Can I enter into a contract with haram clauses?
We might not realise it but pretty much every large company we have ever transacted with has a contract in place with us. The question is – are these contracts permissible to enter into?
But why would this even be a relevant concern if we know that the vast majority, if not all, our contracts have nothing to do with interest or haram items?
My Eon energy contract should prove the point: in it, it says that if I fail to pay on time then Eon has the right to charge me interest on my late payments.
My Eon contract has nothing to do with a haram transaction on the face of it, but here I am signing up to a contract that gets me to agree to pay interest.
In this article we break down when exactly entering contracts with haram elements is acceptable and when it is not.
With thanks to Mufti Faraz Adam and his excellent Messenger’s Money Morals course for a lot of the fiqhi material we have relied upon in this article.
Not all clauses in a contract count the same in the sharia
In the famous words of Shrek, “an ogre is like an onion”. Contracts are just the same: they have many layers. Well, 3 to be precise:
- Terms & Conditions
- Contextual Matters
Contextual matters include things such as transacting during a forbidden period of time (e.g. Friday prayers). This is not so relevant to our discussion here.
The integrals of a contract must be in place in order for a contract to be valid. They include:
- Clear and halal Sale item/subject matter
- Clear and unambiguous Price
- Appropriate Counterparties (e.g. have full faculties)
- Offer and acceptance
For our purposes (examining contracts we have in place with larger corporates), the only relevant aspect that we can sometimes fall foul of when it comes to the fundamentals is the sale item itself. This must be a permissible item.
Islamic law would not see as a valid contract the sale of pork or alcohol for example.
So far so good with my Eon contract – the buying and selling of energy is perfectly permissible.
Terms & Conditions
The issues crop up in the terms and conditions. There are a number of types of terms we can see in a contract. Here are some key ones that help explain the analysis.
- Essential condition – this is a further deeper articulation of what is already necessary as part of the integrals of the contract e.g. the specifications of the items or the delivery mechanism. This is a valid and enforceable term.
- Supporting condition – these are conditions which support the delivery of the integrals of the contract. For example, a guarantee given that the buyer will indeed make the payment (if the payment is deferred). This is a valid and enforceable term.
- Customary condition – these are conditions that are commonplace in that industry/market. For example, cooling off periods are common for online transactions (even when not enforced by law). This is a valid and enforceable term.
- Unfair condition – this is any condition that unfairly favours one party over another. This is a voidable condition. Where, if the oppressed party decided to void the contract (or went to an Islamic court to get it done), then the contract as a whole make become unenforceable. If nothing is voided, then the contract itself still stands, but the parties entering into it would be sinful.
- Fundamentally undermining condition – this is a condition which would render the entire agreement null and void (as opposed to just voiding that particular condition). This is because the condition is such that it
My Eon contract that is asking me to make late payment fees (which is a money for more money transaction) is impermissible and would be riba. This would be an unfair condition and therefore could render the entire contract voidable under the sharia.
Note: voidable means that the contract isn’t necessarily void, but if it went to court it is voidable.
Of course we know that many, if not all, major corporates will have some kind of term that bakes in late payment fees.
There are 3 ways we can approach this analysis:
- Allow the entry of these contracts due to necessity
- Say all such contracts are “faasid” or “voidable” and as such people who enter into them are sinful1.
- Allow the entry into standardised contracts with larger corporates where one cannot negotiate terms on the basis of ikrah (being forced into something against your will). This analysis is based on the contracts of al-ith’aan.
Under this analysis here are some conditions that would/would not be permissible.
|Late payment fees in a contract between individual and utility company||Ikrah applies||There is a large negotiation imbalance here between the two sides. The individual cannot negotiate terms.|
|Late payment fees in contract between individual and his builder||Faasid (voidable)||The individuals are equal in this negotiation and can set bespoke terms.|
|Interest bearing loan between two individuals||Baatil (void)||The fundamentals of this contract are haram and therefore this entire contract is void.|
When is it acceptable to enter into a contract with haram ancillary conditions?
