Wakalah - Shariah Requirements and Optional Practices

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1. Wakalah PART B S S 4 of 20 SHARIAH REQUIREMENTS AND OPTIONAL PRACTICES 7 . Compliance with Part B 7.1 An IFI which uses the wakalah contract for its products shall ensure that such products are in compliance with Part B of this policy document. 8. Definition 8.1 Wakalah refers to a contract where a party, as principal (muwakkil) authorizes another party as his agent (wakil) to perform a particular task on matters that may be delegated, with or without imposition of a fee. 9. Nature S 9.1 The inherent nature of wakalah is the delegation of powers to, or authorization of, the agent by the principal which gives rise to the agent having fiduciary duties (amanah) towards the principal within what he has been authorized to do. S 9.2 A wakalah contract shall be binding in any of the following situations: (a) the wakalah contract involves rights of third party; (b) the wakalah contract involves a fee (wakalah bi al-ujrah) to be paid to the agent; (c) the agent has commenced the work that he has been authorized to do and discontinuance of the work would cause the principal or the agent to suffer damages; or (d) the principal and the agent have agreed not to terminate the wakalah contract within a specified time. G 9.3 The wakalah contract may take the following forms: (a) unrestricted agency (wakalah mutlaqah): an agency contract in which the principal appoints someone as agent to perform a particular task without any specific restriction or condition; or (b) restricted agency (wakalah muqayyadah): an agency contract in which the principal appoints someone as agent to perform a particular task with specific restriction or condition. S 9.4 The wakalah contract shall take effect immediately upon entering into the wakalah contract or, if it is a conditional wakalah contract, upon occurrence of the specified condition(s). S 9.5 Terms and conditions that have been mutually agreed upon and are consistent with Shariah principles shall be binding on the principal and the agent. S 10. Components of wakalah contract S 10.1 A wakalah contract must have all of the following elements: (a) the principal and agent (collectively referred to as contracting parties); (b) the offer (ijab) and acceptance (qabul) to enter into the wakalah Issued on: 24 June 2016
2. Wakalah (c) 11. 5 of 20 contract; and the subject matter of the wakalah contract. Contracting parties S 11.1 The contracting parties in a wakalah contract shall, at minimum comprise a principal and an agent. S 11.2 The contracting parties shall be a natural person or legal entity that must have the legal capacity1 to enter into the wakalah contract. S 11.3 A principal shall not appoint an agent to execute a particular transaction if the principal himself does not have the legal capacity to enter into such transaction. S 11.4 The principal must authorize the agent and notify him of his appointment under the wakalah contract. S 11.5 If a person is acting on behalf of another person without wakalah contract or an appointed agent act beyond the scope of his authorization under the wakalah contract, such person or agent is referred to as unauthorized agent (fuduli). The transaction entered by the unauthorized agent may be ratified, subject to conditions stipulated under paragraph 16.1. 12. Offer (ijab) and acceptance (qabul) S 12.1 The wakalah contract must be entered into through an offer and acceptance between the contracting parties. G 12.2 The offer and acceptance may be expressed orally, in writing or any other methods recognized by Shariah. 13. Subject matter of wakalah S 13.1 The subject matter of the wakalah contract must be Shariah compliant. S 13.2 The subject matter of the wakalah contract must be determined upfront by the principal, made known to and accepted by the agent. 1 From Shariah perspective, legal capacity of a natural person is defined as the capacity to assume rights and responsibilities and capacity to give legal effect to his action. Among the important conditions are that the person must possess sound mind and the capacity to distinguish between what is harmful or beneficial to one’s interests. The legal capacity of a legal entity is defined as eligibility of an entity to acquire rights and assume responsibilities. In Malaysia, the legal capacity of both natural person and legal entity is governed by the Contracts Act 1950 and the Age of Majority Act 1971. Issued on: 24 June 2016
3. Wakalah 14 . 6 of 20 Salient features of wakalah Disclosure of the agent’s authorization S 14.1 Where the agent enters into a transaction with a third party and discloses that he is acting on behalf of the principal – (a) the rights and responsibilities arising from that transaction (huquq al`aqd) must be assumed by the principal; and (b) any intended effect of the transaction (hukm al-`aqd) entered into by the agent pursuant to the authorization shall be binding on the principal. S 14.2 Where the agent enters into a transaction with a third party and does not disclose that he is acting on behalf of the principal – (a) the rights and responsibilities arising from that transaction must be assumed by the agent; and (b) any intended effect of the transaction entered into by the agent pursuant to the authorization shall be binding on the principal. Dual agency G 14.3 Where an arrangement involves more than one principal as contracting parties (whether or not the arrangement involves one or more transactions such as seller and buyer or lessor and lessee), the agent may act for all of the principals. G 14.4 A person, in his capacity as agent for one principal, may enter into a subsequent transaction with himself as the