Shared Profits – And Losses?


Reuven and Shimon decided to invest with Sureprofit
Brokers, a well-known and reliable firm. They gave them the $50k minimum
sum to be invested equally in two blue-chip companies. Reuven contributed
$20k of the sum, whereas Shimon gave $30k. After two months, the broker
reported that one of the companies had gone bankrupt, whereas the shares
of the other had appreciated by thirty percent. Reuven and Shimon are
getting nervous and decide to disband the partnership. How do they divide
the profits and losses?


In Tractate Kesubos (93a), Shmuel discusses a
case where two partners jointly invested a sum of money, but one partner
contributed a larger proportion of the investment. Unless specific terms
were agreed or there is a local custom governing such transactions, the
rule is that they share the profits equally. The reason for this law is
explained by the Rosh as being that the smaller investor provides
expertise to compensate for his lower investment. In recognition of this
fact, the major investor is prepared to share the profits equally. He
therefore does not specify any profit-sharing terms when entering into the
partnership. The Tosafos Ri’d suggests that the major investor’s tacit
agreement to be satisfied with half the profits stems from his friendship
with the minor investor. This law is quoted in Shulchan Oruch, Choshen

If we consider this to be an equal partnership, then
the equal sharing principle should also apply to losses. Thus, if all the
money should be lost, the two partners should suffer an equal loss. Since
they did not invest equal sums, the minor investor would be forced to
compensate the major partner for his greater loss out of his own pocket.
However, the Shulchan Oruch (Ibid. 176:6), basing himself on the
Remah, rules that it is understood that any investor entering into such a
partnership does so on condition that his liability is limited to the sum
he invested. However, it should be noted that if the money that the
partners intended to invest became devalued before they had a chance to
use it, each partner loses in proportion to his investment.

We now have to consider how to look at the results of Reuven and Shimon’s
joint investment. Note that they did not give the broker a sum of money to
be invested as he saw fit (a portfolio). They instructed him to invest
half in Company A and half in Company B. We can therefore regard these as
two separate investments. Thus, the result of investment in Company A is a
total loss of the $25k invested. Reuven loses his $10k investment, Shimon
his $15k. As mentioned above, Reuven does not have to pay Shimon $2,500 so
that their loss should be equal. Reuven entered into the partnership with
the implied condition that his liability for loss be limited to the amount
of his investment. However, when it comes to dividing the profits from
investing in Company B, Reuven’s share is equal to that of Shimon. They
each take half of thirty percent of $25k, namely, $3,750. This results in
Reuven receiving a total of $13,750 (a 37.5% return), whereas Shimon will
receive $18,750 (a return of only 25%). Reuven clearly gains from the fact
that Shimon did not stipulate that profits would be shared in proportion
to the amount invested!

Similar Posts