Definition and Scope
Hawalah (محالة) is the transfer of a debt from a transferor (Muheel) to a payer (Muhal Alaihi). The transferor is the original debtor; the payer is the party who will settle the debt. The transferee (Muhal) is the original creditor. KEY: Hawalah is different from assignment of rights — in Hawalah, the DEBTOR changes; in assignment, the CREDITOR changes.
Permissibility and Acceptance
Hawalah is a Legitimate and Independent Contract It is made out of courtesy and is NOT a contract of sale. Its purpose is to facilitate payments and recovery. It is permissible.
Acceptance is Recommended if Payer is Solvent If the payer is known to be solvent and reliable, acceptance is Mustahabb (recommended). If the payer's status is unknown, acceptance is Mubah (permissible but not recommended).
Three Essential Conditions (the Hawalah standard)
Condition 1: Consent of All Parties The transferor (debtor), transferee (creditor), and payer must all agree. Hawalah cannot be imposed unilaterally.
Condition 2: Transferor Must Be a Debtor The transferor must have an existing debt to the transferee. If not, it is an agency contract for debt collection, not a Hawalah.
Condition 3: Payer Need Not Be a Debtor to Transferor Unlike compulsory set-off, the payer does not need to already owe the transferor. The payer simply undertakes to pay. This is called "Unrestricted Hawalah" and is permissible.
Condition 4: All Parties Must Be Legally Competent Minors and those lacking capacity cannot enter into Hawalah.
Condition 5: Debts Must Be Known and Transferable The amount and nature of the transferred debt must be clear to all parties.
Two Types of Hawalah and Their Rules (the Hawalah standard)
Type 1: Restricted Hawalah The payer is restricted to paying from an asset of the transferor that is already in the payer's possession. Example: Merchant A owes Creditor B AED 100,000. Merchant A asks Merchant C (who holds AED 150,000 of A's goods in warehouse) to pay B from those goods. Condition: The debt to B must equal (or be less than) the value of A's assets in C's possession.
Type 2: Unrestricted Hawalah The payer is NOT a debtor to the transferor. The payer simply undertakes to pay from personal funds and seeks recourse to the transferor afterward. This is allowed if the transfer is made at the transferor's request.
Timing of Payment (the Hawalah standard)
Spot Payment: Hawalah can be on a spot (immediate) payment basis — the payer must pay the transferee right away.
Deferred Payment: Hawalah can also be on a deferred basis — the payer is given time (or the original debt maturity date) to settle. If the original debt is already due, the payer can require additional time, and this is permissible.
Legal Effects of Hawalah (the Hawalah standard, –11)
Effect on Transferor-Transferee Relationship: A VALID Hawalah DISCHARGES the transferor from debt. The transferee can no longer pursue the transferor for payment — only the payer. EXCEPTION: If the transferee conditionally accepted Hawalah (e.g., "only if you are solvent"), and the payer later becomes insolvent, the transferee can pursue the transferor.
Transferee's Right of Recourse Against Transferor: If the payer becomes bankrupt, dies, or denies Hawalah and the transferee cannot recover, the transferee may have recourse to the transferor in these cases: (i) payer dies in bankruptcy; (ii) institution-payer goes into liquidation before payment; (iii) payer is declared bankrupt in lifetime; (iv) payer denies the Hawalah and takes a judicial oath.
Effect on Death and Bankruptcy (the Hawalah standard): A valid Hawalah is NOT annulled by death or liquidation of the transferor or payer. However, if the payer dies or is liquidated and was insolvent, the transferee has recourse against the transferor's estate.
Modern Application: Cheques as Hawalah
When a person issues a cheque, it is a form of Hawalah if the cheque beneficiary is a creditor of the issuer. The issuer (transferor) transfers the debt to the bank (payer) and the cheque beneficiary (transferee). If the beneficiary is NOT a creditor to the issuer (e.g., a gift), then the cheque is NOT a Hawalah but an agency contract for payment.