Having discussed the elements which make an offer invalid, we shall today deliberate on what features make a valid Shariah contract and how a contract can become void.
If a valid offer made by a party is accepted by the counterparty, they have a deal. However, there are certain other aspects which need to be taken care of in a Shariah compliant contract.
In an earlier article, we learned a golden Shariah principle that gain is to be realized only when there is a risk of loss. Keeping that in perspective, let us examine the key points which make a contract compliant with Shariah rules. First, if the parties are entering into a sale and purchase agreement, the seller must undertake the ownership and possession risks over the subject matter of the contract which must be in his or her possession at the time of making the offer. For example, if an Islamic bank has extended a trade financing facility to its customer, it must first acquire the ownership of the goods and possess them before selling them to the customer.
For so long as the goods are held by the Islamic bank, ie from the time these were purchased by the bank from a third party until these are sold to the customer, the bank remains exposed to the ownership and possession risks. If the bank tries to wriggle out of these risks by way of some fabricated means, such as obtaining an undertaking from the customer that it will assume the ownership and possession risks until the conclusion of the sale and purchase agreement between them, the transaction shall become void in Shariah law.
So, what can happen when the bank remains exposed to the ownership and possession risks? Well, the goods may get destroyed due to fire or flooding or could be stolen. These are precisely the ownership risks Shariah requires a potential seller to remain exposed to.
Once the sale and purchase agreement has been signed, these risks automatically get transferred to the buyer since he is now the owner of the goods. It is irrelevant if the goods continue to be stored with the seller, as the buyer may be making the arrangement to pick them up; the seller shall be absolved from the ownership and possession risks from the moment he signs the contract with the buyer.
An interesting question that comes to mind is what happens if the goods get destroyed in the seller’s warehouse after the sale and purchase agreement has been signed? Clearly, it will be the buyer’s risk since he is now the owner of the goods.
The same risks shall apply in the lease contract, with the exception that while the possession risk shall transfer to the lessee upon signing the lease contract, the ownership risks shall continue to remain with the lessor.
In the leasing arrangement, there could be situation that it is a headlease and sublease arrangement and the lessor under the sublease is not the owner but the sublessor. In this case too, the ownership risk will remain with the actual owner (ie the head-lessor) whereas the possession risk will rest with the sublessee and the sublessor (who originally leased the asset from the actual owner before subleasing) shall remain absolved from any risks since he or she neither has the ownership nor possession of the asset. However, this is only true if the actual owner has permitted him or her to sublease the asset.
What if a leased asset gets destroyed while it is in the possession of the lessee? Obviously, the actual owner of the asset shall bear that risk. Pause here – before fixing the responsibility to bear the loss by the owner, it will be examined if the destruction was caused by the negligence of the lessee or not. If the lessee is found to have mishandled the leased asset which caused the destruction, it will be responsible to make good the owner’s loss.
What if there is a partial loss to the leased asset? For example, in a lease arrangement where a fleet of four vehicles have been leased, one car meets with an accident and remains unusable until it is restored to the original working condition at the garage. If the police found that the fleet driver was at fault which caused the accident, the lessee shall continue to pay full rent to the lessor and also get the car repaired. However, if it is a third party’s fault, the lessor shall ensure that the damage is repaired, or the car is replaced, and during that time the lessor shall proportionately reduce the lease rent.
So you see, the Shariah principles are fair, logical and make a lot of sense.
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.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: Discussion on risks in an investment contract.