Islamic Law of Contracts

1123gh11
PhD Program
Term Paper
FRAUD AND DECEIT: COMPARATIVE LAW ISSUES
ISLAMIC LAW OF CONTRACTS
Semester January 2013
Professor Dr. Zainal Azam Abd. Rahman
Mace Abdullah
1000491

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ABSTRACT
This analytic research paper takes an expansive look at the legal theories of fraud and deceit
from the comparative law, Islamic Law of contracts and conventional law perspectives. It
posits that the Islamic Law of contracts may need further development in the area of fraud
and deceit, particularly as it relates to securities transactions, which inherently have
contractual implications. It is surmised that the Islamic Law of contracts presently does not
give a cohesive approach to these areas. It is remarkable that Islamic Finance is a primary
cause for the “revival” of interest in the Islamic Law of contracts. Yet, as Islamic Finance has
grown dramatically over the past several decades, the development of Fiqh in certain areas of
contracts seemingly lags behind the rapidly advancing Islamic Finance. The advancement and
“innovation” of Islamic Finance products is very likely to continue as Islamic Finance seeks
to assert itself as the financial system of choice. Failure of the Islamic Law of contracts to
advance could hinder those prospects. That is not to say that the “root” solutions to modern
day financial market abuses are nonexistent; because they do exist. Yet, modern day usoolis
and fuqahahi
must “dig” into the “roots” to find adequate remedies to such abuses as
securities fraud and deceit and intentional interference with prospective economic advantage
and contractual relations. This paper approaches these areas cautiously, but with deliberation.
Modern financial markets dictate adequate remedies for offenses in order to secure the rights
of investors and to penalize those who would seek to perpetrate fraud upon the marketplace.
This paper is a humble effort to draw attention to the need for further development and
application of the Islamic Law of contracts in this area. While one may suggest that these
“gaps” can be filled by the Qanunii
, this paper posits that the Islamic Law of contracts and/or
its “roots” should be proactive in providing the rules (ahkam) and principle direction in all
areas of Islamic Finance contracts, products and markets.
Key Terms: comparative law; misrepresentation; ghubn or ghabn; fraud; tadlees; deceit;
taghreer; breach of contract; naqd al-‘aqd; damages; ‘adhraar
i
Usoolis (this is an English contrieved plural to Usooli) refer to those Islamic Law (Shari’ah) scholars who
derive rules of law (ahkam) from the Sources of Shari’ah; while fuqahah refers to Shari’ah jurists who apply
those rules (ahkam) to cases.
ii
Qanun is enacted law by a Muslim government. It may be based on religious principles or it may be secular. In
democratic Muslim governments, it may be legislated through a democratic process, whereas in sovereign
states, it may result from decrees by a monarchy. More will be said of Qanun within the paper.

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INTRODUCTION
This paper is analytic and compares and contrasts both the similarities and differences
between the Islamic Law of contracts and conventional law as they relate to the legal theories
of fraud and deceit. The conventional law used in this paper draws extensively on common
law principles; particularly those of the United States. As a preliminary step to comparing the
treatment of fraud and deceit in contractual relationships, a cursory review of comparative
law theory is made to “set the stage” for the analyses.
This paper is important because it addresses what might be perceived as “stunted growth” of
a particular aspect of the Islamic Law of contracts. As Islamic Finance grows, Islamic Law or
Fiqhiii
must grow as well. This prospective growth can be analogized to the growth of a tree.
The Islamic Law of contracts is like a tree that is firmly rooted by its classical texts and life-
giving sources of law. But, its roots are buried under the fertile ground of its spiritual past;
discoverable by those who know of them. Its roots are watered by the spring waters of the
Shari’ahiv
. Without them, there is no life and the tree withers and dies. Yet it is its branches
that bear its fruit. The higher branches and the fruit they bear can be analogized to the
Maqasid ash-Shari’ahv
. They bask in the sun of today’s promise and hope of the warm rain
water of the future. So it is with Islamic Finance and its indispensible Islamic Law of
contracts. Roots and branches are not the same, but parts of a whole. The roots are firmly
fixed, but grow the tree must, as it adapts to its environment. As Almighty Allaah proclaims
in His Qur’an:
“See you not how Allaah sets forth a parable? A good word is like a good
tree, whose root is firmly fixed, and its branches are to the heavens. It
brings forth its fruit at all times, by the leave of its Lord. So Allaah sets
forth parables for men, in order that they may receive admonition. And the
parable of an evil word is that of an evil tree. It is uprooted from the surface
of the earth. It has no stability” (14:24-26).
The exigencies of today’s modern markets demand investors, intermediaries and others look
at the legal framework of jurisdictions as part of their financial decision-making process.
Financial development and economic growth have been linked empirically. Some studies in
this area have indicated that legal systems are a qualitative factor that must be evaluated in
order to ascertain the prospects for both financial development and economic growth (Beck et
al.1
2002). That research put forth the theory that financial intermediation better develops in
jurisdictions where (1) the legal and regulatory systems give high priority to creditors
receiving the full present value of their claims, (2) enforce contracts effectively, and (3)
promote comprehensive and accurate financial reporting. Thus, both the rights of creditors
iii
The body of Islamic Law or jurisprudence is named Fiqh, which implies a deep understanding of a matter.
iv
Shari’ah is the sum total of Guidance given human beings by their Creator, Almighty Allaah. It encompasses
law, but extends beyond law into all aspects of human existence.
v
Maqasid ash-Shari’ah are the higher goals and objectives of the Shari’ah that give live, progress and safety to
human beings.

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(which can easily be extended to investors) and the efficiency and effectiveness of contract
enforcement have been tested as being determinants of long-term economic growth in an
intermediation model.
This paper does not provide any empirical evidence, but it does seek to draw contrast
between the dominant contractual system and the Islamic system of laws in the area of
contracts with hopes of reevaluating the need for the Islamic Law of contracts to continue to
develop after a prolonged period of suspension resulting from the dismantling of the Islamic
khalifatvi
and the stifling shackles of colonialism and its aftermath. While it is true that
Islamic Finance holds the key to future sustainable economic development, it is also true that
the Islamic Law of contracts must continue its development in order for Islamic Finance to
become the leading system worldwide.
OVERVIEW OF COMPARATIVE LAW
Comparative law can be thought of as comparing the laws of one system, country or
jurisdiction with those of another. The comparisons can vary and be modified to meet the
goals or intuitions of the researcher. But, commonly the comparisons are either done on the
macro-level (e.g. Islamic Law compared to conventional law) or micro-level of particular
components within the systems or countries (e.g. contractual laws in one jurisdiction vis-à-vis
another).
At first blush, the comparative exercise might seem tedious. For the Muslim, comparing the
Fiqh derived from the Shari’ah to conventional laws may seem futile; it being believed
axiomatic as part of the Muslim worldview that the Shari’ah-based laws are superior and
there is little benefit that can be derived from the laws of others. Certainly, Muslims hold this
to be true in the area of ‘Itiqadiyyah, the branch of the Shari’ah that deals with the
fundamental religious belief system and related laws. Yet, Almighty Allaah declares in
Qur’an:
“O humankind! We have created you from a male and female and made you
into nations and tribes that you may know (or become acquainted with)
each other. Verily the most honoured among you in the sight of Allaah is
the most righteous among you. Allaah is the most knowledgeable, the best
informed.” Suratul Hujuraat, 49 Ayat 13.
The verbal form ta’aarafoo indicates “knowing” is significant in the Ayat. Lane suggests:
“(t)he difference between arafa and alima is that the former refers to
distinct and specific knowledge, while the latter is more general. Opposite
to arafa is ankara (to deny) and opposite to alima is jahila (to be
ignorant).” (Lane2
1863).
vi
Reference is made the last quasi-unification of Islamic culture worldwide in the Ottoman Empire.

5
Thus, it seems reasonable that engaging in a comparative examination of the laws of others is
a worthwhile exercise that can lead to greater mutual acceptance. More importantly, it can
lead to a greater understanding of one’s own laws. The reader is reminded that in what was
called his “Last Sermon,” Allaah’s Messenger, ASvii
, commanded his followers explicitly to
take his message to those who were not presence, as they may be more capable of
understanding it than those present. It is further noteworthy that those present were of the first
and most honoured of Islamic generations, including such torchbearers of Islamic Law as
‘Umar ibn al-Khattab, RAAviii
, ‘Ali ibn Abu Talib, RAA, and many, many more. This paper
suggests that comparative law not only familiarizes Muslims with the laws of others, but also
helps Muslims understand their own Islamic laws better.
One legal scholar puts it this way:
“Comparative analysis, however, can reveal more than the mere
relationship between various legal systems. It can be a window into our
own society's perceptions and intuitions. We know our native culture well,
have learned to appreciate it and, in some instances, we may assume it to be
superior to others. Sometimes we may be right, but just as often we are
wrong. Exposure only to a single legal system can be insulating and
distorting.” (Eberle3
2007).
Imam Ghazali indicates in his discussion of knowledge that one of the branches of religious
knowledge is that which “relates to the activities of the world, such as the books of law and is
entrusted to the lawyers and jurisprudent…” He elaborated by explaining further:
“If you question (w)hy have you included Fiqh or jurisprudence within the
worldly sciences and Faqihs or jurisprudent as worldly scholars, the reply is
this: Fiqh contains the laws of the administration of the world and Faqihs
are such lawyers. There is of course no doubt that a Faqih also deals with
religion, but that is done through intermediary of this world as the world is
the seed ground of the hereafter.” (Ghazali4
1993).
In this regard, the Messenger of Allaah, AS, when he came to Madinah Munawarah, once
came upon the indigenous people there artificially inseminating the palm trees. He is reported
to have said, what means: “…there is no need to do that.” Thereupon the farmers ceased
doing so and subsequently their crops failed. He then said: “You know more about your own
worldly affairs.” (Bukhari and Muslimix
).
vii
AS means ‘alayhi Salaam or Peace be upon him, the customary salutation upon the Messenger of Allaah,
Muhammad ibn ‘Abdullah.
viii
Radi’a Allaahu anhu, i.e. may Allaah be pleased with him; a accolade generally reserved for Companions of
the Messenger of Allaah, AS, who in Arabic are called Sahabah.
ix
These are references to Hadeeth collections of the sayings, actions and tacit approvals of Prophet Muhammad,
AS, which are alternatively referred to as Sunnah. The six most widely accepted in Islaam are: Bukhari, Muslim,
Abu Dawud, Ibn Majah, an-Nasai’ee and at-Tirmidhi. There are others, including Ahmad and the Muwatta,
however.

