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Business and guarantor

Fatwaa ID: 535

 السلام علیکم ورحمة الله وبركاته

What is the standing on contracts? If a contract is stipulated between two parties whereby one is providing the funds while the other provides the goods for a common project. If one party completes it’s responsibility, how binding is it on the other to complete their responsibility? Is it considered as a debt in case of death? W

As an extension, what is the responsibility of a gaurantor? If someone takes the responsibility of covering an investment by someone in case of loss in a project and the project goes into loss, would that be considered as a debt on the gaurantor?

 السلام علیکم ورحمة الله وبركاته

The business provides workforce for hire. One party does the work while the other party provides the funds.(sleeping partner)

The gaurantor is a partner in the business and gaurantees that the capital investment by the investees is safe. A clause in the contract stipulates that he is liable to pay the invested capital should the business fail and cover any loss thus incurred.

And the business has failed with 100% loss.

 السلام علیکم ورحمة الله وبركاته

Mainly he took this on to secure investors. The thinking was that if we provided a safety net for the investors they will be more willing to invest. But as the business failed, he is unable to fulfill his gaurantee to the investors.

In the Name of Allaah, the Most Gracious, the Most Merciful.
As-salaamu ‘alaykum wa-rahmatullaahi wa-barakaatuh.

We take note of the details of your query. The answers to your queries are as follows:

  1. Based on the information provided, the above business model is that of a mudhaarabah model. This is where one party provides the funds and the other provides or does the work. The latter does not inject and capital to the venture. If he is, then this will be a mushaarakah model instead. It is not clear what you are referring to by “responsibility”. In the case of mudhaarabah, one is to provide the funds and the other is to do all the work diligently and responsibly. The profit ratio is mutually agreed upon from the beginning. In the case of loss, the investor takes the financial loss while the mudhaarib/working partner takes the loss of energy and work.
    It is also not clear what you by debt in case of death. In the event of death, the business will be dissolved and/or a new contract will signed with the heirs of that partner.
    It is if utmost importance that prior to starting the business, one learns about the business he is going into from an Islamic perspective. He must learn what is halaal and what is haraam. He must confirm that his contracts and agreements are Shari’ah compliant. Failure to do so may result in grave sins and even invalidity of the business transactions.
  2. Risk must be taken for any form of investment and business. There is no guarantee that a business will be successful. Every business has the potential of profit and risk of loss. You cannot enter into a venture expecting to have a guarantee of your funds even in the case of loss. The business must ensure that all risks are mitigated. A guarantor for capital in a business is not contractually recognized. If a person had voluntarily said that he guarantees the capital, then that is merely a process for which he cannot be held accountable. We wish to state that it is truly foolish for anyone to make such a guarantee or claim. If such a condition was put on the contract, then that is Islamically invalid.

We advise you to sit with your local competent scholars and understand and clarify all your venture related queries. Draw out a scheme and contract that is Islamically recognized and correct. Any other scheme or contract will be void of goodness and barakah, and may even be invalid in which case you would be sinful. Make sure that you reimburse your local scholars for their time and consultation adequately even if they do not ask for it.

And Allaah Ta’aala knows best.
Mufti Muajul I. Chowdhury
Darul Iftaa New York

07/16/1444 AH – 02/07/2023 CE | AMG1-2749

وصل اللهم وسلم وبارك على سيدنا محمد وعلى ءاله وصحبه أجمعين


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