The document summarizes key concepts in Islamic contract law, including the definition of a contract, its pillars, and general principles. A contract in Islamic law is a legally binding obligation that links two parties. There must be an offer and acceptance to form the basis of the contract. Ownership and property rights are protected under Islamic law, and contracts aim to ensure fair and equitable profit/loss sharing. Wealth should be used in ways that benefit society and do not harm others.

1. FIQH FOR ECONOMISTS 1
ECON 3510 SECTION 02 SEM 2 2018
NOTEBOOK
COMPILATION
PRESENTED TO:
DR. MUHAMMAD IRWAN BIN ARIFFIN
Group name: Tomatillo Matric No. Contribution
Ain Atiya Azmi bt Nazmi 1710222 20%
Shah Nur Aryana bt Shah Jahan 1713322 20%
Nor Aina Nashuha bt Mohamad Fikri 1718734 20%
Fatemeh Pilehrar 1311010 20%
Hossaein Md Faisal 1626161 20%

2. 1
TABLE OF CONTENT
Chapter Topic Page
6 Right and Obligation 2 - 8
7 Ownership 9 - 11
8 Theory of Contract 12 - 32
9 Causes that Invalidate Transactions 33 - 35

3. 2
Chapter 6
Right (Haqq) and Obligation
(Dayn)
Definition
HAQ means proper, right, true, authentic, valid, established
The jurists define Haq as Shari’ah prescription that gives authority and assigns
responsibilities

4. 3
Classification of Rights
1. The Rights of Allah swt (Haqqullah) and the Rights of Human (Haqqunnas)
a. The Right of Allah swt
i. All rights in Islam, including the rights oF humans is included in
the rights of Allah swt
ii. Because these rights are commanded by Allah swt and Muslims
under obligation to observe them
iii. The right of Allah swt are divided into 2 groups:
The exclusive rights of Allah swt:
include His rights on human
beings to worship Him, to obey His
laws and to pay zakat and
penances
Right:
which are intended for public
interest and are not specifically
assigned to any individual
ie: public rights could be a
community's right to mineral
wealth such as mines, forests,
rivers

5. 4
Specifications of Allah’s right
❖ The rights of Allah swtcannot be abolished
❖ The rights of Allah swtcannot be inherited
❖ The offender who repeatedlyviolates the rights of Allah swtis
punished once
➢ A person who has committed theft many times is punished once
❖ The enforcementof the rights of Allah swtis the duty of the state
b. The Right of Humans
i. Refer to those rights which are intended for protection of private
interests
ii. General: All human beings are entitled to the protection of their
religion, life, property, health and honour
iii. Specific: The right to enforce a contract or the right to
compensation for a loss. Ie: in a sale contract a purchaser has a
right to own the object which he has brought and a seller is
entitled to receive the price
Specification of humans right
❖ The enforcementof these or whose right is infringed. He may
demand the enforcementof his rights or waive them
❖ The offender of a private right is punished as many times as the
rights is violated
❖ The basic distinction betweenthe rights of Allah swt and the rights of
humans is that the former cannot be exempted
c. Combined Rights (huquq al-mushtarek)
i. Those rights where the rights of Allah swt and those of humans
are combined.
ii. Ie: Slanders or defamation (qadhaf) and retaliation (qisas)

6. 5
2. Financial and Non-Financial Rights
a. Financial Rights
i. Related to property or its usufruct or rights that may arise from
commercial transactions
ii. Ie: A tenant has a right to stay in a house which he rented and a
wife has a right to maintenance
iii. Intellectual properties such as copyrights, trade logos and
franchises are included in this category
iv. A lender in a loan contract has a right to claim his loan
b. Non-financial Rights
i. Not related to property such as the right of parents, the rights of
a husband and wife, the rights of custody and the rights of a
guardian over minors
ii. The rights to freedom of expression and movement, the rights of
authorities or the states and the right of citizens also included in
this category
3. Rights over a Person and Rights over a Property
a. Right over a Person
i. Shariah has assigned to one person over another
ii. For instance, the rights and obligations that exist between
parents and children, husband and wife, a creditor and a debtor,
an employee and an employer
iii. The right over a person is on the shoulder (dhimmah) of another
person
iv. It does not depend on the existence of a property. For example,
the right of the creditor over a debtor is not terminated if the
sold item is destroyed

7. 6
b. Right over a Property
i. A person to a claim over that property
ii. Include property rights which entitle the owner to use his
property within the limits ordained by law
iii. Abolished when the properties are destroyed. For instance, when
a leased house is set on fire, the right of the tenant to stay in the
house is also terminated
iv. Priority to cases that claims who have rights over a property
4. Rights that can be waived and those that cannot be waived
All rights of humans or private rights can be waived. However, there are
certain rights that cannot be waived
a. Future rights cannot be waived
i. For instance, a wife could not waive her future right to
maintenance
ii. WHY? Because these rights have not yet come into existence,
they cannot be waived
b. Right that give authority to a person over another person
i. For instance, the right of a father or a grandfather to have
guardianship over their children
c. Right which if waived may result in changes to the law cannot be
waived
i. For instance, a person who has made a will (wassiyyah) has the
right to cancel his will. He cannot be made to waive his right to
cancel his own will.
d. Right which if waived, other person’s rights will be affected
i. For instance, a mother cannot waived her right to the custody of
her children

8. 7
5. Heritable and non-heritable Rights
a. Heritable Rights is rights intended to serve the purpose of a guarantee
can be inherited
Example: A pledged property can be kept by the heirs of the pledgee
after the latter dies
i. Rights related to immovable property (huquq al-artifaq); right of
water or the right of way can be inherited
ii. School of Fiqh agrees that certain option; 1) the option of
determination 2) the option of defects which concerns teh sold
items can be inherited
b. Non-heritable Rights are things that related to the person and end with
his death and no right left for him
Example: Rights related to his thought and honesty guardianship over
his oneself or his money

