which is allowable due to its minor or tolerable nature(Ibid). These come in a variety of forms, depending on their effect. They include: Gharar al-wujud (that due to non-existence) Gharar al-husul (non-possession casting doubt on the result of transaction) Gharar al-kimmiyyah (doubt as to quantity) Gharar al-jins (uncertainty as identification of specifications) Gharar as-sifa (uncertainty as to attributes) Gharar al-ajjal (uncertainty as to delivery) Gharar al-iskaan (uncertainty as to place of delivery) Gharar at-taiyin (uncertainty as selection).Ghubn can also render a contract void or voidable under the Islamic Law of contracts. Ghubnhas the literal meaning to decrease or reduce the price or counter-value. Technically, it is todiminish the value of the subject matter of a “commutative contract where the value of one ofthe object is lesser or higher than the actual value at the time of contract” (Omar18et al 2011).The concept of ghubn is one of imbalance between the counter-values in a transaction.Needless to say, this is sometimes as much subjective as it is objective. In other words, whatthe value is to one person may be, and often is, different from what it is to another. Hence,therein exist its classifications and anomalies below.Ghubn is classified as either ghubn faahish or ghubn yasir, wherein the former is “excessiveloss suffered by a party to the contract as a result of concealment or misrepresentation, ordeception or fraud practiced by the other” and the latter occurs when “the difference betweenthe price at which goods were sold and their real market is so small that the merchants do not
  15. 15. 15generally take it into account in their dealings” (Ibid). The materiality of the imbalance canbe quantified, as in Article 165 of the Majella or “Ottoman Code,” wherein:“excessive deception” is not less than 1/20thof the total price of goods,1/10thof the price of animals and 1/5ththat of real estate unlessaccompanied by fraud or verbal deceit (Rayner191991).If there is ghubn faahish (i.e. a gross imbalance or inequity of values) without fraud, theperson deceived cannot rescind the contract. The converse is true, i.e. if fraud is present, shemay rescind the contract. Thus, the contract is voidable only if there is tadlees or taghreeraccording to Majella (Ibid). This anomalous treatment of ghubn faahish can further be seenby the treatment under the different mudhahib or Islamic legal schools of thought.The Hanafi, Shafi’ee and Hanbali schools tend to be more inclined to allow such a contract tobe voided in the absence of fraud when the person or institution involved is in need of publicprotection because of vulnerability, e.g. a minor or waqf donor, etc. This approach has beenadopted by Civil Code of UAE as well (see Law No. 2 of 1987, Article 191). Ibid. It reads:“A contract may not be cancelled on the basis of a gross cheat (ghubnfaahish) in the absence of misrepresentation (taghreer) save in respect ofproperty of a person under restriction, waqf property, and property of theState” (UAE Civil Code 1987).Accordingly, the jumhor or majority treatment of ghubn without fraud resembles mistake(ghalat) and the contract cannot be voided without mutual consent (iqalah). The assumptionhere is that absent fraud or deceit, the parties have equal bargaining power and have struckthe bargain that they both believe is in their best interests, notwithstanding the imbalance invalues. What is noteworthy here is that there is no imposition of riba on the party receivingless in ostensible value. One is left to wonder why? One answer may be that the value of thesubject matter is subjective vis-à-vis objective. Hence, the value of the subject matter is in the“eyes” of the buyer. Yet, this subjective notion is not extended to damages (‘adhraar) as weshall see shortly. Instead, what is seen as loss to an aggrieved party under the rules (ahkam)for ghubn, is deemed speculative under the rules for damages (‘adhraar), without opportunityto present evidence as to the basis of such claims. This leads legal observers to see such“assumptions” as arbitrary; even contrary to the admonition that the “whole of a Muslim isinviolable” (see page 10 herein above).It should be noted at this juncture that many of civil codes and laws in predominantly Muslimcountries may be the result of Qanun filling the gap left by the stunted growth of Fiqh.Clearly, many of the codes cited by Rayner relating to Kuwait, Bahrain and UAE are Qanun.Strong Fiqh influence can be seen in some of them, while others have “mimicked”conventional law because Fiqh has left a gap by either failing to address exigencies resultingfrom changes in the modern financial climate or addressing the needs too slowly. In someMuslim nations, a “Chinese wall” of sorts has been placed between the Fiqh and Qanun. That
  16. 16. 16would appear to be the case in Indonesia and certainly is the case in Turkey (supra Khan).This dichotomy in “Islamic” Law results in a lack of cohesiveness with component areas oflaw within Islamic societies. Some state that their laws are subservient to Qur’an and Sunnah,e.g. Saudi Arabia (Ibid). As Khan puts it:“The qanun may codify the opinions of fiqh in the form of statutes.National and provincial courts may rely on fiqh to construct new holdings.Statutes and cases that incorporate fiqh may be called the fiqh-based qanun.In fact, a Muslim state may codify opinions of fiqh and officially adopt it asthe qanun, thus removing doubts that the fiqh is the law of the state…”(Ibid).Qanun provides the “diffusion” or fluidity that Fiqh must provide. The fuqahah should makea concerted effort to lead and not follow or else we have the untenable position of the “cartbeing in front of the mule.” That is because Qanun is not Fiqh, as the latter applies the divinenusus or texts to human affairs, while the former may or may not.Tadlees and Tashriyyah. Fraud, in general, is grounds for nullification (voiding) ofcontracts in Fiqh. Under the Islamic Law of contracts, fraud is differentiated in form as canbe seen from the discussion of ghubn faahish. However, for purposes of this paper, twoprimary forms of fraud are focal, i.e. tadlees (essentially fraud by concealment) and taghreer(deception).Tadlees is taken from the Arabic word dalas; meaning darkness and concealment. Thus,literally, it signifies the concealment of a defect in the subject matter (maudu ‘alayh) in asale. Technically, most jurists use it in the same manner. However, the Hanbali madhab hasenlarged its meaning to include the buyer giving the illusion that the subject matter has “oneor more attributes that would make it worth more than it really is” (ISRA202010). Thiselement imposed on the meaning of tadlees by the Hanbali madhab results in it having adeceptive characteristic, in addition to concealment.Tashriyyah is a particular type of tadlees relating to the sale of livestock. It is to tie the“udder” of a camel, sheep, cow or other animal to cause it to accumulate milk so as to give afalse impression to the buyer. This then is the “illusion” that the Hanbali madhab hasimposed to expand the scope of tadlees (Mansuri212010). Tadless has a number of otherforms in which it is combined with other forms of trickery to accomplish its evil ends. Theyinclude khilaabah, where khilaabah is any deception that “induces the other party to enterinto a contract.” It appear to be analogous to what is called fraud in the inducement inconventional law. Tadless may also be combined with ghish, which is “to conceal everythingabout” the subject matter that “would make a prospective buyer lose interest in it if he knewabout it…” (Ibid). It thus goes to the basis of the bargain, as they say, conventionally.Taghreer literally means to “trick and mislead in order to harm or expose to risk.” It has thetechnical meaning to expose someone to gharar. The Majella defines taghreer as
