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Islamic Contract Law – Balanced Approach: Form and Substance (with Application & Examples)
1. Judicial Support for Substance over Form
  • The approach is also reflected in:
    • Dubai Cassation Court Judgment No. 125 of 2007
  • Court’s principle:
    • The true intention and meaning of the parties determine the contract
    • Not merely:
      • Words
      • Structure
      • Syntax
👉 If wording is unclear:
  • Courts must:
    • Look at mutual intention


2. Balanced Approach (Very Important)
  • Islamic contract law does NOT:
    • Ignore form
👉 Instead:
  • Requires:
    • Both form AND substance to be analysed


Key Rule
  • If:
    • Form and substance are consistent → ✅ valid
  • If:
    • There is conflict →
      👉 Substance is preferred




3. Why This Balance Matters
  • Form ensures:
    • Legal validity
    • Proper structure
  • Substance ensures:
    • Fairness
    • Compliance with Shariah objectives


👉 Without balance:
  • Only form → risk of:
    • Legal tricks (ḥiyal)
  • Only substance → risk of:
    • Ignoring legal certainty




4. Application Examples


Example 1: Sale vs Loan
  • Form
    • Contract labelled as:
      • “Sale agreement”


  • Substance
    • No real asset transfer
    • Only cash financing


👉 Result:
  • Court/jurist treats it as:
    • Loan, not sale


Example 2: Lease Agreement
  • Form
    • Called:
      • “Lease”


  • Substance
    • Customer:
      • Pays instalments
      • Bears all risks
      • Ends up owning asset


👉 Interpretation:
  • Actually:
    • Financing arrangement (hire purchase–like)


Example 3: Ambiguous Contract Terms
  • Form
    • Contract wording unclear


  • Substance
    • Parties clearly intended:
      • Specific business arrangement


👉 Court will:
  • Prioritise:
    • Actual intention over literal wording


Example 4: Promise vs Binding Obligation
  • Form
    • Document says:
      • “This is only a promise”


  • Substance
    • In practice:
      • Parties treat it as binding


👉 Court may:
  • Recognise it as:
    • Enforceable obligation


5. Key Insight
  • Interpretation of contracts requires:
    • Looking beyond:
      • Labels and wording
👉 Focus on:
  • What the parties truly intended and what the transaction actually does


Final Summary
  • Courts (Malaysia & UAE) adopt:
    • Substance over form approach
  • Islamic law requires:
    • Balanced analysis
      • Examine form
      • Prioritise substance if conflict arises


One-Line Understanding
  • Islamic contract interpretation =
    👉 “Respect the form, but decide based on the substance and true intention.”

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​Islamic Contract Law – Application of “Substance over Form” (with Examples)


1. Judicial Approach in Malaysia
  • Malaysian courts (in both Islamic finance and common law contracts) adopt:
    • Substance over form


Key Case
  • Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd
  • Principle established:
    • Courts will look at:
      • True nature of the transaction
    • Not merely:
      • Labels or contractual wording


2. Application in Practice (Examples)


Example 1: BBA (Deferred Payment Sale)
  • Form
    • Contract labelled as:
      • Sale (al-bayʿ bithaman ājil)
    • Price:
      • Higher due to deferred payment
 
  • Substance Issue
    • Court examines:
      • Whether transaction is:
        • Genuine sale
        • OR disguised loan with interest


👉 Court approach:
  • Looks beyond:
    • “Sale” label
  • Examines:
    • Pricing structure
    • Risk
    • Economic effect


Example 2: “Loan” Disguised as Sale
  • Form
    • Agreement structured as:
      • Sale of asset
 
  • Substance
    • No real asset transfer
    • Customer only receives:
      • Cash


👉 Court conclusion:
  • Substance = financing arrangement
  • Not genuine sale


Example 3: English Law-Style Contract (Malaysia)
  • Courts apply same principle even in:
    • Non-Islamic contracts


Scenario:
  • Document labelled:
    • “Service Agreement”
 
  • Substance
    • Actually operates as:
      • Employment relationship


👉 Court action:
  • Ignores label
  • Reclassifies based on:
    • Actual facts


Example 4: Lease vs Financing
  • Form
    • Agreement called:
      • “Lease”
 
