Contracts and The Form of Business Organizations

Contracts and The Form of Business Organizations

When people do any business together, they are likely to have disputes and differences of opinion over money matters. It is, therefore, important that such matters, involving money, property or other articles of, value, should be written down in the form of a contract and signed by both the parties in the presence of witnesses. These contracts eliminate many unnecessary disputes as well as safeguard and protect the rights of all concerned.

The Holy Quran has referred to such contracts in the following words:

"0 you who believe, when you contract a debt for a fixed time, write it down- And call to witness from among your men two witnesses. And be not averse to writing it whether it is small or large along with the time of its falling due. This is more equitable in the sight of God and makes testimony surer and the best way to keep away from doubts., But when it is ready merchandise which- you give and take among yourselves from hand to hand, there is no blame onr you in not writing it down. And have witnesses when you sell otle to' another". (II: 282)

In these words the Holy Quran has indicated the importance of contract in Islam. The Muslims are here told to put down all their transactions, great or small, in writing except when they are doing hand to hand dealings. Whether' the amount involved is small or large, and' the contract is for a' short' period or longer period, the Muslims are required to write it down in the presence of witnesses. All these precautions are taken to avoid disputes and- to protect and safeguard the right of 'property of the individuals.

Forms of Business Organizations

Many forms of business organizations were current among the Muslims at the-time of the Holy Prophet. Most popular forms of business organizations were partnership, joint-stock- companies muzaraba and business on commission- which would, be discussed in the following pages.

(i) Muzaraba

In-muzaraba one man (or party) provides capital and the other labor, and: both share profit. The-profit is divided according to the terms of the agreement made between the parties.

The difference between a laborer (working for as employer) and partner in muzaraba is that, in the former the capitalist (or employer) is responsible for the payment of wages to the laborer whether he gains or loses in his business while in the latter, the laborer (who is also a partner in business) receives his share only if there is profit from the business. Thus wages are guaranteed to the laborer, no matter what happens to the business; profit or loss, in the former but, in the latter, his share of the profit is guaranteed only if there is any profit. He gets nothing if the business is-running on loss.

1.

Pre-Islamic Period-: This form of business was-prevalent in Arabia even before the advent of the Holy Prophet. Khadija-bint-Khawalid, who was a rich woman, used to give her money to other people to trade with and then to share the profits with them. Then Khadija, being impressed by honesty and righteousness of the Holy Prophet, requested him to take her commercial goods to Syria. There was huge profit from this bargain, out of which-the Holy Prophet received ample share.
2.

Advent of Islam: When the Muslims conquered Khaiber, the Holy Prophet granted the lands to the Jews (on their request) on the condition that they would cultivate the lands and share the produce equally with the Muslims".

The companions of the Holy Prophet used to trade and do other business on the same principle. Zaid bin Aslam reports from his father that "Abdullah and Ubaidullah, two sons of the Caliph Umar, went to Iraq for Jehad with Muslim army. On their return, they went to Abu-Musa, who was the administrator of Basra. He welcomed them and said, "I wish I could do you a favor. I have some money of Bait-al-mal (treasury) which I want to send to Umar. Now I give this money to you as a loan, you purchase some goods with it from Iraq and sell them in Madina, pay the capital to Umar and keep the profit for yourselves". They agreed to this proposal and got the money from Abu Musa who wrote to Umar to receive it from them. When they came to Madina, they sold ' the goods and made some profit. Then they took the capital to Umar, who asked them, "did he give such a loan to every man in the army?" They replied in the negative. Then Umar said, 'This money has been given to you -for being sons of the Caliph; give me the capital as well as the profit". Abdullah kept quiet but Ubaidullah said, "0 Amir-ul-Muminin, You should not do this (to us). Had the money been lost or had we suffered a loss, we would have paid the capital." Umar said, "No ! You must pay it". Ubaidullah again requested. Then Abdur Rehman bin Auf suggested that it would be better if it was counted as muzaraba. Umar agreed and took the capital with half the profit and the other half was given to them".

