Company and Contract Law
The Mudarabah Contract under Jordanian Law: Definition and Legal Framework
A concise overview of the mudarabah as a contractual arrangement between the capital provider and the working partner, referencing Islamic jurisprudence and relevant Jordanian Civil Code provisions. The summary emphasizes validity requirements, grounds for nullity, and termination scenarios with their practical effects on the parties.
Updated: 14 April 2024
Prepared and reviewed by: Ashraf Al-Khawaja
Nature and Legitimacy of Mudarabah
Mudarabah is a specific partnership contract under which the capital provider supplies funds and the working partner invests effort to generate profit; this concept is recognised in Islamic jurisprudence and reflected in Jordanian civil law definitions. Its legitimacy draws on prophetic practice and early Muslim practice, and it is treated legally as a cooperative mechanism linking capital owners with active operators as a means of promoting investment and employment.
Validity Requirements and Practical Implications
For a mudarabah to be valid it must satisfy core elements regarding form, the contracting parties, capital, labour, and profit. In practice this means the capital must be identifiable, fit for commercial use and delivered or placed under the mudarib’s control; each party’s profit share should be specified as a proportion rather than a fixed sum; the working activity must fall within the mudarib’s remit; and both parties must have the legal capacity required for agency under applicable Jordanian provisions — all matters that should be reflected in contract drafting, delivery evidence, and valuation procedures where non-cash capital is involved.
Grounds for Nullity and Limits on Permitted Conditions
A mudarabah is void where it contains terms incompatible with its nature, where the capital is indeterminate or not suitable for commerce, or where delivery of capital is absent. It is also invalid if a fixed monetary share is granted instead of a proportion of profit, if part of the profit is diverted to a third party, or if conditions unduly restrict the mudarib’s freedom to operate. Differences in Islamic schools exist over certain restrictions (for example limiting the type of trade or mandating purchases), and Jordanian law accepts some limitations that were disputed in classical doctrine.
Termination of Mudarabah: Procedures and Practical Effects
A mudarabah terminates by rescission with notice, by expiry of its agreed term, by death or loss of legal capacity of either party, by removal of the mudarib by the capital provider, or by destruction or proof that the capital lacks real value. Practically, parties should provide adequate notice because untimely rescission may give rise to liability for damages; final settlement of profits and losses must be conducted, and losses typically fall on the capital provider unless the mudarib is shown to have been negligent or at fault.
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Notice: This content is for general educational purposes and provides a summary of published legal sources; the original source is linked on the publication page. It is not a substitute for the binding statutory text or for professional legal advice; verify the applicable laws, amendments and dates with official authorities and consult a licensed lawyer before taking any action.
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