Beit Midrash

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Responsibility for a Failed Joint Investment – part I


Various Rabbis

Adar 5773
Case:The plaintiff (=pl) wanted to invest in a vacation site and turned to the defendant (=def), who had a petting farm, to help him develop it. They agreed to be equal partners in profits, but pl was to make the initial investment, which def estimated at 40,000 shekels; def provided mainly expertise and worked to get it operating. There was an unsigned draft agreement, which stated that pl’s investment would be paid back from profits. Pl’s son added in: "even if there are no profits" i.e., def will still have to reimburse pl for his investment. Due to greater than expected expenses, pl ended up investing 80,000 shekels, and the site never ended up operating, as pl decided to stop investing so much above the estimate. Pl demands that def return a portion of the lost investment. Def claims that considering his very weak financial situation, it was clear to pl that def could not commit to pay money out of pocket. Def has complaints against pl for not seeing the project through, thereby causing def’s great investment of time and effort to go to waste.

Ruling:As often happens, the sides apparently expected profits and did not give enough thought to what would happen in the case of loss. Although pl’s son claims that his addition to the draft contract contains a contingency for loss, which obligates def, def denies having seen the unsigned addition, and pl did not prove that he did.
The Tur (Choshen Mishpat 176) rules that if two partners invested different amounts without stipulation, they still split profits equally, not as a proportion of total investment, and they also split losses equally. He cites the Ramah, who says that the equal share of losses refers only to losses on money already invested; it does not require the smaller investor to pay from his personal resources to even out the two partners’ losses. The Shulchan Aruch (CM 176:6) accepts the Ramah’s opinion.
The Rambam (Shluchin V’shutfin 10:5), in discussing a case of an unequal partnership with near total loss of the investment, says that the larger investor cannot swear about the details of the investment and force the smaller investor to reimburse him. The implication is that if the larger investor could prove his claims, he could demand compensation from his partner’s personal funds. The Shulchan Aruch (CM 93:13) cites the Rambam’s opinion, causing the commentaries to wonder how he could cite apparently mutually exclusive opinions as if they are both accepted. The Gra (CM 176:32) and the Taz say the opinions cannot be reconciled, and the Taz says that the Shulchan Aruch agrees with the Ramah and brought the Rambam regarding the laws of oath, but not to make additional inferences. The Bach says there is no contradiction, as the Rambam was talking about cases where the money was lost in normal commercial activity, whereas the Ramah rejects reimbursement specifically regarding loss from external causes. The Netivot Hamishpat (176:11) says that the Rambam requires reimbursement only from past profits that were given out to the partners.
[Next time we will apply the opinions to the present case.]

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