9. 8
Misuse or Abuse of Rights
Misuse of Rights arises when a person exercises his rights in an improper way
★ A person has to exercise his right in a proper way that will not harm others
and does not violate their rights
★ A person has to exercise his right in accordance the dictates of the Shari’ah
★ A person should avoid extravagance and wastage of his own property
★ A person cannot use his right as a vehicle unlawful ends/objectives or to harm
others
○ For example, a person cannot make a will (wassiyyah) that would result
in a harm to the creditors or their heirs
★ A person suffering from a mortal disease may divorce his wife but this exercise
of his right cannot deprive the wife from inheritance
★ The unusual exercise of rights which causes nuisance or disturbances to
neighbours and others
○ For example, a person is prevented from raising a wall of his house in a
way that would harm the neighbors by preventing proper access to
light and air or opening a window in a way that would take away his
neighbour's privacy
★ When a certain action is done without proper care as a result of which harm
would be caused to others the person is held liable

10. 9
Chapter 7
Ownership
Ownership is the legal relation between a person (individual, group, corporation, or
government) and an object. The object may be corporeal, such as furniture, or completely the
creature of law, such as a patent, copyright, or annuity; it may be movable, such as an animal,
or immovable, such as land. Ownership of property may be private, collective, or common,
and the property may be of objects, land or real estate, or intellectual property. Determining
ownership in law involves determining who has certain rights and duties over the property.
These rights and duties, sometimes called a "bundle of rights", can be separated and held by
different parties.The process and mechanics of ownership are fairly complex: one can gain,
transfer, and lose ownership of property in a number of ways. To acquire property one can
purchase it with money, trade it for other property, win it in a bet, receive it as a gift, inherit
it, find it, receive it as damages, earn it by doing work or performing services, make it, or
homestead it. One can transfer or lose ownership of property by selling it for money,
exchanging it for other property or giving it as a gift.

11. 10
Definition of private property
The ownership of tangible and intangible goods by an individual who has exclusive
rights over it. The transfer of a private property can take place only by the owner’s
consent or through a sale or through its presentation as a gift. The property owner
can sale, lease, pledge, build, improve or exploit and appropriate or dispose the
property in lawful way.
Cause for the acquisition of ownership
There are three ways of establishing the ownership:
Contracts; sale,gift,donation etc done intentionally and voluntarily
Inheritance; by operation of law
The rule of first possession of natural resources; once individuals apply their
labour to public property, they can claim private ownership over it on first-to-own
basis, such as a hunter catching wild birds from the forest
Division of private ownership
There are twotype of ownership: complete and incomplete ownership.
Complete ownership: legal and beneficial ownership. This means that the owner
enjoy the legal right associated with legal ownership (e.g. title) and the benefits
derivable from usufruct (e.g. habitation within a real estate )
Incomplete ownership : legal ownership without beneficial ownership,or vice
versa. An owner holding only one or the other is unable to enjoy the full rights of
benefits that come with total ownership.
1) Ownership over right : rights associated with one immovable property and
assigned to another immovable property belonging to another owner, such as water
rights, water flow rights drainage rights, passage rights and neighbouring rights.
2) Ownership only over property :an owner has given the ownership of usufruct
to another for a specified period of time, at the end of which the legal owner of his
heirs will regain complete ownership. A trait of legal ownership is that is perpetual,
whilst beneficial ownership is tied to a specific time . Thus legal ownership will
always result in total ownership eventually.

12. 11
3)Ownership over usufruct : 5 ways of establishing ownership of usufruct, which
are;
A lease;
A loan;
An endowment;
A will bequeathing usufruct and
A permission.
Restriction on ownership rights
In addition to limitations on the use of your property that are imposed by zoning
laws and building codes, other limitations may be created by laws enacted by
government and by traditions that have the force of law (“common law”). For
example, no owner may use his property tocreate a nuisance for his neighbors. A
nuisance under common law occurs when an owner uses his property tointerfere
with the use and enjoyment of his neighbors’ properties – such as making
unreasonable and excessive noise, or conducting activities that carry with them the
risk of an explosion or a release of dangerous chemicals.
In according over properties a muslim is bound to observe certain limitation. For
instance, trade in harmful goods ,cheating,corruption, stealing, and unlawful taking
others property. A muslim have to use his property considering that his decision is
not harmful for his neighbor property.
Property that individual cannot own
Some properties cannot be owned individually such as ocean, free air, atmosphere ,
heat from the sun and space. There also have some properties that are specified for
public usages, such as roads, bridges, rivers etc. Those properties are not owned by
individual neither can be sold,bought or inherited.

13. 12
Chapter 8
The Theory of Contract
Humans are not self-sufficient and need to exchange what he has to acquire a need
that he does not have. Islamic theory of contract lays down the rules and regulations
for mutual agreements and trades to take place.

14. 13
General Principles
1) Ownership and Property Rights are protected
When a contract is signed, the rights and obligations have to be honored. In cases of
breaches, the aggrieved party has to be compensated.
2) The profit and loss of an enterprise should be equitably shared by all its
stakeholders
Islam prohibits the transfer of wealth without equal counter values such as gharar
and riba. Exchanges based on loss and sharing such as musharakah are fair and just
and can benefit both the rich and poor.
3) Wealth should not be used in a way that would harm others, the society and
environment.
Money should not be hoarded, it needs to circulate in the market in the form of
investments that can benefit the society such as investing in green technology.
4) Islamic theory of contract is inclusive and does not reject existing types of
contracts and agreements that are prevalent in society.
Islam does not reject pre-Islamic urf like wadi’ah. As long as an exchange is devoid of
injustice and impermissible things, it is allowed. Innovations in transactions are also
encouraged.