All the Muslim jurists agree that muzaraba is a very useful form of business organization. They regard it as a contract between two parties, one of which provides the capital and the other labor. Both share in the profit ; one in return for his capital, the other in return for his labor. Thus in muzaraba, the capitalist benefits from his capital and laborer from his labor.

This form of business organization is of great importance in the economic system of Islam. Every community has different grades of people ; rich as well as poor, intelligent 'A well as dull. With cooperation of all these people, every member of the community could earn his living. The rich can invest their money and the poor can put in their labour. Thus by cooperation both can earn profit.

According to the Muslim jurists, Islam has made muzaraba lawful because the people need it ; since it often happens that men, who have money and property, lack the ability to use it for productive purposes while others, who have the necessary ability to utilize such financial resources, are poor and penniless. A contract of muzaraba between such parties enables them to utilize the wealth of the rich and the labor of the poor for the benefit of both.

Moreover, this form of business organization has a very healthy effect on the position of the labourers. They feel happy and satisfied for they share in the profit. They even work harder because every increase in the gross profits increases their share of it. It is, therefore, a very successful and popular form of business organization.

Under the capitalist system, the laborers work for wages throughout their whole life and, very often, lose their sense of freedom. They never feel freedom and independence like that of a man working in a muzaraba contract. Then they do not work hard for they have no personal interest or any incentive in the work. It is not, therefore, very uncommon under capitalist system that thousands of working hours are wasted every year by slow-down, or work-to-rule or strikes. Muzaraba gives laborers a share. of the profits which provides them with 'a strong incentive to work harder. They begin to take a greater personal interest in their work which helps to increase the productivity of their work.

Rights of Labourers in Muzaraba:

The laborers enjoy the following rights in Muzarabal:

1.

The laborer has a right to receive a share of the profit for his labor and effort,
2.

The nature of the capital with which he works is that of trust therefore it is lost in business, no damages would be recovered from him.
3.

His position is like that of an agent, who can use the capital only with the permission of the capitalist but who has power to purchase and sell goods, to appoint someone else as an agent and to keep the goods in the custody of another person.
4.

When there is a profit from the business, he shares the profit in payment for his labour. If the contract is nullified, he has a right to receive remuneration for his labour.; but, if he breaks the contract, he will be considered usurper (v.otA) for he has taken over someone else's money (or property).
5.

If he is working in his own town, the labourer will share only in the profit, but if he has to travel business connections, he will be entitled to expenses such as, boarding, lodging, fare etc.

In short, he has the right to hire labourers to carry out the work of the Arm, to ,b}re .4uildings for keeping the, goods and to hire .animals -qr other ,means of transport for carrying the goods of the firm.

Rights of the Capitalist:

An Muzaraba, tbe capitalist also enjoys certain rights as enumerated below:

1.

Profits will be divided in the presence of the capitalist, who must be present when the laborer takes his share of the profit.
2.

The laborer cannot take his share in the absence of the capitalist.

Termination of the Contract:

1.

Either of the party can end the contract at Will ,but"has to inform the ether party.
2.

The contract also ends with the death of any of the partners and does not pass on to the descendants of the deceased. The contract can, of course, be renewed by the descendants.
3.

This is applicable to ,a contract inyolv.iug two men only but, if labour has acquired capital from more than .one persons, or if there are mote than two persons, .invelyed :in the contract of niuzaraba, the .contract will come to an end as far as one man (the deceased) is concerned but ,will remain valid in the case of the others still living.

(ii) Partnership

In partnership two or more persons jointly contribute capital and share the profit as well as the loss. When one person finds it difficult to initiate a big industrial or commercial undertaking without financial help from ,other sources, partnership proves very helpful and useful. Two or more rich persons can form partnership and start a big enterprise.