  • Substance
    • Customer:
      • Bears all risks
      • Pays fixed instalments
      • Eventually owns asset


👉 Court may view as:
  • Hire purchase / financing arrangement


3. General Judicial Principle
  • Courts will:
    • Look beyond:
      • Terminology
      • Structure
  • Focus on:
    • Economic reality
    • True intention of parties


4. Key Insight
  • Same approach applies in:
    • Islamic finance
    • English-style contracts in Malaysia
👉 Reflects:
  • Convergence between:
    • Islamic principles
    • Modern judicial reasoning


Final Summary
  • Malaysian courts:
    • Apply substance over form consistently
  • Even if:
    • Contract wording suggests one thing
👉 Court will determine:
  • What the contract actually does in reality


One-Line Understanding
  • Courts do not ask:
    👉 “What is it called?”
  • They ask:
    👉 “What is it really?”




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​Islamic Contract Law – Preference for Substance over Form (Modern Approach)


1. Key Legal Maxims (Modern Scholarly Approach)
  • “Matters are determined according to intentions”
  • “In contracts, effect is given to intentions and meanings, not words and forms”
👉 Meaning:
  • The true intention of the parties is more important than:
    • Labels
    • Technical wording


2. Position of Ibn al-Qayyim
  • Emphasised:
    • Focus must be on:
      • Intention and motive
  • Key idea:
    • A sound jurist asks:
      • “What was intended?”
    • Not merely:
      • “What was said?”
👉 Warning:
  • Ignoring intention may:
    • Harm parties
    • Misrepresent Sharīʿah


3. Form vs Substance in Practice
  • Sometimes:
    • Form and substance conflict


Example
  • Contract labelled:
    • “Sale”
  • But in reality:
    • Functions like:
      • Loan with interest
👉 In such cases:
  • Preference is given to:
    • Substance (economic reality)


4. Judicial Approach (Malaysia)
  • Courts adopt:
    • Substance over form approach


Case Example
  • Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd
  • Court held:
    • True nature of contract depends on:
      • Substance, not structure or wording


General Judicial Principle
  • Courts will:
    • Look beyond:
      • Labels
      • Terminology
  • Focus on:
    • Actual facts and real nature of transaction


5. Supporting Approach in Other Jurisdictions
  • Similar reasoning applied by:
    • Dubai Cassation Court
  • Principle:
    • Interpretation must consider:
      • True intention of parties
    • Not just:
      • Literal wording


6. Balanced Approach (Very Important)
  • Islamic law does NOT ignore form
👉 Instead:
  • Requires:
    • Both form AND substance


When conflict arises
  • Priority:
    • Substance over form


7. Key Insight
  • Proper interpretation of contracts requires:
    • Looking at:
      • Legal structure (form)
      • Economic reality (substance)


Final Summary
  • Modern Islamic contract interpretation:
    • Gives importance to:
      • Intention
      • Economic substance
  • Courts and scholars:
    • Prefer:
      • Substance when inconsistency arises
  • Best approach:
    • Balanced method
      • Analyse form
      • Prioritise substance where necessary


One-Line Understanding
  • Islamic contract law requires:
    👉 “Examine the form, but decide based on the substance and true intention.”




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Islamic Contract Law – Combining Contracts (Ijtimāʿ al-ʿUqūd): Form vs Substance

1. General Principle (Form-Based Rule)
  • Classical jurists emphasise:
    • Both form and substance matter
  • From the form perspective:
    • General rule:
      • ❌ Two contracts should not be combined into one
      • (ijtimaʿ al-ʿuqūd)


2. Basis of Prohibition
  • Based on Prophetic teachings:
    • Prohibition of:
      • Combining sale and loan
      • “Two sales in one sale” (bayʿatayn fī bayʿ)


Why this is prohibited
  • Combining contracts may lead to:
    • Uncertainty (gharar)
    • Hidden conditions
    • Potential for:
      • Ribā (interest)


