Explanation of Article 316
The article clarifies one of the scenarios where the price is determined based on valid principles, by relying on the seller's capital in the sold item; the seller's capital in the sold item refers to the price at which the seller purchased the item and any direct costs incurred by the seller in the purchase if the contracting parties agree to add them to that price. This is called a trust sale because the buyer trusts the seller regarding the price mentioned. It is contrasted with "bargaining sale," where the price is not determined based on the seller's capital in the sold item.
There are three forms of trust sale:
- Murabaha sale, where the seller sells the commodity at the price he bought it with a known profit, such as saying: the commodity cost me one hundred thousand riyals, I sold it to you with a profit of ten thousand riyals, or a profit of 10%.
- Wadiah sale, where the seller sells the commodity at the price he bought it with a known loss, such as saying: the commodity cost me one hundred thousand riyals, I sold it to you with a loss of ten thousand riyals, or a loss of 10%.
- Tawliya sale, where the seller sells the commodity at the price he bought it without increase or decrease, such as saying: the commodity cost me one hundred thousand riyals, I sold it to you for one hundred thousand riyals.
The trust sale can be for the entire commodity purchased by the seller, as in the previous examples, or for part of it at its share of the price, called "partnership sale" or "association," such as the seller saying: the commodity cost me one hundred thousand riyals, I partnered with you in half of it for fifty thousand riyals.
The trust sale is characterized by two matters clarified by this article: First: The seller's capital in the sold item is considered essential in the contract; hence, the buyer has the right to request annulment if there is a mistake or deception related to it. This is unlike the bargaining sale, where the seller's capital is not considered essential and is usually not mentioned in the contract. Second: The buyer's right to annulment if the capital is not specified at the contract and the price is found to be unfair.
The first paragraph clarifies that in a trust sale, the seller must inform the buyer, in addition to the price at which he bought the item, of everything that might affect that price, such as terms and deferrals, whether the seller's relationship with whom he bought from affects the price, and whether the seller added other costs to the price he bought it for.
If the seller deliberately conceals anything he must disclose to the buyer regarding his capital in the sold item, the buyer has the right to request annulment of the contract. For example, if the seller bought the commodity at a deferred price higher than its current price and then sold it on a Murabaha basis at a current price, claiming that his capital in it is what he bought it for, concealing that the price he bought it for was deferred, the buyer may request annulment of the sale. This is because the agreement of the contracting parties that the sale is on a Murabaha basis makes the seller's capital essential to the buyer, obliging the seller to disclose everything affecting it. Concealing it is considered deception by concealment, applying Article (61). More so if the seller deliberately misinforms about his capital or colludes with whom he bought from to raise the price, it is deception giving the buyer the right to request annulment.
If the seller makes a mistake in his capital mentioned to the buyer, the general rules of mistake in the contract apply, and the buyer may request annulment under the conditions outlined in those rules. The seller can avoid annulment if he shows readiness to execute the contract as intended by the buyer, according to Article (60).
The principle in a trust sale is that the seller's capital in the sold item is determined at the contract. The second paragraph clarifies that the sale is valid even if the capital amount is not determined at the contract, as long as the profit in a Murabaha sale or the loss in a Wadiah sale is specified, because the price is determinable based on valid principles. However, the buyer has the right to request annulment of the sale if the price is found to be unfair, even if there is no defect in consent as outlined in the general rules. This is one of the exceptions to the general principle established in Article (69) that the contracting party does not have the right to request annulment merely for unfairness.
The reason for this is that the buyer in a trust sale has relied on the seller's capital in the sold item and made it a standard upon which he based his consent to the contract. If the price is found to be unfair, it is a defect affecting this consent, as the price is determined based on the seller's capital. For example, if an agreement is made to supply specific goods by type, with the price being the seller's capital at which he buys them with a specified profit, and the price is found to be unfair to the buyer due to the seller's capital being higher than the market price, the buyer may request annulment. If the unfairness is in a batch of what was agreed to be supplied, the buyer may request annulment of that batch only, unless it is shown that he would not have consented to the contract without it, allowing him to request annulment of the contract, applying Article (84).
The right to annulment for unfairness here is subject to the rules outlined in the general rules for annulment, such as limitation periods, the fall of the right to annulment by explicit or implicit ratification, and the right of any interested party to notify the buyer to express his desire, among other rules.
The end of the second paragraph clarifies that the seller can avoid annulment if he provides what the court deems sufficient to remove the unfairness, such as increasing the sold item or reducing the price to the extent that removes the unfairness, not necessarily reaching the market price but to the extent that it is not considered unfair. For example, if the market price is eighty riyals, and the increase considered unfair is above one hundred riyals, the unfairness is removed by reducing the price to one hundred riyals. The seller's right to avoid annulment applies what Article (69) established in the general rules for unfairness in the contract.
The system has balanced in its ruling on this paragraph between the approach that makes the penalty for not determining the seller's capital at the contract in a trust sale absolute nullity, considering that it is not a valid basis for determining the price as it depends on the seller's effort, and the opposite approach that validates the contract without giving the buyer the right to annulment for unfairness, considering that the seller's capital can be a valid basis for determining the price.
Related To
Article 316
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If the seller’s capital is used as a basis to set the price of an item sold by way of Murabaha (cost-plus sale), Wadhi’ah (sale at a price lower than the actual cost), or Tawliyah (at-cost sale), the seller must indicate any effect on his capital. The buyer may demand nullification of the contract if the seller conceals a matter that has an effect on said capital.
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If the capital is not set at the time of concluding the contract and the price is proven to be extremely unconscionable to the buyer, the buyer may demand nullification of the contract. The seller may avoid such nullification if he takes measures the court deems sufficient to eliminate unconscionability.