Definition and Scope
The standard covers situations where unforeseen events ("contingent incidents") arise AFTER a contract is formed, making performance impossible, excessively difficult, or economically unreasonable. It addresses: • Whether obligations are suspended, reduced, or terminated • Who bears the loss • Whether parties may seek relief or renegotiation • The distinction between force majeure and normal business risk
Types of Contingent Incidents
Absolute force majeure (Quwwah al-Qahirah): Events making performance literally impossible: • War, civil unrest, government prohibition • Natural disasters (earthquakes, floods, hurricanes) • Acts of God (epidemics, pandemics — though COVID-19 applicability was debated) Extreme hardship (Darar al-Ghalib): Events making performance possible but unreasonably expensive: • Sharp increase in production costs (rare materials become 10x more expensive) • Currency collapse (a currency used in the contract becomes worthless) • Significant market disruption causing trading halt Normal commercial risk: NOT eligible for relief: • Price volatility within normal ranges • Supplier defaults (without force majeure causing the default) • Market competition • Weather affecting agriculture (farmer assumed this risk)
Consequences of Contingent Incidents
If performance is IMPOSSIBLE (the Contingent Incidents standard, principle 1): • Obligation is DISCHARGED • Buyer receives nothing; seller receives nothing • Both parties bear their own losses proportionally Example: A Salam contract to deliver 100 tons of wheat fails because the entire harvest is destroyed by drought. Neither party can force the other; the contract is null.
If performance is EXCESSIVELY DIFFICULT but still possible (the Contingent Incidents standard, principle 2): • Obligations may be SUSPENDED pending changed circumstances • Parties may RENEGOTIATE terms • If renegotiation fails, a court may MODIFY terms proportionally • Insurer or guarantor (if any) may be called on Example: A Murabahah contract requires delivery of imported goods, but import tariffs triple due to sudden trade sanctions. The bank may seek a price adjustment rather than full cancellation.
If LOSS occurs due to contingent incident (the Contingent Incidents standard, principle 3): • Allocation depends on who bore the RISK at the time of loss • In sales: buyer bears loss after taking possession; seller before • In Salam: seller bears all risk (he contracted to deliver) • In Istisna'a: seller bears all risk (he contracted to complete)
Application in Common Contracts
Murabahah (Cost-plus sale): A bank purchases goods with a 3-month payment plan. After 1 month, war breaks out and import of the goods is legally prohibited. The bank cannot deliver the goods. The bank should refund the customer's payments; the loss is the bank's (it bore ownership risk).
Salam (Pre-paid sale): A buyer prepays for wheat to be delivered in 6 months. Severe drought destroys the entire harvest. The seller cannot deliver. The seller is still obligated — he bore the production risk. He must either source wheat from elsewhere or refund the buyer.
Istisna'a (Manufacturing contract): A builder contracts to construct a building. Mid-construction, earthquake damages the partially completed building. The builder cannot complete. The builder bore the risk; he must either rebuild or refund the customer's advance. Post-delivery, if the building deteriorates due to a contingency, the customer (now owner) bears the risk, not the builder.