Revocation of Contracts by Exercise of a Cooling-Off Option - Scope of Standard

Transcription

1. Shari ’ah Standard No. (54): Revocation of Contracts by Exercise of a Cooling-Off Option Statement of the Standard 1. Scope of the Standard This Standard covers the stipulation of revocation of valid and binding contracts and the causes and consequences of and impediments to such revocation. It does not cover the expiry of contracts at the end of their contractual terms or nullification owing to the absence of a condition required by the Shari’ah. 2. Definition of Cooling-Off Options to Revoke Revocation by exercise of a cooling-off option refers to the termination of a valid and binding contract by virtue of a stipulation in the contract giving one of the parties the option to revoke the contract. 3. Form of Cooling-Off Options to Revoke A cooling-off option to revoke can be stipulated in the contract in any form that indicates it, and it is not required to use any specific word with the meaning of revocation. 4. Permissibility of Cooling-Off Options to Revoke 4/1 It is permissible for both parties to stipulate an option for one or both of them to revoke the contract in specific situations agreed in the contract, without violating Shari’ah rules. 4/2 Revocation by exercise of a cooling-off option is valid if its causes exist, its conditions are satisfied and there are no impediments. It is invalid if its causes do not exist, any of its conditions is not satisfied, if there is an impediment or it is contrary to Shari’ah. 5. Causes Triggering Revocation Rights The cause that triggers the cooling-off option is the existence of one of the situations stipulated in the contract, the occurrence of which gives one or both parties a conditional right to revoke. 1250
2. Shari ’ah Standard No. (54): Revocation of Contracts by Exercise of a Cooling-Off Option 6. Conditions of Valid Revocation The following conditions must be fulfilled for revocation to be valid: 6/1 Existence of the cause triggering the option to revoke at the time of the revocation. 6/2 Absence of any impediments. 6/3 Notification of the revocation given by the owner of the cooling-off option to the other party according to the requirements of custom. 6/4 Exercise of the cooling-off option to revoke by the owner of the option. 7. Impediments to Revocation Revocation cannot take place in the following situations: 7/1 Destruction of the sale item caused by a natural disaster after delivery. 7/2 Destruction of the sale item caused by the buyer whether before or after delivery. 7/3 Conduct that transfers ownership and creates rights for third parties, such as selling or gifting the sale item resulting in ownership passing to a third party. 7/4 Expiry of the period specified in the contract for exercise of the cooling-off option. 8. Consequences of Revocation Revocation nullifies the contract at the moment of revocation. Any growth in the sale item that is physically attached to it is considered part of it. Any growth in the sale item that is physically separate from it and occurs between the time of contract and revocation and before the buyer takes delivery belongs to the seller. If it occurs after deliver, it belongs to the buyer. 9. Waiver of Revocation Rights If the owner of a cooling-off option chooses not to exercise his right to revoke and there is no specific recurring harm attributable to the cause 1251
3. Shari ’ah Standard No. (54): Revocation of Contracts by Exercise of a Cooling-Off Option triggering the option, the buyer is deemed to have permanently waived the option. If the harm attributable to the cause triggering the option is recurring or continuous, the option is not waived. For example, if a leased asset breaks down and the buyer chooses not to revoke the contract and repairs the asset and then the asset breaks down again, the buyer is still entitled to exercise his option to revoke. 10. Payment for Waiver of Revocation Rights 10/1 It is not permissible to stipulate payment for waiver of revocation rights in a sale contract. In contracts that run for specified terms, such as leases (Ijarah), Istisna’a, debt transfer ((Hawalat Hawalat al-Dayn al-Dayn), ), share cropping (Muzara’ah), tree planting partnership (Mugharasah) and agency (Wakalah), it is permissible for one of the parties to waive their rights to the remaining period of the contract in return for a consideration agreed at the time of waiver. 10/2 Unforeseen circumstances resulting in non-exercise of a right to revoke are excluded from the above rule. 11. Application of Cooling-Off Options to Revoke 11/1 Cooling-off options to revoke may be stipulated in credit facility agreements to be triggered by events of default relating to solvency, potential insolvency before it occurs or breach of a restrictive covenant in the contract. 11/2 If the lessor stipulates in a lease contract that he is entitled to add a supplementary rental amount at the beginning of each lease period to cover the costs of maintenance, insurance and taxes levied on owners, and the lessee refuses to accept that, the lessor is entitled to revoke the contract. If the lessee has given a prior promise to purchase the leased asset, the lessor can exercise his rights under the promise and demand performance from the lessee provided that the supplementary rent for that lease period is not added to the purchase price. 11/3 A creditor is entitled to stipulate the right, after notifying the debtor, to accelerate all installments and the right to revoke the contract or 1252
4. Shari ’ah Standard No. (54): Revocation of Contracts by Exercise of a Cooling-Off Option one of them in the event that the debtor fails to pay two or more instalments despite being solvent. 11/4 If the seller stipulates that the buyer provides security or surety or any other form of guarantee and the buyer fails to provide it, the seller is entitled to revoke the contract. 11/5 For other situations of revocation that apply in options to reconsider, options to revoke for incomplete performance and options to revoke for breach of trust, see the relevant Shari’ah Standards. 12. Date of Issuance of the Standard The Shari’ah Board issued this standard on 15 Muharram 1435 A.H., corresponding to 8 November 2014 A.D. 1253