General Contracts The Company (Partnership)
Its Legality
The company or partnership is legislated. This is due to the statement of Allah (SWT) :
(They share in a third.) (4:12)
And His (SWT) statement:
(And verily, many partners oppress one another.) (38:24)
The word Khulata’ in this verse means partners (Shuraka).
Also, the Messenger of Allah (SAW) said:
“Allah the Most High said, ‘I am the third (partner) of two partners (i.e. My help will encompass them always) as long as one of them does not cheat his companion.” [1]
And He (SAW) said:
“Allah’s Hand is over both partners as long as they do not cheat one another.” [2]
Its Definition
Partnership refers to two or more people sharing in an amount of wealth that they have a right to, whether through inheritance or similar sources. It also may be wealth that they have collected between themselves through installments in order to make business investments with it by trading, industry or agriculture.
There are different types of partnership:
‘Profit-and-loss share’ Partnership
This is when two or more persons are partners, whose dealing is permissible legally. They collect a fixed amount, dividing it by fixed instalments or shares. They work together for its development. The profit _____________________________
[1] Abu Dawud recorded it and he was silent about it. Ibn Qattan mentioned that it has some deficiency and Al-Hakim graded it authentic. The rest of its wording states, “But when he cheats, I leave from among them.” This means that He removes the blessing from their wealth.
[2] Ad-Daraqutni recorded it and Al-Munthiri was silent about it. Its actual wording states, “ As long as one of them does not deceive his partner.”
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and loss will be according to their shares in the capital. Every partner has the right to deal on behalf of himself and be the power of attorney on another partner’s behalf. Therefore, he can sell, buy, receive and pay. He can demand debts to be paid back, deduct, and return goods if defective. In brief, he can do whatever he deems beneficial to the wellbeing of the partnership.
Conditions for the validity of ‘Profit-and-loss share’ Partnership:
1) Partnership should be between two Muslims. A non-Muslim partner may deal with usuary, or add to the capital money with forbidden money. If the Muslim deals the selling and buying, there is no harm in non-Muslim partnership. Because the fear of forbidden shares being mixed with the capital amount is unlikely.
2) The capital amount of the partnership must be fixed as well as the shares of every partner. The profit and loss should be on the fixed capital amount and shares. Meanwhile, unknown capital amount or shares of partners will lead to devouring others’ property illegally, which is a prohibited act. Allah (SWT) says:
(And eat up not one another’s property unjustly.) (2:188)
3) The profit should be known and distributed among the partners, according to their shares. Therefore, it is not permissible to say to one of the partners that that he will get his profit from the rams, and the other from the flax and linen, and so on. This involves fraud, which is forbidden.
4) The capital amount should be in cash. If anyone presents the merchandise being his share, he can enter the partnership, and his merchandise should be evaluated according to the current market price. Otherwise, the merchandise stands with its value unknown. Moreover, dealing with the unknown is a prohibited act. It will cause the loss of others’ rights and the consumption of unlawful property.
5) Every partner will work according to his share, like matters of profit and loss. For example, if his share is one fourth (1/4), he will work one day out of four days, and so on. If they hire an employee, then his wages will be from the capital amount of each partner according to his share.
6) If one of the partners dies or become insane, the partnership will be invalid. The heirs of the deceased or the guardians of the insane can reinstate it with the same terms and conditions as earlier or they can dissolve it if they like.
Corporal (Working) Partnership
This refers to two or more persons sharing whatever they earn by their works. For example, they share in making a certain product, or tailoring, or washing clothing, etc. Whatever income they receive from this, would be divided between both equally or according to what they have agreed to.
The basis of permissibility of the corporal (working) partnership is the Hadith recorded by Abu Dawud. ‘Abdullah, Sa‘d and ‘Ammar made a partnership on the day of Badr concerning what they would get from the wealth of the Polytheists. Although ‘Ammar and ‘Abdullah did not get anything. Sa ‘d got two prisoners of war. Thus, the Prophet (SAW) made them share in partial ownership of the two prisoners. This occurred before the legislation concerning the division of war booty. (This Hadith is authentic, and Ahmad, Malik and Abu Hanifah all acted according to it.)
The Laws of this Corporal (Working) Partnership are as Follows:
1) Both of them can demand the wages and receive them from the employer.
