Explanation of Article 106

Explanation of Article 106

This article addresses a second reason for contract termination, which is the option of condition; the first paragraph states the permissibility of the contracting parties agreeing at the time of the contract that one or both of them or a third party has the right to opt out of the contract. For example, a sale may be made with the condition that the seller, the buyer, both, or a third party has the right to withdraw from the contract within ten days. The option of condition differs from the resolutory condition in case of breach of obligation as stated in Article (108); the purpose of the latter is to give the creditor the right to terminate in case of the debtor's breach without the need for a court ruling, while the purpose of the option of condition is to allow the contracting party to deliberate and consider before the contract becomes final and binding on them. This option is not related to breach, as the party with the option can withdraw from the contract at their own discretion even if there is no breach by the other party; however, for the withdrawal to be valid, the other contracting party must be informed within the specified period for the option. Consequently, no effect is attributed to the withdrawal unless the other contracting party is informed. The paragraph clarifies that this withdrawal is considered a termination of the contract; meaning that it results in the effects of termination, such as the contract being nullified retroactively and the parties returning to their pre-contract state, without requiring a warning or breach for withdrawal. This distinguishes the option of condition from earnest money; in the case of earnest money, the contract does not nullify retroactively upon withdrawal, and the parties do not return to their pre-contract state, unlike withdrawal in the option of condition.

The option of condition is supported by the saying of the Prophet, peace be upon him: "The two parties to a sale have the option as long as they have not separated, unless it is a transaction with an option" (8). One of the meanings of a transaction with an option is that the contracting parties agree on the option for both or one of them after separation. The wisdom behind its legitimacy, as previously mentioned, is deliberation, as the contracting party may need to arrange their affairs or test the sold item before the contract becomes binding on them. One of its applications in this system is the sale with a trial condition as stated in Articles (310-312).

Several rulings can be derived from the article:

1. The option of condition is not limited to instantaneous contracts like sales; it is also valid in time-bound contracts like leases, and withdrawal does not have a retroactive effect. It is not limited to consensual contracts either; it is valid even in formal and real contracts, as establishing the right to withdraw does not prevent the contract from being concluded.
2. The option of condition is considered an obligation contingent upon a resolutory condition, not a suspensive one, meaning the contract is effective from the time of its conclusion, and when the party with the option chooses to withdraw, the contract is nullified retroactively, and the creditor must return what they received. The effect of termination relates back to the time the contract was formed unless it is clear from the parties' intent or the nature of the contract that the effect of withdrawal is only at the time the condition is fulfilled. The ruling of the article is not of public order, so if it is clear from the circumstances of the contract that the parties intended the contract's effectiveness to be contingent upon the acceptance of the party with the option, it is valid, and the contract is contingent upon a suspensive condition, which is the acceptance of the party with the option.

The conclusion of the paragraph clarifies that if the contracting parties agree on the option without specifying its duration, this does not invalidate the contract; rather, the contract is valid, and the duration is determined according to custom and the circumstances of the contract. If they disagree on its determination, the court will determine it, as the parties' intent when agreeing on the right to the option without specifying its duration indicates they intended to determine it by custom and the circumstances of the contract; this is merely an interpretation of the parties' intent according to what dealings and the nature of the contract require.

It is clear from the paragraph that the duration of the option of condition is not limited to a specific period, and it is permissible to agree on any duration, even if it is long.

The second paragraph of the article outlines two cases in which the option of condition is forfeited: The first case: If the party with the option issues something indicating the forfeiture of their right to the option, whether by explicit expression, such as saying: "I have forfeited my right to terminate" or "I have confirmed the contract," or by implicit expression, such as making a legal disposition of the item subject to the contract; for example, if a person buys a specific item with an option condition and then sells, leases, gifts, or mortgages it during the option period, this is considered an implicit forfeiture of their right to withdraw. However, merely offering the item for contract, such as offering it for sale or lease without concluding the contract, does not forfeit the option, as this action does not rise to the level of being an indication of forfeiting this right.

The second case: If the option period passes without the party with the option choosing to withdraw, their right to withdraw from the contract is forfeited, and the contract becomes final, with no right to withdraw. This also distinguishes the option of condition from earnest money; the silence of the party with the option until the end of the option period is considered a forfeiture of their option to withdraw, and the contract becomes final for them, while the silence of the earnest money giver until the end of the withdrawal period is considered a withdrawal from the contract.

The conclusion of this paragraph states that if the option is for both contracting parties, the forfeiture of one party's option does not result in the forfeiture of the other party's option unless the contract or custom dictates otherwise, as the default is the independence of each party's right from the other.

It is worth noting that the provisions contained in the article do not apply to statutory provisions established to protect the consumer in certain activities, where the consumer is granted the right to cancel or withdraw from the contract within specific periods, such as consumer financing rules, electronic transactions, and others. The right to cancel or withdraw in those cases originates from those rules, unlike the option of condition, which originates from the agreement of the contracting parties.

Related To

Article 106

1. A contract may be concluded with an option to withdraw therefrom. The party holding such option may withdraw from the contract within the specified period, provided that he notifies the other party of such withdrawal. If the option to withdraw is invoked by the holder thereof, the contract shall be deemed terminated. If the option period is not specified, the court shall determine said period according to custom and the circumstances of the contract.

2. The option to withdraw from a contract shall be forfeited if the holder thereof, explicitly or implicitly, relinquishes such option, or upon the lapse of the option period. If the option is held by both contracting parties and the option of one of the parties is forfeited, the other party’s option shall remain in effect.