other contracting party (such as the purchaser under a tawarruq deposit or the seller under tawarruq financing). S 14.5 In connection with paragraph 13.2, a person shall perform the role as a dual agent under paragraph 14.3 or 14.4 provided that the rights, liabilities and responsibilities of the contracting parties, including the specification of the authorized tasks of the agent is determined upfront, agreed by the principal(s), made known to and accepted by the agent. S 14.6 In relation to paragraph 14.5, all of the principals must agree to the appointment of the agent to act on their respective behalf. Appointment of second agent or sub-agent/ another agent G 14.7 The principal may consent to – (a) the agent appointing another agent on the principal’s behalf; or (b) the agent appointing another agent (sub-agent) for himself (initial agent) to perform all or any part of the task. S 14.8 The agent shall not appoint a second agent or delegate his role to a sub-agent except with the consent of the principal. Issued on: 24 June 2016
4. Wakalah 7 of 20 S 14 .9 When the principal appoints more than one agent and intends for the agents to act together – (a) the principal must explicitly disclose the intention; and (b) each of the agents must perform the task together with other agents as mandated by the principal. Rights and obligations of agent S 14.10 The agent must observe the general interest of the principal in wakalah mutlaqah where the specific condition on the subject matter has not been determined. S 14.11 In the event of agent’s misconduct (ta`addi), negligence (taqsir), or breach of specified terms (mukhalafah al-shurut), the agent shall be liable and shall compensate for loss or damage including any actual cost suffered by the principal. S 14.12 In the event that a breach of specified terms results in gains to principal such as selling at a higher price or buying at a lower price than that the agent was authorized for, the agent shall disclose this to the principal and must not retain any portion of the gains without the consent of the principal. 15. Wakalah fee G 15.1 A wakalah contract may be arranged for a fee (wakalah bi al-ujrah). S 15.2 If the wakalah contract is arranged with a fee, the agent is entitled to receive the wakalah fee for carrying out the authorized task or matters that have been delegated to him. S 15.3 The wakalah fee must be determined and agreed at the time of entering into the wakalah contract. G 15.4 The wakalah fee may be agreed as a fixed amount or as a percentage ratio of a certain amount or an amount linked to a benchmark. G 15.5 The wakalah fee may be paid in a manner that is mutually agreed by the contracting parties such as in one lump sum or in several payments. G 15.6 In addition to the wakalah fee, the contracting parties may agree to an additional fee, over and above the initially agreed fee (performance fee). The performance fee may be in the form of excess of a certain threshold set for the authorized task. G 15.7 If the wakalah contract involves sub-agent, the principal and the initial agent may agree on the party that should pay the wakalah fee for the sub-agent. Issued on: 24 June 2016
5. Wakalah 8 of 20 S 15 .8 Notwithstanding paragraph 15.3, in the event the parties agree that the agent shall be entitled to wakalah fee but the rate is not determined upfront and the task has been fully or partially performed by the agent, he is entitled to a fee based on market rate for a similar task done (ujrah al-mithl). G 15.9 The agent may waive his right to the fee. 16. Transaction by an unauthorized agent (fuduli) S 16.1 In relation to paragraph 11.5, a prospective principal may ratify – (a) a sale transaction where an unauthorized agent sells the assets of the prospective principal to a third party; or (b) a purchase transaction entered into by an unauthorized agent only in the following – (i) the unauthorized agent purchases an asset using prospective principal’s money; or (ii) the unauthorized agent purchases an asset using his own money and discloses that the purchase is made on behalf of prospective principal. S 16.2 In the absence of the ratification in paragraph 16.1(a), the sale contract shall be rescinded and the assets and proceeds from the sale contract shall be returned to the prospective principal and the third party respectively. S 16.3 In the absence of the ratification in paragraph 16.1(b) – (a) the purchase contract entered into by the unauthorized agent shall not be enforceable against the principal; (b) any money belonging to the prospective principal shall be returned; and (c) the unauthorized agent shall be accountable for such transaction. APPLICATION OF WAKALAH WITH OTHER CONTRACTS 17. Application of wakalah with other contracts or arrangements G 17.1 The wakalah contract may be applied with other contracts or arrangements including the following: (a) exchange-based contracts such as murabahah, istisna`, and ijarah; (b) partnership contracts such as musyarakah and mudarabah; (c) murabahah to purchase orderer; (d) ijarah muntahia bittamlik; or (e) tawarruq. 18. Arrangement of wakalah with kafalah G 18.1 An agent in a wakalah contract may enter into a separate kafalah contract to guarantee the performance of a third party’s obligation towards the principal. S 18.2 Where an agent enters into a separate kafalah contract in accordance to paragraph 18.1, the agent shall then assume the role of a guarantor (kafil). Issued on: 24 June 2016
