Islamic Law of Business Contracts and Transactions

Some of the major conditions that must exist for a contract to be valid under Shariah are listed below:

1. Existence of Parties to the Contract  

The parties to the contract need to be real, mature, sane and able to take responsibility.  

2. Existence of Subject Matter of the Contract  

The subject matter of the contract needs to exist at the time of the contract, it should be permissible and should be in the possession of the relevant part. 

3. Existence of Offer and Acceptance  

The offer and acceptance can be oral, implied or written. They also need to be immediate or within the timeframe agreed by the parties. 

4. Free Will of the Parties 

The parties should be free to enter into a contract and determine its contents, there should be no coercion or undue influence. 

5. Contract Should Not Contradict Any Objective of Shariah

The objectives of Shariah are referred to as Maqasid Al-Shariah and contracts should not contradict any of these objectives. 

6. Contract Should Be Free From The Prohibition of Shariah

The parties to the contract must ensure that the contract is free from all the prohibitions identified by Shariah. Apart from the five major prohibitions, these also include:

• Prohibition of sale of debt with debt 
• Prohibition of combining two mutually inconsistent contracts, or contingent contracts, in one contract 

7. Al-Kharaj Bi Al-Daman

This is a Shariah maxim that states that the entitlement of profit corresponds to the liability for bearing losses. In other words, an entity only has the right to profit under a contract, if it is willing to accept losses arising from the contract as well.