Freedom of Choice (Hurriyah al-‘Aqd) in Corporate Mu’amalat

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

The idea of freedom of contract under Islamic law operates around rather diverse principles in that the question as discussed or analyzed by the Islamic jurists contributes to the primary presumption of the fact that no contract, which derogates from any principle of the Shari’ah discipline may be validly concluded. This presumption, thus, automatically sets the doctrine against freedom of contract as it is understood and practiced in the west for the parties to a private transaction are only free to determine the terms and object of their agreement subject to the structures placed upon them by the Shari’ah. Thus, a contract providing for Riba is no more valid, according to the strict Shari’ah discipline.

The advocates of freedom of contract in Islamic law form the majority opinion of Hambali School of Thought. They quote verses from the Qur’an together with Ahadith in the similar vein to conclude that the injunction to fulfill all contracts and undertakings is unqualified and absolute. Further on the basis of the Qur’anic verse:

“He has explained to you that which is forbidden to you ”, and a Sahih Hadith related by Al-Tarmidhi to the effect that:

“Every agreement is lawful amongst Muslim except one which declares forbidden that which is allowed or declares allowed that which if forbidden”.

The advocates of freedom of contract argue that, there is a natural presumption of legality subject to the Qur’anic prohibition.

The majority of the Islamic jurists themselves make no indication that the scope of contracts exposed by them in the system of nominate contract should be closed. There is, therefore, a reasonable presumption that all contracts are valid subject to there being expressly forbidden by the Shari’ah sanctions or that they contain voidable stipulation or contravene Islamic prohibitions especially those of Riba, Maisir or Garar or public policy or morals.

Freedom to Make Stipulations

The freedom of contracting parties to regulate their contractual relationship by means of stipulation in the contract is one of the most interesting problems of the Islamic law of contract. The extent to which the contracting parties enjoyed the freedom to make stipulations was the subject of a wide difference of opinion among the Islamic jurists. The Hanafi and to a lesser extent, the Shafi jurists took the view that the effect of this proposition is the preclude of the partner not only from making stipulations, which are inconsistent with the prescribed effects, but also stipulation which modify or add to the prescribed effects of the contract. Consequently, any stipulation, which is inconsistent with or modifies or adds to the prescribed effect of the contract.

On the other hand, the Hambali and to a lesser extent, the Maliki Schools took the view that a stipulation is contrary to the prescribed effects of the contract only when it modifies or is inconsistent with the prescribed effects of the contract. Therefore, they argue that the parties are to make stipulations, which add to the prescribed effects of the contract, provided that such stipulations are not contrary to the express rules of the Shari’ah sanctions. It could be justified by the Prophetic sanction,

“How can men stipulate conditions which are not in the Book of Allah (swt)?”

All conditions that are not in the Book of Allah (swt) are invalid, be it a hundred conditions, Allah’s (swt) judgement is more true and His conditions are more binding.

Categories Of Stipulation According To The Islamic Jurists (Anwa’ al-Shurut)

Hanafi School of Islamic Jurisprudence

There are mainly two categories of stipulation outlined by the Hanafi School of Thought as highlighted as follows:

Valid Stipulations : The Hanafi School came very near to depriving the contracting parties of any freedom of whatsoever to make stipulations. This was largely due to its dogmatic adherence to the proposition that the effects of a contract are prescribed by law. According to them, the scope is very limited. Only the following stipulations are regarded valid.

i. Stipulation for the prescribed effects of the contract: The stipulation fall under this category may be labeled as our implied terms as practiced in today’s contracts of sales generally. For example it is an implied condition that the title of the subject matter of a contract of sale should be passed to the buyer, the buyer should pay the agreed price and the seller shall deliver the property to the buyer, are some of the prescribed effects of the contract of sale.

ii. Stipulation that consolidate or reinforce the prescribed effects of the contract. An example of such a stipulation is a stipulation by a seller that the buyer should bring a surety or give a pledge or make an assignment of the price. Such a stipulation consolidates one of the prescribed effects of the contract of sale, i.e. the right of the seller to receive the price. The stipulation fall under this category may be termed as express term as practiced in the contemporary commercial transactions.

iii. Stipulation sanction by custom: Stipulation sanctioned by custom was regarded as valid by way of exception on the principle of preference also. This is the only significant exception made by Hanafi School.

Invalid Stipulation

Apart from the exceptions outlined above, any other stipulation made by the parties to a contract is invalid in accordance with the general rule that the effects of a contract are prescribed by law and not by the parties. It is the invalidity, rather than the validity of stipulations that is the general rule.

