Ribit Revisited - A Commercial Conundrum: Does Prudence Permit the Jewish 'Permissible Venture?'
Prof. Steven H. Resnicoff
APPENDIX: SAMPLE PERMISSIBLE VENTURE AGREEMENT (HETTER ISKA)152
THIS AGREEMENT is entered into between ________________ (the "Financier") and _______________ (the "Recipient"), this __________ day of ____________.
WHEREAS, the Recipient is desirous of engaging in one or more business enterprises and/or in the acquisition of bonds and securities (referred to hereinbelow as the "Business"); and
WHEREAS, the Recipient has insufficient funds for the Business; and
WHEREAS, Jewish law prohibits the payment or collection of interest on loans between Jews; and
WHEREAS, but for the Jewish law prohibition on the payment or collection of interest on loans between Jews, the Financier would have been willing to lend the $___________ (amount in writing) referred to hereinbelow on an interest-bearing basis; and
WHEREAS, Jewish law permits the Financier to provide the $_________ (amount in writing) referred to hereinbelow in a way set forth hereinbelow; and
WHEREAS, the Financier and the Recipient enter into this Agreement in order that the Financier provide, and the Recipient receive, the $_________ (amount in writing) referred to hereinbelow while avoiding the Jewish law prohibition on the payment and collection of interest on loans between Jews; and
WHEREAS, under Jewish law, the terms set forth hereinbelow do not authorize the Recipient to obligate the Financier personally in any way; and
WHEREAS, the terms set forth hereinbelow are not intended, under the laws of the State of _________, or under any other secular law, to authorize the Recipient to obligate the Financier in any way; and
WHEREAS, the fact that, as set forth hereinbelow, the Financier is providing the Recipient with the "Deposit" or "Investment," terms which are defined hereinbelow, may enable the Financier to pursue various different business enterprises without having to liquidate assets from one enterprise in order to invest in another; and
WHEREAS, the terms set forth hereinbelow establish what would be designated under Jewish law as a "shutfus;" and
WHEREAS, the Jewish law of "shutfus" differs significantly from the law of joint venture, partnership and agency of the State of ____________ and under other secular law; and
WHEREAS, the parties specifically intend that the terms set forth hereinbelow not form a partnership, joint venture or agency relationship - or any other similar relationship - between them under the laws of the State of ______________ or under any other secular law; [and
[WHEREAS, the parties believe that under the laws of the State of __________________ or under other secular law, although not under Jewish law, the provisions set forth hereinbelow regarding the $_________ (amount in writing) delivered to the Recipient which is hereinbelow defined as the "Deposit," should be characterized as a non-recourse loan from the Financier to the Recipient [Note that if this clause is used, the lender should be especially insistent on receiving a perfectible security interest in collateral for the loan]; and
[WHEREAS, the fact that laws of the State of ______________ or other secular law may label the said provisions regarding the Deposit a "loan" does not cause such provisions to be proscribed under Jewish law;]
NOW, THEREFORE, the parties hereto, in mutual consideration of the representations and promises set forth hereinbelow, and for other good and valid legal consideration, hereby agree, represent and promise as follows:
1. RECITALS. The foregoing recitals are incorporated herein and made a part hereof.
2. RECEIPT OF FUNDS. The Recipient hereby acknowledges receipt, contemporaneous herewith, of the aggregate sum of $___________ (amount in writing) (the "Funds") from the Financier.
3. NON-INTEREST BEARING LOAN. The Financier and Recipient hereby acknowledge that fifty percent of the Funds, or $___________ (amount in writing), was received by the Recipient as a non-interest bearing loan (the "Loan") from the Financier, subject to the terms and conditions of this Agreement.
4. "DEPOSIT" OR "INVESTMENT." The Financier and Recipient acknowledge that fifty percent of the Funds, or $____________ (amount in writing), was received by the Recipient as a deposit or investment (the "Deposit") from the Financier.