  17. 17. 17misrepresentation (Ibid). It is different from ghubn fahish inasmuch as it not only creates animbalance, but it also contains an “element of intent” sufficient enough to cause harm or riskto make the transaction voidable per se. This is sometimes referred to as “scienter” inconventional law; a sort of guilty knowledge that the willful action would lead to harm orpronounced risk.Forms of Fraud and their Conditions. Fraud, from an Islamic Law of contractsperspective, has four elements: Misrepresentation of a material fact (ghubn faahish) Intent (niyat) to deceive Reliance (a’atimaad) on the misrepresentation by the innocent party Harm (dharar) suffered by the innocent party (op. cit. Mansuri).These are ostensibly juridical rules. They are also noticeably similar to the elements of fraudconventionally (as noted below). This similarity is also seen in modern day codes in theMiddle East Islamic countries.Kuwait’s Civil Code, which is a mixture of Maliki, English, French and Egyptian laws, forexample (Article 151) states:“The contract may be nullified because of fraud (tadlees) if one partyconsents to the contract as a result of subterfuge aimed at him by the otherparty with the intention of deceiving him and compelling him into thecontract. It must be shown that the deceived party was not satisfied with thecontract and would not have accepted it if it had not been for the treacheryaimed at him” (op. cit. Rayner).The Bahrain Code of Contracts, 1969, Article 20, states that fraud exists when “committedby a party to a contract, or with his connivance, or by his agent with the intent to deceiveanother party thereto or his agent, or to induce him to enter into the contract” (Ibid). Itarticulates five acts which constitute fraud: Representation, as a fact, of that which is not true, by one who knows it to be false orrecklessly does not care whether such representation be true or false Active concealment of a fact by one having knowledge or belief of the fact Promise made without, at the time of making, any intention of performing it Any other act calculated to deceive Any such act or omission as the law specifically declares to be fraudulent (Ibid).It is instructive to note, at this juncture, that these elements strike a remarkable resemblanceto those found in the conventional law of contracts.Article 185 of the UAE Code states:
  18. 18. 18“Taghreer is when one of the two contracting parties deceives the other bymeans of trickery of word or deed which leads the other to consent to whathe would not otherwise have consented to” (op. cit. Rayner).The UAE Commercial Code, Article 24, further prohibits:“1. The following persons may not engage in trade:-a. Every trader whose bankruptcy was declared during the first year of hispracticing trade unless he has been rehabilitated.b. Any person who has been convicted of a crime of bankruptcy either byfraud, commercial swindle, theft, deception, or by breach of trust, forgery,use of falsified papers, unless he was rehabilitated”Rayner notes that the UAE Civil Code uses taghreer, while the Kuwaiti Code uses tadless;i.e. tadlees and taghreer have come to be used interchangeably. Given that both tadless andtaghreer emanate from misrepresentation or ghubn and neither has force of effect without theinequity present in ghubn, it is not surprising that an amalgamation has occurred in theirusage. Rayner believes this merger of terms to be the result of the relaxation of thedistinctions caused by the origins of the terms, i.e. tadless being the more Arabic of the two;having Maliki originals. In any event, the resulting confusion is not particularly helpful, but issomewhat representative of how fraud and deceit have been merged together under theumbrella notion of misrepresentation (ghubn).A similar amalgamation has occurred in conventional law as well (see below). Thatamalgamation has effectively resulted in the form of fraud called tadless wa taghreer (op. cit.ISRA). The former is obviously more restrictive as it involves the active hiding of a “defect”or something similar to a defect (except under the Hanbali law, which is more expansive asstated). The latter encompasses all forms of deceit and trickery, including omissions.Although there are several ways the jurists make the distinction between the various forms offraud and deceit, one common form is to distinguish between acts and statements. Either maybe done through an agent or agents (i.e. both parties may have agents). Hence, there areaspects of agency law or wakalah present.Taghreer qwali essentially occurs when fraud and deception occurs through the use of words;thus, inducing the other party or his agent to enter into a contract that is inequitable orimbalanced. In the presence of such inequity, a contract founded upon a lie is void (op. cit.Lahasna).Taghreer fi’li or fraudulent acts is sometimes called active fraud, “denoting a fraud producedby a positive act as distinguished from fraudulent statements or failure to disclose” (op. cit.Rayner). Thus, taghreer fi’li is to do something to the subject matter or maudu ‘alayh tomake it look like it is in a condition that is different from what it really is (op. cit. Lahasna).
  19. 19. 19Finally, failure to disclose can be fraudulent as well, albeit all such failure isn’t. This mightbe referred to as taghreer taqreerxiiior remaining silent when it is known that what ispresented is erroneous or omitting material information. This raises an extremely importantform of fraud in the area of finance and investments specifically. Thus, remaining silent withknowledge of omission of a material fact necessary in order to make any other statementsmade, in the light of the circumstances under which they were made, not misleading, ispeculiar to the capital market activities, including financial reporting and managementanalysis information contained in prospectuses.All four mudhahib appear to agree that there is an implied warranty against defects in goods(op. cit. Rayner). However, in finance, the failure to disclose may be in the financial recordsof a party, who has chosen to hide or otherwise exclude or disguise certain damningtransactions in an unremarkable section of the financial statements. While it is advisable touse audited financial statements (thus shifting some or all of the negligence or fault on theauditors), other financial records are sometimes substituted in for audited financials (whichare in many cases only available on an annual basis). In America, for example, it is commonto use income tax returns. Moreover, management, having at times a conflict of interest withboth shareholders and the board, may make statements that are less than revealing. This iswell documented in the asymmetric information theory (Meyers22and Majluf 1984). In anyevent, as Rayner notes, rights and liens held over property must be declared and they are thesubject of any properly conducted due diligence review. In fact, failure to use ordinarydiligence may preclude relief even in the presence of tadlees or taghreer. Rayner points toArticle 22(3) of the Bahrain Law of Contract 1969 (Ibid).Article 85 of Bahrain’s Financial Institutions Law, for example, seeks to protect marketparticipants against such connivances:“Any person responsible for the preparation of the prospectus must ensurethat the prospectus incorporates all the necessary information and that suchinformation is not false or misleading.”That Law further addresses such offenses as “insider” trading and market manipulation:Articles 98, states:“(a) For the purposes of this Chapter, “Inside Information” meansinformation that:1. is precise in nature relating directly or indirectly to one or more of thesecurities or the issuer thereof,2. has not been made public.xiiiThis term is not found in any authoritative texts, but seems fitting nonetheless.
