Partnership

The types of partnerships recognised by Islamic law are predicated on either 1) joint ownership or 2) contract.

1) Joint Ownership:  Two or more persons who are (whether voluntarily or not) joint owners of property —  as a result of the operation of law, not contract. For example they may have purchased property together, been joint heirs or recipients of a gift. None of the joint owners  can act as agents for any other and they have no authority over the ownership claims of any another owner.

2) Contractual Partnerships: Two or more parties. Each acts as agent  for the other partner(s). Therefore the actions of one partner binds the other(s). Capital, profits and other benefits are shared based on a contractual agreement that in addition to setting out parties, including an offer/acceptance also provides for the object and purposes of the partnership.

What follows deals only with Contractual Partnerships.

The partners may contribute any of the following:

  • capital (does not include receivables)
  • management
  • services (in the case of professionals)
  • creditworthiness (where reputation is the basis for acquiring credit for the purchase and subsequent selling on of goods)

The ratio of contribution by the partners may be

  • equal (so unusual that a majority of the legal schools do not deem it possible)
  • unequal

In either case, profit and losses fall in proportion to contributions. They are determined as a percentage or proportion of the total profit or loss, not as an amount fixed in advance. The breakdown must be specified in this fractional form in the partnership contract.

Only in cases of equality the partners act as guarantors for one another and liabilities are joint; otherwise partners act only as agents not as guarantors of the other partners, and all liabilities are individually rather than jointly held.

Conditions specific to partnerships where capital contributions are unequal

  • capital contributions of each partner should be known by the other partners
  • all profits and rights as well as obligations are based on the ratio of contributions to total assets
  • capital contributions should be amalgamated so that individual contributions are rendered indistinguishable from one another
  • the majority view is that contributions of capital must be cash
  • partners share the proceeds of appreciation and the liabilities attendant to the depreciation of assets
  • the legal schools are divided on the allocation of profit
    • one view is that the percent profit paid to a partner must exactly correspond to contributions
    • the other view is that particularly where contributions are not of capital but of difficult to quantify skills or reputation the percentage payable may be at variance with the contribution
  • there is no dispute however regarding losses which must fall in the same ratio as the contributions of the partners

Management

Any partner may at their discretion engage in the management of the partnership. However partners may collectively agree that a subset of the partners only shall engage in management, and these partners in turn act as agents for the other partner(s). There is provision for managing partners acquiring personal liability in cases where they are negligent or exceed their contractually conferred  powers.

Dissolution

Partnerships may be rendered binding by contract for a period of time. A partnership may be dissolved if no such stipulation is made or under the following circumstances:

  • agreement of the partners
  • incapacity or death of on or more partners the heirs or executors of which choose to discontinue
  • insolvency of one or more partners

Liquidation

The rank order of obligations discharged upon dissolution is as follows:

  • obligations of the partnership
  • capital shares
  • profits if any are paid pursuant to the partnership contract
  • loss if any is born by the partners in proportion to their contribution; if the assets of the partnership is not sufficient to cover liabilities patterns are personally liable in proportion to their shares
    • liability is unlimited

There is an alternative partnership which avoids the obvious drawback of unlimited personal liability, which is the Sleeping Partnership.

Mejelle, 10th Book, Preface-Definitions and Chapters I-VII, see also Chapter VIII re other partnerships not discussed here.