LEGAL ASPECTS OF ISLAMIC LAW CONTRACTS

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CHAPTER 3: LEGAL ASPECTS OF ISLAMIC LAW CONTRACTS

Introduction

Islamic law business contracts are governed by rules that the scholars of Islām derived from the Glorious Qur‘ān and Sunnah. These rules emerge into maxims. The rules are based upon five major maxims, governing the actions of the Muslim in Islamic law agreed upon by most schools of law in Islām, the Ḥanbali, Maliki, Ḥanafi and Shafi‘i schools. 186 Burnuu identifies a sixth maxim, in this study. He elaborates on the maxim in the following section. 187 The following chapter comprises a summary of the six major maxims, followed by a brief description of Islamic banking.

The Six Major Maxims of Islamic Law

Al ‘Umūr Bi Maqāsidihah, Matters are Judged by their Intentions )

When implementing these rules to contracts in Islamic law, it should be apprehended that it was codified in four major sunni schools of law: The Ḥanbali, Maliki, Ḥanafi and Shafi‘i schools. These schools of law use two approaches to validate contracts. 189 The first approach concerns the format of the contract to be valid. The second approach concerns the intention of the contract as a vital component for a valid contract. Among these schools, the Ḥanafi and Shafi‘i schools contend that the intention is not required in validating Islamic law
186 Saiti, B. and Abdullah, A. (2016). ‘The legal maxims of Islamic law (excluding five leading legal maxims) and their applications in Islamic finance’, Journal of King Abdulaziz University, Islamic  contracts. 190 This relates to the contract form and structure. The second approach refers to the intention of the contract needed for validity. This position is held by the Ḥanbali and Maliki schools of law. 191 In reconciling these two positions in the schools, it should be considered that the form and intention of an Islamic law contract should both indicate means of validation.
If the rule is applied, “Matters are judged by their intentions.” In an Islamic law contract, the subject matter of a contract should only involve permissible activities of Islamic law. This indicates that the contract is governed by its form and intention, including the steps leading to its execution. All should be in conformance with Islamic law and there should not be an intention to circumvent or oppose actions prohibited by Islamic law.
Caution should be taken concerning engineering contracts, ensuring they maintain the essence of Islamic law. The wording of the SCP contract should convey its true intentions and should be explicit. The SCP contract should exclude Ribā, gambling, or excessive Gharar.

Al Yaqīn Lāyazulu Bi Shak, Certainty Cannot Be Removed by Doubt )كشلاب لوزي لا نيقيلا و ,ناك ىلع ناك ام ءاقب لصلأا) 192

Once contracting parties agree and the contract is in effective operation, neither party can accuse the other party of violating the contract without proof. It is presumed to be in operation and executed unless there is evidence that proves the opposite. Individuals cannot accuse each other of actions, without evidence.
The contract was in operation with all its pillars and conditions, signifying certainty.
Doubt or accusation cannot change that without definitive proof.

Al Ḍarār Uzāl, Harming Is to Be Removed: No Harming and No Harming Others (رارض لا و ,ررض لا)193

In the financial engineering of contracts, caution should be taken to exclude conditions that may negatively impact (harm) either of the contracting parties. The SCP contract should maintain equity and fairness to all contracting parties.

Al Mushaqqah Tajlibu Taysīr (Difficulty Brings Ease) )ريسيتلا بلجت ةقشملا( 194

Islamic law does not impose any obligation on an individual who cannot perform a mandatory duty. Individuals that encounter extreme hardship in their religion, life, family, intellect, or wealth, and may be harmed, are granted concession to perform a duty, prohibited until the hardship ends.
This rule can further be summarized in the following statement, “where there is a necessity, there is no law”.195 Once the condition of necessity is met, authorization is formed, allowing individuals to perform duties, normally prohibited, until the condition that warranted the necessity ceases.

