bilateral contract

Topics: Contract, Debt, Islamic banking Pages: 8 (2794 words) Published: April 14, 2014
Definition Bilateral Contract
A bilateral contract is a legal agreement formed between two parties where both parties involved give mutual promises that they both are legally obligated to perform an act in exchange for the other party's act in future. It means the promise of one party is consideration supporting the promise of the other party. Each party is both promisor and promisee. A bilateral contract specifies a duty to act in exchange for another party's duty to act. It is also called "reciprocal" contracts. Both parties to a bilateral contract make promises. With respect to the promise in issue, the party making the promise is the promisor and the other party is the promisee. Consideration is an essential component of a contract. Bilateral contracts were said to bind both parties the minute the parties exchange promises, as each promise is deemed sufficient consideration in itself. Most of the contracts that exist in Islamic commercial law can be categorized as bilateral contracts. In other words, bilateral contracts are the default for most contracting situations. A bilateral contract requires the consent of both parties and covers the remaining transactions in Islamic law which can be further divided into different classifications according to the purpose and reason of the deal and agreement. This classification is not meant to be exhaustive because in the future many new contracts with different features would possibly come to exist. The scholars have classified bilateral contracts into six classifications which are as follows: 1. Contracts of exchange ('uqud al-mu’awadat)

Contract of exchange will primarily concern trading as well as selling and buying activities. The main contract of exchange is the contract of sale. Sale involves an exchange of a commodity for another commodity or of a commodity for money or of money for money. The contracts of exchange include a variety of contracts which differ from one another on terms of specific legal requirements, rights, obligations and liabilities. The common element to all contracts under contracts of exchange is the transfer of the ownership and possession from one party to another. The classification of sale contracts is based on certain factors which distinguish one contract of sale from another. Therefore, sales are divided into four categories as follows: i. Sale of property to another person for a price.

ii. Sale by exchange of money for money which is known as sarf transaction which consists of selling cash for cash.

iii. Sale by barter. i.e., exchange of object for object whereby neither of which is money payment; each of the two commodities constitute both the price and the object; and

iv. Sale by immediate payment against future delivery such as bay' al-salam (forward sale) and bay' al-istisna' (sale on order). The item of the sale is yet to exist in the future date. There is several numbers of contracts of exchange as follows: i. Musawamah

Musawamah sale is basically a sale by mutual consent completed and concluded through negotiations between the seller and buyer in which no reference is made to the original cost price. It is also a 'profit sale' but the actual cost price and the amount or percentage of the profit is unknown to the buyer because the seller is not bound, in musawamah sale, to disclose the cost price. For example, a person sells a commodity for a lump sum price or installment basis without reference to the cost.

ii. Murabahah
Murabahah sale is a sale above cost in which the seller must disclose to the buyer the cost of the item sold. A sale for the price at which the seller has purchased it, with the addition of stated profit known to both the seller and buyer. In short, it is a cost-plus-profit sale in which the profit is expressly disclosed by the seller. This distinguishing murabahah from other kinds of sale is that the seller tells the purchaser how much cost he has incurred and how much profit he is going to charge in...
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