All praise is due to Allah alone, and peace and blessings be upon the one after whom there is no prophet, Muhammad, and upon his family and companions. To proceed:
Based on what was decided in the fourth session of the Council of Senior Scholars held between 28/10 and 14/11/1393 AH regarding the desire to study the topic of (penalty clauses), it was included in the agenda of the Council in its fifth session, held between 5 and 22/8/1394 AH in the city of Taif.
The topic was then studied in this session after reviewing the research prepared on it by the Permanent Committee for Scientific Research and Ifta.
After deliberating and discussing, and reviewing the issues that can be analogized to the penalty clause, and discussing the direction of its analogy to those issues and the objections raised against it, and contemplating the saying of Allah, the Exalted: (O you who have believed, fulfill [all] contracts) and what has been narrated from him, peace be upon him, saying: (Muslims are bound by their conditions, except for a condition that makes unlawful what is lawful or makes lawful what is unlawful) and the saying of Umar, may Allah be pleased with him: (Rights are determined by conditions) and relying on the correct opinion: that the original rule regarding conditions is validity, and that nothing is prohibited or invalidated except what the Sharia has explicitly prohibited or invalidated by text or analogy.
And reviewing what the scholars have mentioned regarding the classification of conditions in contracts into: valid and invalid.
1. The classification of valid conditions into three types:
1) The first: a condition necessitated by the contract; such as the condition of immediate exchange and the due date of the price.
2) The second: a condition that serves the interest of the contract; such as stipulating a characteristic in the price; like postponement, or mortgage, or a guarantor, or a characteristic in the asset, such as the slave being a virgin.
3) The third: a condition that has a known benefit, and is neither necessitated by the contract nor serves its interest, nor contradicts its implications; such as the seller stipulating to reside in the house for a month.
2. The classification of invalid conditions into three types:
1) The first: a condition imposed by one party of the contract on the other party for another contract; such as a sale, or lease, or similar.
2) The second: a condition that contradicts the implications of the contract, such as stipulating that there will be no loss on the sold item, or that he will not sell, gift, or emancipate.
3) The third: a condition that is related to the contract, such as saying: I sold to you if so-and-so comes.
By applying the penalty clause to them, it becomes evident that it is one of the conditions that are considered to serve the interest of the contract, as it is an incentive to complete the contract within its specified time, and it is supported by what was narrated by Al-Bukhari in his Sahih with his chain of narration from Ibn Sirin: that a man said to his renter: Enter your saddle, for if I do not travel with you on such and such day, you will have one hundred dirhams, and he did not leave, so Shuraih said: (Whoever imposes a condition on himself willingly and without coercion is bound by it).
And Ayyub narrated from Ibn Sirin: that a man sold food and said: If I do not come to you on Wednesday, then there is no sale between me and you, and he did not come, so Shuraih said to the buyer: (You have defaulted) and ruled against him.
Moreover, it is in response to the breach of obligation, as the breach of it is a cause for harm and loss of benefits, and the ruling to validate the penalty clause closes the doors to chaos and manipulation of the rights of Allah's servants, and is one of the reasons for encouraging fulfillment of promises and contracts, in realization of Allah's saying: (O you who have believed, fulfill [all] contracts).
For all these reasons, the Council unanimously decides: that the penalty clause which is stipulated in contracts is a valid and recognized condition, which must be adhered to, unless there is an excuse for breaching the obligation that is considered by Sharia, in which case the excuse would exempt it from obligation until it is removed.
And if the penalty clause is excessive by common standards, such that it is intended as a financial threat, and is far from the implications of the Sharia rules, then it must revert to justice and fairness, according to what has been lost in benefits, or what harm has been incurred.
And the estimation of that in case of disagreement is referred to the Sharia judge through experts and those with insight; acting upon Allah's saying: (And when you judge between people to judge with justice) and His saying: (And let not the hatred of a people prevent you from being just. Be just; that is nearer to righteousness), and upon the saying of the Prophet, peace be upon him: (There should be neither harming nor reciprocating harm).
And with Allah's success, and peace and blessings be upon Muhammad, and upon his family and companions.
