RESOLUTION
No. 109(3/12)
ON
"Penalty Provision"
Quote
- The Council of the Islamic Fiqh Academy of the Organization of the
Islamic Conference in its Twelfth Session held in Riyadh (Kingdom
of Saudi
Arabia) during the period from the 25th of Jumad Thani
to 1st of Rajab 1421
H (23-28/9/2000).
And after
considering the research papers on Penalty Provision presented to
it, and listening to the discussions of its members, experts and
some other
Fuqaha'a.
Decides the
following:
Firstly:
A Penalty Provision in legal terminology is a condition
agreed to
by the two parties of a contract as to how compensation
stipulated
for one of them in case of default or delay from the part of the
other can be assessed.
Secondly:The Council confirms its
previous resolutions regarding Penalty
Provision including the
following:
·Its Resolution No. 85 (2/9) on Salam which
stipulates that "it is
impermissible to include a Penalty
Provision for delay of providing the
commodity since a commodity
sold through Salam is a debt and it is
impermissible to impose an
additional charge for delayed repayment of debt."
·Its
Resolution No. 65 (3/7) on Istisna'a which stipulates that, "It
is
permissible to include a penalty provision in the Istisna'a
contract except
for inevitable circumstances."
·Its
Resolution No. 51(2/6) on Instalment Sale which stipulates that "When
the purchaser delays payment of due instalments no additional
charge should
be imposed on him whether by virtue of a
predetermined condition or
otherwise. Such a practice amounts to
commitment of prohibited usury."
Thirdly:It is permissible to
include the Penalty Provision in the original
contract or make it
as a separate agreement that succeeds the contract and
precedes
the occurrence of the anticipated loss.
Fourthly:It is permissible
to include a Penalty Provision in all financial
contracts except
when the original commitment is a debt. Imposing a Penalty
Provision
in debt contracts is usury in the strict sense.
Consequently, it
is permissible, for instance, to make a Penalty Provision
on the
contractor in contractual agreements, the deliverer in delivery
contracts and the manufacturer in Istisna'a contracts who fails
to or delay
in meeting his commitments.
Whereas it is
impermissible, for instance, to make a Penalty Provision in
Instalment Sale on a debtor who delays repayment of outstanding
instalments, whether due to insolvency or payment evasion. It is
also
impermissible to impose such a provision in the Istisna'a
contract on a
purchaser who delays or fails to meet his
obligations.
Fifthly:The loss that may be compensated includes
actual financial loss
incurred by the partner, any other material
loss and the certainly
obtainable gain that he misses as a result
of his partner's default or
delay. It does not include moral
losses.
Sixthly:The Penalty Provision should become null and void
when the
concerned partner proves that his failure to meet
obligations was due to
reasons that fall out of his control, or
when he proves that no loss has
been incurred by his partner as a
result of his breach of the contract.
Seventhly:The Court may, if
so required by one of the two parties, adjust
the amount of the
compensation, subject to a reasonable justification, or
when the
compensation proves to be exaggerated.
Recommendation:
The
Council recommends convening of a specialized seminar to work out the
conditions and arrangements that could enable the Islamic banks
to
guarantee collection of their outstanding debts.
And Allah
(S.W.T.) knows better. Unquote
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