Salam Contract (Forward Contract)

Introduction

Special device & special licence (rukhsah) for people to meet eco. needs & facilities in daily lives.
Now extended to new type of assets i.e. metal, shares etc.

Definition

Sale/purchase of a deferred item in exchange for immediate price.
Price paid in advance while commodity is deferred-at an agreed date in future.
E.g. Buy 2 tons of date
, deliver in 1 year later, price-paid on the spot.

Shafi’i: “A sale of a well defined commodity to be delivered by seller in the future”
Hanbalis: “A sale whereby the seller undertakes to supply some specific goods to the buyer at future date in exchange for an advance price fully paid on the spot.
Malikis: “A sale in which the capital sum is paid in advance, and the object of sale is deferred to a specific term”.

Salam Commodities conditions

Salam Commodities (Al muslam fihi)
Exception to the rule of impermissibility for the sale of non-existent items.
-Fulfil certain specific requirement -Fungible goods-can be specified by weight, and measured or counted. + seller can be held responsible.
Cannot be too specific “the product of a particular farm/field” or” fruit of a particular tree”
Reason:- Possibility –tree does not produce at time of harvest, crop destroyed before delivery-lead to gharar.
Clearly explained, determined, known to contracting parties, discrepancies (customary)- can be ignored

Note: Salam cannot affect goods which must be exchange on the spot. i.e. currency for currency or wheat for wheat.
Therefore price + object must be different. i.e animal for gold or goods for food.
-Salam commodities must be commonly available at the place where it should be available on delivery date.
Reason: Seller can discharge duties.
View 1-Hanafis-require commodity must be available from day of contracting.
View 2- Shafie, Hanbali, Maliki- must be available at time of contract (not a condition).-Prophet pbuh did not make it a condition.

Issue: Immediate Delivery of Good
View 1: Hanafis, Malikis, Hanbalis: Deferment (delivering object) is a condition for validity.
View 2: Shafie-Ok, regardless deferred or not. –advantageous- 1) immediate- eliminate gharar, 2) after-still serve the purpose.

Delivery

On time
-Necessary to fix the period of delivery according to specification-buyer compelled to accept.
Earlier
Meet spec-purchaser may refuse-with valid reason i.e. does not harm him.
Delayed
If delivery deferred due to reasonable excuse- i.e. seller declared bankrupt-cannot perform obligation on time- should grant extension.-no penalty/penalty clause allowed.

Deliver but Not Meeting Requirement
But if the Spec is different:
a) Better/Higher quality-than agreed in contract-must accept-seller cannot ask for increase in price.
b) Lower quality- Right of option- accept or reject.-Parties may agree to a discounted price.
Note: But if the spec is vital to the contract, even tough superior i quality-contract is invalid.

Issue: Seller fails to perform-Due to unavailability of Salam Commodities at time of delivery
-if all or part unavailable- buyer has option:
i) either to wait until object available or
ii) Cancel the contract and recover paid up capital.

Replacement of Salam Commodity
Buyer may with agreement from Seller-change with other goods (suitable)- with the price of salam goods. –as long as does not involve riba- price not higher than the market value of the original salam commodities at time of delivery.
i.e. currency with currency.
Note: Should not be stipulated in the contract.

Time of Delivery

How Long is Deferment period? (from conclusion of contract to time of delivery)
View 1: Hanafis & Hanbalis: Approximately 1 month-earliest time than can be considered deferred.- if earlier is invalid.
Reason: Help small farmers & trader.

View 2: Imam Malik: Should be a minimum period; not less than 15 days-bcoz market rate may change a forth night.
Exception: Parties agrees to delivery of goods as soon as it arrives (from other cities).-still valid even if takes place after 2 days

View 3: Shafies & Some Hanafis: No minimum period-Prophet pbuh dis not set min.period, only condition is time delivery must be clearly defined.-Parties may fix any date-mutual consent.
More suited for contemporary practice.

Place of delivery

View 1- Hanafi
Must Specified Clearly -If Object not easily portable & require additional cost of transportation.

View 2- Abu Yusuf & Shaybani
No need to specify- Bcoz-the location of contracting is the location.-no need to specify.

View 3- More accepted view in Hanafi school
If goods are easily portable: - Wherever the contracting party meets.

Price of Salam

Can be in other than cash: (Type, form, kind, specification, quantity made known)
• Goods i.e. wheats
• Material value i.e. livestock
• Form of usufruct of certain assets
Rule:
As long as price of capital is known to contracting parties
Pay in full and immediate (majority view) but Imam Malik: seller may give 2 or 3 days concession to the buyers but it should not form part of the agreement.

Legal Consequences

Establish deferred ownership in exchange for immediate ownership (price)
Parties not allowed exchanging the salam goods with sthg else prior delivery.
Reason -delivery & immediate payment-prerequisite for salam.
In contrast-Regular Sale- Price can be deferred.

Partial Revocation
-Permitted by majority scholars.-buyer can revoke part of contract and maintain remaining, with seller’s consent.
Imam Malik-Disagree-choose either revoke or keep intact.

Not Permitted to Release Buyer of the Price without consent
If buyer consented- waiver is valid-same ceases to exist; result in non receipt of price.
If buyer refuse- contract remained valid.
In contrast-Normal sale-price is not a condition.

Termination or Revocation of salam

General rule: seller bound to deliver.
Situation which made it not possible:
i) Death
ii) Salam goods are destroyed.

Death of Seller- Salam will be terminated, buyer can claim price paid from heirs.
Death of Buyer- Contract remain operative.

Damage on goods will only nullify contract when it exceed normal extent of damage.

Majority view
- can fully or partially cancel the contract-upon both agreement, only before delivery.

Full Cancellation-seller must repay full amount of capital.

Partial cancellation-buyer has right of repayment for a corresponding price/capital of salam.
However,-Imam Malik & judge Ibn Layla-disagree- for them buyer should recover full amount.-hadith.
“Do not take anything other than the object of the forward sale or its price”.