Section Two
Speculation
Al-Modārabah
In the Shari’ah, speculation is: a contract of partnership in profit in which the asset is from one person and the work from another. It is, then, different to a company contract in which partnership in the capital is intended; this is because with a speculation contract, although it involves sharing the profit, the capital is not subject to sharing. Some of the speculation’s characteristics are:
a- It is trading in an asset that may be owned by a single party or jointly owned, and the work is in that asset.
b- Investment in speculation is limited to trade, not other investment fields, such as farming etc.
c- Although the profit from a speculation is shared between the worker and the asset owner, the loss is borne by the asset owner only.
d- The work in the speculation is carried out by someone other than the asset owner, while in a contract company it may be done by some of the partners or others.
In a speculation contract, it is sufficient to have a proposal from one party and the acceptance of the other using any wording that gives this meaning. Words are not conditional in the contract, but it can be done by mo‘ātāt, in which the owner hands over his asset intending to trade using it and the worker receives it intending to accept that.
The conditions that must be met by the contracting parties are the same as in other contracts – sanity, intention, free will and the guardian’s permission if the contracting owner is still young. Also, the owner must not be indicted for unreasonable conduct or bankruptcy. The worker, however, does not need a guardian’s permission, nor the lack of any indictment if the speculation does not involve the disposal of his assets.
When the speculation contract is established with all its conditions, it becomes binding, and cannot be invalidated except by relieving the contracting parties from its obligations (iqālah), choice (khiyār) or the end of the term if it had term.
The rest of the speculation rulings are:
1088. If the speculation contract is established on the basis of a certain amount of money, and the owner wants to increase the capital, he does not need a new contract. He is also allowed to pay the money agreed on to the worker in instalments.
1089. It is allowed for each one of the contracting parties to impose any reasonable conditions on the other within the speculation contract, and if the latter accepts the condition, he must observe it for as long as the contract exists and is not invalidated, whether the profit they hoped for is achieved or not.
1090. Several requirements are to be present in speculation:
1- Investment in the asset must be limited to trade not other types of asset growth; so speculation is not valid if they contract that the worker buys something using the owner’s money to benefit from its growth, such as cars or houses to rent to benefit from their rental, or craft tools to practise his craft, and the like.
2- The worker must be capable of carrying out the business in the manner required from him, whether doing this himself or using others – unless he made it conditional that he works himself. So the speculation is invalidated if he is incapable at the outset, and becomes invalidated the moment this is discovered, if this incapacity takes place during the work; the owner has the choice of invalidation if he has made the pursuit of the task by the worker himself a condition and the worker fails to meet this condition.
3- The speculation asset must be an external asset, money or goods, so speculation is not valid using a benefit as an obligatory precaution. That said, speculation using a benefit’s payment/wages/rental is valid, such as saying: ‘Rent my house and speculate using the rent.’
4- The asset must be known both in amount and its description.
5- The profit from it must be destined for whoever spends assets or does the work, and it is limited to the two parties of the contract: the asset owner and the worker, whether each of them was one party or more. So if one of them allocates a share of the profit to a person who is not one of the parties, and who is not participating in an asset nor has a condition on him to participate in the speculation work, the speculation becomes invalidated. It is also invalidated if the owner imposes a condition that all the profit is for him.
In addition, specifying the share of each one of them must be according to the ratio, not numbers, so they make it a third, half etc; if someone specified this using whole numbers -one thousand pounds, for example - the speculation becomes invalidated.
6- The whole of the loss must be borne by the asset owner, so if he imposes a condition on the worker to share in the loss, the condition is invalid if the aim was to take it from his share of the profit, and the worker is not bound by it. In fact, the ruling of the validity of the condition that he takes it (the loss) from his asset not from the profit is not clear-cut. However, if he inserts a condition on the worker to share the whole of the loss, provided that the whole of the profit is for him, the condition is valid, although this ruling is not clear-cut either.
1091. It is allowed to involve several workers in a single speculation, whether the owner is one party or more, dividing the profit between the workers equally or in varying proportions according to the manner they contracted with the owner. It is also allowed to have many owners in a speculation, whether there is one worker or many.
1092. Establishing a speculation contract without conditions implies that the worker himself carries out the trading in the way that is common and suitable from him; so it is not acceptable for him to ask someone else to do the task without the owner’s permission, unless it is normal that other people carry out some actions involved in the speculation, such as accountancy, transport of goods etc. Also, if the worker takes the capital at his disposal, he is not allowed to abstain from trading with it and to freeze the use of it to an extent that is not normal, and if he does this, he is regarded as negligent and compensation will be due from him if damage has been done.
