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Civil Law

Explanation of Article 559

Explanation of Article 559

After Article (558) established that the default in profit-sharing in Mudaraba is based on agreement, this article came to clarify a prohibited form of agreement, which is stipulating a specific amount of profit for one of the contracting parties, and what might be confused with this form from other permissible forms. The first paragraph clarified the invalidity of stipulating a specific amount of profit for one of the contracting parties; the profit must be divided between the contracting parties in a common percentage between them. This rule is of public order and cannot be agreed otherwise, as it may result in the contracting party for whom the specific amount is stipulated monopolizing the entire profit, thus negating the pillar of Mudaraba, which is sharing in profit. For example, if the capital owner or the Mudarib stipulates that their profit from the Mudaraba is fifty thousand riyals, and the Mudaraba profits fifty thousand riyals or less, this means depriving the other contracting party of profit. It is established in partnership contracts, including the Mudaraba contract, that any condition depriving one of the partners of profit is invalid.

Applying the rule of contract severability in paragraph (2) of Article (74): (If the contract includes an invalid condition, only the condition is void, and the contracting party may request the annulment of the contract if it is shown that they would not have agreed to the contract without that condition); if the condition of a specific amount of profit is void, there is no longer an agreement on profit between the contracting parties; the profit division will be according to custom as contained in the second paragraph of Article (558), and the contracting party may withdraw from the contract under the three conditions outlined in the explanation of that article. The contracting party has another option if they do not wish to take this path, which is to request the annulment of the contract if they prove that they would not have agreed to the contract without that condition, applying paragraph (2) of Article (74); if the contract is annulled, each party's share of the profit realized from the Mudaraba before the annulment is determined according to custom, not based on the contract, because if the contract is void, its effect is nullified, but rather applying the rule of unjust enrichment; as the profit realized from the Mudaraba is generated as a result of money and work; the Mudarib deserves compensation for their work to the extent of the benefit returned to the capital owner, and this is estimated as the worker's share of the profit if the contract were valid and such profit was realized; as the reference is to custom in such types of contracts and the nature of the work.

It is clear that the basis of the prohibition in the form outlined in the first paragraph is that the condition may lead to depriving the contracting party of profit; therefore, the second and third paragraphs came with forms of agreement that might be mistakenly thought to fall within the prohibition in the first paragraph; to dispel this misconception, the text stated their permissibility; as the reason for prohibition is absent; the second paragraph referred to two forms, which are: The first form is stipulating that the profit is shared between the contracting parties at an agreed percentage within a certain limit, and any profit exceeding that limit is taken by one of them alone, such as agreeing that the profit is shared equally between them until the Mudaraba profit reaches one hundred thousand riyals, and any excess over one hundred thousand riyals is taken by the capital owner alone or the Mudarib alone; this form does not lead to depriving any of the contracting parties of profit. The second form is agreeing to change each party's share of the profit according to the profit realized from the Mudaraba, provided it is based on valid criteria for determining it, such as agreeing that the profit is shared equally between them until the Mudaraba profit reaches one hundred thousand riyals, and any excess over one hundred thousand riyals is two-thirds for the Mudarib and one-third for the capital owner, or agreeing that profits related to the sale of a specific commodity are shared equally between them, and profits related to the sale of another commodity are two-thirds for the Mudarib and one-third for the capital owner; this is permissible because each contracting party's share is determinable according to valid criteria, and this condition does not lead to depriving either of them of profit. The third paragraph also clarified the permissibility of one of the contracting parties having a known wage for a specific work in addition to their share in the profit; this condition does not conflict with what the first paragraph ruled out by prohibiting stipulating a specific amount, as the prohibition basis there is removed by the existence of a percentage of the profit in contrast to the wage.

Related To

Article 559

  1. A mudaraba contract may not stipulate a fixed amount of profit for either contracting party.

  2. The contracting parties may agree that a certain amount of the profit be equally divided between them and that one of the parties is entitled to any profit in excess of such amount, or they may agree on a variable profit share based on the amount of profit realized from the mudaraba in accordance with valid determination criteria.

  3. The contracting parties may agree that either party be paid a specified fee for the performance of a particular task, in addition to his share in the profit.