15. 14
Definition of Contract
‫ا‬َ‫ه‬ُّ‫ي‬َ‫أ‬ََٰٓ‫ي‬( ۚ ِ‫ود‬ُ‫ق‬ُ‫ع‬ْ‫ٱل‬ِ‫ب‬ ۟‫وا‬ُ‫ف‬ ْ‫و‬َ‫أ‬ ۟‫ا‬ َٰٓ‫و‬ُ‫ن‬َ‫ام‬َ‫ء‬ َ‫ين‬ِ‫ذ‬َّ‫ٱل‬5:1)
Literal meaning: to tie or link together two ends of something
Technical meaning: a legally binding obligation whuch has consequences
for its object or subject matter.
When a seller makes a promise to sell, it
will not transfer ownership to buyer. A promise means an agreement to enter into a
future contract therefore the contract does not exist now. It is ethically recommended
to fulfill promises however it cannot be enforced by law.
A promise becomes a contract only when it takes a conditional form. This mechanism
is used in Bay bithaman ajil and murabahah transactions in which a customer will
make a promise to purchase a stipulated asset from a bank under certain time frame
at given price, after the bank has purchased that asset.
A contract also must be recognised by Shariah. A contract to steal or destroy
properties, or to compound interest, are invalid.
Unilateral: Endowment (waqf),writing off loans (ibra), reward (ju’alah)
Bilateral: sale, rent, mortgage, partnership
Iltizam: A broader meaning, any obligation by will or by law, unilateral
or bilateral.
Tasarruf: the broadest definition. Any verbal or non verbal actions that
are subject to liability in this world and hereafter including theft,
murder, marriage, destroying of property, giving testimony etc
Does wa’ad (promise)
equal a contract?

16. 15
According toHanafi, contract standsontwo pillars, offer
and acceptance. Subject matter and contracting partiesare
not the pillars, they are implied and a requirement for
contract. However, jumhur agreed that thereare3 pillars.
Pillars
Of Contract
Contract
Pillar of Contract #1: Expression (Offer and acceptance)
Verbal - words should contain definite terms such as sale or waqf
-in past or present tense, must not be in future tense
Actions E.g: a customer takes an item with a known price and pays the seller, neither
utters any word
Gestures used in stock exchange
Writing clear, formal, signed or sealed eg exchages va fax or internet, ATM, vending
machines
CONDITIONS OF EXPRESSION:
a) Clarity - clear indication of consent to avoid gharar
b) Conformity - offer must be in line with acceptance. There will be no agreement
if the two contradicts in terms of price or method or payment eg a seller wants to sell
in cash whereas a customer wants to pay in installments
c) Continuity - negotiation must be in the same period of time or situation (majlis),
does not necessarily mean being in the same place as the offer can still be sealed
using video calls or telephone, as long as an agreement is reached within that session.
An offer made after the majlis has separated is void.
When one party brings in unrelated topics while discussing, any agreement made
after that is void as the party is considered to be avoiding the contract (the offer has
lapsed). After specific time passes and no contract is made, the offer has lapsed. The
price can be changed after that eg in stock markets where prices are volatile. This
shows that acceptance should not follow after a lapse, but must immediately follow
the offer.
CAN AN OFFERER WITHDRAW HIS OFFER WITHIN THE SESSION
BEFORE AN ACCEPTANCE IS MADE?
Jumhur: YES.
Malikis: NO. Once an offerer makes the offer, he has established the right
to the offeree to accept or reject it and cannot retract it before the referee
makes a decision.

