A questioner says: I want to build a house according to specific regulations, and I'd like to include a penal clause in the contract between me and the contractor who will carry out the project. Is this permissible?
Praise be to Allah. May Peace and Blessings of Allah be upon His Messenger Muḥammad.
The penal clause is an agreement between two contractors to estimate the compensation that one of them will deserve if the other party breaches the implementation of what he has committed himself to.
Almighty Allah has ordered us to fulfill the contracts. He says, “O you who have believed, fulfill [all] contracts”. The contract and its included conditions must be fulfilled as long as the contract is within the limits of Sharia.
Almighty Allah has forbidden consuming people's wealth unlawfully. He says, “And do not consume one another's wealth unjustly”. Undoubtedly, delaying the giving of people’s rights is a kind of unjust consuming for money unlawfully and it is an illegal way to grab the money.
The basic principle in making contracts and transactions is that these are valid unless there is an evidence for otherwise. The Prophet (pbuh) said, “Muslims are held responsible to their conditions, except for a condition that would make the lawful unlawful, or the unlawful lawful”. The penalty clause is one of the conditions that are considered to be in the interest of the contractors. That is because it is an incentive and motivation for the responsible party to fulfil the contract on time to avoid paying the stated fine, the case which could be harder than the implementation of the commitment included in the contract. It also saves time and money and preserves the rights from loss.
This condition could be stipulated in the contract or in a subsequent agreement before the damage occurs.
A penal clause could be stipulated in financial contracts, except contracts in which the original commitment is a debt. Such condition could be set in contracting contracts for the contractor, and in supply contracts for the supplier.
Based on what was mentioned above, we say to the questioner that it is permissible to set this condition in the contract between you and the contractor who will build the house. If he breaches the implementation of this work, as for example, if there is a delay in implementation, or if the work is carried out in contradiction to the specifications agreed upon in the contract and such breaching results in harm to you, then you will have the right to claim the value of the penal clause stipulated in the contract.