  20. 20. 203. if made public, is likely to have a significant impact on the price of thosesecurities or their derivatives,4. is, directly or indirectly, related to derivatives of commodities which thetraders expect to be disclosed according to the market regulations.(b) In this chapter “profit” includes avoiding of any loss.”Article 106, states:“In the application of this law a person is guilty of market manipulation ifhe:1. is engaged, or encourages others to engage, in any conduct that may givea false or misleading impression as to the supply of or demand for, or theprice or value of any securities.2. is engaged, or encourages others, to engage in any conduct that may givean unrealistic picture of the market regarding the volume and prices of anysecurities.”Thus, it can be seen from the above codes that fraud and deceit pose a significant threat tocapital market propriety and seem to be areas where Fiqh rules are needed to eithersupplement or replace those developed or influenced by reference to conventional law. Thisprocess should not be difficult. As stated earlier, there is simply a need to go to the roots ofthe Islamic Law of contracts. For example, insider trading is analogous to “meeting themerchant on the way” as narrated in the Hadeeth by Abu Hurairah, RAA, above.Fiqh Contractual Stipulations and Options to Nullify. The Islamic Law of contractsprovides a number of shurut al-‘uqud or contract stipulations that can be used to govern theformation of a contract. Either party, in such a case, may insert a condition or stipulation inthe contract that allows him to either cancel or ratify the contract within a specified period oftime. These conditions are akin to the conventional law conditions precedent, concurrent andsubsequent. The legitimacy of the right to insert these shurut into contracts is the subject ofsome ikhtilaaf or disagreement among jurists. There are divergent views on these stipulationsor conditions under the Islamic Law of contracts, i.e.: A liberal approach, wherein the parties are free to insert terms in their contracts aslong as they do not make unlawful that which is lawful and make lawful that which isunlawful applying the general rule that in matters of Ibadat (worship) no condition islawful unless prescribed by the Lawgiver (ostensibly Almighty Allaah and HisMessenger, AS) in the Shari’ah; and in matters of Muamulat (worldly dealings) allconditions are lawful unless specifically restricted by the Lawgiver. A conservative approach, wherein the Shari’ah is to define what conditions arepermissible or otherwise not permissible applying the general rule that actions arepresumed to be impermissible unless declared permissible in the Shari’ah.
  21. 21. 21Nevertheless, as these shurut relate to fraud and deceit, they appear to find legitimacy in aHadeeth, wherein Allaah’s Messenger, AS, is reported to have said to a man who hadcomplained of being cheated:“When you buy or sell, at the moment of sale make a declaration to theeffect that there shall be no cheating (laa khilaabah), and I reserve formyself the option for three days” (Ibid. citing to Shawkaani’s Nayl al-Awtaar).Additionally, the parties have a variety of khayaaraat or options available to them, whichprovide them ample means to exercise due diligence. The different mudhahib or legal schoolsgive more credence to some of the khayaaraat than others. Among them are khiyaar al-‘aybor option of defect, khiyaar al-rukyah or option of sight or inspection and khiyaar at-ta’yin oroption of specification. Each has its usefulness to parties to contracts. However, given thegrievous nature of fraud and deceit, there are special khayaaraat available in such cases.These are generally grouped under khiyaar al-ghubn.In the khiyaar al-ghubn the deceived party is given the right to void the contract to avoid theinjustice therein. This is based on the legal presumption that his or her consent was nevergiven because of the fraud and deceit. Dealing with the property after the fraud and deceit isdiscovered will vitiate this khiyar. Specific to taghreer or tadlees is khiyaar at-tadlees. Thisoption arises whether resulting from concealment of defect or an action which deceives theother party as to the true price or value of the subject matter. In both cases, the innocent partyhas a right to return the maudu ‘alayh so long as he or she was not initially aware of thedefect. The innocent party may elect to keep the maudu ‘alayh. This rule is based upon theHadeeth of Allaah’s Messenger, AS, narrated by Abu Hurairah, RAA:“Do not forcefully keep the milk in the udders of camels and sheep, and ifone buys it thus, then he has the option after milking it, he may keep it orreturn it together with a container of dates…” (az-Zuhaylee232007).Thus, the aggrieved may reject or affirm the contract. Yet, it must be noted at this juncture,that in the context of the modern financial market, returning the animal along with somedates, though possibly analogous, may be difficult given the sometimes complex financialstructures. It is, nonetheless, a basis for Qiyasxiv. Yet, rescission and restitution may simplynot be an appropriate resolution in the contextual environment of modern financial markets.There are two issues that need further research and consideration by the scholars of Islaam:(1) is a distinct possibility that the quantum of damages are being underestimated if rescissionis the sole recourse to an aggrieved party; and (2) contract damages may not be sufficient andan election to treat the offense as a tort might be preferable, as is the case under conventionallegal theories. In the latter case, both injunctive and/or punitive damages may be more just.xivLoosely defined as analogy by Islamic scholars of Fiqh.