17. 16
Pillar of Contract #2 The Parties to a Contract
Ahliyyah: legal capacity enabling a person to acquire rights and undertake obligations.
a) AHLIYYAH AL-WUJUB (PASSIVE OR RECEPTIVE CAPACITY)
“The capacity to receive rights and obligations”
Incomplete receptive capacity- (BEFORE BIRTH) can receive only rights but not
obligations. E.g a foetus can be attributed to his parents and entitled toreceive his share of
inheritance. On contracts which need acceptance, the foetus is not entitled e.g a gift made in
his favour.
Complete receptive capacity - (AFTER BIRTH) a child can receive rights and obligations
through his guardian. They have to pay for the damage they cause however cannot be liable
to crimes. In paying zakah, Hanafis stated that a child is not obliged as zakah is a form of
worship and a child has not yet attained the age to pray. As for jumhur, zakah is a form of
worship, not imposed on the child but on the property that he owns, thus the guardian has to
pay out the zakah for him
b) AHLIYYAH AL-ADA (ACTIVE OR LEGAL CAPACITY)
“The ability to manage wealth, exercise rights and take obligations in Shariah
compliant manner without the need for other’s approval”
‫وا‬ُ‫ل‬َ‫ت‬ْ‫ب‬‫ا‬ َ‫و‬‫ا‬َ‫ذ‬ِ‫إ‬ ٰ‫ى‬َّ‫ت‬َ‫ح‬ ٰ‫ى‬َ‫م‬‫ا‬َ‫ت‬َ‫ي‬ْ‫ل‬‫ا‬‫وا‬ُ‫غ‬َ‫ل‬َ‫ب‬‫م‬ُ‫ت‬ْ‫س‬َ‫ن‬‫آ‬ ْ‫ن‬ِ‫إ‬َ‫ف‬ َ‫ح‬‫ا‬َ‫ك‬ِ‫الن‬‫ًا‬‫د‬ْ‫ش‬ ُ‫ر‬ ْ‫م‬ُ‫ه‬ْ‫ن‬ِ‫م‬‫وا‬ُ‫ع‬َ‫ف‬ْ‫د‬‫ا‬َ‫ف‬ْ‫م‬ِ‫ه‬ْ‫ي‬َ‫ل‬ِ‫إ‬َ‫ل‬ َ‫و‬ ۖ ْ‫م‬ُ‫ه‬َ‫ل‬‫ا‬ َ‫و‬ْ‫م‬َ‫أ‬‫َا‬‫ه‬‫و‬ُ‫ل‬ُ‫ك‬ْ‫أ‬َ‫ت‬‫ا‬ً‫ف‬‫ا‬َ‫ر‬ْ‫س‬ِ‫إ‬‫ا‬ً‫ار‬َ‫د‬ِ‫ب‬ َ‫و‬‫ن‬َ‫أ‬‫ن‬َ‫م‬ َ‫و‬ ۚ ‫وا‬ُ‫ر‬َ‫ب‬ْ‫ك‬َ‫ي‬
‫ًّا‬‫ي‬ِ‫ن‬َ‫غ‬ َ‫ان‬َ‫ك‬‫ن‬َ‫م‬ َ‫و‬ ۖ ْ‫ف‬ِ‫ف‬ْ‫ع‬َ‫ت‬ْ‫س‬َ‫ي‬ْ‫ل‬َ‫ف‬‫ا‬ً‫ير‬ِ‫ق‬َ‫ف‬ َ‫ان‬َ‫ك‬‫ا‬َ‫ذ‬ِ‫إ‬َ‫ف‬ ۚ ِ‫وف‬ُ‫ر‬ْ‫ع‬َ‫م‬ْ‫ل‬‫ا‬ِ‫ب‬ ْ‫ل‬ُ‫ك‬ْ‫أ‬َ‫ي‬ْ‫ل‬َ‫ف‬‫ُوا‬‫د‬ِ‫ه‬ْ‫ش‬َ‫أ‬َ‫ف‬ ْ‫م‬ُ‫ه‬َ‫ل‬‫ا‬ َ‫و‬ْ‫م‬َ‫أ‬ ْ‫م‬ِ‫ه‬ْ‫ي‬َ‫ل‬ِ‫إ‬ ْ‫م‬ُ‫ت‬ْ‫ع‬َ‫ف‬َ‫د‬َ‫ح‬ ِ َّ‫اَّلل‬ِ‫ب‬ ٰ‫ى‬َ‫ف‬َ‫ك‬ َ‫و‬ ۚ ْ‫م‬ِ‫ه‬ْ‫ي‬َ‫ل‬َ‫ع‬‫ًا‬‫ب‬‫ي‬ِ‫س‬-4:6
The verse statedthat an orphan shall be testeduntil he reaches the age for marriage, if
found out that he posseses wisdom, the disposition of rights must be given to him. Thus,
puberty and wisdom (rushd) are two capacities examined.
Sabi al mumayyiz: Child between 8 and age of puberty
Hanafis & Malikis: can enter into beneficial contracts such as accepting
gifts but cannot enter into harmful contracts although with gurdian’s
permission such as becoming a guarantor to debt
Shafi’i & Hanbali: can only enter into contracts on guardian’s behalf
How to
determine
puberty?
Hanafi: female- 17
Male-18
Jumhur: 15 for both

18. 17
Someone who lacks prudent judgement is restrained so as to protect his
interest and the interest of those dealing with him
1)Insanity
Hanafi said that the status of an insane person is equal to the status of a non-
distinguishing child. It can be continuous or non-continous. In case of non-
continuous, a contract made during his sanity is valid.
2)Imbecility or idiocy (Ma’tuh)
A birth defect which causes slow cognitive decisions such as down syndrome. His
status is the status of a non distinguishing child thus can enter into beneficial
contracts and cannot enter into harmful ones.
3)Sleeping
The natural state of unconscious mind cannot distinguish good and bad.
4)Unconsciousness
Unnatural state of unconscious mind due to illnesses such as heart diseases.
5) Intoxication
Caused voluntarily by willful consumption of intoxicants or involuntarily by
prescribing of anesthetics
Malikis, Ibn Taymiyah, Ibn Qayyim: both contracts made by both voluntary or
involuntary intoxicated are invalid
Jumhur: involuntary intoxication contracts are non-valid while voluntary
intoxication contracts are valid to punish those who purposefully weaken their minds
6)Prodigality (sufaha’)
The opposite of rusyd. Can either be dhu al ghuflah, a simpe minded naive person
who can be easily deceived, or a spendthrift like a compulsive gambler who
squanders away wealth.
Only the court can determine if one is safih. Any transactions become the court’s
obligations, not the guardian’s.
Two types of sufaha:
1)A person who becomes an adult but is still safih - status is like a distinguishing
child. Wait until one turns 25 before returning his property.
2)A person who after attaining maturity becomes safih
Hanafi said we cannot restrain this group.
Jumhur said that we can restrain them if proven misappropriation of property.
Obstacles to Capacity
Restraints
Hajr

