PART III ISLAMIC FINANCE – PRODUCTS AND PROCEDURES 177 8 Overview of Financial Institutions and Products: Conventional and
M. Fahim Khan Division Chief
6.5 REQUIREMENTS OF A VALID SALE CONTRACT
6.5.1 The Object of the Sale Contract
Jurists have emphasized the clear identification or specification of the subject matter of a sale contract and its definite delivery to the buyer. They require a number of conditions concerning the object, which must be satisfied for a valid sale. As this aspect has already been discussed in detail in the previous chapter, here we shall briefly indicate the main conditions.
First, the object must be pure, lawful (Mub¯ah), clean, wholesome and, of course, marketable and bearing legal value. It must be M¯al-e-Mutaqawam (wealth having a commercial value);
its underlying cause (Sabab) must be lawful, and it must not be proscribed by Islamic law;
it should not be a nuisance to public order or morality. For example, the sale and trading of commodities such as wine or alcoholic products, pork and pork products is prohibited, and contracts involving such commodities are void on the grounds of their illegality.20The flesh and bones of animals that have died by other means than ritual slaughter (Halal) cannot be sold. Idols are also forbidden commodities.
Second, the object must be in existence at the time of the contract and the vendor must be the real owner of the commodity to be sold. What is not owned by the seller cannot be sold.
For example, if a bank sells to client C a car which is presently owned by factory F, but the
20Muslim, 1981 with annotation by Nawavi,11, pp. 6–8; Tirmidhi, 1988,2, p. 27; Al Jaziri, 1973,2, p. 293.
bank is hopeful that it will buy it from F and shall deliver it subsequently to C, the sale will be void according to the Shar¯ı´ah. At the most, the bank can make a promise to sell.
A related condition is that of taking possession of the goods before their sale. As reported by Imam Bukhari: “Ibn Umar narrated ‘I saw the people buy food stuff randomly (i.e. blindly without measuring it) in the life time of the Prophet and they were punished if they tried to sell it before carrying it into their own houses’.” Qastalani in his commentary on Sahih Bukhari reports that before the commodity comes into the possession of the vendee it is not lawful for sale according to Imam Shafi‘e, Muhammad and some other jurists.21 Many jurists, including the Hanafis, have, however, contended that for a lawful sale transaction, it is sufficient that the item of sale must be present and fully known, leaving no room for ignorance or dispute, and that physical possession is not necessary for a valid sale. It is also ascertained in Majallah that delivery of the sale item on the part of the vendor is completed when he sets it aside for the vendee and there is nothing to restrict him from taking physical possession from the vendor whenever he desires.22
Accordingly, a purchaser who has not got possession of a commodity cannot sell it onward.
For example, if A has purchased a car from B, but B has not yet delivered it to A or to his agent, A cannot sell that car to C and if he sells it before taking its actual or constructive delivery from B, the sale is void.
As discussed earlier, the condition of existence of the sale item at the time of execution of the contract has been mitigated by the authorization of Bai‘ Salam and Istisna‘a contracts, which cover the future supply and future manufacture of goods respectively. Scholars deduce from this permissibility that when the object of a contract is a particular thing, it must be in existence at the time of the contract. Accordingly, if A sells the unborn calf of his cow to B, the contract is void because of Gharar. But where the object is a promise to deliver or to manufacture with given specifications, the object of that promise needs not be in existence at the time of the contract, but must be possible and definite, i.e. it must be capable of being defined in such a way as to avoid Gharar, Jahl or uncertainty about its delivery and dispute about its quality.
Fourth, the object of a sale contract must be capable of certain delivery. Jurists, therefore, have prohibited the sale of a camel which has fled, a bird in the air or a fish in water.23 As such, a stolen motor vehicle cannot be sold until found and seen by both parties. It is important to indicate that the overriding concern of jurists is to prevent conflict and unjustified profits arising out of uncertain contracts. The condition that, for execution of the contract, the object must be capable of delivery can be understood as an aspect of the right to title, namely that the object must be in the ownership of the person intending to sell and the right to transfer must be legal and its quantity and value must be known. If the object of a contract is a promise to deliver or manufacture a good in the future, the promise must be feasible and the goods to be delivered must be known (defined).
Among examples mentioned by jurists for the inability to deliver is the sale of a debt against another debt, the sale of that which one does not have in one’s possession and the sale by a buyer of what he has bought before he takes possession. Similarly, a sale is void if its future existence is uncertain in that it may or may not exist, for example, the sale of what a she-camel may give birth to. However, jurists differ on whether all nonexistent commodities
21Irshad-al-Sari, Sharah, Sahih Bukhari,4, p. 57.
22Al-Atasi, 1403 AH, Majallah, Articles 262, 263; Al-Marghinani,Hidaya:3, pp. 58–59.