This form of business, which was very popular at the time, was kept and maintained by 'the Holy Prophet and his companions in the economic system of Islam. Partnership was popular not only in trade and commerce but also common in agriculture and gardening.

The Holy Prophet helped in forming partnership between the Muhajrin and the Ansar in Madina. Ansar had gardens and the Muhajrin provided labour and the produce was shared between them. In the language of the law, partnership in agriculture iscalled Muzara'ah and in gardening Musakat All the Muslim jurists consider this type of partnership valid and lawful, in which every partner invests his goods or money in the same way as the other partners and their goods become so mixed up that it is impossible to distinguish whose goods have been sold and with whose money goods have been -purchased. If they make a profit, they all share it and if they lose, they all suffer the loss.

1.

Conditions : The following conditions must be observed in a contract of partnership:
1.

Partnership is a contract which must be accepted by both the parties.
2.

According to some jurists partnership contract is legal only if it is carried on in legal tender money.
3.

Imam Sarkhasi makes writing a necessary condition of the partnership contract. He argues that' "partnership is a contract which continues for a period of time, therefore writing of the contract is necessary that if a dispute arises at any time it may be referred to the deed, as stated in"the Holy Quran

"0 ye who believe ! when ye contract a debt for a fixed term, put it down in writing". (II: 282)

Moreover, the purpose of the deed is to provide a .proof of the contract. It must, therefore, be written down to avoid any disputes. In support of his arguments, 'he-quoted the practice of the Holy Prophet. Whenever the Holy Prophet bought any slave, he asked that the deal should be - written down. Once it was written in this way:

" This is the deed in which is mentioned --the purchase of a slave by Mohammad, the Messenger of God, form Udad bin Khalid bin Hausa, the Jew".
4.

Againt, the amount of the capital of each partner should be clearly stated, for, at the time of division of profit, the amount of the capital of each partner must be known, in order that the amount of the profit of each could be calculated. It is, therefore, necessary that the amount of the capital of each partner should be separately shown in the partnership deed so that the partners could refer to that at the time of a dispute between them.
5.

The amount of the profit each partner is to receive in proportion to the amount of his capital must also be stated in the deed.
6.

The date, month, year, when the partnership came into force must also be stated in the deed. This will avoid many unnecessary disputes.
7.

It should also be stated in the deed that the capital is in cash in their hands at the beginning of the contract. This will show that the capital is neither absent nor in the form of debt but is in the form of money which is in their possession.
2.

Types of Partnership:

The Muslim jurists, considering the nature of the contract and the amount of the capital involved therein, have classified partnership into four categories:
1. Shirkat-al-Mufavadba

2. Shirkat-al-`Anan

3. Shirkat-al-Sanai

4. Shirkat-al-Wajooh


1. Shirkat-al-Mufawadha:

In this form of partnership, the working capital of each of the partners, who trade jointly (or do any other business), is equal and they also share equally the profit as well as the loss of the business. Thus they share equally in the assets and the liabilities of the partnership. And each partner is an agent as well a helper of the other partners.

1.

Conditions of Business:

This type of partnership is based on the following conditions:
1.

Whenever Shirkat-al-Mufavadha is formed, the word Al-Mufavadha (equality in everything, profit or loss) must be written in the deed, or verbally spoken, if partnership deed is not written down, because most of the people are ignorant of its conditions.
2.

Both the partners must be equal in status. This partnership is valid between two believers (or parties of believers) who are of age and are free. The partnership is not valid between a free person and a slave.
2.

Rights and Duties of the Partners:

Each partner enjoys certain rights and owes certain duties to the other partners in this form of business as enumerated below.

Every partner is an agent for the other partner (or partners) and has therefore the right to buy or sell goods on his (or their) behalf and lend or borrow when necessary. In short, every partner represents other partner (or partners) when negotiating any business deal and goods bought or any contract sighed by one partner would be binding on all other partners as well.

