Types of Sale Contracts

Sale contracts are distinguished in two different ways: knowledge of cost and time of payment and delivery .

 Knowledge of Cost

The first way distinguishes between sales contracts based on knowledge of cost (including expenses associated with delivery). The cost of the good sold is either:

  • known to both parties (a ‘trust’ sale), or
  • known only to the seller (a ‘bargain’ sale — i.e. as a result only of bargaining, with asymmetric information)

With regard to the trust sale there are three sub-types:

1) Cost plus profit

2) No profit

3) Sale at a Loss

These are self-explanatory; it need only be added that in the case of the cost plus profit, the profit may be a percentage of the cost or a fixed amount and this information must also be shared with the buyer. The property must be owned by the seller. retailer must own the thing sold (wholesale seller must have owned it, not been bankrupt) and must also inform the buyer of any defects; if the purchaser discovers the goods are defective he or she may cancel the sale of demand compensation.

The cost plus profit sale is the murabaha sale. This is a retail sale, as contrasted with (2) which is a wholesale sale.

 Time of Payment and Delivery

The second way distinguishes based upon the time at which the price is paid and the subject matter delivered.

The general rule is that delivery should be immediate. The general rule is that the price should be paid on the spot, by installments or it may be deferred. However the general rule is subject to the following exceptions:

1) Future Commodity Sale: The price is paid at the time of contracting and the commodity delivered at a specific place at a future time. For this to be a valid contract:

  • the commodity
    • must not already be available in the market
    •  must not be specific, it must be interchangeable with other goods of the same kind,
    • type, quantity and quality must be agreed by the parties
  • the price and the commodity must not be of the same kind or variable qualities of the same thing
  • the price of the commodity must be known and agreed by the parties

The buyer may make a pledge or a guaranty a condition of the sale.

This sale is an exception to the rule that goods must exist (and be owned by the seller) at the time of contracting. The origins of this sale are in agriculture.

2) Manufacturing Sale: This is similar to the Future Commodity Sale. However the subject matter is not a commodity but a manufactured good; it is also a specific thing rather than a good interchangeable with other quantities of the same type of good. The contract involves both raw materials and labour, unlike other sales contracts which do not involve the latter. Payment of the entire price may be deferred or paid by installment.

  • the subject matter
    • must be described fully (quality, type, quantity, etc)
    • must be a good that is commonly sold based on a prior order, one which requires time to produce
  • the manufacturing process must be specified
  • unless the manufactured good is defective there can be no unilateral withdrawal or cancellation of the contract
    • the buyer may reserve an option to rescind if the good does not match the description
  • date of delivery must be specified, and stages of completion may also be specified

Damages and/or a penalty for non-performance or late performance are allowed although these do not obtain in cases of frustration or other unseen events.

The counterparty to the buyer may or may not be the manufacturer; a bank for example could be the counterparty and could then enter into a distinct manufacturing contract with the manufacturer.

Only one legal school (the Hanafi) recognise this as a valid contract.

There are several other sales about which the legal schools are divided.

3) Currency Exchange: This is a spot transaction in which different currencies (or gold and silver) are traded.

  • currency exchange on credit is expressly disallowed
  • money may only be exchanged on a cash basis
  • unequal quantities of gold and silver may be exchanged.