19. 18
7)Insolvency/ Bankruptcy
A debtor with a genuine constraint may be delayed payment until the time of ease as
stated in al quran: ‫ن‬ِ‫إ‬ َ‫و‬‫و‬ُ‫ذ‬ َ‫ان‬َ‫ك‬‫ن‬َ‫أ‬ َ‫و‬ ۚ ٍ‫ة‬َ‫ر‬َ‫س‬ْ‫ي‬َ‫م‬ ‫ى‬َ‫ل‬ِ‫إ‬ ٌ‫ة‬َ‫ر‬ِ‫َظ‬‫ن‬َ‫ف‬ ٍ‫ة‬َ‫ر‬ْ‫س‬ُ‫ع‬‫وا‬ُ‫ق‬َّ‫د‬َ‫ص‬َ‫ت‬‫ن‬ِ‫إ‬ ۖ ْ‫م‬ُ‫ك‬َّ‫ل‬ ٌ‫ر‬ْ‫ي‬َ‫خ‬‫ون‬ُ‫م‬َ‫ل‬ْ‫ع‬َ‫ت‬ ْ‫م‬ُ‫ت‬‫ن‬ُ‫ك‬ َ -
2:280 However, a wealthy debtor who procrastinates is unjust.
A person is declared insolvent when debt equals or exceeds assets owned.
i)The creditor can petition the court to sell off the debtor’s assets to settle his debt.
ii)The debtor cannot enter into contracts which will reduce his assets eg waqf or
make a gift without court’s approvals
iii)Settlement of debt starts with cash, then movable properties and lastly immovable
properties
iv)Imam Abu Hanifah disagrees with jumhur and stated that a bankrupt person still
can go into dealings as it is his right over his own wealth
8)Mortal illness (mard al maut)
A bedridden person whose sickness plateud, or sentenced to death.
In wasiyyah, ⅔ of wealth must go to heirs. The other ⅓ can b given for charity, waqf or gift
to non-heirs.
A person who concludes contracts on behalf of others.
GUARDIANSHIP (WALAYAH)
Authorised by shariah
CONDITIONS FOR A GUARDIAN:
1)must have complete legal capacity
2)must have the same religion as the ward
3)a pious and practising muslim, eager to safeguard ward’s interest
4)have an authority to make decisions. He can spend on maintenance from the
ward’s property, can take the movable property but cannot take immovable
properties without court’s permission
5)must protect the ward’s interest in financial decision. Can engage in beneficial
transactions but cannot become a party in transaction with the ward eg renting to the
ward.
AGENCY (WAKALAH)
When someone of complete legal capacity authorises another party who also has complete
legal capacity due to lack of specialised knowledge or time.
Authorisation: walayah (guardianship) and wakalah (agency)

20. 19
COMPARISON BETWEEN WALAYAH AND WAKALAH
1. In wakalah, both parties have complete capacity.
2. A walayah is appointed by shariah while agent (wakil) is appointed by principal
(muwakil)
3. Sameness of religion only in walayah.
4. walayah is not paid while wakalah is paid for the service.
5. The period of walayah is until a child reaches rusyd meanwhile wakalah can be
terminated any time.
A corporation is a legal personality whereby the owners of corporations and board of
directors have limited liability. For example, AirAsia Corporations. AirAsia can enter into
contracts, can sue and be sued in its own name. It is entitled to rights and obligations arising
from contracts. But, its liabilities cannot be linked to its CEO or board of directors since they
are different persons, not AirAsia.
Bankruptcy of a company is equal to death of a natural person which means that the
creditors’ claims remain unsettled. For a person, his heirs may pay off the creditors
under religious sentiments. However, the directors and shareholders of a company
cannot be liable for losses.
Zakat has to be performed by mukallaf. Since a company isn’t a mukallaf, it originally
does not have to perform zakat. However, since the shareholders are natural persons
they should pay zakat based on the amount of shares (Yusuf Qardawi). As an
alternative, the company can pay zakat on the behalf of shareholders.
Legal Personality
What happens when a
company goes bankrupt ?
Do companies
pay zakat too?

21. 20
Pillar of Contract #3: Subject Matter
The subject matter differs according to contract.
Sales: sold item
Ijarah: usufruct
Hawalah: debt transerred
Wakalah: service
Partnership: capital contribution
4 conditions:
a) Legality
-valuable
-can be possessed and secured
-permissible
b) Existence
-to avoid gharar
-exceptional sales are istithna’ and salam
c) Certainty of delivery
-complete ownership
-capable to deliver
d) Precise determination
-to remove ambiguity when an object is not seen
-dispel all elements of ignorance (jahalah)

22. 21
The Purpose and Effect of a Contract
Purpose Principal aim as determined by the Shari’ah & the main reason for
which people use that contract.
Effect Consequences or results and the ensuing rights and liabilities of the
parties
Example ; The purpose of lending things (i’arah) is to give permission to the borrower
to use the borrowed item while its effect is to transfer the usufruct without
consideration.
Expression (iradah zahiriyyah) and Hidden Intention (iradah batiniyyah)
➔ The parties may conclude a contract for a purpose other than for which it is
intended.
➔ Cases where the motive of the contracting parties differs from the purpose of
the contract. Eg; Unlawful purpose when conclude a lawful contract.
◆ A gift given for a purpose to show appreciation can be used as a
camouflage for a bribe.
Should we take into account the hidden intention & purpose
of the contracting parties while determining the validity of a
contract?
Does the existence of invalid intention make a contract void?
Muslim jurist are divided into two groups on the issue of unlawful hidden intention or
purpose :

23. 22
THE SHAFI’IS AND THE HANAFIS THE MALIKIS, HANBALIS AND THE
SHI’AH FIQH SCHOOL
Looks at the purpose of the parties as
expressed in the agreement.
Looks at the hidden purpose of the
parties that is not expressed but could
be understood from the context.
- According to them, once the parties
enter into a properly concluded contract
the question of bad or good hidden
intention is irrelevant tothe validity of
the contract.
- As long as by mutual consent & fulfill
all its pillars and conditions.
- the bad purpose/hidden intention does
not change the purpose of the contract
and does not affects its validity unless it
is expressly mentioned in the agreement
and becomes one of its terms &
conditions.
- Takes into account the purpose of the
parties even if it is not mentioned in the
agreement or
provided one of the parties know the
unlawful purpose or has the means to
know through indications &
circumstances surrounding the contract
that the other parties has unlawful
motive.
- For example: A gift given to the
authority as a bribe.
- Permitting such contract would
promote prohibitions and sins & cause
the wrath of Allah SWT.
As long as the agreement does not
include the unlawful purpose of the
parties the contract is VALID.
If the motive or purpose of the parties is
unlawful, the contract is also VOID.