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The Messenger of Allaah, AS, is reported by his wife, Umm Salamah, RAA, to have said:
“I am a human being too. You come to me disputing and quarrelling.
Perhaps some of you indulge in logic to prove your assertions and it may be
that I give my decision on the strength of your argumentation. Should I,
therefore, give one that which is his brother is entitled to, he should not take
it, for it would be as if I am giving him a coal of fire” (Muwatta’).
These Ahadeeth demonstrate that even the Messenger of Allaah, AS, himself, was not
infallible and our own investigations, determinations and decisions should be tempered by
that fact. Moreover, it is known factually that the Messenger of Allaah, AS, rendered verdicts
based upon laws and customs that existed prior to the advent of Islaam. In fact, the Shar’
Man Qablana (earlier Scriptures) are generally regarded as a secondary Source of Shari’ah.
And Muslims are commanded to believe all the Books of Almighty Allaah, both in Qur’an
(2:4, 2:285, 5:44 and 5:46) and Sunnah (the Hadeeth of Jibreel, AS, found in the “Forty
Hadeeth” of Imam Nawawi and Bukhari). Similarly, the Messenger of Allaah, AS, imposed
the Arab tribal custom of ‘aqilah in at least one of his verdicts. It is ‘aqilah from which
Takaful (the Islamic notion of asset pooling to mitigate risks) can trace its Fiqh origins. The
Prophet, AS, being aware of this tribal practice, is reported to have used ‘aqilah in his rulings
as follows:
“Narrated by Abu Hurairah, RAA; who said that once two women from
Huzail clashed when one of them hit the other with a stone which killed her
and the baby in the victim’s womb. The heirs of the victim brought an
action to the court of the Prophet, AS, who gave a verdict that the
compensation for the foetus to be a male slave or female slave while the
compensation for the killed woman is a blood money (diyat) to be paid by
the ‘aqilah (the relatives of the father’s side) of the killer.” Bukhari, Vol. 9,
# 45.
In Muamulatx
the general rule of Fiqh is that of mubah or abaahah, i.e. permissibility unless
there is a specific nass or text that forbids the transaction. Thus, there is more latitude in the
interpretation of laws in this area which enable examinations and consideration of the laws of
other societies in the search for solutions to legal problems. We may, perhaps, thereby gain
insight into the administration and governance of various matters of this life, e.g. those that
relate to healthcare, urban planning, technology, capital markets, transportation, waste
management, pollution, employment and immigration to name a few. Each of these areas has
contractual implications. This is not to suggest that Islamic usoolis and fuqahah need mimic
conventional legal theorists as Islamic Finance practitioners have sometimes mimicked
conventional finance practitioners. But it is to suggest that something beneficial may be
derived from examining the problems they face in jurisprudence and applying Usool al-Fiqh
x
The branch of Islamic Law or Fiqh that provides rules for the human dealings or interactions and their
properties.

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principles to those problems. The failure to do so may very well result in the expansion of
Qanun instead of the expansion of Fiqh.
Theories of Comparative Law. There are competing views in comparative law. The two
prominent views are “transplanting” and “culturalism.” Professor Alan Watson is the
principal proponent of what is termed “transplanting” (Watson5
1976). Transplanting posits
that legal systems and societies are two separate “notions” and are largely autonomous. Thus,
a legal system or its concepts and principles can be transplanted into societies that are
radically different from the transferring society. They argue that lawmakers decide to import
or transplant other laws into their society because they perceive the laws to be good (Small6
2005).
Culturalists, such as Otto Kahn-Freund, postulate that because “law is a culturally determined
artefact,” it cannot be separated from its societal purpose or circumstances that gave rise to it
(Ibid). Put differently, legal systems are part and parcel of the culture that gives genesis to
them. Hence, they posit that a very large degree of “encounter is required before cross-
contextual or poly-contextual understanding will occur” between the legal practitioners of
different societies (Ibid). The extent of “diffusion” is linked to a number of factors or
contexts; e.g. the similarities between the two societies and cultures. Small defines “context”
as “those circumstances that specifically drive the development of a particular rule” (Ibid). It
is analogous to the Fiqh and conventional law concept of spatio-temporality, which
represents the poly-contextual “dimensions of space-place and time” (Khan7
2009).
Diffusion is the process by which legal constructs are spread. The literal meaning of diffusion
is to spread something, as in all directions. It also has the meaning of something slowly being
mixed with something else. In technical terms, “diffusion” can be said to be the speed at
which laws from different societies influence each another. Diffusion may not necessarily be
the “mixing” of the rules of law between the societies or systems, but may be the degree to
which they are parallel to one another in functionality or usage. This has been sometimes
described as “parallelism” in comparative law discussions. When diffusion is evident, it has
been described as “pluralism.” Another way of ascertaining diffusion may be to observe what
changes in the rules and what does not (Westbrook8
2008). As Westbrook states:
“The phrase “diffusion of law” suggests that laws similarly will lose their
identities and be folded into an amorphous mass...Diffusion suggests the
fear of…homogenization; the fear that our legal system, and by implication
our culture, will lose whatever it is that makes it special. Not too deeply
buried within this anxiety are worries that ethnicity, race, power, home, and
the seat of our beliefs will be obliterated by, or at least subordinated to, a
modern global culture” (Ibid).
Of course, Westbrook reluctantly admits in a footnote that some values are worth preserving
and protecting, i.e. resisting diffusion (Ibid).
Two other comparative law views are also noteworthy; i.e. the functional method of
comparative law and the concept of natural law. In 1971, Konrad Zweigert postulated the

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basic methodological principle of all comparative law is that of functionality (Michaels9
2006). Functionalism posits that in substance it shifts the focus in comparative law from
attempts to understand how things ‘really’ are (their substance) to understanding them only in
their (functional) relation to particular viewpoints (their function). In a less abstract sense,
functionalism posits that if “similar problems cause similar solutions, then the solutions must
somehow be inherent in the problems, and similar functions must be fulfilled by the same
kinds of institutions” (Ibid). Moreover, functionalism asserts that social needs repeatedly give
rise to legal problems and that in response to these “needs,” correlations can functionally be
found between institutional forms because they are the “natural” or “preferred” means in
dealing with the legal problems; i.e. though from different sources, the legal rules are
functional equivalents. In this sense, its most useful purpose might be that of an “evaluative
function of determining the better law” (Ibid). To that end, it can be said that the true function
of laws is to secure justice based upon truth.
An example of the application of functionalism can be seen in the arbitration dispute between
Saudi Arabia and ARAMCO. The arbitration panel in that case wrote:
"Although the Concession Agreement is connected which the Hanbali
school of Moslem law, as applied in Saudi Arabia-from which it derives its
validity and effectiveness-the Interpretation of this Agreement should not
be based on that law alone. The Interpretation of contracts is not governed
by rigid rules; it is rather an art, governed by principles of logic and
common sense, which purports to lead to an adaptation, as reasonable as
possible, of the provisions of a contract to the facts of a dispute…”
http://www.trans-lex.org/260800.
It further stated:
“Law must, in case of need, be interpreted or supplemented by the general
principles of law, by the custom and practice in the oil business and by
notions of pure jurisprudence…” (Encyclopaedia of Hydrocarbons10
).
What these statements indicate in the modern law context is that law must have a flexible
nature to it. That is because techniques, technologies, terminologies and dealings in general
among human beings change with time. However well intended, too rigid an interpretation of
Fiqh does not always lead to the best result. It may be for this reason that the Fiqh legal
maxim that states “custom is a source of law” is one of Islamic Law’s most powerful,
because custom or ‘urf will incorporate into its practices and conventions, the techniques,
technologies, terminologies and dealings that tend to work best for society.
Natural law is somewhat embedded in the functional methodology of comparative law.
Though natural law was discussed by the Greek philosophers of Athens, it was Thomas
Aquinas, the Christian monk, who is best known for articulating the theory of religious
natural law. In substance, he posited:

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“[T]he rational creature is subject to Divine providence in the most
excellent way, in so far as it partakes of a share of providence, by being
provident both for itself and for others. Wherefore it has a share of the
Eternal Reason, whereby it has a natural inclination to its proper act and
end: and this participation of the eternal law in the rational creature is called
the natural law” (Weinreb11
2004).
Thus, one can see that in a sense, natural law is to comparative law, what Adam Smith’s
“invisible hand” is to economic theory. Yet, Aquinas used a normative approach, while
modern day proponents of natural law have modified it to fit their positivistic notion of law
(albeit laced with moral considerations). For example, Weinreb posits that secular natural law
consists of: (1) the right not to be subjected to constraints too great to be resisted; (2) the right
to physical and mental well-being; (3) the right to education; (4) the right to moral consciousness; and
(4) the right to moral opportunities, or plainly put, the freedom of choice, even if that opportunity
leads to moral mistakes (Ibid).
International law is mentioned here briefly as it will be referred to shortly in the context of
the conventional view of “fraud and deceit.” International law can apply to states,
organizations or private parties. The latter is the focus of this paper. International law is based
on treaties, conventions, customs or principles. It is particularly important in cross-border
and/or mutli-jurisdictional dealings. Of special consideration are the enforceability provisions
in the contracts, as well as the dispute resolutions features. Negotiations are important where
the parties have divergent understandings of the law of contracts and it concomitant
principles. Hence, contracts must be thoroughly thought out and well written to reflect the
understandings of the parties involved and the likely interpretation given to the contract
terms.
There have been several attempts to harmonize international contracts. Most notable may be
regional efforts, e.g. the European Union’s Principles of European Contract Law. There have
been other initiatives in the area, which include: (1) the United Nations’ Convention on
Contracts for the International Sale of Goods (CIGS); (2) the UNIDRIOT Principles of
International Commercial Contracts; (3) the Hague Principles on the Choice of Law in
International Contracts; and (4) the suite of contracts promulgated by the International
Federation of Consulting Engineers.
CONTRACTUAL NORMS AND DECENCY
There are a number of comparative contractual norms of decency found in the Islamic and
conventional laws of contracts. The Islamic norms include, but are not limited to: (1)
trustworthiness; (2) truthfulness; (3) generosity in bargaining; (4) modesty of claims; (5)
leniency towards the debtor; (6) voluntary rescission; and (7) the prohibition of “cut-throat”
business practices. All are amply buttressed by nusus or texts in Qur’an and Sunnah
(Hassan12
2006).