Al ‘ādah Muḥakamah (Custom Is Referred to in Case of No Specific Limitations in the Shari‘ah )ةمكحم ةداعلا) 196

All matters involving initiating and resolving disputes in contracts are referred to the custom of the land where the contract is executed, as long as the contents of the contract does not oppose Islamic law.

I‘māl Al Kalām ’aulā Min Iḥmālih (the First Speech Is to Be Acted Upon Than Rejected) )هلامهإ نم ىلوأ ملاكلا لامعإ) 197

Contract language involves the wording of the contract. Applying this maxim would mean the language of the contract, whether verbal or written, is based upon reality and apparent meanings, according to the custom. The meaning of the words of a contract cannot be subject to interpretation, unless the words in the contract indicate a different meaning.

Practical Application of the Foundations of Fiqh

Several writers mention that Islamic banking requires Islamic scholars, grounded in economics and banking, to be considered qualified to approve SCP contracts.198 These authors imply that the Shari‘ah scholar’s knowledge of Islamic law is insufficient to provide a proper ruling on an SCP, unless that scholar is grounded in economics and the internal workings of the banking industry.199
On the contrary, those who work in the field of Islamic banking, require a certain level of knowledge on Islamic law to understand the rules that govern SCP contracts. Islamic banking workers should understand the rules related to the subject matter, pillars, and the conditions of the contract, considering any conditions of an individual that may allow an exception to any prohibitions.
An improved perception of a contract can be obtained by observing its purpose or its intention (between parties). The general maxim indicates, “Matters are judged by their intentions. (Al ‘Umūr Bi Maqāsidihah)” “matters” entail the actual actions of the individual, related to “intentions” for which an action is performed. As this relates to contracts in Islamic law, it would indicate the intended purpose of the contract. The sale of a product, prohibited by Islamic law, would deem the contract void.200 If the intended purpose of the contract involves a product accepted in Islamic law, it would be permissible or allowed according to Islamic law.
Islamic law forbids sales, transfers, renting, or involvement in unlawful transactions. Islamic law would void any contract, involving any unlawful transactions; the only exception relates to ‘necessity.’201 Once the condition of necessity passed, the exception is voided and Islamic law should be fully complied with. Contemporary Islamic scholars use the following criteria in applying Maqāsid Shari‘ah’s rules of necessity (the objectives of Islamic law):
• Preservation of religion.
• Preservation of life.
• Preservation of lineage.
• Preservation of intellect.
• Preservation of wealth.
In Islamic law, unlawful actions can be used conditionally to prevent the destruction of an individual’s religion, life, lineage, intellect, and wealth.203 The application of Maqāsid Shari‘ah’s rules, is based on the following maxim: “Difficulty brings ease. (Al Mushaqqah Tajlibu Taysīr)”. 204 If something unlawful is necessary to prevent the destruction of an individual’s religion, life, lineage, intellect, and wealth, permission is provided to discourage the destruction.205 Destruction can be defined as becoming non-existent or severely impaired, to the extent that it may cause irreparable damage to the individual and/or society.
These Islamic law objectives aim to protect the individual and the society from actions that can reason harm to the society, causing it to be unstable. This maxim, “Difficulty brings ease. (Al Mushaqqah Tajlibu Taysīr )” can apply to both the individual or group with identical circumstances, but not as a rule to the entire Muslim population within a specific location. This reasoning is based on another principle in Islamic law, stating, that “a ruling has to be free of impediments before it can be applied.” Circumstances between individuals, places, and things can vary; separate rulings or Fatāwa may be required for each situation. 206 Fatāwa derived for individuals living in separate locations, may differ according to their circumstances.
Contracts cannot harm either of the contracting parties. In applying the principle of necessity, no individual can be harmed, attributable to the easing of any restriction of unlawful actions. One harm cannot be enforced to eliminate another harm. These are covered under the maxim, “Harming is to be removed. (Al Ḍarār ‘Uzāl,)”.207 What is “Harm”? In financial transactions, “Harm” can be anything that would cause the destruction of wealth or have a negative impact on the individual and society that would cause disruption of normal social order.208 If a contract is disputed, the following maxim is applied in resolving the dispute, “Certainty is not removed by doubt.(Al Yaqīn Lāyazulu bi Shak)”. 209 As it applies to contracts, a claim of default against a contracting party without proof, is unacceptable. In signing the agreement of the contract, there were no impediments to prevent its execution. The contract remains in force until it is fully executed, default by a contracting party or destruction of the subject matter in a rental contract.210
In Islamic law, contracts may abide by the custom of the land where it was incubated, providing the custom of the land does not contradict Islamic law. The following maxim applies in this situation, “Custom is referred to in case of no specific limitations in the Shari‘ah. (Al ‘ādah Muḥakamah)”. 211
The prevalent custom in a location would apply between contracting parties, at the initiation, execution, or dissolution stages of a contract. There would be no objection in using financial instruments in the specific land for business contracts, providing the contract contains no elements that contradict Islamic law.
When contracts with their conditions are constructed, the following maxim is applied, “The first speech is to be acted upon than rejected. (I‘māl Al Kalām ’au lā min Iḥmālih)”.212 This maxim would be relevant in the wording of the contract, as the language of the contract is observed literally in its applied meanings, as it relates to the subject matter, pillars, and conditions of the contract.213
Evaluating Shari‘ah compliant product contracts in the United States, the six major maxims are the criteria, determining if a contract or transaction is permissible in Islamic law.