24. 23
Fictitious Contract (al-Aqd al-Sowri)
Example : Contracts that are concluded by person who are minor,
insane, drunk, sleeping or unconscious.
These categories of people might have made offer and acceptance. However, their
expression of offer and acceptance is not valid as they are not capable of making a
proper intention to conclude a contract.
1. DURESS
➔ A situation where a person is threatened and forced to conclude a contract.
➔ Coercion destroys consent and invalidates a contract.
➔ For example : Death and destruction of properties
➔ According to the majority of Fiqh Schools, the contract is VOID.
➔ However, to The Hanafis, it is a VOIDABLE contract which is once the
threat is over, the party coerced has a choice either to approve or dissolve
the contract.
2. MISTAKE
➔ A situation where a party may enter into a contract by mistake without
actually intending to conclude that contract.
➔ May involve subject-matter of a contract or its attributes.
➔ For example :
◆ Subject-matter
● A contract is concluded for the purchase of a computer while a
television set is delivered
● Invalidates a contract as it is void ab initio.
◆ Attributes of a subject-matter
● When a purchaser bought goods of a certain quality but later
realised that the goods delivered is in a lower or higher quality.
➔ The validity depends on the approval of the party who may suffer from the
mistake.

25. 24
3. FRAUD
➔ A situation where one of the parties to a contract is made to believe that the
contract is in his interest but in reality it is not.
➔ Can be actual, verbal or in the form of hiding the truth.
➔ Actual fraud
◆ A situation where the person through his actions changes the subject-
matter of the contract with the intention to cheat another person.
◆ For example : A person may change the mileage of his car in order to
make it look newer.
◆ Majority of Fiqh Schools says that the purchased has the option to
return the thing, while the Hanafis say the purchaser is entitled to
compensation.
➔ Verbal fraud
◆ When one of the parties in order to persuade the other party resorts
to lies and misinformation.
◆ For example : When a seller tells the purchaser that the goods that he
has offered for sale is unique which cannot be found in the market.
◆ But, it does not affect the validity of the contract.
4. DECEPTION (AL-GHUBN)
➔ May happen due to the ignorance of the purchaser as to the true price of the
sold item.
➔ For instance, when in a sale contract the subject-matter is sold for a higher
than the market price.
➔ Deception could be either slight (yasir) or serious (fahish)
➔ Slight (Yasir)
◆ A situation where goods are bought for a price that closely falls within
the range of price given by experts
◆ For example : Goods are sold for RM200, but experts value it at
RM190 or RM195.
◆ Unavoidable & does not affect the validity of a contract.
➔ Serious (Fahish)
◆ Where a certain property is purchased for a price that does not fall
within the estimated range by experts.
◆ Happens when a purchaser deceived up to 5% of the price of
merchandise goods, up to 10% of the price of animals & up to 20% of
the price of real properties.

26. 25
Conditions of a Contract
However, their presence does not necessarily mean that the contract exists.
Types of Conditions
Those attributes which if absent the contract will not come into
existence.

27. 26
CONDITIONS IMPOSED BY LAW.
1. CONDITIONS FOR CONCLUDING A CONTRACT
➔ The presence of these conditions is necessary; otherwise a contract cannot
be concluded.
◆ General conditions are those conditions which should be fulfilled in
all contracts.
● Includes conditions for offer & acceptance, legal capacity of the
contracting parties & subject matter of a contract.
◆ Specific conditions are the conditions that should be observed while
concluding certain specific contracts.
● For example : The physical transfer of a property is a
conditions in contracts of gift, borrowing, deposit, loan &
mortgage.
2. CONDITIONS FOR VALIDITY OF A CONTRACT
➔ Conditions which if not present would make a concluded contract either
void (batil) or violabe (fasid)
➔ For example : a contract should be free from the elements of uncertainty
(gharar) & ignorance about the price or types of currency.
➔ Similarly, contract entered into by duress & fraud are not valid.
3. CONDITIONS FOR THE EXECUTION OF THE CONTRACT
➔ A contract which is concluded and valid could not be executed unless the
following twoconditions are fulfilled.
◆ The party toa contract should be an owner of the subject-matter or
his authorised agent in case of minor his guardian. The child or
prodigal person is not allowed to enter into a contract unless their
guardian give the permission.
◆ The property should not involve a third party’s right. For example, an
insolvent person cannot sell/transfer his property toothers in a way
that would harm the creditors.
4. CONDITIONS THAT RENDER A CONTRACT BINDING
➔ All contract are binding unless there are options.
➔ The presence of options makes a contract non-binding until the options are
exercised either to confirm or cancel the contract.

28. 27
CONDITIONS STIPULATED BY THE PARTIES
★ Parties have a choice whether to conclude a particular contract or not.
★ Once they conclude a contract, they are not free to change its effect or add new
effects to it
★ The effects & consequences are already determined by Shari’ah.
★ Parties are not allowed to add conditions that may change the effect of a
contract. However, the parties can add conditions that are harmonious with
the effect & purpose of a contract.
★ According to Hanafi, Shafi’e and Maliki schools of Fiqh, conditions put by the
parties can either be valid or void.
VALID CONDITIONS
Valid conditions are divided into three sub-categories.
➔ Conditions which confirm the effects already attributed by the Shari’ah to a
certain contract.
◆ For example, a condition in a contract of sale stipulating that the
object of sale be delivered by the buyer is valid. The seller may insist
that he shall kept the sold item until total payment is made.
➔ Conditions which agree with the effect & purpose of a contract
◆ For example, the seller may require the purchaser to provide a pledge
or a guarantor in a deferred sale contract.
➔ Conditions which are customarily accepted
◆ For example, a sale contract may include conditions regarding the
delivery of the sold items, or a guarantee period during which the
sold item would be repaired.
VOID CONDITIONS
➔ The Shari’ah required that a contract should be concluded by mutual
consent & should be free from uncertainties, fraud & usurious elements.
➔ It is to create & maintain the balance of interest between the parties where
both parties may mutually benefit from a transaction & to avoid injustice.
➔ For example, it is not valid for a creditor to put any condition in a loan
contract that would benefit him as this amounts to usury.

