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Building contracts & rising building costs

Published: 24/08/2011 10:47:00 AM GMT
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Many contractors complain about the rising prices of building materials. Sometimes, the prices of materials doubles after the contracts are signed. This causes many contractors to fail commercially or even fall into bankruptcy. What can they do? Is it possible to add some clauses to the main contract to protect the contractors from these dangers?


Answered by

Sheikh Sâmî al-Suwaylim, member of the Islamic Advisory Board of al-Rajhi Bank

It is confirmed in the hadîth that the Prophet (peace be upon him) recognized the commercial implications of damages brought on by calamity. [Sahîh Muslim (1554)] A calamity, for our purposes, is where destruction of wealth is brought about by factors which are beyond human ability.

An example of this would be where a farmer sells fruit after it ripens but the fruit subsequently becomes damaged by rain, hailstones, or some other natural disaster before it comes into the possession of the purchaser. In this case, the price should be reduced according to the value of the damage.

The Prophet (peace be upon him) said: “If you sell produce to your brother and it is then stricken by a calamity, it is not permissible for you to take anything from him. Would you take the wealth of your brother without justification?” [Sahîh Muslim (1554)]

The same ruling will apply to a building contract in the case of an extreme rise in the price of building materials or essentials. In this case, there needs to be a corresponding increase in the contract’s value or alternatively, a reduction in the quantity or required work so that the contract’s value is in conformity with the costs.

Defining the extent of what constitutes a calamity in commercial terms is subject to juristic discretion (ijtihâd). Jurists of the Mâlikî school of thought estimate it to be one-third of the total value. Therefore, if a third of the sale value is damaged before the purchaser takes possession of the goods, then a corresponding price reduction is in order.

Accordingly, it is possible to estimate the increase or decrease that is to be considered in construction contracts to be a third. Therefore, if the increase in building costs exceeds one-third, then there should be increase in the contract value commensurate with that increase.

The same would apply in the case of a substantial decrease in building costs. A corresponding reduction in the contract’s value would be in order.

Consideration of calamity in commercial law is established in the Sunnah. It is not compulsory to have it written out as a clause in a commercial contract. However, it is better to do so to save the two parties from any future disputes.

And Allah knows best.

Source: Islam Today




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