Example
  • “I sell you this item if you also take a loan from me”
👉 Problem:
  • Contracts are:
    • Interdependent
    • Not independent


3. Exception to the Rule
  • Despite the general prohibition:
    • Some combinations are allowed


Key Example: Ijārah Muntahiya bi al-Tamlīk
  • Involves:
    • Lease (ijārah)
    • Sale/transfer of ownership
👉 Appears to combine:
  • Two contracts


Why it is allowed
  • The contracts are:
    • Separated in stages
  • Supported by:
    • Promise (waʿd), not immediate sale


4. Scholarly Position
  • Ibn al-Qayyim states:
    • Combining contracts is:
      • Permissible in principle
    • Except where:
      • Specifically prohibited


👉 This introduces:
  • Flexibility in Islamic law


5. Form vs Substance Debate
Form-Based View
  • Focus:
    • Whether contracts are:
      • Technically combined
  • Concern:
    • Structure and legal classification


Substance-Based View
  • Focus:
    • Whether combination leads to:
      • Ribā
      • Unfairness
      • Exploitation


👉 Key question:
  • Is the combination:
    • Just a structure?
    • Or does it produce:
      • Prohibited outcome?


6. Key Insight
  • The prohibition is not absolute:
    • It targets:
      • Harmful combinations, not all combinations
  • Therefore:
    • Some combined arrangements are:
      • Valid if:
        • Substance is lawful


Final Summary
  • General rule:
    • ❌ Do not combine contracts
  • Exception:
    • ✅ Allowed if:
      • No prohibited element (ribā, gharar)
  • Debate:
    • Form focuses on:
      • Structure
    • Substance focuses on:
      • Outcome and reality


One-Line Understanding
  • Islamic law does not prohibit all combined contracts, only those where:
    👉 “The combination leads to a prohibited result.”




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Islamic Contract Law – Why Risk Differs (Hire Purchase vs Murābaḥah)


1. Core Principle to Remember
👉 In Islamic law:
“Risk follows ownership” (al-ghunm bil-ghurm)
  • Whoever owns the asset:
    • Must bear:
      • Damage
      • Loss
      • Liability


2. Hire Purchase (Conventional)
Ownership Position
  • Financier:
    • Holds legal title
  • Customer:
    • Has possession and use


Risk Allocation (in practice)
  • Customer bears:
    • Damage
    • Maintenance
    • Insurance
    • Loss
👉 Even though:
  • Customer is NOT the legal owner


Why this is problematic
  • Risk is placed on:
    • Non-owner (customer)
  • Financier:
    • Earns profit
    • Without real risk
❌ Violates Islamic principle


3. Murābaḥah (Islamic Structure)
Stage 1: Before Sale (Important part of your question)
  • Bank:
    • Buys asset
    • Becomes owner
👉 Therefore:
  • Bank must bear:
    • Damage risk
    • Loss risk


Example
  • Bank buys a car
  • Before selling to customer:
    • Car is damaged
👉 Result:
  • Bank bears loss
✅ Because:
  • Bank = owner


Stage 2: After Sale
  • Ownership transfers to customer
👉 Now:
  • Customer bears:
    • All risks


4. Why the Difference Exists
In Hire Purchase
  • Risk is:
    • Contractually shifted to customer
  • Even though:
    • Financier owns asset
👉 Ownership ≠ risk
❌ Artificial structure


In Murābaḥah
  • Risk follows:
    • Actual ownership stage
👉 Ownership = risk
✅ Consistent with Islamic law


5. Simple Side-by-Side
  • Hire Purchase
    • Financier owns
    • Customer bears risk ❌
 
  • Murābaḥah (before sale)
    • Bank owns
    • Bank bears risk ✅
 
  • Murābaḥah (after sale)
    • Customer owns
    • Customer bears risk ✅


6. Key Insight
  • Islamic law is not concerned with:
    • Who uses the asset
👉 It is concerned with:
  • Who owns the asset at that time


Final Answer
  • In murābaḥah:
    • Before transfer:
      • Financier bears risk because:
        • It is the true owner
  • In hire purchase:
    • Risk is shifted to customer even before ownership
    • This:
      • breaks the link between ownership and risk


