SS 23 · Services

SS 23: Agency and the Act of an Uncommissioned Agent (Fodooli)

What this standard is about

SS 23 covers wakalah (agency). An agency contract is a trust-based arrangement in which one party, the principal, authorizes another party, the agent, to perform a task on his behalf. The agent may work for free or for a fee.

The standard covers agency in sales, ijarah (leasing) transactions, fund management, investment agency and routine procedural tasks such as receiving and delivering payments. It sets the conditions for a valid agency, the forms it can take, and the duties of each side. It also covers how an agency ends.

The second part of the standard covers the fodooli (uncommissioned agent). A fodooli is someone who acts in another person's affairs without being appointed as an agent. The standard explains when those acts are valid.

Why it exists

Agency sits at the heart of Islamic banking. Fund management, sukuk structuring, syndication deals and money-market instruments all run on agency contracts. Institutions needed one authoritative set of rules for appointing agents, acting as agents, and handling unauthorized acts.

The key rules, simply put

An agency contract is permissible as long as the task is Shariah-compliant. An agent may not be used for prohibited business or usurious lending.
Both the principal and the agent must have legal capacity. Each must be competent to act.
The agent's pay must be known. It can be a fixed sum, a share of income, or an amount linked to a benchmark that will be known.
The agent must stay inside the authority the principal gave him. If he sells below the set price or buys above it, he must make up the difference.
The agent may not appoint a sub-agent without the principal's permission.
If more than one agent is appointed in a single contract, they cannot act alone unless the principal allows it.
The agency ends on the death of either party, when the principal dismisses the agent, when the agent quits, when the task is done, or when the principal no longer owns the assets concerned.
A fodooli's act has no effect until the owner approves it. If the owner approves, the contract stands. If the owner refuses, the act does not bind the owner. It becomes binding on the fodooli himself instead, as long as he did not declare at signing that he had no authority.

An everyday example

A customer wants to buy machinery but asks an Islamic bank to act as her agent to make the purchase. The bank agrees to a fixed agency fee. It buys the machinery at the price the customer set. Later, a stranger sells off some of the customer's stored goods without permission, claiming to help. The stranger is a fodooli. The customer can approve the sale, in which case it stands, or reject it, in which case the stranger must compensate her for any loss.

Words to know

Wakalah — agency; authorizing someone to act on your behalf
Principal — the person who appoints the agent
Agent — the person authorized to act for the principal
Fodooli — an uncommissioned agent; someone who acts in another's affairs without appointment
Indemnify — compensate for a loss
Ijarah — leasing; the transfer of the use of an asset for a set time at an agreed rent
Usurious — involving riba (interest), which is forbidden in Islam

Source

AAOIFI Shariah Standard No. 23 — https://daralsharia.ae/docs/default-source/news-pdf/standard-23.pdf (Dar Al Sharia / IFN summary; standard issued 30 April 2005)