Arabic (شرط الجزاء أو الشرط الجزائي) for penalty clause. A clause in a commutative contract (aqd mu’awadhah) that stipulates that an agreed amount of money shall be paid to a counterparty if the other counterparty is late in fulfilling a given contractual obligation. For example, in an istisna’a contract (commissioned manufacturing) may include a clause stipulating that the seller (manufacturer or al-sani’) pays the buyer (al-mustasni’) a compensation for late delivery of the asset to be manufactured (al-masnoo’). This may be effected through a condition to decrease the price in order to compensate the buyer for nondelivery on the agreed time.
However, compensation is permissible by shari’a only if the delay is not caused by force majeure. In general, shari’a doesn’t permit stipulation of a penalty clause for default in payment because this would be tantamount to riba.