23Zuhayli, 1985,4, pp. 503, 504.
cannot be sold or only those that involve Gharar. Ibn Taymiyah is of the view that there is no evidence to prove that the sale of every nonexistent item is impermissible there is another cause for the prohibition of the sale of nonexistent objects and that is Gharar.
A nonexistent item cannot be sold, not because it is nonexistent but because it involves Gharar. For example, the “sale for years” (also called Mua‘awamah), in which fruits of a tree or an orchard are sold for more than one year to come, and the sale of Habl al Hablah is prohibited.24Therefore, with regard to the Prophet’s saying: “do not sell what you do not possess”, scholars contend that what is meant by possession here is the inability to deliver the goods. So, from the seller’s part, he must be sure that he can deliver the goods.
Nawavi, in his annotation to Sahih Muslim, has reported that people used to buy from the caravans without weighing, measuring or even estimating precisely.25Selling goods onward could be unjust to the buyers, so they were asked to take possession before selling. This is also evident from the words of Imam Bukhari: “Ibn Umar (Gbpwh) narrated ‘I saw the people buy food stuff randomly (i.e. blindly without measuring it) in the life time of the holy Prophet (pbuh) and they were punished if they tried to sell it before carrying it into their own houses. Similarly, a heap of grain was purchased, considering it a specific amount, the purchaser was asked first to take delivery of the declared amount and then to sell onward’.”26 The rationale behind this seems to be that the seller should take the risk and reward of his trade activity.27 So long as the sold commodity remains with the seller – the buyer has neither made payment nor taken its possession, its risk and reward are that of the seller.
Goods subject to Salam and Istisna‘a and the conditions required for their permission are the best examples of the permissibility of nonexistent but defined goods. It is commonly understood that Salam goods can also not be sold before taking their possession, and the following Hadith is reported for this: The holy Prophet said: “A person who purchases something on Salam, he should not transfer it to others before its transmutation (taking its possession)”.28 But the sale of Salam goods needs more detail (given in Chapter 10), particularly in view of the fact that the above Hadith is “weak”.29 Salam is an exception and goods purchased through Salam can be sold onward on the basis of (Parallel) Salam. If we were to strictly observe the spirit of this Hadith, Parallel Salam would not be possible.
Further, the Salam purchaser undertakes the business risk after the Salam contract is executed;
prices may fall or rise, he has to take possession of the goods.
Ibn Hazm explains that whatever a person owns should be taken as if it is in his possession although the commodity might be in Hind.30 Many other jurists, including the Hanafis, have contended that for a lawful sale transaction, it is sufficient that the item of sale must be present and fully known, leaving no room for ignorance and dispute, and that physical possession is not a necessary condition of a valid sale.31 It is also ascertained in Majallah that delivery of the sale item on the part of the vendor is completed when he sets it aside for the vendee and there is nothing to prevent the buyer from taking physical possession
24Tirmidhi, 1988, No. 1335, p. 32, cf. Al-Dhareer, 1997, pp. 31, 32, see also Muslim (x/95, 200), Nisai, n.d.,7, pp. 293, 294.
25Muslim, 1981, with annotation by Nawavi,10, pp. 168–169.
26Bukhari, Bab al Kail ’alal Baai’i.
27Tirmidhi, 1988, No. 1308–1033, p. 25.
28Abu Daud 1952, Kitab al Buyoo,Al Salaf la Yohawal.
29Ibn Hajar, 1998, 3, No. 1203, p. 69.
30Ibn Hazm,7, 1988, p. 475.
31Al-Atasi, 1403 AH, Majallah, Articles 197–200, 262.
from the vendor whenever he desires.32 Hence, if A has purchased a car from B, who has placed the car in a garage where A has free access and A is allowed to take delivery, real or constructive, from that place whenever he wishes, the car is in the constructive possession of A and if he sells it to C without acquiring physical possession, the sale is valid.
This implies that as the purchaser has taken the liability of the risk, he is considered the owner of the commodity, although the asset/commodity is still in the godown of the seller or even in any other country or area. Hence, if a Karachi-based bank contracts to purchase one hundred thousand bags of fertilizer from a factory in Lahore and the factory sets the bags aside and gives constructive possession to the bank, the bank is considered the rightful owner of the fertilizer and is capable of selling it to any third party. So long as the bags are not sold, the asset, market or price risk will be that of the bank and not of the factory.
However, one can promise to sell something which is not yet owned or possessed.
Similarly, one can promise to buy any asset with given specifications. In the case of promise, the actual sale will have to be executed after the commodity comes into the possession of the seller, with proper offer and acceptance, and unless the sale is formally executed, the promise will have no legal consequences. Normally, a promise creates just a moral obligation on the promisor to fulfil his promise, but if the promisee has incurred any liability or expense as a result of the promise and the promisor backs out, the latter should be held responsible for the actual loss to the promisee.