29. 28
Classification of Contract.
1. CLASSIFICATION BASED ON CHARACTERISTIC.
This classification is based on whether a certain contract, which has certain
characteristic, is valid or void.
➔ The Majority divides contract into valid and void contracts.
◆ VALID contract is when all pillars are correct and their conditions
are met
◆ VOID contract is when one of the pillars or a condition is missing
➔ The Hanafis, divides contract into valid (sahih), voidable or irregular (fasid)
and void (batil) contracts.
◆ VALID contract is a contract which is legal in its asl (offer &
acceptance) and wasf (external attributes that are not in the essence
of a contract but falls outside it)
◆ VOIDABLE OR IRREGULAR when its essential elements are
present and all the essential conditions are fulfilled but it contains a
prohibited attribute.
● For example, a certain property is sold for an unknown price.
● Do not have legal effects
◆ VOID is where one of the pillars of their conditions is defective.
● For example, the subject-matter is not in existence.
2. CLASSIFICATION BASED ON NOMINATED AND NON-NOMINATED
CONTRACTS

30. 29
3. CLASSIFICATION BASED ON PURPOSE AND EFFECT
CONTRACTS FOR ACQUIRING OWNERSHIP (‘UQUD AL-TAMLIKAT)
➔ Contracts that are concluded for the purpose of obtaining ownership over a
property or its usufruct.
➔ Includes contracts of sale, gift (hibah), bequest (wasiyah), lease (ijarah),
borrowing items (i’arah) and waqf.
➔ Could be either:
◆ Commutative (‘uqud al-mu’awadhat) such as sale & lease where the
exchange of counter values takes place
◆ Gratuitous (tabarru’aat) where the exchange of counter values does
not take place such as the contracts of gift, bequest & waqf.
CONTRACTS FOR WAIVING RIGHTS (‘UQUD AL-ISQATAT)
➔ These contracts are used for the purpose of waiving rights.
➔ For example, a creditor may release his debtor from the debt (ibra) or a co-
owner or a neighbour may waive his rights of pre-emption.
CONTRACTS FOR AUTHORISATION (‘UQUD AL-ITLAQAT)
➔ These contracts concluded for the purpose of authorisation where a person
is permitted or authorised to perform a certain act.
➔ For example, the contracts of guardianship and agency (waqalah)
CONTRACTS FOR IMPOSING RESTRAINTS (‘UQUD AL-TAQYIDAT)
➔ Unilateral decisions which restrains a person from performing a certain act
➔ For example, it is possible in a certain situation to remove guardians
➔ Also restraining a person from insanity, idiocy and prodigality
CONTRACTS FOR PROVIDING GUARANTEE (‘UQUD AL-TAWTHIQAT)
➔ Toprovide guarantee or collateral to the creditors
➔ Contracts of kafalah, hiwalah & pledge (rahn)
CONTRACTS FOR PARTNERSHIP (‘UQUD AL-ISHTIRAK)
➔ Include partnership (musharakah), mudharabah & agricultural partnership
such as musaqat & muzara’ah
CONTRACTS FOR THE PURPOSE OF SAFEKEEPING (‘UQUD AL-HIFZ)
➔ Meant for protection and safekeeping of properties such as the contract of
wadi’ah

31. 30
4. CLASSIFICATION BASED ON THE TIME OF EXECUTION.
CONTRACTS THAT GIVE IMMEDIATE EFFECT (AL-AQD AL-MUNJAZ)
➔ Contract that should produce their legal consequences immediately upon
their conclusion.
➔ Effect cannot be postponed to a future date.
➔ For example, the effect of a sale contract is the immediate transfer of
ownership to the purchaser.
➔ A sale contract is not valid if it is concluded today but the ownership of the
sold item would be transferred next month.
CONTRACTS THE EFFECT OF WHICH COULD BE POSTPONED (AL’AQD AL-
MUDHAF LI AL-MUSTAQBAL)
➔ Producing immediate legal effects or the effects of which could be deferred
to a future date.
➔ The contracts of lease, kafalah, hiwalah may produce immediate or deferred
legal effects
➔ For example the contract of bequest (wasiyah) can only be executed when
the person who make the will dies.
CONTRACTS THE EFFECT OF WHICH COULD DEPEND ON CONDITIONS.
(AL-AQD AL-MU’ALLAQ ‘ALA AL-SHART)
➔ Depends on the fulfillment of certain conditions
➔ Includes agency (wakalah), bequest (wasiyah)
➔ For example when a person tells someone that if hes travel, he will become
the agent.
5. BASED ON THE REQUIREMENT OF PHYSICAL POSSESSION
★ ‘Aini’ contracts are those contracts which need the physical transfer of the
subject-matter and its possessions by the other party.
★ Includes hibah (gift), borrowing things (ijarah), deposits (wadi’ah), pledge
(rahn) and loan (qardh)
★ For example, it is not enough that the parties agree on a loan contract but the
lender should also transfer the amount of money to the borrower who should
take its possessions.

