{"id":3746,"date":"2021-11-05T02:09:00","date_gmt":"2021-11-05T02:09:00","guid":{"rendered":"https:\/\/blog.ethis.co\/?p=3746"},"modified":"2022-11-15T04:18:44","modified_gmt":"2022-11-15T04:18:44","slug":"shariah-issues-penalty-compensation","status":"publish","type":"post","link":"https:\/\/ethis.co\/blog\/shariah-issues-penalty-compensation\/","title":{"rendered":"Shariah Issues in Penalty and Compensation in Financial Commitments"},"content":{"rendered":"\n

By Abdulazeem Abozaid<\/em><\/strong>, Professor at Qatar Foundation<\/em><\/strong><\/p>\n\n\n\n

Penalty provision relates to a breach of commitment whether in relation to work\/labour or a debt. For example, when a contract obliges a property developer to pay a certain amount of money for every day of delay in delivering the project specified in the contract, or when the contract states that the debtor-buyer is committed to paying a specific amount or percentage of the debt instalment for every day of delay in repaying the debt instalment. <\/p>\n\n\n\n

Any investment company may have their fair share of defaults on payments. At Ethis<\/a>, for example, they have opted for leniency and providing potential defaulters with more time to make the obligatory payments. However, certain customers could take advantage of this kind of gesture and this results in further delay, and cause serious repercussions in the company\u2019s reputation as well as the business cash flow. <\/p>\n\n\n\n

The penalty provision has become commonplace in contracts today, especially in construction, supply and lease contracts, as well as in contracts that initiate debts, such as sale on a deferred payment basis. <\/p>\n\n\n\n

The reasons for the prevalence of the penalty provision nowadays are due to lack of transparency, the great financial harms that could result from breaching obligations, and the interdependence of contracts and obligations whereby a condition placed by one contracting party leads the other parties to reciprocate with similar conditions on the same or other contracting parties. <\/p>\n\n\n\n

For example, the purchaser in an isti\u1e63n\u0101\u2018 <\/em>contract (musta\u1e63ni\u2018<\/em>) of a building places a penalty provision on the isti\u1e63n\u0101\u2018 <\/em>seller (\u1e63\u0101ni\u2018<\/em>), making the \u1e63\u0101ni\u2018<\/em> place a penalty provision on the contractor, and the latter in turn, places a penalty provision on the supplier of the building materials and so on. Ethis mainly uses Musharakah contracts<\/a> however other contracts have been utilised as well including isti\u1e63n\u0101\u2018 <\/em>for housing projects. <\/p>\n\n\n\n

Another reason for the prevalence of the penalty provision is to avoid or ease litigation proceedings in courts. The penalty provision comes to specify when compensation is required so that it is not left to the court, which could take months if not years to determine the basis and the amount of compensation if any. <\/p>\n\n\n\n

In fact, the idea of the penalty provision originally relates to harm; the party that could be harmed places it in case the other contracting party fails to fulfil his obligations. <\/p>\n\n\n\n

However, it has been expanded such that the contracting party conditions it on others\u2014even if he is not actually harmed by the other failing on their obligations, and the amount of compensation is conditioned beforehand, and is not based on the degree of actual harm. <\/p>\n\n\n\n

However, the default position in Classical Shariah is to give compensation for the harm that has already occurred, and not beforehand, because the compensation is related to the size of the harm, which is only known after it occurs.<\/p>\n\n\n\n

Thus, the penalty provision in its contemporary form includes novel matters that require attention to clarify the extent to which it is acceptable. <\/p>\n\n\n\n

\"Shariah
According to Shariah, penalties & compensations are permitted but with conditions<\/em><\/strong><\/figcaption><\/figure>\n\n\n\n
\n
\n

Table of Contents<\/p>\n