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For example, Almighty Allaah says in Qur’an:
“O you who believe! Eat not up your property among yourselves unjustly,
except that it is a trading by mutual consent of yours…” (4:29).
“Give in full the measure and do not be of those causing loss. And weigh
with scales that are straight. Do not defraud people of their things, and do
not commit corruption in the earth” (26: 181-3).
“Woe to those who give less in measure and weight. Those who, when they
have to receive by measure from men, demand full measure, and when they
have to give by measure or weight to men, give less than due” (83:1-3)
The Messenger of Allaah, AS, re-emphasized these principles:
“O you traders, beware of telling lies in (your business) transactions” (at-
Tabaarani).
“It is unlawful to possess the property of a Muslim without his express
consent” (al-Bayhaqqee).
“The truthful merchant (is rewarded by being ranked) on the Day of
Resurrection together with the Prophet, the truthful ones, the martyrs and
the pious people” (at-Tirmidhi).
Hakim b. Hazim, RAA, reported Allaah's Messenger, AS, said:
“Both parties in a business transaction have the right to annul it so long as
they have not separated; and if they speak the truth and make everything
clear they will be blessed in their transaction; but if they tell a lie and
conceal anything the blessing on their transaction will be blotted out”
(Muslim).
Abu Hurairah, RAA, reported that the Messenger of Allaah, AS, said:
" Do not envy one another, and do not inflate prices for one another, and do
not hate one another, and do not turn away from one another, and do not
undercut one another in trade, but be slaves of Allaah and brothers. A
Muslim is the brother of a Muslim: he does not oppress him, nor does he fail
him, nor does he lie to him, nor does he hold him in contempt. Piety
(taqwaa) is right here [and he pointed to his chest three times]. It is evil
enough for a man to hold his brother Muslim in contempt. The whole of a

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Muslim is inviolable for another Muslim: his blood, his property and his
honour" (Muslim).
This last Hadeeth is particularly important relative to a later discussion herein below
regarding fraud and deceit and related damages (‘adhraar) because it states that lying to one
another is a violation and that the “whole” of a Muslim is inviolable. Moreover, it annotates
the three areas of damage (dharar), i.e. blood (personal injury or diyat), property (or mal) and
honor (or ‘ardhu). The latter term, ‘ardhu, carries such meaning that it takes up over eleven
pages in traditional explanatory definitions and notes in Lanes (see endnote 2). Among the
meanings given to ‘ardhu are to:
 Put someone in a state of disquietude of mind or destruction of the mind
 Make something as an obstacle to another
 Defraud
 Expose someone as to harm
 Hinder or obstruct
 Dishonor someone or his/her family
 Intervene carelessly
 Cover (as with a cloud or darkness) everything except gold or silver
 Deceive
Thus, it is abundantly clear from the nusus or texts that not only are honesty, decency and fair
dealing settled norms in the Islamic Law of contracts, but the protections afforded to innocent
people are comprehensive in scope, including mental security. It should be further noted that
these are some of the same protections afforded Muslims under the Maqasid ash-Shari’ah,xi
i.e. protection of each person’s self (nafs), property (maal), spiritual life (deen), intellect
(‘aql) and family (nasl).
Sanctity of Contract. There are several Ayat in Qur’an that command and declare the
sanctity of contracts and of keeping commitments once given. Among them are:
“O you who believe! Fulfill the contracts…” (5:1).
“…And fulfill the covenant; verily the covenant shall be questioned about”
(17:34).
“Allaah will not impose blame on you for what is meaningless in your
oaths, but He will impose blame upon you for what you intended of
oaths…”(5:89).
The Messenger of Allaah, AS, plainly stated:
xi
Higher Objectives of the Law, which include the mandatory protections of religion, life, family, mind and
property

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“The Muslims are bound by their stipulations” (Abu Da’ud).
“Every agreement is lawful among Muslims except one which declares
forbidden that which is allowed, or declares allowed that which is
forbidden” (at-Tirmidhi).
The conventional notions of the sanctity of promise parallel the Islamic Law of sanctity of
contract. The conventional underpinnings are based on natural law, moral compulsion,
private autonomy (a notion that individual freedom is an extension of rights conferred by the
state), reliance (a notion that it is the vulnerability of the promisee that necessitates that
contracts be held sacrosanct) and the necessities of trade (i.e. a indispensible tool of social
and economic order). (Calamari13
1982). While this paper is not the place for a detailed
discussion of all of these premises to the conventional theory of sanctity of promise, a quote
from former American Chief Justice of its Supreme Court gives the reader a glimpse of the
conventional view, particularly the aforementioned notion of natural law:
“If, on tracing the right to contract, and the obligation created by contract,
to their source, we find them to exist anterior to, and independent of
society, we may reasonably conclude that those original and pre-existing
principles are, like many other natural rights brought with man into society;
and, although they may be controlled, are not given by human legislation”
(Ibid).
Moreover, it is noted by Calamari that this notion of enlightened natural law was preceded by
canon law (Catholic) and rabbinical (Judaic) thinking during the Middle Ages and
Renaissance periods of conventional legal development (Ibid).
Implied Covenant of Good Faith and Fair Dealing. Under prevailing common law
principles "(e)very contract imposes upon each party a duty of good faith and fair dealing in
its performance and enforcement" (Restatement (Second) of Contracts14
§ 205). Good faith is
defined in the Uniform Commercial Code § 1-201(20) as "honesty in fact in the conduct or
transaction concerned" (Ibid). Good faith performance or enforcement of a contract is based
on “faithfulness to an agreed common purpose and consistency with the justified expectations
of the other party; it excludes a variety of types of conduct characterized as involving "bad
faith" because they violate community standards of decency, fairness or reasonableness”
(Ibid).
Fair dealing in the implied covenant of good faith has been interpreted in a manner that
requires performance that is “fair” and “reasonable.” Parties cannot merely perform in
accordance with the terms of a valid, enforceable contract; the performance must lead to a
result that a court would see as fair. Thus, the terms of the contract will not be allowed to
control if they lead to an unfair result and a court will intercede to reform the contract
accordingly (Dobbins15
2005). The requirements under this conventional law notion are

13
implied, as opposed to expressed, and are part of every contract in most common law
jurisdictions. In many such jurisdictions, the consequences of contractual conduct being
carried out in “bad faith” may result in the conduct being viewed by a court as tortious or
harmful to the innocent party’s person or property. Moreover, because they are implied, they
cannot be waived as a matter of law in many jurisdictions.
Islamic Law of contract has the notion of good faith and fair dealing as well. It has been
defined as husn al-niyyah or an act done with good intention or faith. Thus, it compels the
parties to deal with one another honestly, i.e. full and fair disclosure. In this respect, it is
found in Qur’an:
“O you believers! Do not betray Allaah and the Messenger, nor knowingly,
betray your trusts” (8:27)
And it is reported by 'Abdullah ibn 'Amr ibn al-'As that the Messenger of Allaah, AS, stated:
"If anyone has four characteristics, he is a pure hypocrite, and if anyone has
one of them, he has an aspect of hypocrisy until he gives it up: whenever he
is trusted, he betrays his trust; whenever he speaks, he lies; whenever he
makes an agreement, he breaks it; and whenever he quarrels, he deviates
from the truth speaking falsely" (Agreed uponxii
)
Good faith and fair dealing can be observed in the Islamic Law of contracts in several of its
original contractual forms, i.e. murabahah (cost-plus, which requires disclosure of cost),
tawliyyah (sale at cost), wadee’ah (resale at less than original cost) and ishraak (the selling of
part of a partner’s share in a firm or partnership at the price he originally paid with the shared
ratio being fixed and known to each party). These are the contracts of trust or ‘uqud al-
amanah in Fiqh (Abdullah16
2009). However, there has been some erosion of these salient
principles in the nominate contracts of musaawamah, e.g. bai bithaimin ajjal (BBA), where
the exigencies of modern commercial transactions necessitate an implied fairness in dealings.
Nonetheless, the conventional law notion of caveat emptor or “buyer beware” has no
counterpart in the Islamic Law of contracts. Defects, as we shall see, are subject to the
khiyaar ash-shurut or various rights of option under the rules of Fiqh.
Price fixing and intervening to inflate prices secretively is proscribed as Abu Hurairah, RAA,
reported Allaah's Messenger, AS, as saying:
“Do not meet the merchant on the way and enter into business transaction
with him, and whoever meets him and buys from him (and in case it is
done, see) that when the owner of (merchandise) comes into the market
xii
This designation indicates that the Hadeeth has been authenticated in both the collections of Bukhari and
Muslim (generally regarded as the most authenticated Ahadeeth).

14
(and finds that he has been paid less price) he has the option (to declare the
transaction null and void)” (Muslim).
ISLAMIC LAW OF MISREPRESENTATION
The Islamic Law of contract prohibitions against fraud (tadlees) and deceit (taghreer) are
penumbra rules that lay in the “shadow” of the general contractual prohibitions against
excessive ambiguity (gharar) and are intentional forms of misrepresentation (ghabn or
ghubn). Gharar can be defined as excessive or intolerable uncertainty or ambiguity in
contracts. Linguistically, it has meaning of something likeable in appearance, but distasteful
in reality (Lahasna17
2012). Technically, gharar signifies intolerable “uncertainty or
ignorance of one or both parties of the substance or attributes of the subject of sale or doubt”
of the subject matter’s “existence at the time of sale.” It is a form of risk that is avoidable and
therefore prohibited. The presence of gharar in an Islamic contract will result in it being
either void or voidable (Ibid).
There are several classifications and varieties of gharar. The most notable classifications are
those of gharar faahish and gharar yasir, the former being the prohibited class because of its
intolerability and the latter being that which is allowable due to its minor or tolerable nature
(Ibid). These come in a variety of forms, depending on their effect. They include:
 Gharar al-wujud (that due to non-existence)
 Gharar al-husul (non-possession casting doubt on the result of transaction)
 Gharar al-kimmiyyah (doubt as to quantity)
 Gharar al-jins (uncertainty as identification of specifications)
 Gharar as-sifa (uncertainty as to attributes)
 Gharar al-ajjal (uncertainty as to delivery)
 Gharar al-iskaan (uncertainty as to place of delivery)
 Gharar at-taiyin (uncertainty as selection).
Ghubn can also render a contract void or voidable under the Islamic Law of contracts. Ghubn
has the literal meaning to decrease or reduce the price or counter-value. Technically, it is to
diminish the value of the subject matter of a “commutative contract where the value of one of
the object is lesser or higher than the actual value at the time of contract” (Omar18
et al 2011).
The concept of ghubn is one of imbalance between the counter-values in a transaction.
Needless to say, this is sometimes as much subjective as it is objective. In other words, what
the value is to one person may be, and often is, different from what it is to another. Hence,
therein exist its classifications and anomalies below.
Ghubn is classified as either ghubn faahish or ghubn yasir, wherein the former is “excessive
loss suffered by a party to the contract as a result of concealment or misrepresentation, or
deception or fraud practiced by the other” and the latter occurs when “the difference between
the price at which goods were sold and their real market is so small that the merchants do not