6. Wakalah S 18 .3 19. G 19.1 9 of 20 If an arrangement involves wakalah and kafalah contracts is documented in one legal documentation, the following conditions must be fulfilled: (a) such arrangement is consistent with the inherent nature of wakalah and kafalah respectively; (b) the validity of wakalah and kafalah is not made contingent to the other; and (c) the agent must not guarantee his own performance under a wakalah contract or the investment capital or return under a wakalah for investment (wakalah bi al-ishtithmar). Arrangement of wakalah with rahn A wakalah contract may be arranged with collateral (rahn). S 19.2 The collateral under a rahn contract shall only be liquidated in the event of misconduct, negligence or breach of specified terms by the agent under its wakalah contract. 20. Application of wakalah bi al-istithmar G 20.1 A wakalah contract may be entered into for the purpose of investment (wakalah bi al-istithmar). S 20.2 In accordance with paragraph 18.3(c), the agent must not guarantee the capital or return on the investment in any form. S 20.3 In the event of agent’s misconduct, negligence, or breach of specified terms that results in a lower profit rate than the expected profit rate of such investment, the agent shall – (a) repay the investment capital; (b) pay the actual profit up to the event of breach; and (c) compensate such loss and damage which the principal is entitled to in accordance with paragraph 14.11. G 20.4 For the avoidance of doubt, breach of specified terms referred to in paragraph 20.3 includes, but not limited to, breach of the following terms: (a) the fund shall be invested in such a manner that generates a certain expected profit rate and the agent breaches that condition which results in a lower profit rate than the expected profit; or (b) the fund shall be invested only in a specific instrument or portfolio and the agent breaches the condition by investing in another instrument or portfolio which results in a lower profit than the expected profit of the specified instrument or portfolio. S 20.5 In the event a breach of condition results in profit to be higher than the agreed expected profit, the excess profit shall be treated in accordance with the agreed terms and conditions of the performance fee. If the terms and conditions are not stipulated, the principal shall have the discretion to grant the performance fee. Issued on: 24 June 2016
7. Wakalah 10 of 20 G 20 .6 The principal under the wakalah bi al-istithmar contract may require the agent to arrange for an independent third party guarantee on the capital. S 20.7 For the purpose of paragraph 20.6, the following requirements must be observed: (a) the guarantee shall be executed as a separate contract to guarantee loss or depletion of capital; and (b) where the third party guarantor is an entity, it shall not be a related party to the agent. G 20.8 The principal may agree to the agent retaining all or part of the excess profit as performance fee if the actual profit is higher than the agreed expected profit. G 20.9 In the event that the actual profit is lower than the agreed expected profit, the agent may give hibah to the principal to compensate for the difference. S 20.10 In connection with paragraph 20.9, such hibah must not be made obligatory on the agent. G 20.11 The agent may initiate the investment by advancing his own funds with the consent of the principal. S 20.12 In connection with paragraph 20.11, such advancement by the agent must not be made as a pre-condition for entering into the wakalah contract. S 20.13 If the agent sets aside a portion of the investment profit as reserves for the principal – (a) the agent must obtain the principal’s prior consent; and (b) all profit retained in such reserves belongs to the principal. S 20.14 If the capital provided under wakalah bi al-istithmar contract is to be invested together with other pools of funds having similar mandates, the capital must be able to be segregated from the other pools of funds. DISSOLUTION (FASAKH) AND COMPLETION (INTIHA’) OF WAKALAH 21. Dissolution of wakalah S 21.1 A wakalah contract shall dissolve under any of the following circumstances: (a) demise, dissolution or loss of legal capacity of the principal; (b) demise, dissolution or loss of legal capacity of the agent if the wakalah contract stipulates that the task shall be personally performed by the agent; (c) the principal loses his right to the subject matter of the wakalah; (d) both contracting parties mutually agree to terminate the wakalah contract; (e) the principal exercises the option to terminate the wakalah contract due to misconduct, negligence or breach of specified terms of the contract by the agent; or (f) the agent withdraws from the wakalah contract due to breach of Issued on: 24 June 2016
8. Wakalah 11 of 20 specified terms of the contract by the principal . S 21.2 22. Upon dissolution of the wakalah contract, any asset or rights entrusted with the agent shall be returned to the principal, and the agent shall be entitled to a wakalah fee based on the market rate for a similar task, or a fair portion of the agreed fee that commensurate with the task performed, or any rate mutually agreed between the contracting parties. Completion of wakalah S 22.1 A wakalah contract completes upon fulfilment of all obligations of the contracting parties under the wakalah contract which include settlement by the principal of the wakalah fee. G 22.2 Satisfaction of the wakalah fee may be made through any of the following methods: (a) full payment of the agreed sum by the principal; (b) waiver of right to receive the outstanding wakalah fee by the agent; (c) set-off (muqassah) of obligations between the contracting parties; or (d) transfer of the obligation to pay the fee to a third party through transfer of debt (hiwalah al-dayn). S 22.3 Upon completion of the wakalah contract, the contracting parties are free from any contractual obligations under such wakalah contract. Issued on: 24 June 2016