One-Line Understanding
  • Islamic law requires:
    👉 “Who owns must bear risk”
  • Hire purchase breaks it
  • Murābaḥah (properly done) 

​
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Islamic Contract Law – Expanded Reasons Why Conventional Hire Purchase Is Not Shariah-Compliant


1. Combines Lease and Sale in One Contract
  • In conventional hire purchase:
    • The agreement is structured as one single contract that includes:
      • Use of the asset (lease)
      • Transfer of ownership (sale)
  • Why this is problematic:
    • Islamic law requires:
      • Each contract to be separate and independent
    • Combining them creates:
      • Uncertainty (gharar) about the nature of payments
  • Example:
    • Monthly instalments:
      • Are they rent?
      • Or part of purchase price?
    • The ambiguity makes the contract legally problematic in Shariah


2. Guarantees Ownership Transfer
  • In hire purchase:
    • Ownership automatically transfers at the end
    • No new agreement is required
  • Why this is problematic:
    • In Islamic law:
      • Ownership transfer must be:
        • A separate, conscious act
    • A sale cannot be:
      • Embedded or predetermined within a lease
  • Example:
    • “After 5 years, the car becomes yours automatically”
👉 This removes:
  • The independence of the sale contract


3. Resembles Interest-Based Financing (Ribā Concern)
  • Instalments are calculated to include:
    • Cost of financing
    • Fixed profit margin
  • Why this is problematic:
    • The transaction resembles:
      • Loan + interest, but disguised as rent
  • Example:
    • Customer pays RM1,000 monthly
    • Total payment far exceeds asset price
    • Extra amount reflects:
      • Time value of money (interest-like)
👉 Substance:
  • Similar to conventional lending


4. Lacks Real Ownership Risk for Financier
  • In conventional hire purchase:
    • Financier:
      • Retains legal title
    • BUT:
      • Does not bear real risk
  • Customer typically bears:
    • Maintenance
    • Damage
    • Insurance
    • Loss
  • Why this is problematic:
    • Islamic law requires:
      • Ownership risk must follow ownership
  • Example:
    • Car is damaged during contract
    • Customer still must pay
👉 Financier:
  • Earns profit
  • Without exposure to loss


5. Profit Not Linked to Real Risk
  • Financier earns:
    • Fixed and guaranteed return
  • Why this is problematic:
    • Islamic principle:
      • “Al-ghunm bil-ghurm” (profit comes with risk)
  • In hire purchase:
    • Profit is:
      • Pre-determined
      • Not affected by asset performance
  • Example:
    • Even if asset:
      • Loses value
      • Becomes unusable
👉 Financier still:
  • Receives full payment


Final Insight
  • The issue is not the concept of:
    • Leasing followed by ownership
  • The issue lies in:
    • Structure and economic reality


One-Line Understanding
  • Conventional hire purchase is non-compliant because:
    👉 “It removes risk, guarantees profit, and merges contracts in a way that mimics interest-based financing.”​
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Islamic Contract Law – Why Conventional Hire Purchase (Convertible / Rent-to-Own) Is Not Shariah-Compliant


1. What is a Convertible Hire Purchase?
  • A financing arrangement where:
    • Customer pays instalments over time
    • At the end:
      • Ownership automatically transfers
👉 Economically:
  • It looks like:
    • Rent + eventual ownership


2. Main Shariah Issue: Combination of Contracts
  • In conventional hire purchase:
    • Lease + sale are combined into one contract
👉 Problem:
  • Islamic law requires:
    • Contracts to be separate and independent


Why this is problematic
  • Leads to:
    • Uncertainty (gharar)
  • Because:
    • It is unclear whether:
      • Payments are rent
      • Or part of purchase price


3. Predetermined Transfer of Ownership
  • In hire purchase:
    • Ownership transfer is:
      • Automatic and guaranteed
👉 Issue:
  • In Islamic law:
    • Sale must be:
      • A separate, independent contract
  • Cannot be:
    • Pre-built into lease


4. Link to Ribā (Interest)
  • Instalments often include:
    • Financing cost similar to interest
👉 Substance:
  • Looks like:
    • Loan + interest disguised as rent