15
generally take it into account in their dealings” (Ibid). The materiality of the imbalance can
be quantified, as in Article 165 of the Majella or “Ottoman Code,” wherein:
“excessive deception” is not less than 1/20th
of the total price of goods,
1/10th
of the price of animals and 1/5th
that of real estate unless
accompanied by fraud or verbal deceit (Rayner19
1991).
If there is ghubn faahish (i.e. a gross imbalance or inequity of values) without fraud, the
person deceived cannot rescind the contract. The converse is true, i.e. if fraud is present, she
may rescind the contract. Thus, the contract is voidable only if there is tadlees or taghreer
according to Majella (Ibid). This anomalous treatment of ghubn faahish can further be seen
by the treatment under the different mudhahib or Islamic legal schools of thought.
The Hanafi, Shafi’ee and Hanbali schools tend to be more inclined to allow such a contract to
be voided in the absence of fraud when the person or institution involved is in need of public
protection because of vulnerability, e.g. a minor or waqf donor, etc. This approach has been
adopted by Civil Code of UAE as well (see Law No. 2 of 1987, Article 191). Ibid. It reads:
“A contract may not be cancelled on the basis of a gross cheat (ghubn
faahish) in the absence of misrepresentation (taghreer) save in respect of
property of a person under restriction, waqf property, and property of the
State” (UAE Civil Code 1987).
Accordingly, the jumhor or majority treatment of ghubn without fraud resembles mistake
(ghalat) and the contract cannot be voided without mutual consent (iqalah). The assumption
here is that absent fraud or deceit, the parties have equal bargaining power and have struck
the bargain that they both believe is in their best interests, notwithstanding the imbalance in
values. What is noteworthy here is that there is no imposition of riba on the party receiving
less in ostensible value. One is left to wonder why? One answer may be that the value of the
subject matter is subjective vis-à-vis objective. Hence, the value of the subject matter is in the
“eyes” of the buyer. Yet, this subjective notion is not extended to damages (‘adhraar) as we
shall see shortly. Instead, what is seen as loss to an aggrieved party under the rules (ahkam)
for ghubn, is deemed speculative under the rules for damages (‘adhraar), without opportunity
to present evidence as to the basis of such claims. This leads legal observers to see such
“assumptions” as arbitrary; even contrary to the admonition that the “whole of a Muslim is
inviolable” (see page 10 herein above).
It should be noted at this juncture that many of civil codes and laws in predominantly Muslim
countries may be the result of Qanun filling the gap left by the stunted growth of Fiqh.
Clearly, many of the codes cited by Rayner relating to Kuwait, Bahrain and UAE are Qanun.
Strong Fiqh influence can be seen in some of them, while others have “mimicked”
conventional law because Fiqh has left a gap by either failing to address exigencies resulting
from changes in the modern financial climate or addressing the needs too slowly. In some
Muslim nations, a “Chinese wall” of sorts has been placed between the Fiqh and Qanun. That

16
would appear to be the case in Indonesia and certainly is the case in Turkey (supra Khan).
This dichotomy in “Islamic” Law results in a lack of cohesiveness with component areas of
law within Islamic societies. Some state that their laws are subservient to Qur’an and Sunnah,
e.g. Saudi Arabia (Ibid). As Khan puts it:
“The qanun may codify the opinions of fiqh in the form of statutes.
National and provincial courts may rely on fiqh to construct new holdings.
Statutes and cases that incorporate fiqh may be called the fiqh-based qanun.
In fact, a Muslim state may codify opinions of fiqh and officially adopt it as
the qanun, thus removing doubts that the fiqh is the law of the state…”
(Ibid).
Qanun provides the “diffusion” or fluidity that Fiqh must provide. The fuqahah should make
a concerted effort to lead and not follow or else we have the untenable position of the “cart
being in front of the mule.” That is because Qanun is not Fiqh, as the latter applies the divine
nusus or texts to human affairs, while the former may or may not.
Tadlees and Tashriyyah. Fraud, in general, is grounds for nullification (voiding) of
contracts in Fiqh. Under the Islamic Law of contracts, fraud is differentiated in form as can
be seen from the discussion of ghubn faahish. However, for purposes of this paper, two
primary forms of fraud are focal, i.e. tadlees (essentially fraud by concealment) and taghreer
(deception).
Tadlees is taken from the Arabic word dalas; meaning darkness and concealment. Thus,
literally, it signifies the concealment of a defect in the subject matter (maudu ‘alayh) in a
sale. Technically, most jurists use it in the same manner. However, the Hanbali madhab has
enlarged its meaning to include the buyer giving the illusion that the subject matter has “one
or more attributes that would make it worth more than it really is” (ISRA20
2010). This
element imposed on the meaning of tadlees by the Hanbali madhab results in it having a
deceptive characteristic, in addition to concealment.
Tashriyyah is a particular type of tadlees relating to the sale of livestock. It is to tie the
“udder” of a camel, sheep, cow or other animal to cause it to accumulate milk so as to give a
false impression to the buyer. This then is the “illusion” that the Hanbali madhab has
imposed to expand the scope of tadlees (Mansuri21
2010). Tadless has a number of other
forms in which it is combined with other forms of trickery to accomplish its evil ends. They
include khilaabah, where khilaabah is any deception that “induces the other party to enter
into a contract.” It appear to be analogous to what is called fraud in the inducement in
conventional law. Tadless may also be combined with ghish, which is “to conceal everything
about” the subject matter that “would make a prospective buyer lose interest in it if he knew
about it…” (Ibid). It thus goes to the basis of the bargain, as they say, conventionally.
Taghreer literally means to “trick and mislead in order to harm or expose to risk.” It has the
technical meaning to expose someone to gharar. The Majella defines taghreer as

17
misrepresentation (Ibid). It is different from ghubn fahish inasmuch as it not only creates an
imbalance, but it also contains an “element of intent” sufficient enough to cause harm or risk
to make the transaction voidable per se. This is sometimes referred to as “scienter” in
conventional law; a sort of guilty knowledge that the willful action would lead to harm or
pronounced risk.
Forms of Fraud and their Conditions. Fraud, from an Islamic Law of contracts
perspective, has four elements:
 Misrepresentation of a material fact (ghubn faahish)
 Intent (niyat) to deceive
 Reliance (a’atimaad) on the misrepresentation by the innocent party
 Harm (dharar) suffered by the innocent party (op. cit. Mansuri).
These are ostensibly juridical rules. They are also noticeably similar to the elements of fraud
conventionally (as noted below). This similarity is also seen in modern day codes in the
Middle East Islamic countries.
Kuwait’s Civil Code, which is a mixture of Maliki, English, French and Egyptian laws, for
example (Article 151) states:
“The contract may be nullified because of fraud (tadlees) if one party
consents to the contract as a result of subterfuge aimed at him by the other
party with the intention of deceiving him and compelling him into the
contract. It must be shown that the deceived party was not satisfied with the
contract and would not have accepted it if it had not been for the treachery
aimed at him” (op. cit. Rayner).
The Bahrain Code of Contracts, 1969, Article 20, states that fraud exists when “committed
by a party to a contract, or with his connivance, or by his agent with the intent to deceive
another party thereto or his agent, or to induce him to enter into the contract” (Ibid). It
articulates five acts which constitute fraud:
 Representation, as a fact, of that which is not true, by one who knows it to be false or
recklessly does not care whether such representation be true or false
 Active concealment of a fact by one having knowledge or belief of the fact
 Promise made without, at the time of making, any intention of performing it
 Any other act calculated to deceive
 Any such act or omission as the law specifically declares to be fraudulent (Ibid).
It is instructive to note, at this juncture, that these elements strike a remarkable resemblance
to those found in the conventional law of contracts.
Article 185 of the UAE Code states:

18
“Taghreer is when one of the two contracting parties deceives the other by
means of trickery of word or deed which leads the other to consent to what
he would not otherwise have consented to” (op. cit. Rayner).
The UAE Commercial Code, Article 24, further prohibits:
“1. The following persons may not engage in trade:-
a. Every trader whose bankruptcy was declared during the first year of his
practicing trade unless he has been rehabilitated.
b. Any person who has been convicted of a crime of bankruptcy either by
fraud, commercial swindle, theft, deception, or by breach of trust, forgery,
use of falsified papers, unless he was rehabilitated”
Rayner notes that the UAE Civil Code uses taghreer, while the Kuwaiti Code uses tadless;
i.e. tadlees and taghreer have come to be used interchangeably. Given that both tadless and
taghreer emanate from misrepresentation or ghubn and neither has force of effect without the
inequity present in ghubn, it is not surprising that an amalgamation has occurred in their
usage. Rayner believes this merger of terms to be the result of the relaxation of the
distinctions caused by the origins of the terms, i.e. tadless being the more Arabic of the two;
having Maliki originals. In any event, the resulting confusion is not particularly helpful, but is
somewhat representative of how fraud and deceit have been merged together under the
umbrella notion of misrepresentation (ghubn).
A similar amalgamation has occurred in conventional law as well (see below). That
amalgamation has effectively resulted in the form of fraud called tadless wa taghreer (op. cit.
ISRA). The former is obviously more restrictive as it involves the active hiding of a “defect”
or something similar to a defect (except under the Hanbali law, which is more expansive as
stated). The latter encompasses all forms of deceit and trickery, including omissions.
Although there are several ways the jurists make the distinction between the various forms of
fraud and deceit, one common form is to distinguish between acts and statements. Either may
be done through an agent or agents (i.e. both parties may have agents). Hence, there are
aspects of agency law or wakalah present.
Taghreer qwali essentially occurs when fraud and deception occurs through the use of words;
thus, inducing the other party or his agent to enter into a contract that is inequitable or
imbalanced. In the presence of such inequity, a contract founded upon a lie is void (op. cit.
Lahasna).
Taghreer fi’li or fraudulent acts is sometimes called active fraud, “denoting a fraud produced
by a positive act as distinguished from fraudulent statements or failure to disclose” (op. cit.
Rayner). Thus, taghreer fi’li is to do something to the subject matter or maudu ‘alayh to
make it look like it is in a condition that is different from what it really is (op. cit. Lahasna).

