Dropshipping

We sincerely apologize for our belated response.

Dropshipping is a sales method in which the retailer does not keep goods in stock but instead transfers its customer’s orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer.

The common practice of dropshipping is problematic as it entails selling what one does not own and transfers proprietorship to the buyer before the retailer takes possession of the commodity.

As for the first problem, it is resolved by structuring the agreement into a Salam contract.   Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid on spot. The permissibility of Salam is dependent on the following conditions.

1.Full payment of the price should be made at the time of effecting the sale. Failing to do so will be tantamount to a sale of debt against debt, this is expressly prohibited by Nabi (SallallahuAlaihiWasallam).

2.Salam can only be effected in those commodities whose quality and quantity can be specified. The quality of the commodity must be fully specified leaving no ambiguity that may lead to a dispute. All the possible details in this respect must be expressly mentioned. Similarly, the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known.

3. Salamcannot be affected on a particular commodity or a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the Salamwill not be valid. The same rule is applicable to every commodity the supply of which is not certain.

4.The time and place of delivery must be specified.

5.Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange for silver, it is necessary, according to Shari’ah, that the delivery of both be simultaneous.

6.It is necessary that the commodity remains available in the market right from the day of contract up to the date of delivery. Therefore, if a commodity is not available in the market at the time of the contract, Salam cannot be effected in respect of that commodity, even though it is expected that it will be available in the markets at the date of delivery.

Before discussing the solution to the second problem, it is important to discuss the relationship between the retailer and supplier. We have discussed above that the client and retailer will enter into a Salam contract. The structure of the contract between the retailer and client will depend on the nature of the item.

a) If the item is such that the supplier has the item in stock, the retailer will enter a regular buy-and-sale transaction.

b) If the item is not available, then the transaction between the supplier and retailer will be that of a Salam. This transaction is known as a parallel Salam, wherein the retailer enters into a Salam contract with the customer and enters into another Salam contract with the supplier.

As mentioned above, a problematic component of drop shipping is transferring proprietorship to the buyer before the retailer takes possession of the commodity.There two ways to overcome this issue.

1) Providing packaging that distinguishes the retailer from the supplier. The supplier’s packing of the item into the retailer’s provided packaging will constitute possession of the commodity. This is because, upon the conclusion of the sale, the item now belongs to the retailer. The retailer has instructed the supplier to place items that he owns into his own packaging. Thus, placing the items into a packaging that the retailer owns consolidates his ownership. Hence, possession will take place. Then, the supplier will undertake the responsibility of shipping.[i]

To avail of this option, the retailer will have to arrange the delivery of his custom packaging to the supplier beforehand. This is a commonly available service.

It is important to note that this is only valid in scenario (a). This is becausein scenario (b), the conclusion of the contract does not entail ownership. Rather, it merely confers the right to receive a specific item. Thus, the instruction of placing the items into his packaging is incorrect from the onset, as the items do not belong to him.[ii]

2) Appointing the shipping company as the retailer’s representative to take possession on the retailer’s behalf. Generally, the shipping company has a contractual relationship with the supplier and not with the retailer.  Thus, it would be difficult to assume the shipping company to be a representative of the retailer.  However, if the retailer deals directly with the shipping company and enters a contractual agreement with the shipping company to collect the packaged parcels from the supplier, and then deliver it to the customer, this would be valid.  The shipping company’s possession will be regarded as the retailer’s possession. This is valid for both scenarios.

It should be noted that merely paying for the shipping does not appoint the shipping company as the retailer’s representative. Rather, the retailer must enter a contractual relationship with the shipping company for the wakalah(representation) to be valid.