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SECTOR REPORT
The Use of Waad in Islamic Finance Structures
By Davide Barzilai
The Shariah compliant debt markets rely heavily on the use of the
Waad. A Waad is used for Ijarah-based structures (such as Sukuk
Ijarah), the more controversial quasi-equity based structures (such
as Sukuk Musharakah), the Murabahah-based structures used to
enable Shariah compliant hedging transactions, and diminishing
Musharakah structures used in home nancing. In this article, I will
go through a basic Shariah and legal analysis of a typical Waad.
Waad (also referred to as Ahd) in legal terms means a promise and
can come in the form of a unilateral undertaking or commitment to
do something made by one person (the promisor) for the benet of
another (the promisee). The action that the promisor undertakes to
do upon a trigger event might be the purchase of an asset or the entry
into a Murabahah transaction at a price that is pre-determined in
accordance with a formula set out in the promise.
This price might be xed on the day of executing the promise or it might
be determined at the time the promisee exercises its rights under the
promise. An important requirement as to the validity of a promise
under Shariah is that the promisee should not make a direct payment
to receive the benet of the promise. Otherwise, it can be categorized
as a bilateral contract.
In the recent past, there have been some interesting debates as to the
nature of a promise under Shariah but recent debates have their roots
in discussions that took place among the classical Islamic jurists.
The key issue is whether or not a promise is legally binding under Shariah or if it is simply a gratuitous gift which would be a morally binding
commitment. Dr Nurdianawati Irawani Abdullah of the International Islamic University Malaysia has usefully categorized ve key views from
the classical jurists as to the status of a promise under Shariah.
• Fullling a promise is recommended but not obligatory. It is a
moral/religious matter which does not give the promisee any
rights.
• Fullling a promise is obligatory from a religious perspective but
the promise cannot be enforced by the courts. The promisor
has a religious obligation to fulll his or her promise but the
promisee only has a moral right which the courts cannot
enforce.
• Where a promise is subject to certain conditions, its fulllment
is obligatory and can be enforced even if the promisee has not
relied upon the promise.
• Where a promise is subject to certain conditions, its fulllment
is obligatory and can be enforced only if the promisee has
relied upon the promise.
• Fullling a promise is obligatory from a religious perspective
and can be enforced by the courts.
Contemporary Islamic jurists have analyzed the modern day use of
the promise and have generally concluded that since a promise is
conditional and the promisee relies on it (to the extent that if it is not
performed, the promisee will make a loss), it is therefore binding on
the promisor and can be enforced in a Shariah court. There is another
argument that maintains that the promise is not binding, but the
promisee is able to claim for losses caused as a result of the breach.
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There is therefore sufcient consensus among the classical and
contemporary Islamic jurists to conclude that a Waad is binding and
enforceable under Shariah, although it is important to note that there
are alternative views which some parties may choose to adopt.
In order for a promise to be of any material use in the modern
nancial system within which Islamic nance operates, a promise
must be enforceable in a court of law. Assuming that a secular legal
system governs the promise and a secular court has jurisdiction over
the promise, then it will be the secular legal system that one has to
consider when analyzing the promise.
In English law, there is a principle that there cannot be a legally binding
contract where there is no intention by the parties to be legally bound.
There could be a potential argument that the promisor did not intend
to be legally bound by the promise (such as the promise was like a
gift). This argument would be supported by the Shariah view that a
promise is only a morally binding obligation and is not capable of being
legally enforced under Shariah.
Clearly, taking this argument involves ignoring the majority of
contemporary Islamic jurists as well as important classical jurists.
Another available argument is that no consideration for the promise
is given by the promisee. Consideration is one of the English law
requirements for a contract. However, when reviewing commercial
contracts, an English court can deduce intention to create legal
relations from the fact that there is valid consideration.
This line of argument may not be available as, under Shariah, a promisor
should not receive direct consideration in return for granting the
promise. In English law, it would be possible to look at the transaction
as a whole and imply consideration in an indirect way which would not
conict with the Shariah view.
Even if these arguments were to be accepted, there are other aspects
of English law which will give the promisee protection from such a
claim. In commercial agreements (including unilateral contracts),
there is established case law that provides a strong presumption that
the parties intend to be legally bound. In order for this presumption to
be rebutted, the agreement would have to be vague, uncertain or not
seriously meant. This is not the case with the typical promise which is
documented as part of a sophisticated set of nance documents.
Finally, the concept of a deed will solve any consideration issues. In
English law, a deed can be distinguished from other forms of written
contracts by certain execution formalities. The key difference between
a deed and a contract signed under hand is that a deed is enforceable
despite a lack of consideration. Having established that a promise
is on the face of it binding and enforceable in a court, one needs to
look at the content of the promise to ensure that each term is in fact
binding.
From a Shariah perspective, one key consequence of an agreement
being classied as a Waad as opposed to a contract (A’qd) is that the
terms of a Waad do not have to meet the same Shariah criteria of
uncertainty (Gharar) as would be needed in a contract. The concept
Page 15
17th July 2009
SECTOR REPORT
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of certainty of terms under English law differs from the concept of
certainty under Shariah.
From a Shariah perspective the concept refers to excessive uncertainty
regarding the subject matter or the price to be paid under the contract.
This means that one cannot sell something which does not exist at
the time of the sale or is not owned by the seller at such time. It also
means that delivery and payment terms must be xed at the time of
the sale.
From an English law perspective, provided that the terms are sufciently
clear to determine the object of the sale, the price and delivery terms
then would be considered sufciently clear. This means that selling
something for a price based on the performance of an index — such
as a retail price index, the London Interbank Offered Rate or a stock
exchange index — would be valid and not be considered uncertain.
However, English law will not recognize agreements to agree. An
agreement to agree would be considered unenforceable where an
essential term of a contract is subject to further agreement and there is
no mechanism available to determine how that term is to be agreed.
Since a Waad cannot contain the actual agreement to sell or buy
something (otherwise it would be considered a contract and would be
subject to all the rules of Gharar) it is usual for a Waad to be drafted
so that the promisor will agree to enter into an agreement to buy
or sell something in the future. From an English law perspective, it
is therefore essential to ensure that the mechanism for determining
the future agreement is certain. Careful drafting is therefore required
to ensure that a Waad, which may be binding under Shariah, is also
binding under English law.
In conclusion, there are some within the Islamic nance community who
are concerned that the industry has focused on ensuring that documentation is Shariah compliant without concern to the essence or spirit of
Shariah, in the way that the otherwise Shariah compliant documentation is used in a commercial setting. While I have shown that a Waad
from an English and Shariah perspective can be binding and enforceable, the debate as to how it is used still remains a valid and important
discussion which the industry will continue to debate.
Davide Barzilai
Partner
For more information, please contact:
Sarah Webster
PR Manager, Norton Rose
3 More London Riverside, London SE1 2AQ, UK
Tel: +44 20 7444 5942
E-mail: [email protected]
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