5. SPECIFIC AGREEMENTS, REPRESENTATIONS AND PROMISES OF THE RECIPIENT. The Recipient agrees, represents and promises, without limitation, as follows:
a. The Recipient shall not disclose or confirm to any party the fact that this Agreement was entered into, nor shall the Recipient enter into, make or confirm any representation that a religious or secular "partnership," "joint venture" or "agency" relationship was established between it and the Financier; provided, however, that this provision in no way restricts the Recipient: (1) from making any oral or written statements to the Rabbinic Court referred to in paragraph "12" hereinbelow; (2) from raising the existence of this permissible venture agreement as a defense to any action instituted by the Financier in a secular court; or (3) from making a statement, if any, required of the Recipient by secular law;
b. The Recipient shall not in any way use the Financier's name in connection with the business conducted by the Recipient pursuant to this Agreement;
c. The Recipient shall invest the Loan in the Business and at no time during the term of this Agreement shall the Recipient withdraw any part of the Loan from the Business;
d. The Recipient shall invest the Deposit and all undistributed profits therefrom or proceeds thereof with diligence and with scrupulous care, which the parties hereto recognize as requiring more than the mere exercise by the Recipient of its "business judgment," on behalf of the Financier in any lawful business enterprise and/or in the acquisition of bonds and securities;
e. There shall be an irrebuttable presumption that the Deposit was invested by the Recipient in the most profitable business activity or activities (whether in business enterprise(s) and/or in the acquisition of bonds or securities) that the Recipient pursued during the term of this permissible venture agreement. If no such activity was profitable, there shall be an irrebuttable presumption that the Deposit was invested by the Recipient in the business activity or activities which under the terms of this permissible venture agreement would be the least unprofitable to the Financier. In order to establish that there were no profits pursuant to paragraph "7" hereinbelow, the Recipient must take the oath described therein as to each business activity that he so pursued. In order to establish that there were net losses pursuant to paragraph "5h" hereinbelow, the Recipient must adduce proper witnesses as to each such business activity that he so pursued;
f. The Recipient shall immediately notify the Financier of the extent of any net losses from the Business during any monthly period;
g. The Recipient shall defend the Financier against, hold the Financier harmless from, and to indemnify the Financier as to, any loss, debt, obligation or liability which might arise under or as a result of this Agreement, other than as to the loss of part or all of the Deposit pursuant to paragraph "5h" hereinbelow;
h. The Recipient shall repay to the Financier the amount of the Deposit on or before ____________, ____________, along with the Financier's share of any undistributed profits therefrom; provided, however, that if the Business has net losses, the amount the Financier shall be obligated to repay shall be reduced by an amount obtained by multiplying the total net losses by a fraction whose numerator is the Deposit and whose denominator is the total amount of money, including the Deposit, which is invested in the Business. In the event that the Recipient fails to make such payment on time, he shall be in breach of this Agreement. Nonetheless, until the payment is made, the Recipient shall continue to be responsible for the Deposit on the terms and conditions set forth in this Agreement.
In the event of any dispute as to the existence or amount of net losses, the Recipient shall have the burden of proving that there were any such net losses and, if so, the extent thereof. He may prove the existence and extent of net losses, as well as the extent of other money invested in the Business, only by offering the competent testimony of [either specify two particular persons and require that they be qualified to offer testimony at the time of the dispute or simply refer to "two persons qualified to offer testimony"]. Such competence and qualification are to be determined in accordance with Jewish law. In addition, to be effective, the testimony must establish that there were net losses, the extent of the losses, and the amount of total investment in each and every one of the business activities which the Recipient pursued during the term of this permissible venture agreement.
In the event that the Recipient adduces such testimony, he must also take a solemn oath administered by [name of particular rabbi(s) or rabbinic organization] in [name of place] in front of [names of particular people or congregation] while holding a Torah scroll in which oath the Recipient states that the Recipient has faithfully fulfilled all of his obligations and responsibilities under this permissible venture agreement, including, without limitation, that he has invested the Deposit diligently and with scrupulous care.
[The Recipient hereby grants to the Financier a ______________% [this percentage should be determined by a fraction whose numerator is the amount of the Deposit and whose denominator is the sum of the amount of the Deposit and the amount which the Recipient is to invest in the Business] security interest in the assets used in the Business, said security interest being expressly subordinate to the claims of creditors of the Business.]
