I had ended my last article with a question to which I did not receive any reply. No worries, I will chip in with the answer but before that let me summarize the query. I was talking about the misfortune that happened at the hands of an Islamic bank’s undisclosed agent while purchasing the consignment of Vietnamese rice for and on behalf of the Islamic bank. The shipment of inferior quality rice caused a pretty penny to the Islamic bank, ie the principal. The question was about fixing the responsibility for the loss, ie who should bear it, the principal or the agent?
There could be two situations here: first, the agent should straightaway admit the negligence of not appointing the survey firm despite the advice from the bank’s relationship manager to be careful while dealing with the new supplier. In this case, the Wakalah–Murabahah facility for this particular transaction shall be withdrawn by the Islamic bank and the customer shall be asked to retire the import bill against cash. This will result in the loss owing to receiving lower quality rice to be borne by the customer.
But if the agent does not want to admit the mistake, the dispute shall be referred to the bank’s Shariah board which will ask the Shariah auditors to investigate the matter and submit the report to enable the scholars to decide purely on the merit of the case, and not because they are part of the bank’s Shariah board. It is apparent what the Shariah auditors’ report would state and based on which, what the Shariah board’s Fatwa (Shariah edict) would be.
The Shariah board would declare that the customer failed to safeguard the Islamic bank’s interest while acting as its undisclosed agent for purchasing the rice. The Islamic bank shall also be appropriately covered from the ‘promise to purchase’ document submitted by the customer committing that it will be responsible to compensate the bank in case of its negligence.
Had the customer opted for the pre-shipment inspection by an independent entity, it would have incurred little extra cost but would have prevented the unfavorable situation.
We are about to conclude our discussion on the unrestricted agency and I want to talk about the agent’s malicious intention and what the Shariah redress is for such a situation. Assume an unrestricted agent has been entrusted to purchase a certain commodity for the principal’s trading activity. He has found a desperate seller and has been able to squeeze an excellent price against short-term credit for the goods which are relevant to the principal’s business and the demand which is growing fast.
The unrestricted agent concludes the deal and takes possession of the goods which it does not bring to the principal’s warehouse but sells them in the market, collects the proceeds and pays the supplier. The principal somehow comes to know of this underhanded dealing by the unrestricted agent and terminates the Wakalah agreement forthwith. At the same time, the principal sues the erstwhile unrestricted agent in the Shariah court, claiming damages equal to the profit earned by the agent.
The Shariah court shall declare that if the agency agreement was valid and in full force at the time of the agent purchasing the goods from the distressed seller, the constructive possession and title to the goods actually passed to the principal even if the principal was unaware of the purchase made by the agent. If the agent would have wanted to complete the transaction outside the Wakalah arrangement and for its own behalf, it had two options to choose from.
First, the agent should have obtained prior permission from the principal of its intention to complete the transaction not as the agent but in its individual capacity. Or the agent should have terminated the unrestricted agency agreement, provided it had not received the agency fee at the time of signing the agreement which makes the Wakalah contract irrevocable until the expiry or completion of the Wakalah task, whichever occurs first.
If the principal permits the unrestricted agent to keep the one-off purchase of the consignment outside the Wakalah agreement, there will be no need for the parties to terminate the agreement which will continue mutatis mutandis for the other transactions undertaken by the agent.
Now that I have built the blocks for the general agency arrangement, I intend to explain the investment agency agreement from next week since it plays a crucial role for an Islamic financial institution to deal with big-ticket transactions and make wholesale money for its depositors and shareholders.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Next Week: Discussion on the subject of Wakalah shall continue.