2. Shirkat-al-`Anan:

The second type of partnership is called Shirkat-al-`Anan. In this form of partnership, the partners do neither contribute equal capital nor share equal profits. One of the partners contributes more capital than the other (or others) and receives the lion's share of the profits. This form of business was also very common in Arabia and was accepted by the Holy Prophet and his companions as a useful and valid form of business.

Conditions:

The following conditions must be observed in this form of business contract:
1.

It is not necessary that all the partners should have equal share in the capital or the profit. One might have contributed fifty thousand pounds and received an equivalent sum in profits while the other only five thousand.
2.

The working capital of each of the partners might be equal but the share should be greater than the other. The right of each partner to claim greater share of the profit might be due to extra labor or better organization ability or managerial skill in handling business or any other reason. It might have been due to the fact that one of the partners would not agree to join the business as equal partner in the profit. Therefore as a matter of necessity, such a partnership, given more share of the profit to one of the partners, was regarded legal and valid.
3.

As there is no compulsion for equality either in capital or in profit, this type of partnership is valid between men, women and children; and between masters and servants whom their masters have given permission; and also between a Muslim and a non-Muslim.
4.

Each .partner is an agent but not a patron of the other partner (or partners). In other words, none of the partners is liable to pay the debts of the other partner (or partners).
5.

None of the partners has any right to lend anything out of the joint property. It would not be considered valid if any of the partners were to mortgage joint property so that the debt should fall on both (or all).

3. Shirkat-al-Sanai (or AI-Abdan):

When artisans, technicians and other manual laborers join together in a partnership in the production of a commodity or commodities, it is called Shirkat-al-Sanai. It is also known as Shirkat-al-Taqqabal which means to accept. For instance, two artisans, a carpenter and blacksmith join together in a partnership on the condition that they would accept orders from customers concerning their trade and jointly share the income from business. Such a, partnership is very useful for artisans, technicians and laborers who, can form big companies and start business in their respective trades and, share the profits amongst themselves. If any person has no capital: but is a technician or a specialist in a certain branch of industry or a mere manual laborer, then he may join with others, in a. partnership on the basis of his labor. He will share in the profit on the basis of his labor alone while others for their capital as well. According to Imam Sirkhasi technicians and artisans' skill and industry, is their capital and in Shirkat-al-Sanai laborers' industry is their capital.

Conditions:

This partnership is based on the following conditions':
1.

The share of the partners in this business need not be: equal any of the partners may take a greater share of the profits than- the others because of: his superior_ skill or special, job or any other reason.
2.

The Muslim-jurists have justified share of the profit according to the amount (or nature) of their work.

4. Shirkat-al-Wajooh

If the partners have neither capital nor skill, they may start a business on credit and share the profits amongst themselves. This form of partnership is called Shirkat-al-Wajooh. Two or more persons without any capital may enter into a, contract that, they would- do business on credit and share in-the profits and losses. This type of business can only be done by persons- of great reputation and integrity (Wajooh); who are well known for their honesty and, high credit.

The Muslim jurists have, in fact, regarded credit as a form. of wealth, like that of industry and. skill in Shirkat-al-Sanai, which is used for the production of more wealth.

1.

Conditions:

This type of partnership is valid if the, following conditions are satisfied:
1.

Every partner must receive the same (or equal) share of the profit.
2.

Inequality inn the.-respective. share -(in the- profit) of different partners is not allowed in this form of business organization.
2.

Termination of Partnership:

All types of business organizations are considered void in the following circumstances:
1.

Whenever any partner utilizes his right to terminate the contract ; but it would not be considered operative unless the other partner (or partners) is informed. It may be remembered that every partner has equal right to terminate the contract.
2.

Partnership ends with the death of one of the partners, for each partner is an agent (or representative) of the other partner (or partners) and as the agency is terminated, partnership is also terminated. But, if the descendants of the deceased desire, they may renew the contract.