  22. 22. 22The first problem can be resolved somewhat via applying the distinctions between rad al-mithli (compensation due for damages in the sale of fungible property or goods), rad al-qeemee (compensation due for damages in the sale of relatively unique good), ujrat al-mithli(compensation due for damages arising out of wages, fees and charges) and at-taw’id(penalties for intentional late payments on contracts). However, as to the second issue above,there presently does not appear to be any choice of legal remedy given in the Islamic Law ofcontracts.As to injunction, we find support for its imposition in both Qur’an and Sunnah (Billah242003):“You are the best of people, evolved for mankind, enjoinging what is right,forbidding what is wrong” (3:110).The Messenger of Allaah, AS, is reported to have said:“He who among you sees something evil should restrain it by his hand. Andif he has not the strength of hand, then he should do it with his tongue. Andif he has not the strength of tongue, then he should (abhor it) from hisheart” (Muslim).Moreover, the Majella states:“Persons who cause injury to the public, such as an ignorant physician, mayalso be interdicted. In such cases, however, the object of the interdiction isto restrain them from practice, and not to prohibit them from dealing withtheir property” (Article 964).“A private injury is tolerated in order to ward off a public injury. Theprohibition from practice of an incompetent physician is derived from thisprinciple” (Article 26).“Repelling an evil is preferable to securing a benefit” (Article 30).Yet, in the classical sense, punitive damages, as they are understood in conventional law, arelooked upon with disdain. This may be the result of the Islamic Law of contract norm notedabove regarding the principle of modesty of claims (supra p. 10).Fiqh of Contractual Damages (‘Adhraar). The Islamic Law of contracts differssubstantially from conventional law in the area of contractual damages. Never is it moreobvious than in the area of fraud and deceit. Aside from the procedure for rectifying wrongscaused by breaches, e.g. showing leniency and extending time for debtors, there is an ever-present proclivity towards rescission in the Islamic Law of contracts. That preference is notpresent in conventional law. This is a restrictiveness of Fiqh rules of compensatory damages
  23. 23. 23from the classical perspective. The notion that seems to impose those restrictions is theconcept of property or mal. Under the restrictive meaning classically attributed to it underFiqh, losses that emanate from breach of contract (naqd al-‘aqd) must be assessed “in exactproportion” to property lost. Of course, property lost is a “loaded” term, i.e. it may have adifferent meaning to different persons, depending on their perspective. It also be interpretedsubjectively or objectively. There are, of course, a number of problems with such aconstriction.First, what is lost from the viewpoint of the innocent party is often at odds with what he orshe may have given as property. In other words, the loss may be, and often is, greater than thevalue of the property lost. Again, as noted earlier, this result does not “jive” well with theapproach under ghubn faahish. In that case, as mentioned, where there is an obviousimbalance in values exchanged, nothing is done unless there is fraud or deceit, because theunderlying assumption is that both parties understand the value of what they are giving andreceiving. In other words, there is a subjective test at work therein. Here, under the prevailingview of damages, the Fiqh presumption is that if the damages are not tied to the propertygiven, in exact proportion, then they reflect gharar. That view is inconsistent with the view ofproperty in many other aspects of the Islamic Law of contracts. For example, sukukrepurchases must be at market value (with the limited exception afforded liquidating interestsin ijarah), not par (see the Feb. 2008 AAOIFI fatwa).Another example is an opportunity lost. Moreover, market prices change; sometimes daily inthe modern financial markets. Where a commodity is purchased on the market under fraudand deceit, and subsequent thereto, the price of the commodity rises, the buyer, if notdefrauded in the first transaction, could have, with ease, sold the commodity at prevailingprices within a short period of time. Yet, what occurs is the buyer must spend precious timeand money to have the fraudulent transaction rescinded, only to be given back his/her moneyfor a commodity that is now substantially higher priced. The rad al-mithli remedy does nothelp in such an instance. He has, without a doubt, lost profits and there appears to be no casefor gharar in that instance. In such a case, notwithstanding the classical view of “speculativedamages,” the claimant must be able to present his/her claim in full; which may includeinvestment strategies, plans, prior transactions, prevailing market price movements, etc.Almighty Allaah states in Qur’an:“And as for the petitioner, do not repel (him)” (93:10)To deny such a claimant this opportunity brings zulm or oppression “face-to-face” withgharar. Other modern scenarios can be shown with respect to construction contracts(including istisna’), where delays caused by misrepresentation can have an impact oncontracts in the hundreds of thousands, if not millions of dollars.In this regard, some legal maxim from the Majella seem appropriate:
  24. 24. 24“Freedom from liability is a fundamental principle. Therefore, if one persondestroys the property of another, and a dispute arises as to the amountthereof, the statement of the person causing such destruction shall be heard,and the onus of proof as to any amount in excess thereof is upon the ownerof such property” (Article 8).“It is an accepted fact that the terms of law vary with the change in thetimes” (Article 39).“The value is the real price of an article” (Article 154)That said, the classical notion of damages can be summarized as follows:“Loss of profit, moral prejudice and delay in performance are not propertieswithin that meaning, cannot be valued in precise terms (for they areintangible elements and not on the market), and therefore do not constitutevalid elements for compensation…” (Saleh251989).And further:“…when the subject matter of a sale contract is totally or partiallydestroyed, misappropriated or impaired by a material defect, for whatsoeverreason, including the vendor’s deed…liability for the loss, misappropriationor effect is borne by the vendor. The ensuing consequence for the Hanafis isthat the sale is cancelled and the buyer is entitled to have back exactly whathe has paid…Shafi’e teaching is much the same”(Ibid).While the above is a simplification of sometimes complex rules according to the differentmudhahib, the end result is that absent extenuating circumstances, the innocent party is left, ifhe is lucky, with no more than what he had before the agony of being maliciously tricked.This result does not seem just or fair and throws a rather specious excuse of gharar in theface of justice (‘adl). This is the case of looking at the mizan or balance and clinging to thepivot thereof instead of looking into the scales thereof. As Ibn Taymiyah wrote:“The corrupting factor in gharar is the fact that it leads to dispute, hatred,and devouring others wealth wrongfully. However, it is known that thiscorrupting factor would be overruled if it is opposed by a greater benefit(almaslahah al-rajihah)” (El-Gamal 262001).Justice or ‘adl, is clearly such a greater benefit. Where ‘adl is absent, zulm is present.Additionally, some acts warrant punishment or else their perpetrators tend to repeat them.Their acts are grievous, malicious, wanton and offensive. They are patently imbued with zulmor malicious oppression. Moreover, this is a violation of the “honor” of the incorporeal