Upon such repayment, title to any property vesting under Jewish law in the Financier pursuant to paragraph "6" hereof, shall automatically vest in the Financier.
i. The Recipient shall account for and pay to Financier, on the ____________ day of each month of the civil calendar, beginning ___________, __________, any rights of the Financier to profits from the Business, as such right is set forth in paragraph "7" hereof.
j. Notwithstanding the provisions of subparagraphs "h" and "i," above, in the event that there are net Business losses in any monthly period or in the event that the Recipient breaches this Agreement, the Financier may immediately require the repayment of the Loan and the Deposit, plus the Financier's share of profits to date, pursuant to paragraph "7" hereinbelow, or minus the Financier's share of net losses to date, pursuant to paragraph "5k" hereinabove.
6. TITLE TO OBJECTS ACQUIRED. Under Jewish law, title to any objects acquired through use of the Deposit or the profits therefrom or proceeds thereof shall be vested in the Financier. The Recipient may commingle such monies with the Loan or with other monies invested by the Recipient. In the event of such commingling, the title, under Jewish law, of any objects acquired through the use of such monies, the profits therefrom or the proceeds thereof, shall vest in the Financier and Recipient with the proportionate undivided share of each being equal to his respective share of the total monies so invested in the Business.
Nevertheless, under the laws of the State of ____________________, and under other secular law, including the Internal Revenue Code, such title shall not vest in the Financier but, rather in the Recipient, provided that this provision does not cause this Agreement, or any part hereof, to be violative of Jewish law.
7. FINANCIER'S RIGHTS TO PROFITS. The Financier and Recipient shall share all net profits from the Business on an equal basis. Thus, the Financier shall receive an amount obtained by multiplying the net profits by a fraction whose numerator is the Deposit and whose denominator is the total amount invested in the said Business. Nonetheless, the Recipient anticipates net profits of at least % per annum of the Deposit. It shall be presumed that the Business was profitable to this extent until and unless the Recipient takes a solemn oath administered by [name of particular rabbi(s) or rabbinic organization] in [name of place] in front of [names of particular people or congregation] while holding a Torah scroll in which oath the Recipient: (1) states that there was no business activity which the Recipient pursued during the term of this permissible venture agreement in which there was a profit equal to or more than % per annum of the Deposit; (2) identifies which of such business activities were most profitable and, as to each, specifies the profits which were made; and (3) states that the Recipient has faithfully fulfilled all of his obligations and responsibilities under this permissible venture agreement, including, without limitation, that he has invested the Deposit diligently and with scrupulous care. The Financier agrees to forgive its claims as to any excess profits if, for such applicable period, the Recipient pays to the Financier an amount equal to _________% [this should be one-half of the percentage figure filled in on the first blank in this subparagraph] per annum on the aggregate sum of the Funds.
8. PAYMENT TO THE RECIPIENT. The Recipient acknowledges receipt, contemporaneous herewith, of $1.00 (One Dollar) as compensation under Jewish law for his services in connection with the Deposit.
9. PROOF OF RECIPIENT'S PERFORMANCE. In the event that the Financier contends that the Recipient has failed to faithfully discharge one or more of the Recipient's obligations or responsibilities hereunder, the Recipient shall have the burden of proving that he has faithfully fulfilled all said obligations and responsibilities. He may prove such compliance and fulfillment only by offering the competent testimony of two persons qualified to offer testimony. Such competence and qualification are to be determined in accordance with Jewish law.
10. RECIPIENT'S CONTROL OF BUSINESS. The Financier shall have no control over or responsibility for the management or operation of the Business. Such control shall belong exclusively to the Recipient.
11. REFERENCES TO "JEWISH LAW." Any references herein to "Jewish law" are intended to refer to religious rules pertaining to Jews as such are set forth in SHULCHAN ARUKH.
12. MANDATORY, BINDING ARBITRATION. [Insert a clause requiring mandatory, binding arbitration before a specific rabbinic panel authorized to authorize an arbitration award based on Jewish law. Ensure that the clause meets all of the conditions required in the particular jurisdiction to permit an award resulting from such arbitration to be docketed as a civil judgment]
IN WITNESS WHEREOF, the parties hereto place their hands and seals hereon, this ________ day of ______________, 19_____.
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