32. 31
Options of a Contract
★ A right given to one or both parties to a contract to either confirm or cancel
the contract. Contract is not binding on the parties until the option is
exercised to confirm it
★ Options allow the parties to think over the terms and conditions & to make a
choice which is the result or careful thinking and deliberation
★ Designed to protect the interest of both parties
THE OPTIONS OF SESSIONS
★ A right given to both parties to a contract to terminate a contract while the
session still continues and they are not yet seperated.
★ The contract is binding only after the session is over and neither of the
parties rejects the contract during the sessions.
THE OPTIONS OF CONDITIONS
★ Either or both parties insert a condition into the contract giving them an
option within a fixed period to either confirm or cancel the contract.
★ Togive the contracting parties more time to think about the terms and
conditions
THE OPTIONS OF DEFECT
★ Gives either of the parties the right to cancel a contract if he discovers in one
of the counter values a defect which was not known to him during the
conclusion of the contract.
★ Applicable to lease contracts and sales.
★ The affected party given an option to return the goods and claim his money
or he may keep the defective goods and ask for the refund.
THE OPTIONS OF DETERMINATION
★ The right of the purchaser to select from among three items, the one which
he would buy.
★ Applicable to contract where the parties agree to conclude the contract but
the buyer has not decided on the choice of the object during the session of
contract.
THE OPTIONS OF SIGHT OR INSPECTION
★ Right to the purchaser who has not seen the object, to confirm or cancel the
contract after inspection.
★ If he has seen the object, the option could not be established to him
★ Only establish to the purchaser as the seller is expected tohave the
knowledge of the item which he owns and sells.

33. 32
Termination of Contracts
BY CANCELLATION
➔ Certain contract are not binding and the contracting parties may cancel
them at any time
➔ There are certain contract which are binding on one contracting party but
not on the other
➔ All other contracts that are binding on both parties can be terminated in the
following situations.
◆ When a contract is voidable/irregular (fasid)
◆ By the exercise of options by the contracting parties
◆ Mutual agreement between the parties (iqala)
◆ Impossibility of executing a contract or frustration
◆ Natural way when the period for which it is concluded lapses or when
a contract achieves it purposes.
BY THE DEATH OF THE CONTRACTING PARTIES
➔ A lease (ijara) contract according to the Hanafis is terminated when either a
lessor or a lessee dies. However, majority says it cannot be terminated
because of death
➔ A pledge contract is terminated with the death of the pledgor.
◆ The heirs of the deceased pledgor can settle the debt of the pledgee
and release the pledged property which would be divided among
them based on the law of inheritance (faraidh)
◆ Failure to settle the debt entitles the pledgee to sell the pledge and
recover his debt
➔ Contracts of agency (wakalah) and partnership (sharikah) are not binding
on the contracting parties.
◆ These contract are terminated with the death of one of the parties
either the principal or the agent.
◆ A partnership contract however possible to believe that death can
affect the partnership so the heirs could replace the deceased partner
or other partner can buy his shares
➔ The agricultural partnership contracts of irrigation (muzara’h) & share
cropping (musaqat) are terminated by the death of either of the parties
◆ But for example the trees are about to yield fruits the partnership
would not be affected by the death.

34. 33
Chapter 9
Causes That Invalidate
Transactions

35. 34
The reasons that cancel the transaction
Generally, there are four causes that invalidate transactions, the first and most
important one is usury, second is Gharar, third one is gambling and fourth one is
haram property.
Usury, interest or Riba, is a defined amount of interest added and requested from
loans by the lender, and it causes unethical growth in the economy, it puts pressure
on the needy people who borrow for consumption, doesn’t share the risk with the
investors, the lender earns money without doing anything and bringing development
to the society which widen the gap of rich and poor classes in the society, does not
motivate people to cooperate and it leads to financial crisis, social disorder and
conflict by the end, and all those are not what Islam teaches to the society, that is
why Quran and Sunnah forbid usury.
Quran calls the lender and borrower of the usury contract the enemies of Allah,
referring to Riba al-nasiyyah, when debtor wills to pay his creditor stipulated
increase over specific time, here the defined amount and time are the problem, so
Islamic law prohibits renting money with interest even if it is used for productive
purposes because the business may not be successful by the expected time and
amount, but it asks for profit and loss sharing contracts like Musharakah, and
Mudarabah,which benefits the two sides of party which share the actual profit, and
the society as whole by job and money creation.
The second type of Riba is Riba al-fadl which is prohibited in the Sunnah by the
prophet, it happens when a Ribawi commodity which are; gold, silver, barely, dates
and salt ,( but according to Shafi’i all foodstuff is included) is exchanged for an
unequal amount of same commodity or delay in the time of delivery also is important
in the cases of equal amount of same commodity or unequal amount of different
commodity, so the commodity is not ascertained with same commodity but different
quality, and price of those can be changed through market and currency in different
times, plus it does not lead to Riba al-nasiyyah by some selfish people.

36. 35
Gharar: uncertainty, danger and peril: when substance is unknown but purchaser is
attracted tothe contract, and in Quran any deceivetion is forbidden. And clearly
Gharar makes people wrongfully believe they are earning from the contract and this
leads to conflict among the parties by the end. So to avoid that all pillars of contract
should be well defined, the time of delivery of the object also is important or some
information is hidden from one party, like selling a house cheaply without
mentioning it has Jins there!
However because of necessity in some condition then Islam permit the contract of
Salam, where still the object is not in existence, and the price and time are clear
however both parties accept the uncertainty of the market. So quality, quantity, price,
date of delivery and all the necessary details to ensure the interest of both parties are
covered in the contract.
There are however differences between Gharar and risk, as risk is the nature of
investing and marketing and it is not caused by cheating, unlike Gharar where loss is
directed and delivered by one of the parties because of some hidden information.
Gambling, when chances has taken the position of skill and entrepreneurship skills,
so the winner earn unlawfully from the losers without even exchanging counter-
values and efforts among the parties, and this is not the values Islam teaches its
followers, plus gambling bring addiction to the parties both of them do gambling to
survive and earn more,however a lucky prize offered by some companies is different
and it is not included in gambling because there is no losses to any parties.
Haram property, which contains the property or objects that is voided in Islam, like
wine business or now drug trafficking, and Muslims are not allowed to own,
use,produce,manufacturer, import or export any haram goods or even business like
prostitution, and conventional banks , because it corrupts the parties and the society
as whole.