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Summary of Theory of Contracts in Islamic Law

Contracts in Islamic law perform the same functions as their commercial contract counterparts in the United States, such as buying, selling, renting, and investments. Islamic law governs SCP contracts. These principles prohibit usury, speculation, injustice, and circumstances that can lead to a dispute between contracting parties.

Requirements of Contracts in Islamic Law

Contracts in Islamic law must follow a certain format. This format represents pillars and conditions of the contract as it relates to the subject matter of the contract. These pillars and conditions would apply to all forms of Islamic law contracts. According to most scholars in Islām, both pillars and conditions of a contract should be present for a contract to be valid. If not adhered to, the contract is considered void.

CHAPTER 1: STUDY INTRODUCTION
CHAPTER 2: LITERATURE REVIEW
CHAPTER 3: LEGAL ASPECTS OF ISLAMIC LAW CONTRACTS
3.3.2 Ijārah (Leasing Contract)
3.3.3 Mushārakah (Profit-Loss Sharing Partnership)
3.3.4 Istisna‘ )Manufacturing Finance Contract)
3.3.5 Ba‘ Al-Salam (Forward Sale)
3.3.6 Sukuk (Islamic Certificates)
3.4 Issues of Contract Modifications
3.4.0 Conventional Contracts and SCPs
3.4.1 Guarantees/Insurance
3.4.2 Excessive Gharar (Uncertainty)
3.4.3 Securitization of SCP Contracts
3.4.4 SCP Contract Default
3.5 Conclusion
CHAPTER 4: METHODOLOGY
4.0 Introduction
4.1 Participants
4.2 Instruments
4.3 Procedures
4.4 Comparative Data Analysis
4.5 Limitations
4.6 Conclusion
CHAPTER 5: DATA ANALYSIS
5.1 Research Questions
5.2 Data Collection
5.2.0 Literature Review Data
5.2.1 Qualitative Interview Analysis
5.2.2 Validity and Reliability
5.2.3 Quantitative Data Analysis
5.2.4 Validity and Reliability
5.3 Summary of the Findings
5.4 Data Figures and Tables
5.5 Conclusion
CHAPTER 6: CONCLUSION
6.1 Discussion of the Data
6.2 Implications of the Findings
6.3 Limitations of the Research
6.4 Recommendations for Future Research
6.5 Conclusion
BIBLIOGRAPHY
APPENDICES
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