19
Finally, failure to disclose can be fraudulent as well, albeit all such failure isn’t. This might
be referred to as taghreer taqreerxiii
or remaining silent when it is known that what is
presented is erroneous or omitting material information. This raises an extremely important
form of fraud in the area of finance and investments specifically. Thus, remaining silent with
knowledge of omission of a material fact necessary in order to make any other statements
made, in the light of the circumstances under which they were made, not misleading, is
peculiar to the capital market activities, including financial reporting and management
analysis information contained in prospectuses.
All four mudhahib appear to agree that there is an implied warranty against defects in goods
(op. cit. Rayner). However, in finance, the failure to disclose may be in the financial records
of a party, who has chosen to hide or otherwise exclude or disguise certain damning
transactions in an unremarkable section of the financial statements. While it is advisable to
use audited financial statements (thus shifting some or all of the negligence or fault on the
auditors), other financial records are sometimes substituted in for audited financials (which
are in many cases only available on an annual basis). In America, for example, it is common
to use income tax returns. Moreover, management, having at times a conflict of interest with
both shareholders and the board, may make statements that are less than revealing. This is
well documented in the asymmetric information theory (Meyers22
and Majluf 1984). In any
event, as Rayner notes, rights and liens held over property must be declared and they are the
subject of any properly conducted due diligence review. In fact, failure to use ordinary
diligence may preclude relief even in the presence of tadlees or taghreer. Rayner points to
Article 22(3) of the Bahrain Law of Contract 1969 (Ibid).
Article 85 of Bahrain’s Financial Institutions Law, for example, seeks to protect market
participants against such connivances:
“Any person responsible for the preparation of the prospectus must ensure
that the prospectus incorporates all the necessary information and that such
information is not false or misleading.”
That Law further addresses such offenses as “insider” trading and market manipulation:
Articles 98, states:
“(a) For the purposes of this Chapter, “Inside Information” means
information that:
1. is precise in nature relating directly or indirectly to one or more of the
securities or the issuer thereof,
2. has not been made public.
xiii
This term is not found in any authoritative texts, but seems fitting nonetheless.

20
3. if made public, is likely to have a significant impact on the price of those
securities or their derivatives,
4. is, directly or indirectly, related to derivatives of commodities which the
traders expect to be disclosed according to the market regulations.
(b) In this chapter “profit” includes avoiding of any loss.”
Article 106, states:
“In the application of this law a person is guilty of market manipulation if
he:
1. is engaged, or encourages others to engage, in any conduct that may give
a false or misleading impression as to the supply of or demand for, or the
price or value of any securities.
2. is engaged, or encourages others, to engage in any conduct that may give
an unrealistic picture of the market regarding the volume and prices of any
securities.”
Thus, it can be seen from the above codes that fraud and deceit pose a significant threat to
capital market propriety and seem to be areas where Fiqh rules are needed to either
supplement or replace those developed or influenced by reference to conventional law. This
process should not be difficult. As stated earlier, there is simply a need to go to the roots of
the Islamic Law of contracts. For example, insider trading is analogous to “meeting the
merchant on the way” as narrated in the Hadeeth by Abu Hurairah, RAA, above.
Fiqh Contractual Stipulations and Options to Nullify. The Islamic Law of contracts
provides a number of shurut al-‘uqud or contract stipulations that can be used to govern the
formation of a contract. Either party, in such a case, may insert a condition or stipulation in
the contract that allows him to either cancel or ratify the contract within a specified period of
time. These conditions are akin to the conventional law conditions precedent, concurrent and
subsequent. The legitimacy of the right to insert these shurut into contracts is the subject of
some ikhtilaaf or disagreement among jurists. There are divergent views on these stipulations
or conditions under the Islamic Law of contracts, i.e.:
 A liberal approach, wherein the parties are free to insert terms in their contracts as
long as they do not make unlawful that which is lawful and make lawful that which is
unlawful applying the general rule that in matters of Ibadat (worship) no condition is
lawful unless prescribed by the Lawgiver (ostensibly Almighty Allaah and His
Messenger, AS) in the Shari’ah; and in matters of Muamulat (worldly dealings) all
conditions are lawful unless specifically restricted by the Lawgiver.
 A conservative approach, wherein the Shari’ah is to define what conditions are
permissible or otherwise not permissible applying the general rule that actions are
presumed to be impermissible unless declared permissible in the Shari’ah.

21
Nevertheless, as these shurut relate to fraud and deceit, they appear to find legitimacy in a
Hadeeth, wherein Allaah’s Messenger, AS, is reported to have said to a man who had
complained of being cheated:
“When you buy or sell, at the moment of sale make a declaration to the
effect that there shall be no cheating (laa khilaabah), and I reserve for
myself the option for three days” (Ibid. citing to Shawkaani’s Nayl al-
Awtaar).
Additionally, the parties have a variety of khayaaraat or options available to them, which
provide them ample means to exercise due diligence. The different mudhahib or legal schools
give more credence to some of the khayaaraat than others. Among them are khiyaar al-‘ayb
or option of defect, khiyaar al-rukyah or option of sight or inspection and khiyaar at-ta’yin or
option of specification. Each has its usefulness to parties to contracts. However, given the
grievous nature of fraud and deceit, there are special khayaaraat available in such cases.
These are generally grouped under khiyaar al-ghubn.
In the khiyaar al-ghubn the deceived party is given the right to void the contract to avoid the
injustice therein. This is based on the legal presumption that his or her consent was never
given because of the fraud and deceit. Dealing with the property after the fraud and deceit is
discovered will vitiate this khiyar. Specific to taghreer or tadlees is khiyaar at-tadlees. This
option arises whether resulting from concealment of defect or an action which deceives the
other party as to the true price or value of the subject matter. In both cases, the innocent party
has a right to return the maudu ‘alayh so long as he or she was not initially aware of the
defect. The innocent party may elect to keep the maudu ‘alayh. This rule is based upon the
Hadeeth of Allaah’s Messenger, AS, narrated by Abu Hurairah, RAA:
“Do not forcefully keep the milk in the udders of camels and sheep, and if
one buys it thus, then he has the option after milking it, he may keep it or
return it together with a container of dates…” (az-Zuhaylee23
2007).
Thus, the aggrieved may reject or affirm the contract. Yet, it must be noted at this juncture,
that in the context of the modern financial market, returning the animal along with some
dates, though possibly analogous, may be difficult given the sometimes complex financial
structures. It is, nonetheless, a basis for Qiyasxiv
. Yet, rescission and restitution may simply
not be an appropriate resolution in the contextual environment of modern financial markets.
There are two issues that need further research and consideration by the scholars of Islaam:
(1) is a distinct possibility that the quantum of damages are being underestimated if rescission
is the sole recourse to an aggrieved party; and (2) contract damages may not be sufficient and
an election to treat the offense as a tort might be preferable, as is the case under conventional
legal theories. In the latter case, both injunctive and/or punitive damages may be more just.
xiv
Loosely defined as analogy by Islamic scholars of Fiqh.

22
The first problem can be resolved somewhat via applying the distinctions between rad al-
mithli (compensation due for damages in the sale of fungible property or goods), rad al-
qeemee (compensation due for damages in the sale of relatively unique good), ujrat al-mithli
(compensation due for damages arising out of wages, fees and charges) and at-taw’id
(penalties for intentional late payments on contracts). However, as to the second issue above,
there presently does not appear to be any choice of legal remedy given in the Islamic Law of
contracts.
As to injunction, we find support for its imposition in both Qur’an and Sunnah (Billah24
2003):
“You are the best of people, evolved for mankind, enjoinging what is right,
forbidding what is wrong” (3:110).
The Messenger of Allaah, AS, is reported to have said:
“He who among you sees something evil should restrain it by his hand. And
if he has not the strength of hand, then he should do it with his tongue. And
if he has not the strength of tongue, then he should (abhor it) from his
heart” (Muslim).
Moreover, the Majella states:
“Persons who cause injury to the public, such as an ignorant physician, may
also be interdicted. In such cases, however, the object of the interdiction is
to restrain them from practice, and not to prohibit them from dealing with
their property” (Article 964).
“A private injury is tolerated in order to ward off a public injury. The
prohibition from practice of an incompetent physician is derived from this
principle” (Article 26).
“Repelling an evil is preferable to securing a benefit” (Article 30).
Yet, in the classical sense, punitive damages, as they are understood in conventional law, are
looked upon with disdain. This may be the result of the Islamic Law of contract norm noted
above regarding the principle of modesty of claims (supra p. 10).
Fiqh of Contractual Damages (‘Adhraar). The Islamic Law of contracts differs
substantially from conventional law in the area of contractual damages. Never is it more
obvious than in the area of fraud and deceit. Aside from the procedure for rectifying wrongs
caused by breaches, e.g. showing leniency and extending time for debtors, there is an ever-
present proclivity towards rescission in the Islamic Law of contracts. That preference is not
present in conventional law. This is a restrictiveness of Fiqh rules of compensatory damages