  25. 25. 25person as stated earlier and is no less a violation than that of injury to person or property.When rescission or compensation is tied to the exact proportion of the property lost, theoffended party may not be fully compensated and the offending party may easily computethat cost-benefit probability of damage to him being no more than return of property;readying himself for the next attempt to defraud the next innocent market participant; eitherdirectly or indirectly through an agent. Law of averages dictates he eventually finds someoneand defrauds and/or deceives, with again nothing to lose, even if caught.Blood, Property and Honor. Fiqh has a rich body of jurisprudence dealing with tortiousacts and negligence. Unfortunately, liability in classical Fiqh is largely “damage liability”(Kassim272006). Additionally, much of the law is marred by the label of diyat, which isgenerally translated as “blood money.” Yet, the Fiqh actually involves much more than justcompensation tied to blood money. The practice of diyat or paying blood money in lieu ofqisas or an “eye for an eye” is an ancient tradition which predated Islaam. Its apparentlimitation to animal and commodity payment in lieu of blood has evolved so that modernMuslim jurists award monetary damages as compensation for physical harm. There is alsosome evidence that non-physical harm (incorporeal) is being used as a basis forcompensation. In the area of professional torts, e.g. medicine, a distinction is made as towhether there is physical injury (darar hissi) or moral injury (darar maanawi). Darar hissiincludes any injury inflicted to the body (and why was classically the basis for diyat). Dararmaanawi includes injury to the patient’s reputation and honor (al-‘ardhu as noted hereinabove). The breadth and scope of this latter damage would appear to be comprehensive as thedefinition of al-‘ardhu suggests; yet, there appears reluctance on the part of Muslim jurists toapply the true meaning of this form of damage (Ibid).Thus, in the modern financial markets, and indeed in the area of the Islamic Law of contracts,there appears to be a distinct need for evolution or development to allow market participantsto apply the “root” principle to quasi-contractual wrongs. That is to say that though the initialtransaction may have been entered into as a contract, the wrongdoer has caused the resultingharm to be personal (incorporeal) to the aggrieved and tort claims should be allowed insteadof rescission, where elected. This is because what, in effect, occurs in some instances is thatno contract was form at all since there was no redho or mutual consent. Hence, what is leftthereupon is a wrong and the remedy for that wrong should, at the election of the aggrieved,lay in a tort claim.Some examples of tort claims from the Sources may illuminate the case:From Qur’an…“O you who have believed, prescribed for you is legal retribution for thosemurdered - the free for the free, the slave for the slave, and the female forthe female. But whoever overlooks from his brother anything, then thereshould be a suitable follow-up and payment to him with good conduct.
  26. 26. 26This is alleviation from your Lord and a mercy. But whoever transgressesafter that will have a painful punishment” (2:178)“And never is it for a believer to kill a believer except by mistake. Andwhoever kills a believer by mistake - then the freeing of a believing slaveand a compensation payment (diyah) presented to his family, unless theygive (it as) charity. But if he was from a people at war with you and he wasa believer - then [only] the freeing of a believing slave; and if he was from apeople with whom you have a treaty, then a compensation paymentpresented to his family and the freeing of a believing slave. And whoeverdoes not find (one or cannot afford to buy one), then fast for two monthsconsecutively, (seeking) acceptance of repentance from Allaah. And Allaahis ever Knowing and Wise” (4:92).Thus, it can be seen from the above Ayat that “compensation” includes monetarycompensation as well as commodity compensation. Of course, the “compensation payment”is diyat or blood money, which signifies that blood was drawn. Following the customs andpractices of the Arab peninsula that he found, the Messenger of Allaah, AS, used livestock asa “benchmark” for compensation (Ismail28l 2012). This is seen from a Hadeeth reported:“’Abd Allaah b. Abu Bakr b. Muhammad b. ‘Amr b. Hazm reported from hisfather that the book that the Apostle of Allaah, AS, wrote for ‘Amr b. Hazmon the subject of blood-money stated that the compensation of a life is 100camels and nose, if cut in full, 100 camels, and in case of maamoomah(head injury down to the skull) one-third of the blood money and in jaa’ifah(injury to the inside of stomach) also it is one-third and in case of injury tothe eye, fifty camels, of the hand fifty, of the foot fifty, and of every fingerten, and of every tooth five, and for moo’dihah (bone breaking or fracture)five camels” (Muwatta’).And another Hadeeth addresses compensation for non-physical injury:“Narrated by ‘Anas, RAA, concerning an event involving the wives of theProphet, AS, ‘They brought in a pot containing some food for the Prophetand it was said that ‘Aishah, RAA, threw it away spilling all the food.’ TheProphet said: food (must be replaced) with food and container withcontainer” (Tirmidhi, Abu Dawood).Thus, at least with respect to personal injury, compensation extends to the “harm” causedwhen payment is not made in-kind (qisas), but by compensation. Accordingly, some scholarshave opined that the injury need not be to the person, but may be due for the “pain andsuffering” caused. This seems reasonable in light of the fact that loss of life is in mostinstances within a family a matter of great “pain and suffering.” This seems to be the case inthe matter of pregnancy miscarriage caused by fear or nervous shock. Thus, the “Hanbali
  27. 27. 27school, in the case of nervous shock followed by miscarriage or death of a pregnant woman,the person who has put her in fear will bear liability for diyah in such cases. In the opinion ofal-Shafi’ee, however, there is only liability for diyah in the case of miscarriage (daman al-janeen) alone and not in the case of death of the woman, because nervous shock is notnormally a cause of death” (Mohamad291997 citing to Ibn Qadaamah).And finally, with respect to how compensatory damages were regarded by the Messenger ofAllaah, AS, we find this in another version of a Hadeeth, previously cited, a showing of theflexibility in the awarding damages, wherein the fluctuation of value in the market wasconsidered:“The Messenger of Allaah, AS, would fix the blood money for accidental killing at the rate offour hundred dinars or their equivalent in silver for townsmen, and he would fix it accordingto the price of the camels so when they are dear, he raised the amount to be paid and whencheap prices prevailed he reduced the amount to be paid . . . the Messenger of Allaah gavejudgment that for cutting off a nose completely there was full blood money, one hundredcamels to be paid. If the tip of the nose was cut off, half of the blood money, that is, fiftycamels were to be paid, or their equivalent in gold or silver, or a hundred cows or onethousand sheep, for the hand when it was cut off, half the blood money