2) If one of them becomes sick or absent due to an excused reason, the earning of the other should be divided between both partners.
3) If the absence of anyone of them is too long or his sick leave delayed for a long period of time, the healthy (present) partner can co-opt a new employee in his place. His wages should be deducted from the share of the sick or absent partner.
4) If anyone of the partners excuses himself from continuing his work, the other can abrogate the partnership deal.
Honoring Partnership
Honoring partnership refers to two or more partners sharing in buying and they resell on their own. Whatever they earn from profit or loss, they share equally in it.
Negotiable Partnership
This type is more comprehensive than the types of profit-and-loss share, honoring, and corporal (working), as it comprises these as well as speculative partnership. Negotiable partnership refers to each partner authorizing the other to deal freely, both financially and personally in every aspect of the partnership. Both are free to sell, buy, speculate, authorize, take legal action, pawn, and to travel with the property. The profit should be distributed among them according to their mutual agreement. The loss should be according to each partner’s financial contribution.
Speculative Partnership (Mudaribat)
Its Definition
The speculative partnership refers to one person giving a certain fixed amount to another person in order to trade with it. The profit of it would be distributed between them both according to what they have agreed upon. However, if any loss occurs, it will be born only by the investor of the capital money. As for the employee, it is enough for him to lose his effort and striving, so why should another loss be imposed upon him?
Its Permissibility
The speculative partnership is permissible according to the consensus of the Companions,
and the Imams. [1] This practice was implemented in the lifetime of the Messenger of Allah (SAW) and he approved of it.
Its Regulations
The following are the rules of the speculative partnership:
1) This partnership should be between the Muslims who are allowed to deal. There is nothing wrong with this partnership being between a Muslim and a disbeliever, as long as the capital money is invested by the disbeliever and the work is done by Muslim. The reason is that it is not feared that the Muslim will deal in interest or forbidden wealth.
2) The capital wealth should be a fixed amount.
3) The worker’s share of the profit should be specified. If the worker’s share is not specified, he gets a wage for his work and the total profit will be for the owner of the capital amount. However, if they say, “We will share the profit between us,” then the profit will be divided in half between them.
4) If they dispute regarding any term of the profit, for example, whether the worker gets a fourth or a half of the profit, the claim of the owner of the capital is accepted after his swearing an oath.
5) It is not right for the worker to make another speculative partner with the wealth of another person when it is harmful to the wealth of the first partner. However, it is allowed for the worker to do so if his first partner gives him permission to do that. This is because it is for bidden to cause harm between the Muslims.
6) The profit should not be distributed as long as the contract is valid, unless both parties agree to divide the profit.
7) If the capital investment causes any loss, then it should be covered from the profit. Therefore, the employee will not have any right to the profit unless the damage and loss of the capital is covered. This is applicable as long as the profit has not been divided. For example, in the case of both parties making a deal with sheep and receiving profit from it, then they invested it again in trading grains or flax. If they loss the business even from their capital money, they will share the loss from the current capital. The employee should not adjust the current loss from the profit of the former deal.
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[1] From this is what Malik recorded in Al-Muwatta ’ that ‘Abdullah and ‘Ubaydullah, the two sons of ‘Umer bin Al-Khattab, passed by Abu Musha Al-Ash’ari in Al-Basrah. So he gave them some wealth to take to ‘Umar. Then he encouraged them to take some merchandise with it that they could sell, and then when they sold it, they could pay the capital sum of the money to ‘Umar. Thus, they did so. However, ‘Umar forbade them from keeping the profit. So ‘Ubaydullah said to him, “Could not you make this a speculative deal, since he (Abu Musa) said, ‘If this wealth decreases or is used up in loss, then we are responsible for that.” So ‘Umar took the capital sum of money and divided the profit in half, giving them each a half of the remaining profit. Thus he made it a speculative deal.
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8) If the speculative partnership is abrogated and some of the merchandise left, or some debt with someone, the owner of the capital can demand that the existing property be sold to make cash instead or to return the debt. The employee must act according to what the owner instructs.
9) The claim of the worker should be accepted about the damage or loss of the property if there is not any evidence established against his claim. If he claims the damage of the property and produces the evidence to prove it, his claim will be accepted after his swearing.