23
from the classical perspective. The notion that seems to impose those restrictions is the
concept of property or mal. Under the restrictive meaning classically attributed to it under
Fiqh, losses that emanate from breach of contract (naqd al-‘aqd) must be assessed “in exact
proportion” to property lost. Of course, property lost is a “loaded” term, i.e. it may have a
different meaning to different persons, depending on their perspective. It also be interpreted
subjectively or objectively. There are, of course, a number of problems with such a
constriction.
First, what is lost from the viewpoint of the innocent party is often at odds with what he or
she may have given as property. In other words, the loss may be, and often is, greater than the
value of the property lost. Again, as noted earlier, this result does not “jive” well with the
approach under ghubn faahish. In that case, as mentioned, where there is an obvious
imbalance in values exchanged, nothing is done unless there is fraud or deceit, because the
underlying assumption is that both parties understand the value of what they are giving and
receiving. In other words, there is a subjective test at work therein. Here, under the prevailing
view of damages, the Fiqh presumption is that if the damages are not tied to the property
given, in exact proportion, then they reflect gharar. That view is inconsistent with the view of
property in many other aspects of the Islamic Law of contracts. For example, sukuk
repurchases must be at market value (with the limited exception afforded liquidating interests
in ijarah), not par (see the Feb. 2008 AAOIFI fatwa).
Another example is an opportunity lost. Moreover, market prices change; sometimes daily in
the modern financial markets. Where a commodity is purchased on the market under fraud
and deceit, and subsequent thereto, the price of the commodity rises, the buyer, if not
defrauded in the first transaction, could have, with ease, sold the commodity at prevailing
prices within a short period of time. Yet, what occurs is the buyer must spend precious time
and money to have the fraudulent transaction rescinded, only to be given back his/her money
for a commodity that is now substantially higher priced. The rad al-mithli remedy does not
help in such an instance. He has, without a doubt, lost profits and there appears to be no case
for gharar in that instance. In such a case, notwithstanding the classical view of “speculative
damages,” the claimant must be able to present his/her claim in full; which may include
investment strategies, plans, prior transactions, prevailing market price movements, etc.
Almighty Allaah states in Qur’an:
“And as for the petitioner, do not repel (him)” (93:10)
To deny such a claimant this opportunity brings zulm or oppression “face-to-face” with
gharar. Other modern scenarios can be shown with respect to construction contracts
(including istisna’), where delays caused by misrepresentation can have an impact on
contracts in the hundreds of thousands, if not millions of dollars.
In this regard, some legal maxim from the Majella seem appropriate:

24
“Freedom from liability is a fundamental principle. Therefore, if one person
destroys the property of another, and a dispute arises as to the amount
thereof, the statement of the person causing such destruction shall be heard,
and the onus of proof as to any amount in excess thereof is upon the owner
of such property” (Article 8).
“It is an accepted fact that the terms of law vary with the change in the
times” (Article 39).
“The value is the real price of an article” (Article 154)
That said, the classical notion of damages can be summarized as follows:
“Loss of profit, moral prejudice and delay in performance are not properties
within that meaning, cannot be valued in precise terms (for they are
intangible elements and not on the market), and therefore do not constitute
valid elements for compensation…” (Saleh25
1989).
And further:
“…when the subject matter of a sale contract is totally or partially
destroyed, misappropriated or impaired by a material defect, for whatsoever
reason, including the vendor’s deed…liability for the loss, misappropriation
or effect is borne by the vendor. The ensuing consequence for the Hanafis is
that the sale is cancelled and the buyer is entitled to have back exactly what
he has paid…Shafi’e teaching is much the same”(Ibid).
While the above is a simplification of sometimes complex rules according to the different
mudhahib, the end result is that absent extenuating circumstances, the innocent party is left, if
he is lucky, with no more than what he had before the agony of being maliciously tricked.
This result does not seem just or fair and throws a rather specious excuse of gharar in the
face of justice (‘adl). This is the case of looking at the mizan or balance and clinging to the
pivot thereof instead of looking into the scales thereof. As Ibn Taymiyah wrote:
“The corrupting factor in gharar is the fact that it leads to dispute, hatred,
and devouring others' wealth wrongfully. However, it is known that this
corrupting factor would be overruled if it is opposed by a greater benefit
(almaslahah al-rajihah)” (El-Gamal 26
2001).
Justice or ‘adl, is clearly such a greater benefit. Where ‘adl is absent, zulm is present.
Additionally, some acts warrant punishment or else their perpetrators tend to repeat them.
Their acts are grievous, malicious, wanton and offensive. They are patently imbued with zulm
or malicious oppression. Moreover, this is a violation of the “honor” of the incorporeal

25
person as stated earlier and is no less a violation than that of injury to person or property.
When rescission or compensation is tied to the exact proportion of the property lost, the
offended party may not be fully compensated and the offending party may easily compute
that cost-benefit probability of damage to him being no more than return of property;
readying himself for the next attempt to defraud the next innocent market participant; either
directly or indirectly through an agent. Law of averages dictates he eventually finds someone
and defrauds and/or deceives, with again nothing to lose, even if caught.
Blood, Property and Honor. Fiqh has a rich body of jurisprudence dealing with tortious
acts and negligence. Unfortunately, liability in classical Fiqh is largely “damage liability”
(Kassim27
2006). Additionally, much of the law is marred by the label of diyat, which is
generally translated as “blood money.” Yet, the Fiqh actually involves much more than just
compensation tied to blood money. The practice of diyat or paying blood money in lieu of
qisas or an “eye for an eye” is an ancient tradition which predated Islaam. Its apparent
limitation to animal and commodity payment in lieu of blood has evolved so that modern
Muslim jurists award monetary damages as compensation for physical harm. There is also
some evidence that non-physical harm (incorporeal) is being used as a basis for
compensation. In the area of professional torts, e.g. medicine, a distinction is made as to
whether there is physical injury (darar hissi) or moral injury (darar maanawi). Darar hissi
includes any injury inflicted to the body (and why was classically the basis for diyat). Darar
maanawi includes injury to the patient’s reputation and honor (al-‘ardhu as noted herein
above). The breadth and scope of this latter damage would appear to be comprehensive as the
definition of al-‘ardhu suggests; yet, there appears reluctance on the part of Muslim jurists to
apply the true meaning of this form of damage (Ibid).
Thus, in the modern financial markets, and indeed in the area of the Islamic Law of contracts,
there appears to be a distinct need for evolution or development to allow market participants
to apply the “root” principle to quasi-contractual wrongs. That is to say that though the initial
transaction may have been entered into as a contract, the wrongdoer has caused the resulting
harm to be personal (incorporeal) to the aggrieved and tort claims should be allowed instead
of rescission, where elected. This is because what, in effect, occurs in some instances is that
no contract was form at all since there was no redho or mutual consent. Hence, what is left
thereupon is a wrong and the remedy for that wrong should, at the election of the aggrieved,
lay in a tort claim.
Some examples of tort claims from the Sources may illuminate the case:
From Qur’an…
“O you who have believed, prescribed for you is legal retribution for those
murdered - the free for the free, the slave for the slave, and the female for
the female. But whoever overlooks from his brother anything, then there
should be a suitable follow-up and payment to him with good conduct.

26
This is alleviation from your Lord and a mercy. But whoever transgresses
after that will have a painful punishment” (2:178)
“And never is it for a believer to kill a believer except by mistake. And
whoever kills a believer by mistake - then the freeing of a believing slave
and a compensation payment (diyah) presented to his family, unless they
give (it as) charity. But if he was from a people at war with you and he was
a believer - then [only] the freeing of a believing slave; and if he was from a
people with whom you have a treaty, then a compensation payment
presented to his family and the freeing of a believing slave. And whoever
does not find (one or cannot afford to buy one), then fast for two months
consecutively, (seeking) acceptance of repentance from Allaah. And Allaah
is ever Knowing and Wise” (4:92).
Thus, it can be seen from the above Ayat that “compensation” includes monetary
compensation as well as commodity compensation. Of course, the “compensation payment”
is diyat or blood money, which signifies that blood was drawn. Following the customs and
practices of the Arab peninsula that he found, the Messenger of Allaah, AS, used livestock as
a “benchmark” for compensation (Ismail28
l 2012). This is seen from a Hadeeth reported:
“’Abd Allaah b. Abu Bakr b. Muhammad b. ‘Amr b. Hazm reported from his
father that the book that the Apostle of Allaah, AS, wrote for ‘Amr b. Hazm
on the subject of blood-money stated that the compensation of a life is 100
camels and nose, if cut in full, 100 camels, and in case of maamoomah
(head injury down to the skull) one-third of the blood money and in jaa’ifah
(injury to the inside of stomach) also it is one-third and in case of injury to
the eye, fifty camels, of the hand fifty, of the foot fifty, and of every finger
ten, and of every tooth five, and for moo’dihah (bone breaking or fracture)
five camels” (Muwatta’).
And another Hadeeth addresses compensation for non-physical injury:
“Narrated by ‘Anas, RAA, concerning an event involving the wives of the
Prophet, AS, ‘They brought in a pot containing some food for the Prophet
and it was said that ‘Aishah, RAA, threw it away spilling all the food.’ The
Prophet said: food (must be replaced) with food and container with
container” (Tirmidhi, Abu Dawood).
Thus, at least with respect to personal injury, compensation extends to the “harm” caused
when payment is not made in-kind (qisas), but by compensation. Accordingly, some scholars
have opined that the injury need not be to the person, but may be due for the “pain and
suffering” caused. This seems reasonable in light of the fact that loss of life is in most
instances within a family a matter of great “pain and suffering.” This seems to be the case in
the matter of pregnancy miscarriage caused by fear or nervous shock. Thus, the “Hanbali

27
school, in the case of nervous shock followed by miscarriage or death of a pregnant woman,
the person who has put her in fear will bear liability for diyah in such cases. In the opinion of
al-Shafi’ee, however, there is only liability for diyah in the case of miscarriage (daman al-
janeen) alone and not in the case of death of the woman, because nervous shock is not
normally a cause of death” (Mohamad29
1997 citing to Ibn Qadaamah).
And finally, with respect to how compensatory damages were regarded by the Messenger of
Allaah, AS, we find this in another version of a Hadeeth, previously cited, a showing of the
flexibility in the awarding damages, wherein the fluctuation of value in the market was
considered:
“The Messenger of Allaah, AS, would fix the blood money for accidental killing at the rate of
four hundred dinars or their equivalent in silver for townsmen, and he would fix it according
to the price of the camels so when they are dear, he raised the amount to be paid and when
cheap prices prevailed he reduced the amount to be paid . . . the Messenger of Allaah gave
judgment that for cutting off a nose completely there was full blood money, one hundred
camels to be paid. If the tip of the nose was cut off, half of the blood money, that is, fifty
camels were to be paid, or their equivalent in gold or silver, or a hundred cows or one
thousand sheep, for the hand when it was cut off, half the blood money was to be paid; for
one foot, half of the blood money was to be paid. For a wound in the head, a third of the
blood money is due, that is, thirty camels and a third of the blood money, or their equivalent
in gold, silver, cows, sheep; for a head thrust which reach the body, the same blood money
was to be paid. Ten camels were to be paid for every finger and five camels for every
tooth…” (op.cit. Kassim citing to Sunan Abu Dawud, 2nd Ed. Beirut: Dar al-Fikr, 1979, Vol.
12 at pp. 303-306 and Ibn Qayyim Al-Jauziyah, aAwn al-Maabud Sharh).
A More Expansive View of Property. Although the purpose of this paper is not to give a
detailed analysis of the attributes of property from an Islamic Law of contracts perspective, it
must be noted that an exact definition as to what property is from a Fiqh position is far from
settled. Notwithstanding Saleh’s fairly narrow view of property, others define property more
expansively. For example, one Islamic scholar has noted, it is established in the Fiqh of
Ijarah that usufruct is not a thing, but a benefit to be enjoyed. Hence, all property cannot be
corporeal by analogy (Ali30
2003). As she aptly points out, the Majella states:
“Property of some specific value is spoken of in two senses. (1) It is a thing
the benefit (mutaqawwam) of which it is lawful to enjoy; (2) The other is
acquired property” (Article 127).
She further goes on to note:
“Of late, the range of possible counter values and subject matters has
expanded so as to include certain rights, which proprietary value and
capacity to be valid subject matters of contracts may still be very much
debatable. These possible counter values include mostly abstract rights