was to be paid; forone foot, half of the blood money was to be paid. For a wound in the head, a third of theblood money is due, that is, thirty camels and a third of the blood money, or their equivalentin gold, silver, cows, sheep; for a head thrust which reach the body, the same blood moneywas to be paid. Ten camels were to be paid for every finger and five camels for everytooth…” (op.cit. Kassim citing to Sunan Abu Dawud, 2nd Ed. Beirut: Dar al-Fikr, 1979, Vol.12 at pp. 303-306 and Ibn Qayyim Al-Jauziyah, aAwn al-Maabud Sharh).A More Expansive View of Property. Although the purpose of this paper is not to give adetailed analysis of the attributes of property from an Islamic Law of contracts perspective, itmust be noted that an exact definition as to what property is from a Fiqh position is far fromsettled. Notwithstanding Saleh’s fairly narrow view of property, others define property moreexpansively. For example, one Islamic scholar has noted, it is established in the Fiqh ofIjarah that usufruct is not a thing, but a benefit to be enjoyed. Hence, all property cannot becorporeal by analogy (Ali302003). As she aptly points out, the Majella states:“Property of some specific value is spoken of in two senses. (1) It is a thingthe benefit (mutaqawwam) of which it is lawful to enjoy; (2) The other isacquired property” (Article 127).She further goes on to note:“Of late, the range of possible counter values and subject matters hasexpanded so as to include certain rights, which proprietary value andcapacity to be valid subject matters of contracts may still be very muchdebatable. These possible counter values include mostly abstract rights
  28. 28. 28(‘aqq manawt), such as, the rights to receivables, the rights to futurebenefits from a concluded contract, and the rights to license andconcession” (Ibid).Hence, it is clear that she sees “benefits” that flow from property as a form of property. Andthough this particular scholar believes the main issue regarding these “abstract” rights lies inwhether or not they can serve as consideration for a contract, the point in this paper iswhether or not such value can be attributed to property in damage calculations? Hence, just asthe jumhor or majority view of the Maliki, Shafi’ee and Hanbali mudhahib view usufruct asproperty derived from the underlying asset, this paper posits that under circumscribedinstances, lost profits and lost benefits also derive value from the underlying asset or property(Ibid). She surmises:“Thus, it can be concluded that al-haqq al-maalee al-aynee also includesabstract and intangible rights. In fact, in the decision by the OIC FiqhAcademy, intellectual property rights have been said to be property rightsthat are capable of being bought and sold for a consideration, despite oftheir intangible nature” (Decision 5, fifth session, (1988), Fiqh AcademyJournal, 3: 2571).Finally, as she points out, shares in a company are analogous because they represent aproportionate general right in the underlying khultah or mixture of “real properties, usufructs,rights, money and debts” of the company (Ibid). This is a point well taken with respect tofraud and deceit in the modern capital market.It bears repeating that the economic/financial climate of today’s markets is vastly differentfrom that under which the Messenger of Allaah, AS, gave some, if not all of his rulings. Thatdoes not obviate the importance of his rulings and certainly one cannot venture so far as toquestion his authority or the Ultimate Authority of Almighty Allaah. One can, however, drawcogent contrast between the markets, customs and Muamulat in what we must admit was arelatively primitive village economy, where people knew each other well, largely trusted oneanother, travelled little and with a population size that was miniscule relative to today’sworld. There is, therefore, a distinct need for an inter-temporal review, if not expansion, ofthe scope and sophistication of what can fairly be called trading and mutual assurancearrangements sustained by individual and tribal relations and reputations. Hence, the role ofthe rule of law is comparatively distinguishable in its application to the needs of therespective marketplaces.One glowing look at, for example, how compensation was computed should draw theattention to even the most recalcitrant mind. Even though there was gold and silver moneyavailable, compensation was largely awarded based upon camels and slaves; neither of whichare readily available in the monetarized economies of today. In fact, gold and silver are notreadily available and most emerging and advanced economies use “paper” money and other
  29. 29. 29financial instruments as surrogates for trust, if not gold and silver, to effectuate the dailydealings in the marketplace. Modern Fiqh must bridge this gap as well.CONVENTIONAL LAW OF MISREPRESENTATIONThe general rule in conventional law regarding the umbrella area of misrepresentation is thatit is by nature a tort. A tort, as noted herein elsewhere above, is a private or civil wrong orinjury. It is, by definition, a wrong independent of contract (Black311968). A person deceivedto enter into a transaction by misrepresentation may bring a tort action for deceit, but mayelect to pursue a contract case for restitution instead. However, a contract action cannot betransformed into a tort case for misrepresentation (op. cit. Calamari). This kind of legalnotion has also been referred to as quasi-contract because technically a “contract” formedfraudulently vitiates the contract itself (as it does from the Islamic perspective), but allowsthe aggrieved party to elect to have the court respect the contract constructively so that he/shemay pursue his/her rights there under.Fraud & Deceit Definitions. Tortious fraud, which is in conventional law, deceit for allintent and purposes, has five elements, namely: Representation as to past or existing material fact(s) Falsity Scienter Deception Justifiable reliance by the innocent party Resulting in injury or harm (Lexis Nexis322008)These elements are somewhat relaxed for the quasi-contract case for deceit, because thescienter element is not a hard-and-fast requirement. That is so because restitution may beavailable even when the representation is negligent, even innocent (Ibid). If themisrepresentation is seen as being negligent instead of intentional, then elements differ andare: A representation as to a past or existing material fact(s) Falsity Lack of reasonable grounds for belief in the truth of the representation made Intent to induce reliance Justifiable reliance by the innocent party Proximity of cause of injury or harm (op. cit. Lexis Nexis).As in the Islamic Law of contracts, there is a materiality threshold. But that restriction isimposed only in cases of negligent misrepresentation vis-à-vis intentional misrepresentation.Materiality is based upon whether or not the misrepresentation would be “likely to affect theconduct of a reasonable man” (Ibid). Restatement (Second) Contracts states:
  30. 30. 30“§ 164. When a Misrepresentation Makes a Contract Voidable(1) If a partys manifestation of assent is induced by either a fraudulent or amaterial misrepresentation by the other party upon which the recipient isjustified in relying, the contract is voidable by the recipient.(2) If a partys manifestation of assent is induced by either a fraudulent or amaterial misrepresentation by one who is not a party to the transaction uponwhich the recipient is justified in relying, the contract is voidable by therecipient, unless the other party to the transaction in good faith and withoutreason to know of the misrepresentation either gives value or reliesmaterially on the transaction” (op.cit. ALI).Moreover, if a person who makes a misrepresentation knows that it is likely that therepresentation will induce the other party to enter into the contract (even if it would not soinduce a “reasonable person”), the representation is material. Another way of stating it is thata misrepresentation is material if it induces the other party to alter his or her position to his orher detriment. A misrepresentation that is fraudulent, need not be material; but it must adduceassent (Ibid). A reasonable or prudent “person” is a “hypothetical person” who “exercisesaverage care, skill, and judgment in conduct that society requires of its members for theprotection of their own and of others interestsxv.” Thus, the same standard of prudence orreasonableness can be used to ascertain whether reliance by an aggrieved party was“justifiable” and whether or not reasonable or prudent due diligence would have resulted inher not relying on the misrepresentations.Scienter is a term that is used to signify prior knowledge of acts or words which may lead toinjury and which there is a duty to guard against and the failure to do so has led to that injury.It is frequently equated with guilty knowledge (op. cit. Black). Thus, it is an essential elementof fraud, which is then intentional misrepresentation, but not essential to negligentmisrepresentation. Negligent misrepresentation requires that the person knew or should haveknown the words would lead to harm.Different Froms of Fraud and Deceit. Some conventional jurisdictions differentiate thevarious forms of fraud and deceit. For example, there is actual and constructive fraud andfraud in the inducement. Actual fraud can be defined as “consisting of any of the followingacts, committed by a party to the contract, or with his or her connivance, with intent todeceive another party to the contract, or to induce him or her to enter into the contract: The suggestion, as a fact, of that which is not true, by one who does not believeit to be true;xvhttp://definitions.uslegal.com/r/reasonable-man-theory/
  31. 31. 31 The positive assertion, in a manner not warranted by the information of theperson making it, of that which is not true, though he or she believes it to betrue; The suppression of that which is true, by one having knowledge or belief of thefact; A promise made without any intention of performing it; or Any other act fitted to deceive (California Civil Code Sec. 1572).Constructive fraud, on the other hand, has been defined as consisting of either: Any breach of duty which, without an actually fraudulent intent, gains anadvantage to the person at fault, or any one claiming under him or her, bymisleading another to his or her prejudice, or to the prejudice of any oneclaiming under him or her, or Any such act or omission that the law specially declares to be fraudulent,without respect to actual fraud (California Civil Code Sec. 1573).Fraud in the inducement is a subset of fraud. It occurs when a party knows he is forming acontract, but his consent is induced by fraud or deceit. A contract is formed, which, by reasonof the fraud and deceit, is voidable since there is no consent when induced by fraud or deceit.Deceit in conventional law is the act of wilfully deceiving another with intent to induce himto alter his position to his injury or risk. Such a person is liable for any damage which theother party suffers (California Civil Code Sec. 1709). And further, a deceit is either a(n): Suggestion, as a fact, of that which is not true, by one who does not believe it to betrue; Assertion, as a fact, of that which is not true, by one who has no reasonable groundfor believing it to be true; Suppression of a fact, by one who is bound to disclose it, or who gives information ofother facts which are likely to mislead for want of communication of that fact; or, Promise, made without any intention of performing it.Hence, it can be seen from the above that promises that are relied upon that cause harm orinjury resulting there from are actionable under conventional law. This is an area of somedebate in the Islamic Law of contracts, although some prominent scholars believe that apromise in the financial markets that is relied upon creates an obligation, whether or notsupported by other consideration, e.g. Dr. Hussain Hamid Hassan (Hassan332008).Finally, there is a particular kind of fraud and deceit that is found in the capital markets. InAmerica, it is covered by the Securities Act of 1934 and is referred to as a Rule 10(b)-5violation. That violation states:“Rule 10b-5 -- Employment of Manipulative and Deceptive Devices
  32. 32. 32It shall be unlawful for any person, directly or indirectly, by the use of anymeans or instrumentality of interstate commerce, or of the mails or of anyfacility of any national securities exchange,a. To employ any device, scheme, or artifice to defraud,b. To make any untrue statement of a material fact or to omit to state a materialfact necessary in order to make the statements made, in the light of thecircumstances under which they were made, not misleading, orc. To engage in any act, practice, or course of business which operates or wouldoperate as a fraud or deceit upon any person, in connection with thepurchase or sale of any security” (13 FR 8183, Dec. 22, 1948, as amendedat 16 FR 7928, Aug. 11, 1951).This violation is just one of several covered by the Act. Also covered by it are thosefraudulent deeds that result in insider trading.Business Torts in Common Law. It is important to note that in some common lawjurisdictions, fraud and deceit are part of the body of law called business torts. These torts areinjuries to a person’s property or economic interests. Misrepresentation, fraud and deceit,intentional interference with prospective economic relations and intentional interference withexisting contractual relations are the primary business torts. Intentional interference withprospective economic relations, for example, contains the following elements: An economic relationship between the innocent party and some third party, with theprobability of future economic benefit Knowledge of the relationship by the wrongdoer Intentional acts on the part of the wrongdoer designed to disrupt the relationship Actual disruption of the relationship Economic harm to the innocent party proximately caused by the acts of the wrongdoer(Youst v. Longo (1987) 43 Cal.3d 64, 71).The business tort of interference with contractual relations has its roots in the tort of inducingbreach of contract. It is also referred to as the tort of interference with existing contractualrelations and its elements are similar to those above. Both the tort of interference withcontract relations and the tort of interference with prospective contract or economic relationsinvolve basically the same conduct. However, in the former case, the interference takes placewhen a contract is already in existence, while in the latter, before the contract would, withcertainty, have been consummated but for the conduct of the wrongdoer. Moreover, the act ofinterference in the former case is usually intentional (but may in certain cases only benegligent), while in the latter case, it must be intentional. These kind of torts are recognizedin the Islamic Law of contracts, as it is prohibited, for example, to make a bai’ al-mustarsal(or the sale made after intercepting goods before they reach their destination in themarketplace and falsifying the cost thereof) as was sometimes done among ancient Arabs.