All praise is due to Allah alone, and peace and blessings be upon the one after whom there is no prophet, Muhammad, and upon his family and companions. To proceed:
Based on what was decided in the fourth session of the Council of Senior Scholars held between 28/10 and 14/11/1393 AH regarding the desire to study the topic of (penalty clauses), it was included in the agenda of the Council in its fifth session, held between 5 and 22/8/1394 AH in the city of Taif.
The topic was then studied in this session after reviewing the research prepared on it by the Permanent Committee for Scientific Research and Ifta.
After deliberating and discussing, and reviewing the issues that can be analogized to the penalty clause, and discussing the direction of its analogy to those issues and the objections raised against it, and contemplating the saying of Allah, the Exalted: (O you who have believed, fulfill [all] contracts) and what has been narrated from him, peace be upon him, saying: (Muslims are bound by their conditions, except for a condition that makes unlawful what is lawful or makes lawful what is unlawful) and the saying of Umar, may Allah be pleased with him: (Rights are determined by conditions) and relying on the correct opinion: that the original rule regarding conditions is validity, and that nothing is prohibited or invalidated except what the Sharia has explicitly prohibited or invalidated by text or analogy.
And reviewing what the scholars have mentioned regarding the classification of conditions in contracts into: valid and invalid.
1. The classification of valid conditions into three types:
1) The first: a condition necessitated by the contract; such as the condition of immediate exchange and the due date of the price.
2) The second: a condition that serves the interest of the contract; such as stipulating a characteristic in the price; like postponement, or mortgage, or a guarantor, or a characteristic in the asset, such as the slave being a virgin.
3) The third: a condition that has a known benefit, and is neither necessitated by the contract nor serves its interest, nor contradicts its implications; such as the seller stipulating to reside in the house for a month.
2. The classification of invalid conditions into three types:
1) The first: a condition imposed by one party of the contract on the other party for another contract; such as a sale, or lease, or similar.
2) The second: a condition that contradicts the implications of the contract, such as stipulating that there will be no loss on the sold item, or that he will not sell, gift, or emancipate.
3) The third: a condition that is related to the contract, such as saying: I sold to you if so-and-so comes.
By applying the penalty clause to them, it becomes evident that it is one of the conditions that are considered to serve the interest of the contract, as it is an incentive to complete the contract within its specified time, and it is supported by what was narrated by Al-Bukhari in his Sahih with his chain of narration from Ibn Sirin: that a man said to his renter: Enter your saddle, for if I do not travel with you on such and such day, you will have one hundred dirhams, and he did not leave, so Shuraih said: (Whoever imposes a condition on himself willingly and without coercion is bound by it).
And Ayyub narrated from Ibn Sirin: that a man sold food and said: If I do not come to you on Wednesday, then there is no sale between me and you, and he did not come, so Shuraih said to the buyer: (You have defaulted) and ruled against him.
Moreover, it is in response to the breach of obligation, as the breach of it is a cause for harm and loss of benefits, and the ruling to validate the penalty clause closes the doors to chaos and manipulation of the rights of Allah's servants, and is one of the reasons for encouraging fulfillment of promises and contracts, in realization of Allah's saying: (O you who have believed, fulfill [all] contracts).
For all these reasons, the Council unanimously decides: that the penalty clause which is stipulated in contracts is a valid and recognized condition, which must be adhered to, unless there is an excuse for breaching the obligation that is considered by Sharia, in which case the excuse would exempt it from obligation until it is removed.
And if the penalty clause is excessive by common standards, such that it is intended as a financial threat, and is far from the implications of the Sharia rules, then it must revert to justice and fairness, according to what has been lost in benefits, or what harm has been incurred.
And the estimation of that in case of disagreement is referred to the Sharia judge through experts and those with insight; acting upon Allah's saying: (And when you judge between people to judge with justice) and His saying: (And let not the hatred of a people prevent you from being just. Be just; that is nearer to righteousness), and upon the saying of the Prophet, peace be upon him: (There should be neither harming nor reciprocating harm).
And with Allah's success, and peace and blessings be upon Muhammad, and upon his family and companions.