5. No Real Ownership Risk
  • In conventional hire purchase:
    • Financier:
      • Does not bear real ownership risk
  • Customer:
    • Bears:
      • Maintenance
      • Loss
      • Liability
👉 Violates:
  • Principle:
    • “Al-ghunm bil-ghurm” (profit must come with risk)


6. Fixed Return Regardless of Outcome
  • Financier earns:
    • Guaranteed return
👉 Issue:
  • Profit is:
    • Not linked to real economic activity or risk


7. Comparison with Islamic Alternative (Ijārah Muntahiya bi al-Tamlīk)
  • Islamic structure:
    • Lease contract
    • Separate promise to transfer ownership
    • Ownership transfer done:
      • At end via separate contract
👉 Ensures:
  • No mixing of contracts
  • Clear separation of stages


8. Key Insight
  • Problem is NOT:
    • Renting and owning
  • Problem is:
    • How it is structured


Final Summary
  • Conventional hire purchase is not Shariah-compliant because:
    • Combines lease and sale in one contract
    • Guarantees ownership transfer
    • Resembles interest-based financing
    • Lacks real risk for financier


One-Line Understanding
  • Not compliant because:
    👉 “It looks like leasing, but functions like an interest-based loan.”​

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Islamic Contract Law – Correct Basic Elements (Clarified Notes)​

1. Offer (Ijāb)
  • Proposal made by one party


2. Acceptance (Qabūl)
  • Agreement by the other party
👉 Together:
  • Form the ṣīghah (form of the contract)


3. Consent (Riḍā)
  • Must be:
    • Free and genuine
  • Must not involve:
    • Coercion
    • Fraud
    • Deception


4. Legal Capacity (Ahliyyah)
  • Parties must:
    • Be legally competent
    • Understand the nature of the transaction


5. Subject Matter (Maʿqūd ʿAlayh)
  • Must be:
    • Lawful (halal)
    • Certain (free from excessive uncertainty/gharar)
    • Capable of delivery


6. Legality of Purpose
  • Contract must not involve:
    • Ribā (interest)
    • Gharar (excessive uncertainty)
    • Prohibited activities


Clarification of Commonly Confused Elements
❌ Consideration
  • Not a strict requirement in Islamic law
  • The principle:
    • “No consideration = no contract” does not apply
👉 Emphasis is on:
  • Lawful exchange and fairness


⚠️ Intention to Create Legal Relations
  • Not treated as a separate formal element
  • Reflected within:
    • Consent and agreement


⚠️ Certainty
  • Recognised but not separate
  • Incorporated within:
    • Requirement of valid subject matter (avoidance of gharar)


Clean Exam Structure
Essential elements of Islamic contract law:
  • Offer (ijāb)
  • Acceptance (qabūl)
  • Consent (riḍā)
  • Legal capacity (ahliyyah)
  • Lawful and certain subject matter


Final Key Difference
  • Islamic Contract Law
    • Focus:
      • Valid agreement + lawful substance
  • English & Malaysian Law
    • Focus:
      • Consideration + intention + formal legal structure


One-Line Summary
  • Islamic contract law =
    “Offer and acceptance with consent, capacity, and lawful subject matter.”

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​Islamic Contract Law – Form vs Substance (Examples Only)


1. Murābaḥah Financing (Cost-Plus Sale)
  • Form
    • Bank buys an asset and sells it to customer at a markup
    • Structured as a sale contract
  • Substance Issue
    • In practice:
      • Bank may never truly bear risk
      • Transaction closely resembles:
        • Loan + interest
👉 Question:
  • Is it a real sale or just a disguised loan?