1093. A speculation contract implies that all expenses involved in the speculation process are to be met from the speculation asset unless it was made conditional otherwise; this includes the costs of advertising, storage, transport, guest expenses and the like. However, the worker’s personal expenses are to be borne by him when in his home(land) and by the speculation asset when travelling provided he is travelling with the owner’s permission, otherwise it is to be borne by the worker. If the worker falls ill during this travel, he must bear the cost of his medical treatment, even if he is travelling with the owner’s permission.
1094. Any loss in the speculation process is to be compensated for from the profit made in that process – for as long as the speculation continues – in a way that the owner and the worker agree on. Therefore, any profit does not become fixed until after the end of the speculation by invalidation or the like, or after the elapse of the term if they made it limited to term, or by specifying a time period for compensating the loss in the speculation of all goods or the loss of certain goods, and so on.
1095. As was mentioned in entry no. 1090, speculation condition no. 6, the worker is not responsible for any loss, but this refers only to loss in the capital that cannot be compensated for;, the loss in profits, however, that can be compensated from them is a responsibility of both owner and worker, unless the worker inserts a condition of no compensation, as will be explained just below.
1096. It is valid if the worker imposes a condition on the owner absolutely not to compensate any loss or damage or both from the profit, or from the early or late profit, or imposes a condition to make compensating it at a certain ratio and in a certain format; if the owner accepts this, it becomes binding on him. However, it is not valid for the owner to make it conditional to take all profit for himself – it was mentioned previously - if this makes the worker wholly or partially responsible for the loss, unless the owner gives the whole of the profit for the worker; in that case he can impose the whole of the loss on him, but such ruling is not clear-cut.
1097. It is not valid for one of the contracting parties to take his share of the profit before dividing the profit and separating the shares.
The share of each of them in all types of assets must be distributed according to the ratio of the share to the whole of the asset; this covers money and other assets, without any one of the parties having the right to take his whole share of the money, for example, and give the other his share of the other assets, unless they agree on it. Regarding the debts of others owed to them , however, the worker has to abide by the owner’s wish, so if he attributes the worker’s share of the profit wholly or partially from these debts that result from the speculation, he must accept this, unless he had makes it a condition otherwise when contracting. And when they reach an agreement that is acceptable to both to distribute the debts owed on their shares, in this case dividing them is not valid until after collecting them, or they can reach an agreement to sell these debts and divide the income received.
1098. If the speculation is invalidated out of choice, or if this happens due to an unexpected reason after it was established correctly, the ruling is according to two situations:
1- If this takes place before commencing any speculation transactions or its pre-requirements, the worker must return the asset and he retains nothing.
2- If this takes place after the completion of the work or during it, then if no profit has been made, the asset must be returned to the owner without the worker retaining anything. But if profit has been made, there are two possibilities:
a- If the asset is of one type, such as if all of it is money or all of it goods, the owner takes his capital and they divide the profit between them.
b- If the asset is of different types, such as if some is money and some goods, the owner takes his capital from both types according to his ratio in what exists, not from the type of the original speculation money, then divides the profit from both types with the worker.
However, if the invalidation is such that the speculation itself is rendered void, and the worker speculated using the asset out of ignorance of the situation, but with the acceptance of the owner in any case, in this case the transactions that took place are valid and the whole profit is given to the owner, and the owner has to pay the worker the least of the two: the profit agreed on or the payment for similar work (ojrat al-Mithl), unless the speculation invalidation was due to the owner making it conditional that the worker would not have any profit, in which case, nothing shall be due from the owner to the worker.
1099. If the capital was shared jointly between two people and they speculated using one worker, then one of the partners invalidated the use of his share, the speculation does not become invalidated in the other’s share.
1100. The worker is entrusted with the speculation asset at his disposal, so he does not pay compensation for any damage that is done to it unless as a result of his own transgression and negligence; any violation of the limits specified by the owner on how to speculate, and when and where, may be regarded as negligence.
1101. If the owner made it conditional on the worker to pay compensation for whatever part of the capital is damaged even without transgression or negligence on his part, the condition is invalid and the owner has no right to force the worker to abide by it even if the worker had accepted it before.
1102. If one of the contracting parties dies after the contract has been established, with all its conditions, here if he is the owner, the contract will not be invalidated and his heirs have to observe their obligations towards the contract as it was made. If the deceased is the worker and the owner has not made handling the work himself conditional on him, the heirs should carry out the speculation work in the way committed to by the deceased, otherwise the speculation becomes invalidated and they have to return the asset to its owner.