There are two categories of stipulation treated as invalid according to Hanafi School of law. They are as follows:

a. Invalid stipulations, which are unseverable. In this category, the stipulations must confer an additional advantage on one of the contracting parties such as stipulation by the seller of a house that he should occupy it for certain period. A contract involves such a stipulation does not render itself invalid became the stipulation may be severed after a period of time from which point the contract would operate as effectives.

b. Invalid stipulations which are severable: Invalid stipulations other than those conferring an additional advantage on either of the contracting parties and which are made in relation to a contract that involves the exchange of prosperity for property, are severable.

Shafii School

There are two categories of stipulations outlined by the Shafii School of Islamic jurisprudence as follows:

Valid Stipulation : The Shafii School is nearer to in its approach to the freedom to make stipulation to the Hanafi than to any other two Schools except that the Shafii School does not recognize a stipulation sanctioned by custom as opposed to the view of the Hanafi School of Thought.

Invalid Stipulation : All other stipulations are regarded as contrary to the prescribed effects of the contract and therefore invalid. Invalid stipulations, which confer an additional advantage on one of the contracting parties, are unseverable and the contract becomes void (Batil). But it is not clear from the text whether such a stipulation makes all contracts void irrespective of their nature. An invalid stipulation that confers no benefit on either of the contracting parties is severable.

Maliki School

Maliki School of Islamic jurisprudence ruled out two categories of Islamic jurisprudence.

Valid stipulations : In Maliki School of law, stipulations are classified into three categories. Firstly, those for the prescribed effect of the contract. These are obviously valid. Secondly, those to the prescribed effects of the contract. These are obviously invalid and thirdly, the stipulations in which Maliki differs from both Hanafi and Shafii Schools, they are neither for nor contrary to the prescribed effects of contract.

Invalid stipulations : In contracts other than the contract of marriage, stipulations are invalid when:

(a) they are inconsistent with the prescribed effects of the contract such as the stipulated by the seller that the buyer shall not resell or make of a gift of the subject matter of the contract; or

(b) when they make the price uncertain as where a stipulation for a loan form a part of contract of sale, such as stipulation makes the price uncertain because if the loan is to be advanced by the seller, the price paid by the buyer will be the consideration for both the thing sold and for securing the loan.

Hambali School

Valid Stipulation : The Hambali School is reputed to be the most liberal of all Schools as regards the freedom to make stipulations. It is believed to be the only School, which makes the freedom to make stipulation the rule rather than the exception. The Hambali jurists made no attempt to formulate any jurisprudence arguments for or against the freedom to make stipulation. The permissibility of stipulation in Hambali School is wider than in Hanafi and Shafii School and a fraction wider than Maliki law, except as regards the contract of marriage where the liberalism of the Hambalis is not matched by any of the other Schools. Therefore, according to the Hambali School of law, a stipulation by a wife that her husband should not take a second wife or shall not ask her to live other than in her home town will be valid.

Invalid Stipulation : In Hambali School of law, a stipulation will be regarded as invalid if:

View of Ibn Taymiyyah

Ibn Taymiyyah argued that it is a basic rule of Islamic law that the contracting parties can make whatever stipulations they deemed fit for regulating their contractual relationship.

View of Ibn Qudamah

According to Ibn Qudamah, there are four categories of stipulations. They are as follows:

i. Stipulations of the essence of the contract. For example, the seller should deliver the sale object to the buyer and the buyer should pay the agreed price to the seller and it could be termed as implied term as practiced in the contemporary commercial practice.

ii. Stipulation connected with the legitimate interest of the parties. For example, the terms for a pledge or security to guarantee payment due, determination of the period over which payment is to be made, and specification of the required quality of services to be performed. The stipulations fall under this category could be well termed as express term in the contemporary commercial transactions.

iii. Stipulations contrary to the essence of the contract. For example, transfer of ownership is one of the essence of contract of sale, so that any condition which imposes a restraint upon the buyer’s power of disposal of the property, preventing him, for example, from giving it or hiring it to any other person or certain nominated persons fall into this category. The stipulation under this category is resemblance with the stipulations restraining on trade, which is unlawful, and therefore such stipulations have no room in the Shari’ah discipline.

iv. Stipulations, which neither reinforce nor contradict the essence of the contract but are designed to secure an additional benefit for one of the parties.

To illustrate Ibn Qudamas above views, the stipulations fall in this category cold be well termed as exemption clause(s), which generally should not have any justification under Shari’ah sanction as it gives an opportunity to a simple party with a monopoly gain while bringing some undesired and unfair situation for the other party. An exemption clause may be exceptionally justifies under Shari’ah principle subject to the fulfillment of the following conditions.

a. The clause contained in the contract should be made with a mutual and free consent of both the contracting parties.

b. The clause should not be put by a single party for his own benefit while ignoring the security of other.

c. The exemption clause should not be contrary to the Shari’ah sanctions, for a monopolous benefit and against the fundamental rights of the other party to the contract.