28
(‘aqq ma'nawt), such as, the rights to receivables, the rights to future
benefits from a concluded contract, and the rights to license and
concession” (Ibid).
Hence, it is clear that she sees “benefits” that flow from property as a form of property. And
though this particular scholar believes the main issue regarding these “abstract” rights lies in
whether or not they can serve as consideration for a contract, the point in this paper is
whether or not such value can be attributed to property in damage calculations? Hence, just as
the jumhor or majority view of the Maliki, Shafi’ee and Hanbali mudhahib view usufruct as
property derived from the underlying asset, this paper posits that under circumscribed
instances, lost profits and lost benefits also derive value from the underlying asset or property
(Ibid). She surmises:
“Thus, it can be concluded that al-haqq al-maalee al-'aynee also includes
abstract and intangible rights. In fact, in the decision by the OIC Fiqh
Academy, intellectual property rights have been said to be property rights
that are capable of being bought and sold for a consideration, despite of
their intangible nature” (Decision 5, fifth session, (1988), Fiqh Academy
Journal, 3: 2571).
Finally, as she points out, shares in a company are analogous because they represent a
proportionate general right in the underlying khultah or mixture of “real properties, usufructs,
rights, money and debts” of the company (Ibid). This is a point well taken with respect to
fraud and deceit in the modern capital market.
It bears repeating that the economic/financial climate of today’s markets is vastly different
from that under which the Messenger of Allaah, AS, gave some, if not all of his rulings. That
does not obviate the importance of his rulings and certainly one cannot venture so far as to
question his authority or the Ultimate Authority of Almighty Allaah. One can, however, draw
cogent contrast between the markets, customs and Muamulat in what we must admit was a
relatively primitive village economy, where people knew each other well, largely trusted one
another, travelled little and with a population size that was miniscule relative to today’s
world. There is, therefore, a distinct need for an inter-temporal review, if not expansion, of
the scope and sophistication of what can fairly be called trading and mutual assurance
arrangements sustained by individual and tribal relations and reputations. Hence, the role of
the rule of law is comparatively distinguishable in its application to the needs of the
respective marketplaces.
One glowing look at, for example, how compensation was computed should draw the
attention to even the most recalcitrant mind. Even though there was gold and silver money
available, compensation was largely awarded based upon camels and slaves; neither of which
are readily available in the monetarized economies of today. In fact, gold and silver are not
readily available and most emerging and advanced economies use “paper” money and other

29
financial instruments as surrogates for trust, if not gold and silver, to effectuate the daily
dealings in the marketplace. Modern Fiqh must bridge this gap as well.
CONVENTIONAL LAW OF MISREPRESENTATION
The general rule in conventional law regarding the umbrella area of misrepresentation is that
it is by nature a tort. A tort, as noted herein elsewhere above, is a private or civil wrong or
injury. It is, by definition, a wrong independent of contract (Black31
1968). A person deceived
to enter into a transaction by misrepresentation may bring a tort action for deceit, but may
elect to pursue a contract case for restitution instead. However, a contract action cannot be
transformed into a tort case for misrepresentation (op. cit. Calamari). This kind of legal
notion has also been referred to as quasi-contract because technically a “contract” formed
fraudulently vitiates the contract itself (as it does from the Islamic perspective), but allows
the aggrieved party to elect to have the court respect the contract constructively so that he/she
may pursue his/her rights there under.
Fraud & Deceit Definitions. Tortious fraud, which is in conventional law, deceit for all
intent and purposes, has five elements, namely:
 Representation as to past or existing material fact(s)
 Falsity
 Scienter
 Deception
 Justifiable reliance by the innocent party
 Resulting in injury or harm (Lexis Nexis32
2008)
These elements are somewhat relaxed for the quasi-contract case for deceit, because the
scienter element is not a hard-and-fast requirement. That is so because restitution may be
available even when the representation is negligent, even innocent (Ibid). If the
misrepresentation is seen as being negligent instead of intentional, then elements differ and
are:
 A representation as to a past or existing material fact(s)
 Falsity
 Lack of reasonable grounds for belief in the truth of the representation made
 Intent to induce reliance
 Justifiable reliance by the innocent party
 Proximity of cause of injury or harm (op. cit. Lexis Nexis).
As in the Islamic Law of contracts, there is a materiality threshold. But that restriction is
imposed only in cases of negligent misrepresentation vis-à-vis intentional misrepresentation.
Materiality is based upon whether or not the misrepresentation would be “likely to affect the
conduct of a reasonable man” (Ibid). Restatement (Second) Contracts states:

30
“§ 164. When a Misrepresentation Makes a Contract Voidable
(1) If a party's manifestation of assent is induced by either a fraudulent or a
material misrepresentation by the other party upon which the recipient is
justified in relying, the contract is voidable by the recipient.
(2) If a party's manifestation of assent is induced by either a fraudulent or a
material misrepresentation by one who is not a party to the transaction upon
which the recipient is justified in relying, the contract is voidable by the
recipient, unless the other party to the transaction in good faith and without
reason to know of the misrepresentation either gives value or relies
materially on the transaction” (op.cit. ALI).
Moreover, if a person who makes a misrepresentation knows that it is likely that the
representation will induce the other party to enter into the contract (even if it would not so
induce a “reasonable person”), the representation is material. Another way of stating it is that
a misrepresentation is material if it induces the other party to alter his or her position to his or
her detriment. A misrepresentation that is fraudulent, need not be material; but it must adduce
assent (Ibid). A reasonable or prudent “person” is a “hypothetical person” who “exercises
average care, skill, and judgment in conduct that society requires of its members for the
protection of their own and of others' interestsxv
.” Thus, the same standard of prudence or
reasonableness can be used to ascertain whether reliance by an aggrieved party was
“justifiable” and whether or not reasonable or prudent due diligence would have resulted in
her not relying on the misrepresentations.
Scienter is a term that is used to signify prior knowledge of acts or words which may lead to
injury and which there is a duty to guard against and the failure to do so has led to that injury.
It is frequently equated with guilty knowledge (op. cit. Black). Thus, it is an essential element
of fraud, which is then intentional misrepresentation, but not essential to negligent
misrepresentation. Negligent misrepresentation requires that the person knew or should have
known the words would lead to harm.
Different Froms of Fraud and Deceit. Some conventional jurisdictions differentiate the
various forms of fraud and deceit. For example, there is actual and constructive fraud and
fraud in the inducement. ''Actual fraud'' can be defined as “consisting of any of the following
acts, committed by a party to the contract, or with his or her connivance, with intent to
deceive another party to the contract, or to induce him or her to enter into the contract:
 The suggestion, as a fact, of that which is not true, by one who does not believe
it to be true;
xv
http://definitions.uslegal.com/r/reasonable-man-theory/

31
 The positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he or she believes it to be
true;
 The suppression of that which is true, by one having knowledge or belief of the
fact;
 A promise made without any intention of performing it; or
 Any other act fitted to deceive (California Civil Code Sec. 1572).
Constructive fraud, on the other hand, has been defined as consisting of either:
 Any breach of duty which, without an actually fraudulent intent, gains an
advantage to the person at fault, or any one claiming under him or her, by
misleading another to his or her prejudice, or to the prejudice of any one
claiming under him or her, or
 Any such act or omission that the law specially declares to be fraudulent,
without respect to actual fraud (California Civil Code Sec. 1573).
Fraud in the inducement is a subset of fraud. It occurs when a party knows he is forming a
contract, but his consent is induced by fraud or deceit. A contract is formed, which, by reason
of the fraud and deceit, is voidable since there is no consent when induced by fraud or deceit.
Deceit in conventional law is the act of wilfully deceiving another with intent to induce him
to alter his position to his injury or risk. Such a person is liable for any damage which the
other party suffers (California Civil Code Sec. 1709). And further, a deceit is either a(n):
 Suggestion, as a fact, of that which is not true, by one who does not believe it to be
true;
 Assertion, as a fact, of that which is not true, by one who has no reasonable ground
for believing it to be true;
 Suppression of a fact, by one who is bound to disclose it, or who gives information of
other facts which are likely to mislead for want of communication of that fact; or,
 Promise, made without any intention of performing it.
Hence, it can be seen from the above that promises that are relied upon that cause harm or
injury resulting there from are actionable under conventional law. This is an area of some
debate in the Islamic Law of contracts, although some prominent scholars believe that a
promise in the financial markets that is relied upon creates an obligation, whether or not
supported by other consideration, e.g. Dr. Hussain Hamid Hassan (Hassan33
2008).
Finally, there is a particular kind of fraud and deceit that is found in the capital markets. In
America, it is covered by the Securities Act of 1934 and is referred to as a Rule 10(b)-5
violation. That violation states:
“Rule 10b-5 -- Employment of Manipulative and Deceptive Devices

32
It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security” (13 FR 8183, Dec. 22, 1948, as amended
at 16 FR 7928, Aug. 11, 1951).
This violation is just one of several covered by the Act. Also covered by it are those
fraudulent deeds that result in insider trading.
Business Torts in Common Law. It is important to note that in some common law
jurisdictions, fraud and deceit are part of the body of law called business torts. These torts are
injuries to a person’s property or economic interests. Misrepresentation, fraud and deceit,
intentional interference with prospective economic relations and intentional interference with
existing contractual relations are the primary business torts. Intentional interference with
prospective economic relations, for example, contains the following elements:
 An economic relationship between the innocent party and some third party, with the
probability of future economic benefit
 Knowledge of the relationship by the wrongdoer
 Intentional acts on the part of the wrongdoer designed to disrupt the relationship
 Actual disruption of the relationship
 Economic harm to the innocent party proximately caused by the acts of the wrongdoer
(Youst v. Longo (1987) 43 Cal.3d 64, 71).
The business tort of interference with contractual relations has its roots in the tort of inducing
breach of contract. It is also referred to as the tort of interference with existing contractual
relations and its elements are similar to those above. Both the tort of interference with
contract relations and the tort of interference with prospective contract or economic relations
involve basically the same conduct. However, in the former case, the interference takes place
when a contract is already in existence, while in the latter, before the contract would, with
certainty, have been consummated but for the conduct of the wrongdoer. Moreover, the act of
interference in the former case is usually intentional (but may in certain cases only be
negligent), while in the latter case, it must be intentional. These kind of torts are recognized
in the Islamic Law of contracts, as it is prohibited, for example, to make a bai’ al-mustarsal
(or the sale made after intercepting goods before they reach their destination in the
marketplace and falsifying the cost thereof) as was sometimes done among ancient Arabs.