Concluding Remarks on Partnership in General:

It may here be pointed out that there is immense scope of expansion in the forms of business organizations based on partnership in the modern industrial world. These forms of business organizations are particularly suited to under-developed countries where capital is scarce and greater effort is needed on the part of the inhabitants themselves. This will enable these countries not only to mobilize their internal resources but also to stand on their own feet in matters of finance and not depend upon charity from other nations (and squeeze the country under the weight of annual payment of interest on debt).

Numerous forms of business organization in the field of trade, commerce, industry, gardening, medicine, education, mining, transport (road as well as sea), agriculture including the purchase of animals, seeds, tools etc. were formed by the Muslims to help the economy of the time. These and thousands more can be formed on the same principle to develop our economy and to meet the demands of the modern age.
3.

Joint-stock Companies : Modern industrial enterprises require huge capital and are, therefore, beyond the capacity any single person. It is through joint-stock companies that these big enterprises in the field of trade, industry and agriculture can be undertaken. Modern industrial and technological progress is mainly due to the assistance of joint-stock companies.

In this form of business organization, total required (working) capital is divided into many shares of small value which are offered for sale to the public. Every one can buy as many shares as he likes. The people who buy shares are called shareholders and are the real owners of the company.

In this type of organization, the capitalist (i.e., the shareholder) for his capital (i.e., share) and the entrepreneur for his enterprising ability and skill get a share of the profit while the laborers are rewarded for their labor in the form of wages. In one way these companies resemble Shirkat-al-`Anan. The liability of the members is limited and the board of directors as representative of the shareholders supervise the work on their behalf. The shareholders, whenever they wish, may sell their shares in the market like transferable property.

It would not be true to say that the joint-stock companies are the creation of the modern age. They were found in the old days and were very popular in Arabia. In fact the commercial dealings of the Quraish Mecca were carried out by jointstock companies. Even in the commercial caravan of Badr, capital invested belonged to many people who were doing business on the same principle as the modern joint-stock companies. Undoubtedly, there has been marked improvement and development of the rules, scope and forms of the companies' sitice those times but basically the modern-stock companies are of the same genus as the old ones.
4.

Business on Commission:

Islam also allows business on commission. According to Abdullah-bin Abbas,' there is no harm in asking a commission agent to sell your cloth (or other goods) at any price and keep the excess profit (over and above the profit you ask) for himself (as commission) any single person. It is through joint-stock companies that these big enterprises in the field of trade, industry and agriculture can be undertaken. Modern industrial and technological progress is mainly due to the assistance of joint-stock companies.

In this form of business organization, total required (working) capital is divided into many shares of small value which are offered for sale to the public. Every one can buy as many shares as he likes. The people who buy shares are called shareholders and are the real owners of the company.

In this type of organization, the capitalist (i.e., the shareholder) for his capital (i.e., share) and the entrepreneur for his enterprising ability and skill get a share of the profit while the laborers are rewarded for their labor in the form of wages. In one way these companies resemble Shirkat-al-`Anan. The liability of the members is limited and the board of directors as representative of the shareholders supervise the work on their behalf. The shareholders, whenever they wish, may sell their shares in the market like transferable property.

It would not be true to say that the joint-stock companies are the creation of the modern age. They were found in the old days and were very popular in Arabia. In fact the commercial dealings of the Quraish ~f Mecca were carried out by jointstock companies. Even in the commercial caravan of Badr, capital invested belonged to many people who were doing business on the same principle as the modern joint-stock companies. Undoubtedly, there has been marked improvement and development of the rules, scope and forms of the companies since those times but basically the modern-stock companies are of the same genus as the old ones.
5.

Government Undertakings:

Islam has not ignored any of the possible corporate forms of -business organizations; which can benefit the people. In' fact, it has been one of the basic objectives of Islam to utilize all the resources and powers of the country in the production of wealth and to coordinate the available supply of labor and capital in the best interest of the community.