2. Tawarruq (Commodity-Based Financing)
  • Form
    • Customer buys a commodity on deferred payment
    • Immediately sells it for cash
  • Substance Issue
    • No real intention to use the commodity
    • Purpose:
      • Obtain cash
👉 Looks like:
  • A series of sales
    👉 But substance:
  • Cash loan with profit (similar to interest)


3. Ijārah (Leasing Contract)
  • Form
    • Bank owns asset and leases it
    • Customer pays rent
  • Substance Issue
    • If:
      • All risks shifted to customer
      • Ownership is only “on paper”
👉 Then:
  • It may resemble:
    • Conventional financing, not true leasing


4. Ṣukūk Structures
  • Form
    • Investors own shares in assets
    • Returns based on asset performance
  • Substance Issue
    • If returns are:
      • Fixed and guaranteed
👉 Then:
  • It resembles:
    • Conventional bonds (interest-based)


5. Buy-Back Arrangement (Bayʿ al-ʿĪnah)
  • Form
    • Asset sold and then repurchased
  • Substance Issue
    • No real transfer of ownership intended
    • Purpose:
      • Generate cash with extra payment
👉 Substance:
  • Similar to:
    • Loan with interest


Final Insight
  • These examples show:
    • A contract can be:
      • Valid in form
      • But questionable in substance


One-Line Understanding
  • Form = what the contract looks like
  • Substance = what the contract actually does







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Islamic Contract Law – Why Banks Often Do NOT Truly Bear Risk in Murābaḥah 

You’re thinking in the right direction--legally, the asset belongs to the bank, so the bank should bear the risk.
But the issue is not just legal ownership, it is about real (substantive) risk in practice.


1. The Ideal (Correct) Murābaḥah Situation
  • Bank:
    • Buys the asset
    • Becomes true owner
  • During ownership:
    • Bank bears:
      • Damage risk
      • Loss risk
      • Market risk
Example (Proper Risk)
  • Bank buys a house
  • Before selling to customer:
    • House is damaged by fire
👉 Result:
  • Bank bears the loss
✅ This is genuine risk → profit is justified


2. What Happens in Practice (Agency Structure)
  • Customer is appointed as:
    • Agent of the bank
  • Customer:
    • Selects the house
    • Buys it on behalf of the bank
👉 Technically:
  • Ownership passes to bank (even briefly)
BUT…


3. Why Scholars Say “No Real Risk”
Because banks structure the transaction to eliminate risk
A. Immediate Back-to-Back Sale
  • Bank buys → instantly sells to customer
👉 No time to bear:
  • Market risk
  • Price fluctuation


B. Risk Shifted to Customer
  • Customer may:
    • Already agree to buy before bank purchases
    • Bear costs if anything goes wrong
👉 So:
  • Even during “bank ownership”:
    • Customer carries practical risk


C. Paper Ownership Only
  • Bank:
    • Never physically possesses the asset
    • Never controls it
👉 Ownership exists:
  • Legally (on paper)
  • Not:
    • Economically (in reality)


4. Example (Very Clear Comparison)
Example 1 – Real Risk
  • Bank buys a car
  • Keeps it for a few days
  • Car is damaged
👉 Bank loses money
✅ Real ownership + real risk


Example 2 – No Real Risk (Typical Practice)
  • Customer:
    • Chooses car
    • Signs promise to buy
  • Bank:
    • Pays supplier
    • Immediately sells to customer
  • If anything goes wrong:
    • Customer still must pay
👉 Bank never truly exposed to loss
❌ Risk is theoretical, not real


5. Key Issue: Legal vs Economic Reality
  • Legal position
    • Yes, asset belongs to bank
  • Economic reality
    • Bank avoids:
      • Loss
      • Uncertainty
      • Market exposure
👉 Islamic law focuses on:
  • Substance, not just form


6. Why This Matters in Islamic Law
  • Principle:
    • “Profit must be linked to risk” (al-ghunm bil-ghurm)
  • If bank:
    • Takes profit
    • But avoids risk
👉 Then:
  • It resembles:
    • Interest-based lending


7. Final Insight
  • You are correct:
    • In theory, bank should bear risk
  • But in practice:
    • Contracts are structured so:
      • Risk is minimised or shifted
👉 That’s why scholars criticise:
  • Murābaḥah as sometimes being:
    • Formally valid but lacking substance


One-Line Understanding
  • Ownership on paper ≠ real risk in practice
  • Islamic law requires:
    👉 Real risk, not just technical ownership​
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