33
Similarly, the Messenger of Allaah, AS, forbade under-cutting or bidding over a business
proposal of another. Hence, if there is a difference in treatment between the Islamic and
conventional laws in this area, it is likely to be reflected in the damage or compensation
calculation and whether the fraud is treated as a contract or tort violation.
Malaysian Civil Law. Malaysian Civil Law follows common law notions of
misrepresentation, fraud and deceit. Thus, ss17-19 of the Contracts Act defines fraud and
misrepresentation. The primary difference between Malaysia’s statutes and those noted above
are that actual and constructive fraud are combined in s 17 and s18 as negligent and
intentional misrepresentation. s19 gives the aggrieved party the option of either having the
contract voided or performed. However, it is unclear as to the extent Malaysia has adopted
the Misrepresentation Act of 1967 (Braizer and Murphy34
1999). If its Civil Courts enforce
the Act and the case law there under, then misrepresentation that is regarded as deceit can be
treated as a tort. Also, it is not clear whether a principal can be held liable for the
misrepresentation of his or her agent. Moreover, there does not appear to be a separate tort
claim for fraud or deceit under Malaysian Civil Law. What appears instead is the potential to
apply the above noted Misrepresentation Act of 1967, or to otherwise apply the principle of
negligence, which is recognized by Malaysian courts (Azlan and Hingun35
1998). If this
analysis is current as to the status of fraud and deceit in Malaysia, then aggrieved parties are
left to rescission as their primary remedy in most, if not all, business transactions.
International Conventions. UNIDROIT Article 3.2.5 addresses fraud as:
“A party may avoid the contract when it has been led to conclude the
contract by the other party’s fraudulent representations, including language
or practice, or fraudulent non-disclosure of circumstances which, according
to reasonable commercial standards of fair dealing, the latter party should
have disclosed” (United Nations36
2012).
The Principles of European Contract addresses both deceit and fraud in the following
Articles:
“Article 4:106: Incorrect Information
A party who has concluded a contract relying on incorrect information
given it by the other party may recover damages in accordance with Article
4:117(2) and (3)xvi
even if the information does not give rise to a
xvi
Article 4.117(2) If a party has the right to avoid a contract under this Chapter, but does not exercise its right
or has lost its right under the provisions of Articles 4.113 or 4.114, it may recover, subject to paragraph (1),
damages limited to the loss caused to it by the mistake, fraud, threat or taking of excessive benefit or unfair
advantage. The same measure of damages shall apply when the party was misled by incorrect information in the
sense of Article 4.106.
(3) In other respects, the damages shall be in accordance with the relevant provisions of Chapter 9, Section 5,
with appropriate adaptations (these damages are codified to make the aggrieved party “whole” and include lost
profits)

34
fundamental mistake under Article 4:103, unless the party who gave the
information had reason to believe that the information was correct.
Article 4:107: Fraud
(1) A party may avoid a contract when it has been led to conclude it by the
other party's fraudulent representation, whether by words or conduct, or
fraudulent non-disclosure of any information which in accordance with
good faith and fair dealing it should have disclosed.
(2) A party's representation or non-disclosure is fraudulent if it was
intended to deceive.
(3) In determining whether good faith and fair dealing required that a party
disclose particular information, regard should be had to all the
circumstances, including:
(a) whether the party had special expertise;
(b) the cost to it of acquiring the relevant information;
(c) whether the other party could reasonably acquire the information for
itself; and
(d) the apparent importance of the information to the other party” (PECL37
1999).
Thus, it can be seen from the cursory review of various international theories of law, that
fraud and deceit are well established in conventional law, with some jurisdictions providing
for rescission, while under others the aggrieved party may elect to pursue the breaching party
either in contract or tort and under the former damages may include lost profits and
incorporeal damage under the latter. This is a crucial distinction that should be made clear in
the Islamic Law of contracts.
Limitations and Conditions. Conventional law does limit what representations it classifies
as misrepresentations. The following distinctions are representative of those limitations:
 Relief is afforded misrepresentations of fact, but not erroneous opinions. This
limitation protects vendors from liability for “puffing” or trade talk. Representations
such as “best buy” or “finest quality” and similar such statements are exemplary.
However, representations that are overly optimistic regarding investments are
generally not protected.
 A half-truth can be a misrepresentation.
 A statement made in good faith, but followed by changes that make the statement no
longer true is protected. However, if the person making the statement knows the other
party is relying on the statement and he becomes aware of the changes affecting the

35
statement, then the person making the statement has a duty to inform the other party
of the truth relating to the changes.
 The relationship between the parties, if of a fiduciary or confidential nature, may raise
the duty to disclose beyond what would otherwise be required.
 So-called merger clauses (wherein the contract states that it is the final understanding
between the parties and any additions to it must be in writing) do not generally protect
parties against misrepresentations where the jurisdiction allows parol evidencexvii
to
prove such misrepresentations. The conventional legal maxim, “fraud vitiates
everything it touches,” will trump such merger clauses. However, a growing number
of jurisdictions do respect these clauses when they contain language which
specifically state that no representations have been made and that the purchaser is
relying on his own inspection and nothing else (op. cit. Calamari).
Because of conventional law’s affinity to the notion of freedom of contract, numerous
conditions exist under its system of laws. Such conditions are usually conditions precedent,
concurrent, subsequent, express or constructive. Constructive conditions are sometimes called
conditions implied in law. They differ from conditions implied in fact inasmuch as conditions
implied in fact are impliedly agreed to by the parties, while constructive conditions may be
constructed by a court (Ibid). It can be said that the use and extent of conditions, including
implied warranties, in conventional law have served as surrogates for options used in the
Islamic Law of contracts. Contract options in conventional law are almost exclusively
express and may take any number of formats, as would be expected under the notion of
freedom of contract. Some are required to be in bold print.
Concept of Damages in Conventional Law. The principal difference in remedies under
conventional laws is that a defrauded party may elect to treat fraud and deceit as a tort and let
the transaction stand, so to speak, keep any defected goods and sue for damages or simply
rescind the contract (being afforded restitution where appropriate). Under some statutory
schemes in conventional law, no election is even required. For example, the Uniform
Commercial Codexviii
in America does not require an election where the sale of goods
between merchants is concerned:
“§ 2-721. Remedies for Fraud.
Remedies for material misrepresentation or fraud include all remedies
available under this Article for non-fraudulent breach. Neither rescission or
a claim for rescission of the contract for sale nor rejection or return of the
xvii
“Under this rule, when parties put their agreement in writing, all previous oral agreements merge in the
writing and a contract as written cannot be modified or changed by parol evidence (verbal or oral), in the
absence of a plea of mistake or fraud in the preparation of the writing…But (this) rule does not forbid a resort to
parol evidence not inconsistent with the matters stated in the writing” (supra Black).
xviii
Most states in America have adopted both the Restatement provisions and the UCC; albeit some with
modifications. Those modifications are not germane to this discussion herein, however.

36
goods shall bar or be deemed inconsistent with a claim for damages or other
remedy” (ALI38
2011).
Conventional law classifies tort damages as nominal damages, compensatory damages, and
punitive damages. Nominal damages are a symbolic award (often one dollar) given when
liability is established but no actual harm is proven. (Lexis Nexis39
2004). Compensatory
damages are awarded to indemnify for injury to person, property, and other harm. (Ibid).
Compensatory damages may be awarded for “both pecuniary and non-pecuniary losses.”
Non-pecuniary compensatory damages may include pain and suffering, and other forms of
mental distress that may have no obvious monetary equivalent. This valuation problem has
generated controversy over the desirability of compensating for pain and suffering at all. See
cases, e.g., Seffert v. LosAngeles Transit Lines, 364 P.2d 337 (Cal. 1961). However, such
claims are as a rule, benchmarked to some form of medical and/or psychological treatment
and the related expenses concomitant therewith.
Punitive damages are awarded to punish and deter future egregious conduct by the wrongdoer
and serve as an example to others who might think of doing such acts (Ibid). For this reason
they are sometimes referred to as exemplary damages. Punitive damages may be imposed by
the court where it is proven by clear and convincing evidence the perpetrator has been guilty
of oppression, fraud or malice, in addition to the actual damages. Such damages may not be
avoided in bankruptcy proceedings in many jurisdictions
As stated, pain and suffering are linked for purposes of tort damages. Pain is broadly defined
from medical and psychological perspectives. The out-of-pocket pecuniary compensatory
costs incurred for medical and/or psychological treatment in the case of personal injuries can
be used as a benchmark for the imposition of more general non-pecuniary compensatory
damages for suffering. They are awarded to cover such harm as the trauma of worries, the
shock of injury, the physical pain and suffering and mental anguish endured and in some
cases has been construed to encompass loss of consortium with spouses. Thus, the damage
calculation can be quite complicated and may result in a significant award of damages in tort.
If the aggrieved party chooses rescission and/or restitution, the rules operate in parallel to the
Islamic Law of contracts and aside for the preference for leniency, which is not likely to be
prevalent in fraud and deceit matters, the rescission is virtually the same. In the area of
restitution, any difference is negligible since conventional law seeks to have returned to the
aggrieved whatever was given. However, if the assistance of attorneys is necessary, the
aggrieved party may be entitled to recovery of attorney fees and “costs” associated with
pursuing her rights (which may be provided for either in statute or pursuant to the contract
between the parties). Hence, recovery of attorney’s fees and costs are another stipulation or
condition that may be added to a contract under conventional law.

Islamic Law of Contracts

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