  33. 33. 33Similarly, the Messenger of Allaah, AS, forbade under-cutting or bidding over a businessproposal of another. Hence, if there is a difference in treatment between the Islamic andconventional laws in this area, it is likely to be reflected in the damage or compensationcalculation and whether the fraud is treated as a contract or tort violation.Malaysian Civil Law. Malaysian Civil Law follows common law notions ofmisrepresentation, fraud and deceit. Thus, ss17-19 of the Contracts Act defines fraud andmisrepresentation. The primary difference between Malaysia’s statutes and those noted aboveare that actual and constructive fraud are combined in s 17 and s18 as negligent andintentional misrepresentation. s19 gives the aggrieved party the option of either having thecontract voided or performed. However, it is unclear as to the extent Malaysia has adoptedthe Misrepresentation Act of 1967 (Braizer and Murphy341999). If its Civil Courts enforcethe Act and the case law there under, then misrepresentation that is regarded as deceit can betreated as a tort. Also, it is not clear whether a principal can be held liable for themisrepresentation of his or her agent. Moreover, there does not appear to be a separate tortclaim for fraud or deceit under Malaysian Civil Law. What appears instead is the potential toapply the above noted Misrepresentation Act of 1967, or to otherwise apply the principle ofnegligence, which is recognized by Malaysian courts (Azlan and Hingun351998). If thisanalysis is current as to the status of fraud and deceit in Malaysia, then aggrieved parties areleft to rescission as their primary remedy in most, if not all, business transactions.International Conventions. UNIDROIT Article 3.2.5 addresses fraud as:“A party may avoid the contract when it has been led to conclude thecontract by the other party’s fraudulent representations, including languageor practice, or fraudulent non-disclosure of circumstances which, accordingto reasonable commercial standards of fair dealing, the latter party shouldhave disclosed” (United Nations362012).The Principles of European Contract addresses both deceit and fraud in the followingArticles:“Article 4:106: Incorrect InformationA party who has concluded a contract relying on incorrect informationgiven it by the other party may recover damages in accordance with Article4:117(2) and (3)xvieven if the information does not give rise to axviArticle 4.117(2) If a party has the right to avoid a contract under this Chapter, but does not exercise its rightor has lost its right under the provisions of Articles 4.113 or 4.114, it may recover, subject to paragraph (1),damages limited to the loss caused to it by the mistake, fraud, threat or taking of excessive benefit or unfairadvantage. The same measure of damages shall apply when the party was misled by incorrect information in thesense of Article 4.106.(3) In other respects, the damages shall be in accordance with the relevant provisions of Chapter 9, Section 5,with appropriate adaptations (these damages are codified to make the aggrieved party “whole” and include lostprofits)
  34. 34. 34fundamental mistake under Article 4:103, unless the party who gave theinformation had reason to believe that the information was correct.Article 4:107: Fraud(1) A party may avoid a contract when it has been led to conclude it by theother partys fraudulent representation, whether by words or conduct, orfraudulent non-disclosure of any information which in accordance withgood faith and fair dealing it should have disclosed.(2) A partys representation or non-disclosure is fraudulent if it wasintended to deceive.(3) In determining whether good faith and fair dealing required that a partydisclose particular information, regard should be had to all thecircumstances, including:(a) whether the party had special expertise;(b) the cost to it of acquiring the relevant information;(c) whether the other party could reasonably acquire the information foritself; and(d) the apparent importance of the information to the other party” (PECL371999).Thus, it can be seen from the cursory review of various international theories of law, thatfraud and deceit are well established in conventional law, with some jurisdictions providingfor rescission, while under others the aggrieved party may elect to pursue the breaching partyeither in contract or tort and under the former damages may include lost profits andincorporeal damage under the latter. This is a crucial distinction that should be made clear inthe Islamic Law of contracts.Limitations and Conditions. Conventional law does limit what representations it classifiesas misrepresentations. The following distinctions are representative of those limitations: Relief is afforded misrepresentations of fact, but not erroneous opinions. Thislimitation protects vendors from liability for “puffing” or trade talk. Representationssuch as “best buy” or “finest quality” and similar such statements are exemplary.However, representations that are overly optimistic regarding investments aregenerally not protected. A half-truth can be a misrepresentation. A statement made in good faith, but followed by changes that make the statement nolonger true is protected. However, if the person making the statement knows the otherparty is relying on the statement and he becomes aware of the changes affecting the
  35. 35. 35statement, then the person making the statement has a duty to inform the other partyof the truth relating to the changes. The relationship between the parties, if of a fiduciary or confidential nature, may raisethe duty to disclose beyond what would otherwise be required. So-called merger clauses (wherein the contract states that it is the final understandingbetween the parties and any additions to it must be in writing) do not generally protectparties against misrepresentations where the jurisdiction allows parol evidencexviitoprove such misrepresentations. The conventional legal maxim, “fraud vitiateseverything it touches,” will trump such merger clauses. However, a growing numberof jurisdictions do respect these clauses when they contain language whichspecifically state that no representations have been made and that the purchaser isrelying on his own inspection and nothing else (op. cit. Calamari).Because of conventional law’s affinity to the notion of freedom of contract, numerousconditions exist under its system of laws. Such conditions are usually conditions precedent,concurrent, subsequent, express or constructive. Constructive conditions are sometimes calledconditions implied in law. They differ from conditions implied in fact inasmuch as conditionsimplied in fact are impliedly agreed to by the parties, while constructive conditions may beconstructed by a court (Ibid). It can be said that the use and extent of conditions, includingimplied warranties, in conventional law have served as surrogates for options used in theIslamic Law of contracts. Contract options in conventional law are almost exclusivelyexpress and may take any number of formats, as would be expected under the notion offreedom of contract. Some are required to be in bold print.Concept of Damages in Conventional Law. The principal difference in remedies underconventional laws is that a defrauded party may elect to treat fraud and deceit as a tort and letthe transaction stand, so to speak, keep any defected goods and sue for damages or simplyrescind the contract (being afforded restitution where appropriate). Under some statutoryschemes in conventional law, no election is even required. For example, the UniformCommercial Codexviiiin America does not require an election where the sale of goodsbetween merchants is concerned:“§ 2-721. Remedies for Fraud.Remedies for material misrepresentation or fraud include all remediesavailable under this Article for non-fraudulent breach. Neither rescission ora claim for rescission of the contract for sale nor rejection or return of thexvii“Under this rule, when parties put their agreement in writing, all previous oral agreements merge in thewriting and a contract as written cannot be modified or changed by parol evidence (verbal or oral), in theabsence of a plea of mistake or fraud in the preparation of the writing…But (this) rule does not forbid a resort toparol evidence not inconsistent with the matters stated in the writing” (supra Black).xviiiMost states in America have adopted both the Restatement provisions and the UCC; albeit some withmodifications. Those modifications are not germane to this discussion herein, however.

×