Jurisprudence

A person enters into contract to carry out a project, such as building a school, hospital, bridge and the like, for a government or non-government organisation. The party contracting out the project may stipulate a condition requiring the contractor to pay a certain amount of money as a penalty, should the work not be completed on schedule. This is in compensation of damage that may be sustained by the first party. For the party contracting out the work to be sure of the ability of the contractor to pay such damages, they will require the contractor to bring in the bank to stand as guarantor. The bank then issues such surety whereby it pledges to pay the amount agreed should the contractor default.

(13) The guarantee given by the bank to the party contracting the work to pay the amount agreed should the contractor default is a form of financial surety, which is [in a way] similar to a personal pledge. That is, a third party stands guarantor between two contracting parties to summon the party who is owed the right, at the request of the party who owes the right.

However, a financial guarantee differs from a personal one in one aspect. The personal guarantor is responsible for paying to the party, who is owed the debt, the same amount of the debt. Should he die before honouring the guarantee, the amount due be set aside from his estate before any other shares. As for the financial guarantor, his responsibility is to pay the amount of the actual debt, rather by paying it to the party who is owed the debt. If he dies before that, no amount should be set aside from his estate, except where his will stipulates that.

The guarantee contract is made sound by the guarantor consenting to all that which proves his honouring his undertaking and obligations, be it in a written form, utterance, or action, and the acceptance of the party commissioning the guarantee.

(14) It is permissible for the bank to receive commission from the contractor in return for standing guarantor for the contractor.

Such commission could be justified as a sort of ji'aala (fee, charge, reward). That is, the contractor determines the commission as a fee for the bank in return for the guarantee. It will then be halal for the bank to receive it.

(15) Sometimes the contractor fails to complete the project on the agreed time. He then refuses to pay the agreed amount to the owner of the project. If the bank pays the money to the owner, does the bank have the right to claim it back from the contractor? Apparently, the bank has such a right, for the guarantee is made out at the request of the contractor. He, therefore, stands to make up for the loss sustained by the bank as a result of putting forward the surety.