“Okay, Ibrahim you’re saying that if a corporate has overwhelming power and you can’t really negotiate with it, that would justify an ancillary (i.e. not core) term being in a form I wouldn’t necessarily be happy with. But that leaves rather a lot of grey. How do I navigate this – where is the line?”
Let’s build things it up step by step:
First, the vast majority of scholars and schools (other than the Zaahiris) are happy to say that a contract of al-ith’aan with a large corporate that does not contain any problematic terms other than it doesn’t really give you room to negotiate – is fine due to either necessity, being a common feature of the modern economy and way of doing things, or because you technically still do have a choice: you can accept or walk away from that contract.
Second, everyone agrees that if you have a contract where the integrals and the active clauses (i.e. the clauses that are activated from the very start as part of the consummation of the contract) are impermissible, then the entire contract becomes impermissible.
The third layer is where there is debate: the contract where there is an ancillary term that is technically impermissible and you are unable to negotiate on that point.
Some scholars take a strong view on it and say that all such contracts should be avoided2 whereas others are much more lenient.
Their argument for, in particular, penalty clauses on late payment are:
- This is a clause that is in abeyance so not part of the active/operative part of the contract. And if an individual knows that if he does X, the impermissible part of the contract (currently in abeyance) will kick in, then he must do all he can to avoid such an eventuality.
- Given we live in the West, where interest-based late payment clauses are the established norm from HMRC, the courts, legislation and all standard contractual templates – and, crucially, these clauses are all in abeyance unless someone triggers them – such clauses could also be seen as allowed due to necessity or the ordinary conduct of the market3.
It may seem odd, but “the ordinary conduct of the market” and “making ease for people” are absolutely fundamental principles of the fiqh of trade and scholars throughout time have leaned on these principles to make things easier for people.
Indeed, we even have the Prophetic tradition of allowing Bai’ salam, bai’ istisn’aa etc. even though they are technically within the category of contracts where you are buying/selling something that doesn’t exist which is otherwise forbidden.
Assuming we run with these scholars’ analysis therefore, entering into any of the following contracts would become permissible:
- Entering into any contract with a large service provider
- Entering into a credit card contract
- Entering into a banking contract
- Buying a car on finance
But is this too lenient an approach? Should one only opt for strictly necessary contracts of this nature?
It may well be that you say “Ibrahim, okay, I buy the necessity argument, but I don’t buy the “part of the everyday way of doing things” argument. Therefore I will only enter such contracts where it is absolutely necessary for life.
That’s fair enough I guess, but it would put you in pretty severe difficulty for nearly all standardised contracts. If you’re a businessman who has a credit line with a supplier – that’s the end of your business. If you have paid a deposit on a holiday but not fully paid – well you can’t do that now. In fact, you basically can’t buy anything on a payment plan.
We’re personally comfortable with the “part of the everyday way of doing things” argument so would not encourage people to unnecessarily put themselves into difficulty.
These are nuanced and sensitive matters but it is important to keep an eye for the ease of the people, understanding the reality of modern finance, and simultaneously understanding the way of the Islamic scholar.
- The idea would be that the unfair condition does not go to the heart of the contract, and as such the term itself is unfair and sinful but it does not affect the broader contract ab initio. For further analysis see this quote and the underlying reference:
وفي هذا يقول صاحب [المبسوط] : (لأن الشرط باطل في نفسه، والمنتفع به غير راض بدونه) ، وهذا السبب لا يقوم في التصرفات الأخرى ومن ثم يسقط الشرط؛ لأنه فاسد، ولكن يبقى العقد على صحته. ——– ص243 – كتاب أبحاث هيئة كبار العلماء – العقود التي يكون فيها الشرط الفاسد مفسدا للعقد – المكتبة الشاملة ↩︎
- https://www.islamweb.net/ar/fatwa/460345/ ↩︎
- For analysis on this from a Hanafi perspective see: ص241 – كتاب أبحاث هيئة كبار العلماء – الأسباب التي دعت المذهب إلى القول بفساد الشرط والعقد في هذه الصور – المكتبة الشاملة.
See also: ص236 – كتاب أبحاث هيئة كبار العلماء – التمييز في المذهب الحنفي بين حالتن – المكتبة الشاملة ↩︎