Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment)

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1. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) Statement of the Standard 1. Scope of the Standard This Standard covers options to reconsider (cooling-off options, eitheror options, and options to revoke due to non-payment) that are stipulated by the parties to grant them time to reconsider the transaction. It does not cover options to revoke contracts due to incomplete performance (defect, deal fragmentation and breach of condition or description) or options to revoke contracts due to breach of trust (dishonest inducement, deception and overcharging) as they have separate Shari’ah Standards dedicated to them. 2. Cooling-Off Options 2/1 Definition of cooling-off options Cooling-off options give one or both of the parties or a third party the right either to continue with the contract or to revoke it within a stipulated period of time. It is effected by any phrase indicating that it is non-binding and revocable during the period of the option. 2/2 Conditions of validity Cooling-off options are subject to the following conditions: 2/2/1 The option must be stipulated in the contract unless it is implied by a pre-existing custom or the parties agree to subsequently include it in the contract. 2/2/2 The option must have a stipulated time limit. The option is not valid if a time limit is not stipulated or if it is unspecified, such as a stipulation to refer to an expert without stating a time limit, or if the time limit is indeterminate, such as stipulating that the option will end when a certain index reaches a particular value. There is no minimum or maximum time limit except if 1218
2. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) it is contrary to what is customarily acceptable in relation to the subject matter of the contract. 2/2/3 The stipulated cooling-off period must coincide with the beginning of the contract period. 2/2/4 If the contract relates to several items, it must specify those items to which the option relates, as provided in item 2/8/3. 2/2/5 The subject matter must remain in the condition it was initially in when it was sold, in accordance with item 2/6. 2/3 Scope Cooling-off options apply to binding financial contracts, such as sale, lease, transfer of debt, guarantee, division of wealth and Waqf. They do not apply to non-binding contracts such as unpaid agency or contracts which require payment in advance, such as Salam or which require spot payment of both countervalues such as currency exchange. 2/4 Consequences of cooling-off options 2/4/1 The owner of the option has the right to confirm the contract or revoke it during the stipulated period. If he does not revoke it during this period, the option lapses and the contract become binding. 2/4/2 The owner of the option may test the sold item and does not thereby lose his right to revoke the contract except if he does so repetitively without need or conducts himself as the owner of the sold item in a manner that is contrary to the terms of the contract and/or custom. 2/4/3 Where there is a cooling-off option, the parties are not required to make payment or delivery (the sold item to the buyer and the price to the seller) unless they agree otherwise. One or both parties may voluntarily make payment or delivery and the option does not lapse as a result, except if the conduct of the parties towards the countervalues indicates the intention to give or take ownership. If one party makes payment or 1219
3. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) delivery, the other is entitled to hold back, in which case the first party is entitled to demand return of what they have paid/ delivered. 2/4/4 The owner of the option may offer the item to which the option relates for sale to third parties, and the option does not lapse until the sale is completed. 2/5 Effect of options to cool-off on ownership 2/5/1 If the option to cool-off is owned by both parties or just the seller, there is no transfer of ownership in either countervalue and legal rights related to the subject matter remain solely with the seller to the exclusion of the buyer. 2/5/2 If the option is owned by just the buyer, ownership of the sold item transfers from the seller to the buyer and the buyer’s conduct as the owner of the sold item serves as confirmation of the contract. 2/5/3 If an item sold under option is destroyed while in the possession of the seller, it is the seller’s loss. If it is destroyed in the possession of the buyer while the buyer owns the option, he is liable to pay its price. If it is destroyed in the possession of the buyer owing to his negligence or violation while the seller owns the option and decides to revoke the contract, the buyer is liable to pay its cost. If it is destroyed in the possession of the buyer without there being any negligence or violation on his part, he has no liability. 2/6 Rules relating to increase in the sold item during the option period 2/6/1 Anything that is physically connected and grows out of the original, such as agricultural produce (crops) or animal produce (livestock) belongs to the buyer if the buyer owns the option and confirms the contract. And it belongs to the seller of the seller owns the option, whether he confirms the contract or revokes it. 1220
4. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) 2/6/2 Anything that is physically separate and does not grow out of the original, such as compensation for damage to the sold item caused by a third party during the option period, belongs to the buyer if he chooses to conclude the contract. If he chooses to revoke the contract, it belongs to the seller. 2/6/3 Anything that is separate but grows out of the original, such as dividends on shares and rent from leased assets belongs to the seller. 2/7 Cessation and lapsing of cooling-off options 2/7/1 When the option period expires, the contract becomes binding. 2/7/2 When the owner of the option exercises his option to revoke the contract, then the contract terminates. It is required for the other party to know of the revocation for the revocation to be valid. If the owner of the option concludes the contract, whether expressly or implicitly, the contract becomes binding. 2/7/3 If the sold item is destroyed before physical or constructive delivery, the contract terminates. 2/8 Some applications of cooling-off options 2/8/1 The institution, whether as a seller or buyer, stipulates an option to reconsider whether or not it is worth selling or buying an item. 2/8/2 The institution stipulates an option to reconsider when purchasing items from suppliers in order to offer them to its clients without obtaining a binding promise from them to purchase the items. If the clients do not wish to purchase the items, the institution returns the items to the seller. 2/8/3 The institution stipulates an option to reconsider in relation to the whole or a part of a single deal. If the various items being sold are different from each other, the items to which the option relates must be specified. If they are fungible, such as wheat or rice, the percentage to which the option relates must be specified. 1221
5. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) 2/8/4 It is not permissible to use cooling-off options as a ruse to synthesise the effect of a benefit enjoyed by the lender in exchange for a giving a loan, which can occur if the buyer pays for an item purchased under option, uses the item during the option period and then returns it before the option period expires to receive his money back. 2/8/5 It is not permissible to use cooling-off options to avoid price fluctuations during the option period. 3. Option to Revoke Due to Non-Payment 3/1 Definition of option to revoke for non-payment Options to revoke due to non-payment are options stipulated by sellers or buyers to enable them to revoke contracts if the other party fails to make payment of price or rent on the due date. Such options are not valid unless they are expressly stipulated. 3/2 Scope of option to revoke for non-payment Options to revoke for non-payment are permissible in contracts that do not require spot payment at time of contract. They are not permissible in Salam and currency exchange contracts. 3/3 Prerequisites The seller is entitled to revoke the contract if the buyer does not pay the price within the specified period. 3/4 Transfer Options to revoke due to non-payment lapse upon the death of the owner of the option (whether it is the seller or the buyer). 4. Either-Or Options 4/1 Definition 4/1/1 Either-or options entitle the buyer to conclude the contract to purchase one or more item out of several items specified by the contract during a stipulated period of time. Such options are created by stipulation of the parties. 1222
6. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) 4/1/2 It is not required for the items being sold to be fungible or for their prices to be equal. If their prices are different, the price of each item must be specified. 4/1/3 The agreed option period must be specified and there is no minimum or maximum time limit. 4/2 Prerequisites 4/2/1 Either-or options make ownership attached to one or more of several items to which the option relates but not to any item or items in particular. If the buyer takes delivery of all of them, he is liable to pay for one of them and holds the remaining items on trust. If one of them is destroyed or damaged in his possession, he must purchase it for its price. If all items are destroyed and their prices are different, the buyer is liable to pay the average price of the items for the number of items purchased. For example, if there are three items and he purchased one of them with an option to choose which one, he is liable to pay one third of the price of each item. 4/2/2 If the items to which the either-or option relates are destroyed by an act of the seller after the buyer has taken delivery, the buyer is not liable. 4/2/3 If the option period expires without the buyer choosing which item or items he wishes to confirm, he is legally obligated to do so unless the seller chooses to revoke the contract. 4/2/4 If the buyer treats one of the items in which he has an option as though he owns them, his conduct is deemed to be confirmation of the contract for those items. 4/3 Transfer Either-or options transfer to the heirs of the owner of the option upon his death who in which case enjoy all the rights of the original owner of the option. 1223
7. Shari ’ah Standard No. (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) 5. General Rules Relating to Option to Reconsider 5/1 It is not permissible to sell or transfer options to reconsider. 5/2 It is permissible to have two or more options to reconsider in one contract. 6. Date of Issuance of the Standard The Shari’ah Board issued this standard on 23 Shawwal 1434 A.H., corresponding to 30 December 2013 A.D. 1224